<PAGE>

     As filed with the Securities and Exchange Commission on July 9, 1999
                                                     Registration No. 333-
-------------------------------------------------------------------------------
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     Under
                          THE SECURITIES ACT OF 1933
                                ---------------
                           KANA COMMUNICATIONS, INC.
            (Exact name of registrant as specified in its charter)
                                ---------------
         Delaware                  7372                    77-0435679
     (State or other          (Primary Standard         (I.R.S. Employer
     jurisdiction of              Industrial          Identification No.)
     incorporation or        Classification Code
      organization)                Number)
                               87 Encina Avenue
                          Palo Alto, California 94301
                                (650) 325-9850
  (Address, including zip code, and telephone number, including area code, of
                 the registrant's principal executive offices)
                                ---------------
                             Michael J. McCloskey
                            Chief Executive Officer
                           Kana Communications, Inc.
                               87 Encina Avenue
                          Palo Alto, California 94301
                                (650) 325-9850
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                                ---------------
                                  Copies to:
        Warren T. Lazarow, Esq.              Laird H. Simons III, Esq.
      David A. Makarechian, Esq.           Katherine Tallman Schuda, Esq.
     Kimberley E. Henningsen, Esq.             Sayre E. Stevick, Esq.
        Taylor L. Stevens, Esq.                  FENWICK & WEST LLP
    BROBECK, PHLEGER & HARRISON LLP             Two Palo Alto Square
         Two Embarcadero Place              Palo Alto, California 94301
            2200 Geng Road                         (650) 494-0600
      Palo Alto, California 94303
            (650) 424-0160
                                ---------------
  Approximate date of commencement of proposed sale to the public:  As soon as
practicable after the effective date of this Registration Statement.
                                ---------------
  If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                                ---------------
                        CALCULATION OF REGISTRATION FEE
<TABLE>
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
<CAPTION>
  Title of Each Class of                                                       Amount of
     Securities to be                                           Amount to     Registration
        Registered                                           be Registered(1)     Fee
------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>
Common Stock, $.001 per share..............................    $40,250,000      $11,190
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o).
                                ---------------
  The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this preliminary prospectus is not complete and  +
+may be changed. These securities may not be sold until the registration       +
+statement filed with the Securities and Exchange Commission is effective.     +
+This preliminary prospectus is not an offer to sell nor does it seek an offer +
+to buy these securities in any jurisdiction where the offer or sale is not    +
+permitted.                                                                    +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   Subject to Completion. Dated July 9, 1999.

                                       Shares

                         [LOGO OF KANA COMMUNICATIONS]

                           Kana Communications, Inc.
                                  Common Stock

                                  -----------

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

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

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

                                  -----------

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

                                  -----------

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

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

                                  -----------

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

Goldman, Sachs & Co.

                 Hambrecht & Quist

                                                         Wit Capital Corporation

                                  -----------

                         Prospectus dated      , 1999.
<PAGE>

Description No. 1

Inside Front Cover

A logo bearing the words "powered by Kana" in lower case letters, immediately
above and to the left of the Kana logo, which consists of the letter "K"
surrounded by a partially open oval and the words "Kana Communications."

Below the logo is a band of white space, and below the white space are logos of
the following customers:

eBay Inc., eToys Inc., Priceline.com Incorporated, Chase Manhattan Bank, Ford
Motor Company and Northwest Airlines.
<PAGE>

Inside Gatefold

Centered across the top of the gatefold, in stylized letters, the words "Kana
develops, markets and supports an integrated suite of e-Business infrastructure
solutions addressing online customer interactions." Immediately to the left of
this phrase appears the Kana logo, which consists of a stylized "K" surrounded
by a partially open oval and the words "Kana Communications."

Below the phrase, centered in the page, a trapezoidal shape design which covers
most of the gatefold that has within it two large shaded trapezoidal shapes,
with one such shape on the far left of the trapezoid and another shape on the
far right of the trapezoid. The smaller shape on the right is entitled the "Kana
Architecture." The smaller shape on the left is labeled "Customers and Web
Sites." Shading covers and extends over the smaller trapezoids. Extending from
the design that is labeled Kana Architecture is a series of broken an unbroken
lines to boxes labeled with the main heading "Kana Applications." Each box has a
subheading that represents a different application of Kana's suite of
applications, including Kana Control, Kana Mail, Kana Direct, Kana Reports, Kana
Link, Kana Classify and Kana Web Connect. Extending from the boxes entitled
"Kana Applications" toward the smaller shape labeled Customers and Web Sites is
a series of broken and unbroken lines which are interrupted by the phrases
"upselling to customers," "defining new products and services," and "optimizing
performance."

Below this graphic is a band of white space. Below the white space is a shaded
area covering the lower eighth of the gatefold, with the phrase "Kana business
benefits" on the far left of the shaded region. Within the shared region appears
the words "enhanced customer relationships," "reduced operating and IT costs,"
and "increased revenue opportunities."
<PAGE>

                               PROSPECTUS SUMMARY

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

                                  Our Business

    We develop, market and support an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.

    We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to manage important customer data
and monitor real-time, hands-on customer feedback on our software.

    We believe that our solution differs from those of our competitors as a
result of several core capabilities, including an advanced, scaleable, Web-
based architecture that supports industry standards, workflow optimization and
tools for enhanced productivity. In addition, our solution offers comprehensive
data analysis and reporting, and advanced messaging analysis technologies,
which permit e-Businesses to choose the level of automation appropriate for
their needs. We believe that our solution helps e-Businesses enhance customer
relationships, lower operating and IT costs and create new revenue
opportunities.

    Our customers include e-Businesses in the communications, Internet,
retailing and technology industries, and companies employing e-Business
strategies in traditional industries such as financial services, energy,
automobile and airlines. As of June 30, 1999, more than 100 customers have
licensed our software, including:

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

                             Our Market Opportunity

    With the advent of the Internet and the proliferation of e-mail, the manner
in which businesses communicate with their customers has undergone a
fundamental change: customers are now demanding that businesses be accessible
and communicate online. Given the emerging shift to online customer
interaction, traditional solutions are not addressing the changes required by
e-Businesses. Negative consequences, such as lost customers, result from a
failure to respond effectively to online communications. In addition, e-
Businesses may lose the opportunity to take advantage of new revenue-generating
opportunities by failing to capitalize upon the wealth of information conveyed
through online customer interactions.

                                       3
<PAGE>


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

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

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

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

                                  Our Strategy

    Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. The
key elements of our strategy include:

    Extend Market Leadership Position. Our objective is to extend our position
as a leader in the e-Business infrastructure market for managing online
customer interactions by leveraging our suite of software applications and
establishing ourselves as the solution of choice. We believe that by broadening
our platform and suite of applications, we can expand our market opportunities
and solidify our position as a leading provider of comprehensive e-Business
infrastructure solutions.

    Expand Our Suite of Products to Enter New Markets. We intend to expand our
suite of products to include additional e-commerce and content management
applications in order to enter new markets. We are working with our customers
to identify the strategic and functional needs of e-Businesses that operate in
the rapidly changing Internet environment. Our focus is to develop applications
that address those needs and integrate them seamlessly with our existing
platform to help e-Businesses establish broader and deeper customer
relationships.

    Increase Global Distribution Capabilities and Partnerships. We intend to
broaden and increase our worldwide distribution capabilities by combining the
efforts of our direct sales force and our partnerships with leading e-Business
service and infrastructure providers. By expanding existing partnerships and
aggressively developing new alliances, we can leverage our partners' sales,
marketing and deployment capabilities.

    Establish Technology Leadership with Open, Scaleable, Web-based
Architecture. Our objective is to establish the Kana architecture as the
leading technology platform and market standard for e-Business infrastructure
solutions addressing online customer interactions. Because our advanced
architecture is based on industry standards such as Java and Extensible Mark-up
Language (XML), e-Businesses and third parties are able to develop and deploy
new applications on top of the Kana platform. We intend to continue to develop
and enhance our advanced architecture to efficiently handle the growing volume
of online customer interactions while providing increased functionality across
e-Businesses.

    Leverage Hosted Web-Based Application Service. Kana Online, our hosted Web-
based application service, allows us to manage important customer data and
monitor real-time, hands-on customer feedback on our software. We intend to
continue developing this service because it allows us to target additional
markets that are complementary to our software-based solution, provides us with
recurring revenue streams and may, in the future, allow us to enter into new
business opportunities.


                                       4
<PAGE>

    Emphasize Customer Advocacy and Satisfaction. We believe that delivering
complete customer satisfaction is vital to growing our business. We intend to
remain focused on providing the highest level of satisfaction to our customers
and to continue to design our solutions to address their online customer
interactions needs. In addition, we intend to continue to build our
professional services group, which maintains customer relationships beyond the
implementation phase and is responsible for providing a superior customer
experience.

                             Corporate Information

    Kana Communications, Inc. was incorporated in California in July 1996 as
Kana Net Works, Inc., changed its name to Kana.com, Inc. in January 1997 and
then changed its name to Kana Communications, Inc. in October 1997. Kana
Communications, Inc. plans to reincorporate in Delaware prior to the
consummation of this offering. References in this prospectus to "Kana", "we",
"our", and "us" collectively refer to Kana Communications, Inc., a Delaware
corporation, its subsidiary and its California predecessor, and not to the
underwriters. Kana's principal executive offices are located at 87 Encina
Avenue, Palo Alto, California 94301 and its telephone number is (650) 325-9850.

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

                                  The Offering

<TABLE>
<S>                       <C>
Common stock offered....      shares
Common stock to be
 outstanding after the
 offering...............      shares
Use of proceeds.........  For general corporate purposes, including working
                          capital, product development, possible acquisitions and
                          capital expenditures. See "Use of Proceeds".
Proposed Nasdaq National
 Market symbol..........  KANA
</TABLE>

    The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999, and includes
1,257,708 shares of common stock issuable upon conversion of preferred stock
issued subsequent to June 30, 1999 and excludes:

  . 264,800 shares of common stock issuable upon exercise of stock options
    outstanding as of June 30, 1999 at a weighted average exercise price of
    $0.28 per share;

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

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

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

                                       5
<PAGE>

                      Summary Consolidated Financial Data

                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                          Year Ended      Three Months Ended
                                         December 31,          March 31,
                                        ----------------  --------------------
                                         1997     1998      1998       1999
                                        -------  -------  ---------  ---------
<S>                                     <C>      <C>      <C>        <C>
Consolidated Statement of Operations
 Data:
Total revenues........................  $   --   $ 2,049  $     177  $   1,423
Gross profit..........................      --     1,476        147        987
Operating loss........................   (1,435)  (6,525)    (1,042)    (1,957)
Net loss..............................  $(1,383) $(6,337) $  (1,012) $  (1,845)
                                        =======  =======  =========  =========
Basic and diluted net loss per share..  $ (0.62) $ (2.48) $   (0.55) $   (0.47)
                                        =======  =======  =========  =========
Shares used in computing basic and
 diluted net loss per share...........    2,246    2,555      1,824      3,939
                                        =======  =======  =========  =========
Pro forma basic and diluted net loss
 per share............................           $ (0.35)            $   (0.47)
                                                 =======             =========
Shares used in computing pro forma
 basic and diluted net loss per
 share................................            17,979                22,708
                                                 =======             =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                        March 31, 1999
                                                 -----------------------------
                                                 Actual  Pro Forma As Adjusted
                                                 ------- --------- -----------
<S>                                              <C>     <C>       <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
 investments.................................... $ 8,631  $18,831     $
Working capital.................................   7,566   17,766
Total assets....................................  11,138   21,338
Notes payable, less current portion.............     360      360
Total stockholders' equity......................   8,534   18,734
</TABLE>

    The consolidated balance sheet data as of March 31, 1999 is set forth on an
actual basis; on a pro forma basis to give effect to the sale in July 1999 of
1,257,708 shares of our Series D preferred stock and the conversion of all of
our outstanding preferred stock into common stock upon completion of this
offering; and on an as adjusted basis to reflect the sale of     shares of
common stock offered at an assumed initial public offering price of $    per
share and after deducting the estimated underwriting discount and the estimated
offering expenses. See "Use of Proceeds" and "Capitalization".

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

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

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

  . assumes the completion of a   for one reverse stock split;

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

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

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

                                       6
<PAGE>

                                  RISK FACTORS

    You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.

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

                         Risks Related to Our Business

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

    We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. We
were incorporated in July 1996 and we first recorded revenue in February 1998.
As an early stage company in the new and rapidly evolving market for e-Business
customer interactions solutions, we face numerous risks and uncertainties. Some
of these risks include our ability to:

  . anticipate and adapt to the changing e-Business market;

  . attract more customers;

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

  . build and maintain relationships with system integrators and other
    strategic partners;

  . attract, retain and motivate qualified personnel;

  . execute our product development activities;

  . respond to actions taken by our competitors; and

  . continue to build an infrastructure to manage our growth effectively.

We may not successfully address any of these risks.

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

    Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of investors or public market
analysts, the price of our common stock could decline substantially. Factors
that might cause quarterly fluctuations in our operating results include:

  . the evolving and varying demand for e-Business customer interactions
    solutions, particularly the Kana solution;

  . the timing of sales of our products and services and the timing of new
    releases of our products;

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

  . delays in introducing our products and services, or new releases of our
    products;

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

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

  . our ability to develop and attain market acceptance of the Kana
    solution, additional products and enhancements to our products;

  . the entrance of new competitors;


                                       7
<PAGE>

  . new product announcements or introductions by competitors;

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

  . the mix of domestic and international sales;

  . the timing of releases of new versions of third-party software and
    hardware products that work with our products;

  . costs related to acquisitions of technologies or businesses;

  . our ability to attract, integrate, train, retain and motivate a
    substantial number of sales and marketing, research and development,
    administrative and product management personnel;

  . costs related to the customization of our products;

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

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

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

  . governmental regulation surrounding the Internet and e-mail in
    particular.

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

    Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. See "--We may not be able to forecast our revenues accurately
because our products have a long and variable sales cycle" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

We have a history of losses and may not be profitable in the future

    Since we began operations in 1997, we have incurred substantial operating
losses in every quarter. As a result of accumulated operating losses, at March
31, 1999, we had an accumulated deficit of approximately $9.6 million. Since
inception, we have funded our business primarily through selling our stock, not
from cash generated by our business. Our growth in recent periods has been from
a limited base of customers, and we may not be able to sustain these growth
rates. We expect to continue to increase our operating expenses and our
expenditures on our professional services organization. As a result, we expect
to continue to experience losses and negative cash flows, even if sales of the
Kana solution continue to grow, and may not generate sufficient revenues to
achieve profitability in the future. If we do achieve profitability, we may not
be able to sustain or increase any profitability on a quarterly or annual basis
in the future. See "--Our quarterly revenues and operating results may
fluctuate in future periods and we may fail to meet expectations, which may
cause the price of our common stock to decline", "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".

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

    The market for our solution is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any one of which could
seriously harm our business.

                                       8
<PAGE>

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

    Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than do we.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. In the past, we have lost potential customers to competitors for
various reasons, including the ability or willingness of our competitors to
offer lower prices and other incentives that we did not match. In addition,
current and potential competitors, particularly enterprise or call center
software providers that market integrated suites of products, have established
or may establish co-operative relationships among themselves or with third
parties to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidations.

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

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

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

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

    To date, the sales cycle for the Kana solution has taken three to 12 months
and has required pre-purchase evaluation by a significant number of individuals
in our customers' organizations. Many of our customers evaluate our software
slowly and deliberately, depending on the specific technical capabilities of
the customer, the size of the deployment, the complexity of the customer's
network environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy the Kana solution. The long sales cycle for
our products may cause license revenue and operating results to vary
significantly from period to period.

    Along with our partners, we invest significant amounts of time and
resources educating and providing information to our prospective customers
regarding the use and benefits of our products. We may not recoup this
investment if the prospective customer does not ultimately license our
solution. See "--Our quarterly revenues and operating results may fluctuate in
future periods and we may fail to meet expectations, which may cause the price
of our common stock to decline".

                                       9
<PAGE>

Difficulties in implementing our solution could harm our revenues and margins

    Forecasting our revenues depends upon the timing of implementation of the
Kana solution. This implementation typically involves working with
sophisticated software, computing and communications systems. If we experience
difficulties with implementation or do not meet project milestones in a timely
manner, we could be obligated to devote more customer support, engineering and
other resources to a particular project. Some customers may also require us to
develop customized features or capabilities. If new or existing customers have
difficulty deploying our products or require significant amounts of our
professional services support or customized features, our revenue recognition
could be further delayed and our costs could increase, causing increased
variability in our operating results. See "--Our quarterly revenues and
operating results may fluctuate in future periods and we may fail to meet
expectations, which may cause the price of our common stock to decline".

Our business depends on the acceptance of the Kana solution, and it is
uncertain whether the market will accept this product

    Substantially all of our revenue is currently derived from licenses of our
software and related services. We are not certain that our target customers
will widely adopt and deploy the Kana solution. Our future financial
performance will depend on the successful development, introduction and
customer acceptance of new and enhanced versions of the Kana solution. In the
future, we may not be successful in marketing the Kana solution or any new or
enhanced products.

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

    We intend to hire a significant number of additional sales, marketing,
engineering, professional services and product management personnel in 1999 and
beyond. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel in the future. Our
business cannot continue to grow if we cannot attract qualified personnel. Our
failure to attract and retain the highly trained personnel that are integral to
our product development and professional services organizations may limit the
rate at which we can develop and install new products or product enhancements,
which would harm our business. As of June 30, 1999, we had only a 20-person
professional services organization. We will need to increase our staff to
support new customers and the expanding needs of our existing customers,
without compromising the quality of our customer service. Hiring qualified
professional services personnel, as well as sales, marketing, administrative
and research and development personnel, is very competitive in our industry,
particularly in the San Francisco Bay Area, where Kana is headquartered, due to
the limited number of people available with the necessary technical skills. We
expect to face greater difficulty attracting these personnel with equity
incentives as a public company than we did as a privately held company. See
"Business--Employees".

We may face difficulties in hiring and retaining qualified sales personnel to
sell the Kana solution

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

Loss of key personnel could harm our business

    Our future success depends to a significant degree on the skills,
experience and efforts of our senior management and other key personnel. The
loss of the services of any of these individuals

                                       10
<PAGE>

could harm our business and operations. In addition, we have not obtained key
person life insurance on any of our key employees. If any of our key employees
left or was seriously injured and unable to work and we were unable to find a
qualified replacement, our business could be harmed.

Our business will suffer if we fail to manage our growth successfully

    Our ability to offer the Kana solution successfully in a rapidly evolving
market requires an effective planning and management process. We have limited
experience in managing rapid growth. In addition, we have recently hired a new
Chief Executive Officer, and many of our other officers are relatively
inexperienced. We are experiencing a period of growth that is placing a
significant strain on our managerial, financial and personnel resources. Our
business will suffer if this growth continues and we fail to manage this
growth. On June 30, 1999, we had a total of 98 full-time employees compared to
38 on June 30, 1998. We expect to continue to hire new employees at a rapid
pace. The rate of our recent growth has made management of that growth more
difficult.

    In addition, the proceeds of this offering will be used in part to expand
product offerings and expand international operations, as well as sales and
marketing capabilities. Any additional growth will further strain our
management, financial, personnel, internal training and other resources. To
manage any future growth effectively, we must improve our financial and
accounting systems and controls, reporting systems and procedures, integrate
new personnel and manage expanded operations. Any failure to do so could
negatively affect the quality of our products and our ability to respond to our
customers, retain key personnel and our business in general. We plan to move
our corporate offices to a new location in October 1999. This move may disrupt
our business and operations. See "Business--Facilities".

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

    To be competitive, we must develop and introduce on a timely basis new
products and product enhancements for companies with significant e-Business
customer interactions needs. Any failure to do so could harm our business. In
the past, we have failed to ship some new products or product enhancements by
our planned shipment date. If we experience similar delays in the future, we
may face:

  . customer dissatisfaction;

  . cancellation of orders and license agreements;

  . negative publicity;

  . loss of revenues;

  . slower market acceptance; and

  . legal action by customers against us.

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

Technical problems with our Kana Online service could harm our business

    The success of our Kana Online service depends on the efficient and
uninterrupted operation of our own and outsourced computer and communications
hardware and software systems. These systems and operations are vulnerable to
damage or interruption from human error, natural disasters, telecommunications
failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar adverse events. We have no formal disaster recovery plan, and our
insurance policies may

                                       11
<PAGE>

not adequately compensate us for any losses that we may incur. Any system
failure that causes an interruption in our service or a decrease in
responsiveness could harm our relationships with our customers and result in
reduced revenues. See "Business--Products and Services--Kana Online".

    We have entered into an Internet-hosting agreement with Exodus
Communications, Inc. to maintain all of our Kana Online servers at Exodus' data
center in Santa Clara, California. Our operations depend on Exodus' ability to
protect its and our systems in its data center against damage from human error,
natural disasters, telecommunications failures, break-ins, sabotage, computer
viruses, intentional acts of vandalism and similar adverse events. Exodus does
not guarantee that our Internet access will be uninterrupted, error-free or
secure. Any disruption in the Internet services provided by Exodus could harm
our business.

We need to quickly and successfully build skills relating to our Kana Online
service

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

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

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

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

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

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

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

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

See "Business--Intellectual Property".

We also rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which are only of limited value

    We also rely on a combination of laws, such as copyright, trademark and
trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. We
currently have a registered trademark, "Kana", and pending trademark
applications for our logo and "KANA COMMUNICATIONS and Design". However, none
of our

                                       12
<PAGE>

trademarks is registered outside of the United States, nor do we have any
trademark applications pending outside of the United States. Moreover, despite
any precautions that we have taken:

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

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

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

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

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

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

    Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software in our industry may be increasingly subject
to third-party infringement claims as the number of competitors grows and the
functionality of products in different industry segments overlaps. Third
parties may currently have, or may eventually be issued, patents that our
products or technology infringe. Any of these third parties might make a claim
of infringement against us. Many of our software license agreements require us
to indemnify our customers from any claim or finding of intellectual property
infringement. Any litigation, brought by us or others, could result in the
expenditure of significant financial resources and the diversion of
management's time and efforts. In addition, litigation in which we are accused
of infringement may cause product shipment delays, require us to develop non-
infringing technology or require us to enter into royalty or license
agreements, which may not be available on acceptable terms, or at all. If a
successful claim of infringement were made against us and we could not develop
non-infringing technology or license the infringed or similar technology on a
timely and cost-effective basis, our business could be significantly harmed.
See "Business--Intellectual Property".


We may face liability and lost sales if our software contains errors

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

  . loss of or delay in revenues and loss of market share;

  . loss of customers;

  . failure to achieve market acceptance;

  . diversion of development resources;

  . injury to our reputation;

                                       13
<PAGE>

  . increased service and warranty costs;

  . legal actions by customers against us; and

  . increased insurance costs.

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

Our ability to increase revenues depends on our ability to expand and manage
our international operations

    For the three months ended March 31, 1999, we derived approximately six
percent of our total revenues from sales outside North America. We also have
established an office in the United Kingdom. As a result, we face risks from
doing business on an international basis, including:

  . reduced protection for intellectual property rights in some countries;

  . licenses, tariffs and other trade barriers;

  . difficulties in staffing and managing foreign operations;

  . longer sales and payment cycles;

  . greater difficulties in collecting accounts receivable;

  . political and economic instability;

  . seasonal reductions in business activity;

  . potentially adverse tax consequences;

  . compliance with a wide variety of complex foreign laws and treaties; and

  . variation and unexpected changes in local laws and regulations.

    We plan to expand our existing international operations and establish
additional facilities in other parts of the world. The expansion of our
existing international operations and entry into additional international
markets will require significant management attention and financial resources.
In addition, in order to expand our international sales operations, we will
need to, among other things:

  . expand our international sales channel management and support
    organizations;

  . customize products for local markets; and

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

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

                                       14
<PAGE>

    Our international revenues are denominated in local currency. Therefore, a
strengthening of other currencies versus the U.S. dollar could make our
products less competitive in foreign markets. We do not currently engage in
currency hedging activities. To the extent that we are unable to manage a
successful expansion of our business into international markets, our business
could be severely harmed.

Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel and
operations

    Although we have not done so in the past, we may acquire or invest in other
companies, products or technologies. If we make any acquisitions, we will be
required to assimilate the operations, products and personnel of the acquired
businesses and train, retain and motivate key personnel from the acquired
businesses. We may be unable to maintain uniform standards, controls,
procedures and policies if we fail in these efforts. Similarly, acquisitions
may cause disruptions in our operations and divert management's attention from
day-to-day operations, which could impair our relationships with our current
employees, customers and strategic partners. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets.

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

    We may need to raise additional funds to develop or enhance our products or
services, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. Additional financing may
not be available on terms that are acceptable to us. If we raise additional
funds through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders would be reduced and these securities
might have rights, preferences and privileges senior to those of our current
stockholders. If adequate funds are not available on acceptable terms, our
ability to fund our expansion, take advantage of unanticipated opportunities,
develop or enhance products or services, or otherwise respond to competitive
pressures would be significantly limited.

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

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

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

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

                                       15
<PAGE>

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

                         Risks Related to Our Industry

Our future product demand will depend on our ability to manage multiple
technologies and technological change

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

  . rapid technological change;

  . frequent new product introductions;

  . changes in customer requirements; and

  . evolving industry standards.

    The Kana solution is designed to work on a variety of hardware and software
platforms used by our customers. However, our software may not operate
correctly on evolving versions of hardware and software platforms, programming
languages, database environments and other systems that our customers use. For
example, the server component of the current version of the Kana solution runs
on the Windows NT operating system from Microsoft, and we must develop a
solution that is compatible with UNIX and other operating systems to meet the
demands of our customers. If we cannot successfully develop these products in
response to customer demands, our business could suffer. Also, we must
constantly modify and improve our products to keep pace with changes made to
these platforms and to database systems and other back-office applications and
Internet-related applications. This may result in uncertainty relating to the
timing and nature of new product announcements, introductions or modifications,
which may cause confusion in the market and harm our business. If we fail to
modify or improve our products in response to evolving industry standards, our
products could rapidly become obsolete, which would harm our business.

We may not be able to respond to changing customer preferences in our market

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

Our business substantially depends upon the continued acceptance and growth of
the Internet and e-mail as a medium of communication

    We sell the Kana solution primarily to organizations that receive large
volumes of e-mail and Web-based communications. Consequently, our future
revenues and profits, if any, substantially

                                       16
<PAGE>

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

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

    Due to the increasing popularity and use of the Internet, it is possible
that state and federal regulators could adopt laws and regulations that may
impose additional burdens on those companies that conduct business online.

    The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws or laws that may inhibit the
use of Internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may decrease
the expansion of the Internet. A decline in the growth of the Internet,
particularly as it relates to online communication, could decrease demand for
our products and services and increase our costs of doing business, or
otherwise harm our business. Moreover, the applicability to the Internet of
existing laws in various jurisdictions governing issues such as property
ownership, sales tax, libel and personal privacy is uncertain and may take
years to resolve. Our costs could increase and our growth could be harmed by
any new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services.

Year 2000 issues present technological risks, could cause disruption to our
business and could harm sales of the Kana solution

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

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

                         Risks Related to This Offering

We will have broad discretion in using the proceeds from this offering

    We intend to use the proceeds from this offering for general corporate
purposes, including working capital, and we may use a portion of the proceeds
to acquire other businesses, products or

                                       17
<PAGE>

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

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

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

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

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

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

    Immediately after this offering, we will have outstanding     shares of our
common stock, assuming no exercise of the underwriters' over-allotment option.
Of these shares, the     shares sold in this offering will be freely tradable
and 24,402,670 shares will be available for resale in the public market under
Rule 144 (subject in some cases to volume limitations) or Rule 144(k) under the
Securities Act following a lock-up period that expires 180 days after the date
of this prospectus. In addition, upon expiration of the 180-day lock up period,
6,333,898 shares will be available for resale in the public market under Rule
701, subject in some cases to a right of repurchase by the Company, and
1,257,708 shares will not be saleable under Rule 144 until July 2000.

    Holders of approximately 24,401,670 shares of our common stock have the
right to require us to register their shares of common stock with the
Securities and Exchange Commission. In addition, after this offering, we intend
to register approximately     shares of our common stock that we may issue
under our stock option plans. Once we register these shares, they can be freely
sold in the public market upon issuance, in some instances subject to the lock-
up agreements described above. If these holders cause a large number of
securities to be sold in the public market, the sales could materially and
adversely affect the market price of our common stock. In addition, any of
these sales could impede our ability to raise needed capital. See "Shares
Available for Future Sale" and "Underwriting".

                                       18
<PAGE>

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

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

                 Cautionary Note on Forward-Looking Statements

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

                                       19
<PAGE>

                                USE OF PROCEEDS

    The net proceeds to Kana from the sale and issuance of the     shares of
common stock offered are estimated to be $    million (approximately $
million if the underwriters' over-allotment option is exercised in full), at
the assumed initial public offering price of $    per share after deducting the
underwriting discount and estimated offering expenses. We are conducting this
offering primarily to increase our equity capital, to create a public market
for our common stock and to facilitate our future access to public equity
markets. We intend to use the net proceeds for general corporate purposes,
including working capital, product development and capital expenditures. In
addition, we may use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. However, we currently have no plan for use of the
expected offering proceeds, nor have we sought the advice of or received
reports from any of our professional advisors regarding the use of the offering
proceeds. In addition, we have no agreements or commitments with respect to any
acquisition or investment, and we are not involved in any negotiations with
respect to any similar transaction. Pending these uses, we will invest the net
proceeds of this offering in short-term, interest-bearing, investment-grade
securities. See "Risk Factors--We will have broad discretion in using the
proceeds from this offering".

                                DIVIDEND POLICY

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

                               PREEMPTIVE RIGHTS

    As of the date of this prospectus, holders of at least 6,378,856 shares of
our preferred stock have preemptive rights that entitle them to purchase
approximately five percent of the shares to be issued in this offering. The
number of shares that may be purchased under these rights, however, may be
limited at the discretion of the underwriters. Shares purchased by these
stockholders under their preemptive rights will reduce the number of shares
available to new investors in this offering. See "Underwriting".

                                       20
<PAGE>

                                 CAPITALIZATION

    The following table sets forth the capitalization of Kana as of March 31,
1999:

  . on an actual basis;

  . on a pro forma basis giving effect to the sale of 1,257,708 shares of
    our Series D preferred stock for total proceeds of $10.2 million and the
    conversion of all shares of the convertible preferred stock into
    20,026,670 shares of common stock upon the completion of this offering;
    and

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

    This table should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements appearing elsewhere
in this prospectus.

<TABLE>
<CAPTION>
                                                         March 31, 1999
                                                  -----------------------------
                                                  Actual  Pro Forma As Adjusted
                                                  ------  --------- -----------
                                                  (In thousands, except share
                                                      and per share data)
<S>                                               <C>     <C>       <C>
Notes payable, less current portion.............. $  360   $   360     $
                                                  ------   -------     ----
Stockholders' equity:
 Convertible preferred stock: $0.001 par value
  per share; 50,000,000, 50,000,000 and 5,000,000
  shares authorized actual, pro forma and as
  adjusted, respectively; 18,768,962, 0 and 0
  shares issued and outstanding actual, pro forma
  and as adjusted, respectively..................     19        --
 Common stock: $0.001 par value per share;
  60,000,000 shares authorized actual, pro forma
  and as adjusted; 8,357,607, 28,384,277 and
  shares issued and outstanding actual, pro forma
  and as adjusted, respectively..................      8        28
 Additional paid-in capital...................... 22,797    32,996
 Deferred stock-based compensation............... (4,463)   (4,463)
 Notes receivable from stockholders..............   (243)     (243)
 Accumulated other comprehensive losses..........    (19)      (19)
 Accumulated deficit............................. (9,565)   (9,565)
                                                  ------   -------     ----
 Total stockholders' equity......................  8,534    18,734
                                                  ------   -------     ----
Total capitalization............................. $8,894   $19,094     $
                                                  ======   =======     ====
</TABLE>
    The number of shares outstanding as of March 31, 1999 excludes:

  . 316,300 shares of common stock issuable upon exercise of stock options
    outstanding at a weighted average exercise price of $0.08 per share;

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

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

    Also excludes 2,232,000 shares of common stock that have been issued or are
issuable upon exercise of stock options granted between March 31, 1999 and June
30, 1999 at a weighted average exercise price of $0.46 per share.

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

                                       21
<PAGE>

                                    DILUTION

    The pro forma net tangible book value of Kana at March 31, 1999, was
approximately $18.7 million, or $0.66 per share. Pro forma net tangible book
value per share represents total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all outstanding convertible preferred stock. After giving
effect to the sale in July 1999 of 1,257,708 shares of our Series D preferred
stock and the sale of     shares of common stock offered by Kana at an assumed
initial public offering price of $    per share, and after deducting the
estimated underwriting discount and commissions and estimated offering
expenses, Kana's pro forma net tangible book value at March 31, 1999, would
have been $   , or $    per share. This represents an immediate increase in net
tangible book value of $    per share to existing stockholders and an immediate
dilution of $    per share to new investors purchasing shares of common stock
in this offering. Dilution is defined as the diminution in the proportion of
income, or earnings per share, to which each share is entitled due to the
issuance of additional shares. With the sale and issuance of     shares in this
offering, existing stockholders will suffer an immediate reduction in the net
tangible book value of their shares because the additional shares decrease the
percentage of ownership of the existing stockholders. The following table
illustrates this dilution:

<TABLE>
<S>                                                                   <C>   <C>
Assumed initial public offering price per share......................       $
  Pro forma net tangible book value per share as of March 31, 1999... $0.66
  Increase per share attributable to new investors...................
                                                                      -----
Pro forma net tangible book value per share after the offering.......
                                                                            ----
Dilution per share to new investors..................................       $
                                                                            ====
</TABLE>

    The following table summarizes, as of March 31, 1999, on a pro forma basis,
the total number of shares and consideration paid to Kana and the average price
per share paid by existing stockholders and by new investors purchasing shares
of common stock in this offering at an assumed initial public offering price of
$    per share, before deducting the estimated underwriting discount and
estimated offering expenses:

<TABLE>
<CAPTION>
                             Shares Purchased  Total Consideration      Average
                            ------------------ ---------------------     Price
                              Number   Percent  Amount     Percent     Per Share
                            ---------- ------- ---------  ----------   ---------
<S>                         <C>        <C>     <C>        <C>          <C>
Existing stockholders...... 28,384,277       %  $                    %   $
New public investors.......
                            ----------  -----   ---------  ----------
  Totals...................             100.0%  $               100.0%
                            ==========  =====   =========  ==========
</TABLE>

    The foregoing computations are based on the number of shares of common
stock outstanding as of March 31, 1999 and exclude:

  . 316,300 shares of common stock issuable upon exercise of stock options
    outstanding at a weighted average exercise price of $0.08 per share;

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

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

    Also excludes 2,232,000 shares of common stock that have been issued or are
issuable upon exercise of stock options granted between March 31, 1999 and June
30, 1999 at a weighted average exercise price of $0.46 per share.

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

                                       22
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

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

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

<TABLE>
<CAPTION>
                                          Years Ended     Three Months Ended
                                         December 31,          March 31,
                                        ----------------  --------------------
                                         1997     1998      1998       1999
                                        -------  -------  ---------  ---------
                                               (In thousands, except
                                                  per share data)
<S>                                     <C>      <C>      <C>        <C>
Consolidated Statement of Operations
 Data:
Revenues:
 License..............................  $   --   $ 1,793  $     161  $   1,165
 Service..............................      --       256         16        258
                                        -------  -------  ---------  ---------
   Total revenues.....................      --     2,049        177      1,423
Cost of revenues:
 License..............................      --        54          4         34
 Service..............................      --       519         26        402
                                        -------  -------  ---------  ---------
   Total cost of revenues.............      --       573         30        436
                                        -------  -------  ---------  ---------
Gross profit..........................      --     1,476        147        987
Operating expenses:
 Sales and marketing..................      366    3,796        498      1,539
 Research and development.............      699    2,254        403        823
 General and administrative...........      257      721        104        227
 Amortization of stock-based
  compensation........................      113    1,230        184        355
                                        -------  -------  ---------  ---------
Total operating expenses..............    1,435    8,001      1,189      2,944
                                        -------  -------  ---------  ---------
Operating loss........................   (1,435)  (6,525)    (1,042)    (1,957)
Other income, net.....................       52      188         30        112
                                        -------  -------  ---------  ---------
Net loss..............................  $(1,383) $(6,337) $  (1,012) $  (1,845)
                                        =======  =======  =========  =========
Basic and diluted net loss per share..  $ (0.62) $ (2.48) $   (0.55) $   (0.47)
                                        =======  =======  =========  =========
Shares used in computing basic and
 diluted net loss per share...........    2,246    2,555      1,824      3,939
                                        =======  =======  =========  =========
Pro forma basic and diluted net loss
 per share............................           $ (0.35)            $   (0.47)
                                                 =======             =========
Shares used in computing pro forma
 basic and diluted net loss per
 share................................            17,979                22,708
                                                 =======             =========
</TABLE>

<TABLE>
<CAPTION>
                                                        December 31,
                                                        ------------- March 31,
                                                         1997   1998    1999
                                                        ------ ------ ---------
<S>                                                     <C>    <C>    <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments...... $3,513 $9,952  $8,631
Working capital........................................  3,281  9,294   7,566
Total assets...........................................  3,824 11,969  11,138
Notes payable, less current portion....................     51    360     360
Total stockholders' equity.............................  3,504 10,038   8,534
</TABLE>


                                       23
<PAGE>

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

                                    Overview

    Kana develops, markets and supports an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.

    We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to manage important customer data
and monitor real-time, hands-on customer feedback on our software.

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

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

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

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

                                       24
<PAGE>

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

    In connection with the granting of stock options to our employees, we
recorded deferred stock-based compensation totaling approximately $6.2 million
through March 31,1999. This amount represents the total difference between the
exercise prices of stock options and the deemed fair value of the underlying
common stock for accounting purposes on the date these stock options were
granted. This amount is included as a component of stockholders' equity and is
being amortized on an accelerated basis by charges to operations over the
vesting period of the options, consistent with the method described in
Financial Accounting Standards Board, or FASB, Interpretation No. 28. We
recorded $1.2 million of stock-based compensation amortization expense during
the year ended December 31, 1998, and approximately $355,000 of stock-based
compensation amortization expense during the three months ended March 31, 1999.
As of March 31, 1999, we had a total of $4.5 million of deferred stock-based
compensation that had not been amortized. We expect to record additional
deferred stock-based compensation of at least $12.0 million for stock option
grants made during the three months ended June 30, 1999. The amortization of
the remaining deferred stock-based compensation will result in additional
charges to operations through July 2003. The amortization of stock-based
compensation is classified as a separate component of operating expenses
in our consolidated statement of operations.

    Although revenues have increased consistently from quarter to quarter,
since the beginning of 1997 we have incurred substantial costs to develop our
products and to recruit, train and compensate personnel for our engineering,
sales, marketing, client services and administration departments. As a result,
we have incurred substantial losses since inception and, as of March 31, 1999,
had an accumulated deficit of $9.6 million. We believe our future success is
contingent upon providing superior customer service, increasing our customer
base and developing our products. We intend to invest heavily in sales,
marketing, research and development, client services and infrastructure to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future.

    We had 98 full-time employees as of June 30, 1999 and intend to hire a
significant number of employees in the future. This expansion places
significant demands on our management and operational resources. To manage this
rapid growth, we must invest in and implement scaleable operational systems,
procedures and controls. We expect future expansion to continue to challenge
our ability to hire, train, manage and retain employees.

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

                                       25
<PAGE>

                             Results of Operations

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

<TABLE>
<CAPTION>
                                                               Three Months
                                                   Year Ended      Ended
                                                  December 31,   March 31,
                                                  ------------ ---------------
                                                      1998      1998     1999
                                                  ------------ ------   ------
<S>                                               <C>          <C>      <C>
Revenues:
  License........................................      87.5%     91.0%    81.9%
  Service........................................      12.5       9.0     18.1
                                                     ------    ------   ------
    Total revenues...............................     100.0     100.0    100.0
Cost of revenues:
  License........................................       2.6       2.3      2.4
  Service........................................      25.3      14.7     28.3
                                                     ------    ------   ------
    Total cost of revenues.......................      27.9      17.0     30.7
                                                     ------    ------   ------
Gross profit.....................................      72.1      83.0     69.3
Operating expenses:
  Sales and marketing............................     185.3     281.4    108.2
  Research and development.......................     110.0     227.7     57.8
  General and administrative.....................      35.2      58.8     16.0
  Amortization of stock-based compensation.......      60.0     104.0     24.9
                                                     ------    ------   ------
    Total operating expenses.....................     390.5     671.9    206.9
                                                     ------    ------   ------
Operating loss...................................    (318.4)   (588.7)  (137.5)
Other income, net................................       9.2      16.9      7.9
                                                     ------    ------   ------
    Net loss.....................................    (309.2)%  (571.8)% (129.6)%
                                                     ======    ======   ======
</TABLE>

                   Three Months Ended March 31, 1998 and 1999

Revenues

    Total revenues increased from $177,000 in the quarter ended March 31, 1998
to $1.4 million in the quarter ended March 31, 1999. License revenue increased
from $161,000 in the quarter ended March 31, 1998 to $1.2 million in the
quarter ended March 31, 1999. This increase in license revenue was due
primarily to increased market acceptance of our products, expansion of our
product line and increased sales generated by our expanded sales force. Total
headcount in our sales department increased from four people at March 31, 1998
to 17 people at March 31, 1999. License revenue represented 91.0% of total
revenues for the quarter ended March 31, 1998 and 81.9% of total revenues for
the quarter ended March 31, 1999.

    Service revenue increased from $16,000 in the quarter ended March 31, 1998
to $258,000 in the quarter ended March 31, 1999. This increase in service
revenue was due primarily to the increased licensing activity described above,
resulting in increased revenue from customer implementations, customization
projects and maintenance contracts, and the introduction of our hosted service.
Service revenue represented 9.0% of total revenues for the quarter ended March
31, 1998 and 18.1% of total revenues for the quarter ended March 31, 1999.

    During the three months ended March 31, 1998, six customers each accounted
for more than 10% of total revenues. During the three months ended March 31,
1999, no customer accounted for

                                       26
<PAGE>

more than 10% of total revenues. Revenue from international sales for the three
months ended March 31, 1998 and 1999 were less than 10% of total revenues.

Cost of Revenues

    Cost of license revenue increased from $4,000 for the quarter ended March
31, 1998 to $34,000 for the quarter ended March 31, 1999. As a percentage of
license revenue, cost of license revenue was 2.5% for the quarter ended March
31, 1998 and 2.9% for the quarter ended March 31, 1999. The increase in the
cost of license revenue was due primarily to royalties, product documentation
costs and delivery costs for shipments to customers. We anticipate that the
cost of license revenue will increase in absolute dollars as we license
additional technologies, although cost of license revenue will vary as a
percentage of license revenue from period to period.

    Cost of service revenue increased from $26,000 for the quarter ended March
31, 1998 to $402,000 for the quarter ended March 31, 1999. The growth in cost
of service revenue was attributable primarily to an increase in personnel
dedicated to support our growing number of customers. Cost of service revenue
as a percent of service revenue was 163% for the quarter ended March 31, 1998
and 156% for the quarter ended March 31, 1999. We anticipate that cost of
service revenue will increase in absolute dollars, but decline as a percentage
of service revenue, as we continue to expand our service offerings.

Operating Expenses

    Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel and
promotional expenditures, including public relations, advertising, trade shows,
and marketing collateral materials. Sales and marketing expenses increased from
$498,000 in the quarter ended March 31, 1998 to $1.5 million in the quarter
ended March 31, 1999. This increase was attributable primarily to the addition
of sales and marketing personnel and an increase in sales commissions
associated with increased revenues and, to a lesser extent, to higher marketing
costs. As a percentage of total revenues, sales and marketing expenses were
281% for the quarter ended March 31, 1998 and 108% for the quarter ended
March 31, 1999. This decrease in sales and marketing expense as a percent of
total revenues was due primarily to the increase in total revenues over the
period. We expect to continue to increase our marketing and promotional efforts
and hire additional sales personnel. Accordingly, we anticipate that sales and
marketing expenses will increase in absolute dollars, but will vary as a
percentage of total revenues from period to period.

    Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors. Research and development expenses increased from
$403,000 in the quarter ended March 31, 1998 to $823,000 in the quarter ended
March 31, 1999. This increase was attributable primarily to the addition of
personnel associated with product development. As a percentage of total
revenues, research and development expenses were 228% for the quarter ended
March 31, 1998 and 57.8% for the quarter ended March 31, 1999. This decrease in
research and development expense as a percent of total revenues was due
primarily to the increase in total revenues over the period. We expect to
continue to make substantial investments in research and development and
anticipate that research and development expenses will continue to increase in
absolute dollars, but will vary as a percentage of total revenues from period
to period.

    General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for administrative personnel,
legal, accounting and other general corporate expenses. General and
administrative expenses increased from $104,000 in the quarter ended March 31,
1998 to $227,000 in the quarter ended March 31, 1999, due primarily to
increased

                                       27
<PAGE>

personnel and facilities expenses necessary to support our growth. As a
percentage of total revenues, general and administrative expenses were 58.8%
for the quarter ended March 31, 1998 and 16.0% for the quarter ended March 31,
1999. This decrease in general and administrative expenses as a percent of
total revenues was due primarily to the increase in total revenues over the
period. We expect that general and administrative expenses will increase in
absolute dollars as we add personnel and incur additional costs related to the
anticipated growth of our business and operation as a public company. However,
we expect that these expenses will vary as a percentage of total revenues from
period to period.

Other Income, Net

    Other income, net consists primarily of interest earned on cash and short-
term investments, offset by interest expense related to a note payable. Other
income, net was $30,000 in the quarter ended March 31, 1998 and $112,000 in the
quarter ended March 31, 1999. The increase in other income, net was due
primarily to increased interest income earned on higher cash balances as a
result of our Series C preferred stock financing in September 1998.

                     Years Ended December 31, 1997 and 1998

Revenues

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

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

Cost of Revenues

    Cost of license revenue was $54,000 in 1998. As a percentage of license
revenue, cost of license revenue was 3.0% in 1998. Cost of license revenue
consisted of royalties paid to a third party, product documentation costs and
delivery costs for shipments to customers.

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

Operating Expenses

    Sales and Marketing.  Sales and marketing expenses were $366,000 for 1997
and $3.8 million for 1998. The increase was due primarily to the addition of
sales and marketing personnel, increased sales commissions related to increased
total revenues and, to a lesser extent, increased marketing costs. As a
percentage of total revenues, sales and marketing expenses were 185% for 1998.

    Research and Development.  Research and development expenses were $699,000
for 1997 and $2.3 million for 1998. The increase was attributable primarily to
the addition of personnel associated with product development. As a percentage
of total revenues, research and development expenses were 110% for 1998.

    General and Administrative. General and administrative expenses were
$257,000 for 1997 and $721,000 for 1998. The increase was due primarily to the
addition of management and financial

                                       28
<PAGE>

personnel necessary to support our growth. As a percentage of total revenues,
general and administrative expenses were 35.2% for 1998.

Other Income, Net

    Other income, net was $52,000 for 1997 and $188,000 for 1998. The increase
was due primarily to an increase in interest income earned on higher balances
of cash and short-term investments due primarily to our Series C preferred
stock financing in September 1998.

                           Provision for Income Taxes

    We have incurred operating losses for all periods from inception through
March 31, 1999, and therefore have not recorded a provision for income taxes.
We have recorded a valuation allowance for the full amount of our net deferred
tax assets, as the future realization of the tax benefit is not currently
likely.

    As of December 31, 1998, we had net operating loss carryforwards for
federal and state tax purposes of approximately $6.1 million. These federal and
state loss carryforwards are available to reduce future taxable income and
expire at various dates into the year 2018. Under the provisions of the
Internal Revenue Code, certain substantial changes in our ownership may limit
the amount of net operating loss carryforwards that could be utilized annually
in the future to offset taxable income.

                                       29
<PAGE>

                        Quarterly Results of Operations

    The following tables set forth a summary of our unaudited quarterly
operating results for each of the five quarters in the period ended March 31,
1999. The information has been derived from our consolidated unaudited
financial statements that, in management's opinion, have been prepared on a
basis consistent with the audited consolidated financial statements contained
elsewhere in this prospectus and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of such
information when read in conjunction with our audited consolidated financial
statements and notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
                                          Quarter Ended
                          ----------------------------------------------------
                          Mar. 31,   June 30,   Sept. 30,  Dec. 31,   Mar. 31,
                            1998       1998       1998       1998       1999
                          --------   --------   ---------  --------   --------
                                         (In thousands)
<S>                       <C>        <C>        <C>        <C>        <C>
Consolidated Statement
 of Operations Data:
Revenues:
 License................  $   161    $   454     $   478   $   699    $ 1,165
 Service................       16         25          97       119        258
                          -------    -------     -------   -------    -------
 Total revenues.........      177        479         575       818      1,423
                          -------    -------     -------   -------    -------
Cost of revenues:
 License................        4         12          17        21         34
 Service................       26         32         189       273        402
                          -------    -------     -------   -------    -------
 Total cost of
  revenues..............       30         44         206       294        436
                          -------    -------     -------   -------    -------
Gross profit............      147        435         369       524        987
                          -------    -------     -------   -------    -------
Operating expenses:
 Sales and marketing....      498        900       1,111     1,287      1,539
 Research and
  development...........      403        462         668       721        823
 General and
  administrative........      104        177         217       221        227
 Amortization of stock-
  based compensation....      184        246         352       448        355
                          -------    -------     -------   -------    -------
 Total operating
  expenses..............    1,189      1,785       2,348     2,677      2,944
                          -------    -------     -------   -------    -------
Operating loss..........   (1,042)    (1,350)     (1,979)   (2,153)    (1,957)
Other income, net.......       30         10          37       111        112
                          -------    -------     -------   -------    -------
Net loss................  $(1,012)   $(1,340)    $(1,942)  $(2,042)   $(1,845)
                          =======    =======     =======   =======    =======
As a Percentage of Total
 Revenues:
Revenues:
 License................     91.0%      94.8%       83.1%     85.5%      81.9%
 Service................      9.0        5.2        16.9      14.5       18.1
                          -------    -------     -------   -------    -------
 Total revenues.........    100.0      100.0       100.0     100.0      100.0
                          -------    -------     -------   -------    -------
Cost of revenues:
 License................      2.3        2.5         3.0       2.6        2.4
 Service................     14.7        6.7        32.9      33.4       28.3
                          -------    -------     -------   -------    -------
 Total cost of
  revenues..............     17.0        9.2        35.9      36.0       30.7
                          -------    -------     -------   -------    -------
Gross profit............     83.0       90.8        64.1      64.0       69.3
                          -------    -------     -------   -------    -------
Operating expenses:
 Sales and marketing....    281.4      187.9       193.2     157.3      108.2
 Research and
  development...........    227.7       96.5       116.2      88.1       57.8
 General and
  administrative........     58.8       37.0        37.7      27.0       16.0
 Amortization of stock-
  based compensation....    104.0       51.4        61.2      54.8       24.9
                          -------    -------     -------   -------    -------
 Total operating
  expenses..............    671.9      372.8       408.3     327.2      206.9
                          -------    -------     -------   -------    -------
Operating loss..........   (588.7)    (281.8)     (344.2)   (263.2)    (137.5)
Other income, net.......     16.9        2.1         6.4      13.6        7.9
                          -------    -------     -------   -------    -------
Net loss................   (571.8)%   (279.7)%    (337.7)%  (249.6)%   (129.6)%
                          =======    =======     =======   =======    =======
</TABLE>

    The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on our level of actual and anticipated business
activities. Our revenues and operating results are difficult to forecast and
will fluctuate, and we believe that period-to-period comparisons of our
operating results will not necessarily be meaningful. As a result, you should
not rely upon them as an indication of future performance.

                                       30
<PAGE>

                        Liquidity and Capital Resources

    Since inception, we have financed our operations primarily from private
sales of convertible preferred stock totaling $16.4 million and, to a lesser
extent, from bank borrowings and lease financing.

    Our operating activities used $1.1 million during 1997, $4.9 million during
1998 and $1.0 million during the first quarter of 1999. This negative operating
cash flow resulted principally from our net losses experienced during these
periods as we invested in the development of our products, expanded our sales
force and expanded our infrastructure to support our growth.

    Our investing activities, consisting of purchases of furniture, fixtures
and computer equipment to support our growing number of employees, used
$498,000 during 1997, $854,000 during 1998 and $331,000 during the first
quarter of 1999.

    Our financing activities generated $4.9 million in cash during 1997 and
$12.3 million in cash during 1998. Of these financing activities, the issuance
of convertible preferred stock generated net proceeds of $4.6 million during
1997 and $11.6 million during 1998. We also had proceeds from bank borrowings
of $720,000 in 1998. There were no financing activities during the first
quarter of 1999.

    At March 31, 1999, we had cash and cash equivalents aggregating $8.5
million and short-term investments totaling $160,000. Our short-term
investments secure a letter of credit issued in connection with the lease of
our corporate offices. In addition, our bank debt was $720,000 and we had
available $280,000 under an existing line of credit.

    We expect to devote substantial resources to continue our research and
development efforts, expand our sales, support, marketing and product
development organizations, establish additional facilities worldwide and build
the infrastructure necessary to support our growth. Although we believe that
the proceeds of this offering, together with our current cash and cash
equivalents and our borrowing capacity, will be sufficient to fund our
activities for at least the next 12 months, there can be no assurance that we
will not require additional financing within this time frame or that such
additional funding, if needed, will be available on terms acceptable to us or
at all. In addition, although there are no present understandings, commitments
or agreements with respect to any acquisition of other businesses, products or
technologies, we may, from time to time, evaluate potential acquisitions of
other businesses, products and technologies. In order to consummate potential
acquisitions, we may issue additional securities or need additional equity or
debt financing and any financing may be dilutive to existing investors.

                              Year 2000 Compliance

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

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

                                       31
<PAGE>

Scope of Year 2000 Assessment

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

    .products;

    .software applications;

    .facilities;

    .suppliers and vendors; and

    .computer systems.

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

Budget and Schedule

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

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

Products

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

Third-party Hardware and Software Systems and Services

    We are in the process of evaluating all of the material third-party systems
and software we use in our business. We have received assurances of Year 2000
compliance from substantially all of the providers of hardware used in our
business. We have identified approximately 20 different software

                                       32
<PAGE>

vendors that provide software products in our business. To date, we have not
received adequate assurances from the provider of our accounting software, but
we anticipate a Year 2000 upgrade to be received in the next month. If any of
the assurances we have received from our third-party software or hardware
providers are false, our internal systems and our ability to ship our product
would by materially harmed.

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

Contingency Plan

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

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

    .delay or loss of revenue;

    .cancellation of customer contracts;

    .diversion of development resources;

    .damage to our reputation;

    .increased service and warranty costs; and

    .litigation costs.

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

                      Recently Issued Accounting Standards

    The FASB issued Statement of Financial Accounting Standards, or SFAS, No.
133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we do not currently hold any derivative instruments and do not engage
in hedging activities, we expect that the adoption of SFAS No. 133 will not
have a material impact on our financial position or results of operations. We
will adopt SFAS No. 133 effective January 1, 2000.

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

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

                                       33
<PAGE>

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

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

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

           Qualitative and Quantitative Disclosures About Market Risk

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

                                       34
<PAGE>

                                    BUSINESS

    Kana develops, markets and supports an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.

    We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to to manage important customer
data and monitor real-time, hands-on customer feedback on our software.

    Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. We
intend to use our advanced Web-based architecture, which uses industry
standards, such as the Java programming language, and Extensible Mark-up
Language (XML) to facilitate scaleability and the integration of our platform
with other e-Business and legacy systems. In addition, we intend to expand our
suite of products to enter new markets, increase our global distribution
capabilities and partnerships, leverage our hosted application service and
continue to emphasize customer advocacy and satisfaction.

    Our customers include e-Businesses in the communications, Internet,
retailing and technology industries, and companies employing e-Business
strategies in traditional industries such as financial services, energy,
automobile and airlines. As of June 30, 1999, more than 100 customers have
licensed our software, including:

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

                              Industry Background

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

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

    Given the emerging shift to online customer interaction, traditional
solutions are not addressing the fundamental changes required by e-Businesses.
The Gartner Group estimates that companies

                                       35
<PAGE>

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

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

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

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

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

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

                               The Kana Solution

    We develop, market and support an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows e-Businesses to manage high volumes of e-mail
and Web-based customer communications. Furthermore, our software is designed to
integrate with enterprise applications and systems to capitalize upon the
extensive customer information contained within online customer communications.
The Kana solution enables enterprises to manage their online customer
communications in order to enhance customer relationships, reduce operating and
IT costs and generate additional revenue opportunities. Kana Online, our Web-
based service, offers the Kana solution on a hosted basis.

    We believe our software solution provides the following business benefits:

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

                                       36
<PAGE>

    Reduced Operating and IT Costs. Our solution reduces the operating and IT
costs of e-Businesses by increasing the efficiency and effectiveness of online
communications, and by migrating customer interactions from expensive
telephony-based environments to the more cost-effective mediums of e-mail and
the Web. The Kana solution utilizes a combination of automation, intelligent
workflow and advanced messaging analysis technologies to allow e-Businesses to
respond to customer messages rapidly and accurately, which can decrease the
number of repeat inquiries received and increase the efficiency of users. Our
open, scaleable Web-based architecture is designed to be readily integrated
with e-Businesses' legacy systems, extending these systems' useful lives and
allowing e-Businesses to avoid expensive upgrades. In addition, our hosted Web-
based service, Kana Online, allows e-Businesses to utilize a customized Kana
solution while minimizing IT infrastructure costs.

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

  . strategically cross-sell and up-sell existing products and services
    during the response process;

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

  . identify and develop new product and service offerings.

    In addition to these business benefits, our solution differs from those of
our competitors as a result of the following core capabilities, which we
believe enable us to deliver superior value to e-Businesses:

    Advanced Architecture.  Our solution features an advanced, scaleable, Web-
based architecture based on industry standards.

  . Web-Based. The Kana solution is based upon an advanced Web-based
    architecture that supports multiple hardware and software platforms and
    browser-based and thin client interfaces. Our solution runs on multiple
    hardware resources simultaneously in order to enhance scalability. In
    addition, our software is readily deployable and performs in demanding
    operating environments.

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

  . Open and Standards-Based.  Our software supports industry-standard
    application programming interfaces (APIs) and integrates easily with:

      .existing enterprise software environments;

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

      .product and other databases; and

      .a broad range of other information systems.

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

    Intelligent Workflow.  Our software is designed to optimize workflow,
information and communications associated with online customer interactions.
The Kana solution can be configured

                                       37
<PAGE>

to trigger not only a message response but also other actions within an
organization. For example, our software can alert an e-Business' engineering
department when the e-Business receives repeat inquiries about a software
defect or the human resources department if a resume is attached to a
communication.

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

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

    Advanced Message Classification.  Our software enables e-Businesses to
rapidly and accurately classify and respond to customer messages with the
desired level of human intervention. We are developing advanced messaging
analysis technologies that significantly increase the efficiency of the message
management process. e-Businesses experiencing a high volume of inbound messages
can choose the level of automation appropriate for their needs, including
routing a message to a particular queue or user for response, categorizing a
message for a fully automated response or allowing the creation of a fully
personalized response to the inquiry.

                               The Kana Strategy

    Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. The
key elements of our strategy include:

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

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

                                       38
<PAGE>

    Increase Global Distribution Capabilities and Partnerships.  We intend to
broaden and increase our worldwide distribution capabilities by combining the
efforts of our direct sales force and our partnerships with leading e-Business
service and infrastructure providers. By expanding existing partnerships and
aggressively developing new alliances, we can leverage their additional sales,
marketing and deployment capabilities to help establish Kana as a global
provider of e-Business infrastructure solutions addressing online customer
interactions.

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

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

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

                                       39
<PAGE>

                             Products and Services

Kana Platform and Suite of Applications

    The Kana solution is comprised of a platform and a suite of software
applications that work together to create an advanced and scaleable online
customer interactions solution for e-Businesses. The Kana platform consists of
the Kana Core Technology and Kana Control. The suite of software applications
consists of Kana Mail, Kana Direct, Kana Reports, Kana Link, Kana Classify and
Kana Web Connect. We generally license our software based on the number of
concurrent users of the system and the application components purchased.

Kana Application Components

Kana Technology Platform

Corporate Infrastructure

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

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

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

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

                                       40
<PAGE>

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

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

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

    Kana Classify. Kana Classify is our advanced messaging analysis technology
that drives automated actions. Kana Classify categorizes customer messages and
can automatically respond to customers, suggest responses for user review or
route messages to skill-based queues. Kana Classify is currently in limited
release with selected Kana customers.

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

Kana Online

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

    The hardware and core technology supporting Kana Online is pre-installed
and managed at Exodus Communications, Inc., a leading provider of Internet
server hosting and management solutions. We believe that Exodus is equipped to
provide the security, reliability and performance required for hosting our
solution through its nationwide network operating centers and high-speed wide
area network backbone.

    Kana Online offers several key benefits to e-Businesses:

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

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

                                       41
<PAGE>

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

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

Professional Services

    Our professional services group consists of client services, technical
services and solution services. As of June 30, 1999, our professional services
group consisted of 20 full-time employees.

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

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

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

                                   Technology

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

Open, Standards-Based Architecture

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

  . Java;

  . JDBC (Java DataBase Connectivity);

  . XML (Extensible Mark-up Language);

  . standard relational databases from Oracle and Microsoft; and

  . Microsoft ASP (Active Server Pages).

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

Multi-Tier Web-Based Architecture

    The Kana platform relies on an advanced multi-tier Web-based architecture.
This architecture separates the different system components into logical
layers, supports multiple hardware and software platforms, supports browser-
based and thin client interfaces and enables the system to run

                                       42
<PAGE>

on multiple hardware resources simultaneously in order to enhance scalability.
The tiers are the presentation, user interface, workflow, business object and
data layers.

Web- and Windows-Based Interfaces

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

Advanced Messaging Analysis Technologies

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

Ease of Platform Upgrade

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

                              Sales and Marketing

Sales

    Our sales strategy is to pursue targeted accounts through a combination of
our direct sales force and our strategic partners. To date, we have targeted
our sales efforts at the e-Business divisions of Global 2000 companies and
rapidly growing Internet companies. We maintain direct sales personnel
domestically in California, Connecticut, Georgia, Illinois, Maryland,
Massachusetts, New York and Texas, and internationally in the United Kingdom.
The direct sales force is organized into regional teams, which include both
sales representatives and systems engineers. Our direct sales force is
complemented by telemarketing representatives based at our headquarters in Palo
Alto, California.

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

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<PAGE>

Marketing

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

  . conducting seminars;

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

  . establishing and maintaining close relationships with recognized
    industry analysts;

  . conducting direct mailings and ongoing public relations campaigns;

  . managing and maintaining our Web site;

  .conducting market research; and

  .creating and placing advertisements.

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

                                    Partners

    Kana has three types of partnerships, service partnerships, marketing
alliance partnerships and reseller partnerships, that are designed to leverage
our services, software development and sales capabilities. We view these
partners as critical to our success in providing enterprise-wide e-Business
interactions solutions.

    Service Partners.  Our service partners include system integrators, such as
Andersen Consulting and Scient Corporation, that provide implementation
consulting services that allow us to leverage the size and scope of their
organizations.

    Marketing Alliance Partners.  We have established a series of relationships
with marketing alliance partners across a variety of industries such as
customer relationship management software, sales force automation software,
telephony systems and IT hardware, that allow us to provide a comprehensive
solution to e-Businesses.

    Reseller and Strategic Sales Partners.  We complement our direct sales
force with a series of reseller and strategic sales partnerships with industry
leaders, such as MCI WorldCom, Inc. and Convergys Corporation.

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

    We rely to a significant degree on our relationships with our partners.
Many of these partners also work with competing software companies, and our
success will depend on their willingness and ability to devote sufficient
resources and efforts to the Kana solution. Our arrangements with these

                                       44
<PAGE>

parties typically are in the form of non-exclusive agreements that may be
terminated by either party without cause or penalty and with limited notice.
Therefore, we can provide no guarantee that any of our partners will continue
their relationship with us.

                                   Customers

    Our customers range from Global 2000 companies pursuing an e-Business
strategy to rapidly growing Internet companies. As of June 30, 1999, we have
licensed our solution to more than 100 customers in a variety of industries
worldwide. Kana's representative customers include:

  Portals                      e-Tailing                Internet



    Excite@Home                barnesandnoble.com       Critical Path
    Lycos                      CDNOW                    eBay
    GoTo.com                   eToys                    Priceline.com

  Financial                    Technology               Airlines



  Chase Manhattan Bank         Hewlett-Packard          Canadian Airlines
  Dime Savings Bank            Netscape                 KLM Airlines
  Dow Jones/Wall Street JournalPeopleSoft               Northwest Airlines

    Communications             Call Centers             Other



  Ameritech                    Convergys                Ford Motor Company
  TCI.Net                      Modus Media              The Gap
  US West                      Stream International     Shell International

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

                            Research and Development

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

    Our research and development expenses totaled approximately $2.3 million
for the year ended December 31, 1998 and $699,000 for the year ended December
31, 1997. As of June 30, 1999, approximately 29 of our employees were engaged
in research and development activities. Our success depends, in part, on our
ability to enhance our existing customer interactions solutions and to develop
new services, functionality and technology that address the increasingly
sophisticated and varied needs of our prospective customers. Delays in bringing
to market new products or their

                                       45
<PAGE>

enhancements, or the existence of defects in new products or enhancements,
could be exploited by our competitors. If we were to lose market share as a
result of lapses in our product management, our business would suffer.

                                  Competition

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

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

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

                             Intellectual Property

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

  . An e-Business infrastructure solution for online customer interactions,
    using rules and message categories to codify workflow, including use of
    standard phrases, response templates, recipient lists and routing;

  . An e-Business infrastructure solution for online customer interactions
    in which advanced workflow features are used in conjunction with rules,
    queues and timers;

  . An e-Business infrastructure solution for online customer interactions
    that uses queues and timers to track, route and escalate the priority of
    messages; and

  . An e-Business infrastructure solution for online customer interactions
    that combines a rule-based workflow engine with a text classification
    system to automate e-mail response.

                                       46
<PAGE>

    These patents, if allowed, will cover a material portion of our solution.

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

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

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

  . Kana ceases to do business without a successor; or

  . Kana discontinues providing maintenance and support.

    Substantial litigation regarding intellectual property rights exists in the
software industry. Our software products may be increasingly subject to third-
party infringement claims as the number of competitors in the industry segments
grows and the functionality of products in different industry segments
overlaps. Some of our competitors in the market for customer communications
software may have filed or may intend to file patent applications covering
aspects of their technology that they may claim Kana's technology infringes. We
cannot be certain that any of these competitors will not make a claim of
infringement against us with respect to its products and technology.

                                   Employees

    As of June 30, 1999, we had 98 full-time employees, 20 of whom were engaged
in customer service and support, 35 in sales and marketing, 29 in research and
development, and 14 in finance, administration and operations. Our future
performance depends in significant part upon the continued service of our key
technical, sales and marketing, and senior management personnel, none of whom
is bound by an employment agreement requiring service for any defined period of
time. The loss of the services of one or more of our key employees could harm
our business.

    Our future success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense, particularly in the San Francisco
Bay Area where we are headquartered. Due to the limited number of people
available with the necessary technical skills and understanding of the
Internet, we can give no assurance that we can retain or attract key personnel
in the future. None of our employees is represented by a labor union. We have
not experienced any work stoppages and consider our relations with our
employees to be good. See "Risk Factors--We may be unable to hire and retain
the skilled personnel necessary to develop our engineering, professional
services and support capabilities" and "--We may face difficulties in hiring
and retaining qualified sales personnel to sell the Kana solution".

                                       47
<PAGE>

                                   Facilities

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

                               Legal Proceedings

    We are not currently a party to any legal proceedings.

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<PAGE>

                                   MANAGEMENT

                        Executive Officers and Directors

    The following table sets forth certain information regarding the executive
officers and directors of Kana as of June 30, 1999:

<TABLE>
<CAPTION>
Name                      Age                     Position
----                      ---                     --------
<S>                       <C> <C>
Michael J. McCloskey.....  42 Chief Executive Officer and Director
Mark S. Gainey...........  31 President and Chairman of the Board of Directors
Joseph D. McCarthy.......  34 Vice President, Finance and Operations
Michael R. Wolfe.........  30 Vice President, Engineering
Paul R. Holland..........  38 Vice President, Worldwide Sales
William R. Phelps........  37 Vice President, Professional Services
David M. Beirne..........  35 Director
Eric A. Hahn.............  39 Director
Charles A. Holloway,
 Ph.D....................  63 Director
Steven T. Jurvetson......  32 Director
Ariel Poler..............  32 Director
</TABLE>

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

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

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

    Michael R. Wolfe. Mr. Wolfe joined Kana in May 1997 as Director of
Engineering and has served as Vice President, Engineering since April 1998.
Prior to joining Kana, from March 1995 to February 1997, Mr. Wolfe served as
Director of Engineering at Internet Profiles Corporation, an internet marketing
company. From February 1994 to March 1995, Mr. Wolfe was an associate at

                                       49
<PAGE>

Wells Fargo Nikko specializing in software development. From June 1991 to
February 1994, Mr. Wolfe was a software programming analyst at Goldman, Sachs &
Co. Mr. Wolfe has taught computer science at Stanford University and the
University of California at Berkeley. Mr. Wolfe holds a B.S. and M.S. in
Computer Science from Stanford University.

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

    William R. Phelps. Mr. Phelps joined Kana in December 1998 as Vice
President, Professional Services. Prior to joining Kana, from March 1997 to
November 1998, Mr. Phelps served as Vice President, Professional Services for
CrossWorlds Software, Inc., an application integration software company. From
January 1994 to February 1997, Mr. Phelps served as a principal consultant at
Booz, Allen & Hamilton, a management consulting firm. Mr. Phelps holds a B.S.
in Industrial Engineering from Stanford University.

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

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

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

    Steven T. Jurvetson. Mr. Jurvetson has served as a Director of Kana since
April 1997. Mr. Jurvetson has been a Managing Director of Draper Fisher
Jurvetson, a venture capital firm, since June 1995. Prior to joining Draper
Fisher Jurvetson, from July 1990 to September 1993,

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<PAGE>

Mr. Jurvetson served as a consultant with Bain & Company, a management
consulting firm. Mr. Jurvetson served as a research and development engineer at
Hewlett-Packard during the summer months from June 1987 to August 1989. Mr.
Jurvetson serves on the boards of directors of Cognigine Corporation,
FastParts, Inc., iTv Corp., Tacit Knowledge Corporation, Third Voice, Inc. and
ReleaseNow.com Corporation. Mr. Jurvetson holds a B.S. and an M.S. in
Electrical Engineering from Stanford University and an M.B.A. from the Stanford
Graduate School of Business.

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

                       Board of Directors and Committees

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

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

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

          Compensation Committee Interlocks and Insider Participation

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

                             Director Compensation

    Kana currently does not compensate any non-employee member of the board.
Directors who are also employees of Kana do not receive additional compensation
for serving as directors. In 1998, Kana granted an option to purchase 40,000
shares of common stock to Dr. Holloway at an exercise price of $0.05 per share
and an option to purchase 112,549 shares of common stock to Mr. Hahn at an
exercise price of $0.05 per share.

                                       51
<PAGE>

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

                             Executive Compensation

Summary Compensation Table

    The following table sets forth information concerning compensation during
the year ended December 31, 1998 of Kana's Chief Executive Officer and each of
the four other most highly compensated executive officers who earned an
annualized salary of more than $100,000 for the fiscal year ended December 31,
1998, referred to in this prospectus as the Named Executive Officers. In June
1999, Mr. Michael J. McCloskey joined Kana as its Chief Executive Officer. Mr.
McCloskey's annualized salary for 1999 is $150,000. In June 1999, the
compensation committee approved an increase in Mr. Gainey's annual salary to
$150,000. No individual who would otherwise have been includable in the table
on the basis of salary and bonus earned during 1998 has resigned or otherwise
terminated their employment during 1998. The compensation table excludes other
compensation in the form of perquisites and other personal benefits that
constitutes the lesser of $50,000 or 10% of the total annual salary and bonus
of each of the Named Executive Officers in 1998.

<TABLE>
<CAPTION>
                                                         Long-Term
                                                        Compensation
                                   Annual Compensation     Awards
                                   -------------------- ------------
                                                         Securities
                             Year                        Underlying   All Other
Name and Principal Position  Ended  Salary     Bonus    Options (#)  Compensation
---------------------------  ----- -------------------- ------------ ------------
<S>                          <C>   <C>       <C>        <C>          <C>
Mark S. Gainey.............  1998  $  72,500        --        --         --
 President and former Chief
  Executive
  Officer
Joseph D. McCarthy(1)......  1998     92,917        --    160,000        --
 Vice President, Finance
  and Operations
Paul R. Holland............  1998     75,000 $  139,022       --         --
 Vice President, Worldwide
  Sales
William R. Phelps(2).......  1998      8,917        --        --         --
 Vice President, Profes-
  sional Services
Christopher M. Noble(3)....  1998    109,374        --    350,000        --
 Former Vice President,
  Marketing
</TABLE>
--------
(1) Mr. McCarthy joined Kana in March 1998. His annualized salary for 1998 was
    $120,000.
(2) Mr. Phelps joined Kana in December 1998. His annualized salary for 1998 was
    $130,000.
(3) Mr. Noble joined Kana in February 1998. His annualized salary for 1998 was
    $125,000. Mr. Noble left Kana in March 1999.

                                       52
<PAGE>

                       Option Grants in Last Fiscal Year

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

                             Option Grants in 1998
<TABLE>
<CAPTION>
                                        Individual Grants
                         -----------------------------------------------
                                                                         Potential Realizable Value
                                                                              at Assumed Annual
                                                                            Rates of Stock Price
                         Number of                                         Appreciation for Option
                         Securities Percent of Total Exercise                  Term at Public
                         Underlying Options Granted   Price                    Offering Price
                          Options   to Employees in    Per    Expiration ---------------------------
Name                     Granted(#)       1998        Share      Date         5%            10%
----                     ---------- ---------------- -------- ---------- ------------- -------------
<S>                      <C>        <C>              <C>      <C>        <C>           <C>
Mark S. Gainey..........      --           --           --          --
Joseph D. McCarthy......  160,000         9.22%       $0.05    03/19/08
Paul R. Holland.........      --           --           --          --
William R. Phelps.......      --           --           --          --
Christopher M. Noble....  350,000        20.18         0.05    02/12/08
</TABLE>

    In 1998, Kana granted options to purchase up to a total of 1,734,549 shares
to employees, directors and consultants under Kana's 1997 Stock Option/Stock
Issuance Plan at exercise prices equal to the then existing fair market value
of Kana's common stock on the dates of grant, as determined in good faith by
the board of directors. Options granted are immediately exercisable in full,
but any shares purchased under these options that are not vested are subject to
repurchase by Kana at the option exercise price. Generally this repurchase
right lapses as to 25% of the shares after one year of service and as to the
remaining shares in equal monthly installments over an additional three-year
period.

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

    In June 1999, Kana granted to Mr. McCloskey, Kana's Chief Executive
Officer, an option to purchase 1,400,000 shares of common stock at an exercise
price of $0.45 per share. The option is immediately exercisable for vested and
unvested shares, but any shares purchased under these options that are not
vested are subject to repurchase by Kana at the option exercise price. This
repurchase right lapsed as to 280,000 shares on June 17, 1999 and lapses as to
the remaining shares in equal monthly installments over the 48-month period
following June 17, 1999. The option expires on June 16, 2009.

    In June 1999, Kana granted to Mr. McCarthy an option to purchase 75,000
shares of common stock and granted to Mr. Phelps an option to purchase 35,000
shares of common stock, each at an exercise price of $0.45 per share. Each
option is immediately exercisable for vested and unvested shares, but any
shares purchased under these options that are not vested are subject to
repurchase by Kana at the option exercise price. The repurchase right lapses
for each of the grants as to 25% of the shares after one year of service from
June 17, 1999 and as to the remaining shares in equal monthly installments over
the 36-month period following June 17, 2000. Each option expires on June 16,
2009.

                                       53
<PAGE>

   Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values

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

<TABLE>
<CAPTION>
                                                           Number of
                                                        Shares Acquired  Value
     Name                                                 on Exercise   Realized
     ----                                               --------------- --------
     <S>                                                <C>             <C>
     Mark S. Gainey....................................          --        --
     Joseph D. McCarthy................................     160,000       $ 0
     Paul R. Holland...................................     608,558         0
     William R. Phelps.................................          --        --
     Christopher M. Noble..............................     350,000         0
</TABLE>

    In February and June 1999, Mr. Phelps exercised options to purchase a total
of 310,000 shares of common stock. The exercise price for each grant equaled
the fair market value on the date of exercise and accordingly, Mr. Phelps did
not realize value on the exercises. In June 1999, Mr. McCloskey exercised an
option to purchase 1,400,000 shares of common stock. The exercise price equaled
the fair market value on the date of exercise and accordingly, Mr. McCloskey
did not realize value on the exercise. In June 1999, Mr. McCarthy exercised an
option to purchase 75,000 shares of common stock. The exercise price equaled
the fair market value on the date of exercise and accordingly, Mr. McCarthy did
not realize any value on the exercise.

                                 Benefit Plans

1999 Stock Incentive Plan

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

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

                                       54
<PAGE>

    Programs.  Our 1999 plan has five separate programs:

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

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

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

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

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

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

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

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

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

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

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

                                       55
<PAGE>

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

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

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

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

  . The options currently outstanding under our 1997 plan will immediately
    vest in the event we are acquired and the acquiring company does not
    assume those options. Certain of those options, however, contain an
    additional vesting acceleration feature which will result in the
    immediate vesting of all or part of those options upon an involuntary
    termination of the optionee's employment within 18 months following an
    acquisition in which those options are assumed.

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

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

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

                                       56
<PAGE>

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

    The FASB recently issued an exposure draft of a proposed interpretation of
the current accounting principles applicable to equity incentive plans. Under
the proposed interpretation, option grants made to non-employee board members
after December 15, 1998 will result in a direct charge to the company's
reported earnings based upon the fair value of the option measured initially as
of the grant date of that option and then subsequently on the vesting date of
each installment of the underlying option shares. If the proposed
interpretation is adopted, then the following changes will be made to our
automatic stock option grant program:

  . The initial 20,000-share option grant will not be made to a newly
    elected or appointed non-employee board member until the first annual
    stockholders meeting held more than 12 months after the date of his or
    her initial election or appointment to the board. At that annual
    meeting, the board member will also receive an option grant for an
    additional 5,000 shares under the annual grant portion of the program.

  . One-half of the shares subject to the initial 20,000-share option grant
    will be immediately vested at the time of the option grant, and the
    remaining shares will vest in a series of 24 successive equal monthly
    installments upon the optionee's completion of each month of board
    service over the 24-month period measured from the grant date. However,
    the shares will immediately vest in full upon certain changes in control
    or ownership or upon the optionee's death or disability while a board
    member.

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

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

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

  . Limited stock appreciation rights will automatically be included as part
    of each grant made under the salary investment option grant program and
    the automatic and director fee option grant programs, and these rights
    may also be granted to one or more officers as part of their option
    grants under the discretionary option grant program. Options with this
    feature may be

                                       57
<PAGE>

    surrendered to us upon the successful completion of a hostile tender
    offer for more than 50% of our outstanding voting stock. In return for
    the surrendered option, the optionee will be entitled to a cash
    distribution from us in an amount per surrendered option share based
    upon the highest price per share of our common stock paid in that tender
    offer.

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

1999 Employee Stock Purchase Plan

    Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
board in July 1999 and we expect it to be approved by the stockholders in
August 1999. The plan will become effective immediately upon the signing of
the underwriting agreement for this offering. The plan is designed to allow
our eligible employees and the eligible employees of our participating
subsidiaries to purchase shares of common stock, at semi-annual intervals,
with their accumulated payroll deductions.

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

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

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

    Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and October
each year. In no event, however, may any participant purchase more than 750
shares on any purchase date, and not more than 75,000 shares may be purchased
in total by all participants on any purchase date.

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

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

                                      58
<PAGE>

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

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

  . The board may at any time amend, suspend or discontinue the plan.
    However, certain amendments may require stockholder approval.

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

Restricted Stock Purchase Agreements

    In July 1996, Kana sold to Mr. Gainey, Kana's co-founder, President and
Chairman of the Board, 3,750,000 shares of common stock at a purchase price of
$0.0001 per share. In April 1997, Kana repurchased those shares of common stock
and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase price of
$0.01 per share. These shares are subject to a right of repurchase granted to
Kana that lapses in a series of equal monthly installments over a four-year
period measured from June 4, 1996. In addition, Kana's right to repurchase 50%
of any unvested shares will lapse in the event of an acquisition of Kana by
merger or asset sale and if Mr. Gainey is not offered employment or is
terminated without cause by Kana or its successor.

Stock Purchase Agreements

    In February 1997, Dr. Holloway, one of Kana's directors, exercised an
option to purchase 80,000 shares of common stock and entered into a stock
purchase agreement for the purchase of the shares. These shares are subject to
a right of repurchase granted to Kana. Under the stock purchase agreement, upon
an acquisition of Kana by merger or asset sale, Kana's right to repurchase all
of the unvested shares will automatically lapse in its entirety and the shares
will vest in full unless the repurchase right is assigned to the successor
entity.

    In April 1998, Mr. Holland, Kana's Vice President, Worldwide Sales,
exercised an option to purchase 608,558 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, upon an acquisition of Kana by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity. In addition, in the event of both an acquisition of Kana by
merger or asset sale and if Mr. Holland is not offered comparable employment by
the successor entity, Kana's right to repurchase all of the unvested shares
will automatically lapse and the shares will vest in full.

    In June 1998, Mr. McCarthy, Kana's Vice President, Finance and Operations,
exercised an option to purchase 160,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, upon an acquisition of Kana by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity. In addition, in the event of both an acquisition of Kana by
merger or asset sale and if Mr. McCarthy is not offered employment by the
successor entity, Kana's right to repurchase 50% of the unvested shares will
automatically lapse and the shares will vest in full.

                                       59
<PAGE>

    In July 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 112,549 shares of common stock and entered into a stock purchase
agreement for the purchase of the shares. These shares are subject to a right
of repurchase granted to Kana. Under the stock purchase agreement, upon an
acquisition of Kana by merger or asset sale, Kana's right to repurchase all of
the unvested shares will automatically lapse in its entirety and the shares
will vest in full.

    In July 1998, Dr. Holloway exercised an option to purchase 40,000 shares of
common stock and entered into a stock purchase agreement for the purchase of
the shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Dr. Holloway does
not provide services to the successor entity, Kana's right to repurchase 25% of
the unvested shares will automatically lapse and the shares will vest in full.

    In February and June 1999, Mr. Phelps, Kana's Vice President, Professional
Services, exercised options to purchase a total of 310,000 shares of common
stock and entered into a stock purchase agreement for the purchase of the
shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Mr. Phelps is not
offered employment by the successor entity, Kana's right to repurchase 25% of
the unvested shares will automatically lapse and the shares will vest in full.

    In June 1999, Mr. McCloskey, Kana's Chief Executive Officer, exercised an
option to purchase 1,400,000 shares of common stock and entered into a stock
purchase agreement for the purchase of the shares. These shares are subject to
a right of repurchase granted to Kana. Under the stock purchase agreement and
the terms of Mr. McCloskey's employment arrangement, this stock is subject to
vesting, which accelerates under certain circumstances. See "--Employment
Arrangements".

    In June 1999, Mr. McCarthy exercised an option to purchase 75,000 shares of
common stock and entered into a stock purchase agreement for the purchase of
the shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Mr. McCarthy is
not offered employment by the successor entity, Kana's right to repurchase 25%
of the unvested shares will automatically lapse and the shares will vest in
full.

Employment Arrangements

    In June 1999, Kana entered into an employment arrangement with Mr.
McCloskey. Mr. McCloskey serves as Chief Executive Officer on an at-will basis.
However, under the terms of the employment arrangement, upon a change of
control:

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

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

                                       60
<PAGE>

  . if Mr. McCloskey is offered full-time employment with the successor
    corporation as other than that corporation's chief executive officer,
    the rate at which his then unvested shares of common stock vest will
    double, such that his shares of common stock will vest at a rate
    equivalent to 46,667 shares of common stock per month;

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

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

                  Limitation of Liability and Indemnification

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

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

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

  . unlawful payments of dividends or unlawful stock repurchases or
    redemptions as provided in Section 174 of the Delaware General
    Corporation Law; or

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

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

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

                                       61
<PAGE>

              TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES

                              Sales of Securities

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

  . In July 1996, Kana sold to Mark S. Gainey 3,750,000 shares of common
    stock for a total consideration of $375. In April 1997, Kana repurchased
    those shares and sold to Mr. Gainey 3,750,000 shares of common stock for
    total consideration of $37,500.

  . In July 1996, Kana sold to Michael T. Horvath 1,250,000 shares of common
    stock for a total consideration of $125. In April 1997, Kana repurchased
    those shares and sold to Mr. Horvath 625,000 shares of common stock for
    total consideration of $6,250.

  . In April 1997, Kana sold to various investors, including entities
    affiliated with Draper Fisher Jurvetson, a total of 5,923,078 shares of
    Series A preferred stock for total consideration of $770,000.

  . In September 1997, Kana sold to various investors, including entities
    affiliated with Draper Fisher Jurvetson and entities affiliated with
    Benchmark Capital, a total of 7,453,704 shares of Series B preferred
    stock for total consideration of $4,025,000.

  . In June 1998, Kana sold to Eric A. Hahn 168,824 shares of Series B
    preferred stock for total consideration of $91,165.

  . In August and September 1998, Kana sold to various investors, including
    entities affiliated with Draper Fisher Jurvetson, entities affiliated
    with Benchmark Capital, entities affiliated with Amerindo Investment
    Advisors, Inc. and Eric A. Hahn, a total of 5,121,148 shares of Series C
    preferred stock for total consideration of $11,625,006.

  . In July 1999, Kana sold to various investors, including entities
    affiliated with Draper Fisher Jurvetson, entities affiliated with
    Benchmark Capital and entities affiliated with Amerindo Investment
    Advisors, a total of 1,257,707 shares of Series D preferred stock for
    total consideration of $10,200,004.

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

<TABLE>
<CAPTION>
                                                                     Total Shares
                                                                  of Preferred Stock
                          Series A  Series B  Series C  Series D      on an As-
                          Preferred Preferred Preferred Preferred     Converted
        Investor            Stock     Stock     Stock     Stock         Basis
        --------          --------- --------- --------- --------- ------------------
<S>                       <C>       <C>       <C>       <C>       <C>
Entities affiliated with
 Draper Fisher
 Jurvetson..............  4,530,289 1,966,297   930,397  246,609      7,673,592
Entities affiliated with
 Benchmark Capital......          0 5,183,704 1,013,216  271,270      6,468,190
Entities affiliated with
 Amerindo Investment
 Advisors...............          0         0 1,762,115  369,915      2,132,030
Eric A. Hahn............          0   168,824    44,053        0        212,877
</TABLE>

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

    In February 1997, in connection with an option exercise, Kana issued
80,000 shares of common stock to Dr. Holloway, one of Kana's directors, for an
aggregate exercise price of $800.


                                      62
<PAGE>

    In June 1998, in connection with option exercises, Kana issued 250,000
shares of common stock to Mr. Poler, one of Kana's directors, for an aggregate
exercise price of $2,500.

                     Agreements with Officers and Directors

    In February 1997, Dr. Holloway, one of Kana's directors, exercised an
option to purchase a total of 80,000 shares of common stock.

    In July 1996, Kana sold to Mr. Gainey, Kana's co-founder, President and
Chairman of the Board, 3,750,000 shares of common stock at a purchase price of
$0.0001 per share. In April 1997, Kana repurchased those shares of common stock
and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase price of
$0.01 per share. These shares are subject to a right of repurchase granted to
Kana that lapses in equal monthly installments over a four-year period from
June 4, 1996. In addition, Kana's right to repurchase 50% of his then unvested
shares will lapse if Mr. Gainey is terminated without cause by Kana or its
successor.

    In April 1998, Mr. Holland, Kana's Vice President, Worldwide Sales,
exercised an option to purchase 608,558 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. Holland paid the
$30,428 exercise price by delivering a five-year full-recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. Holland. As of June 30, 1999, a total of $32,452 in
unpaid principal and interest was outstanding under the note.

    In June 1998, Mr. McCarthy, Kana's Vice President, Finance and Operations,
exercised an option to purchase 160,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. McCarthy paid
the $8,000 exercise price by delivering a five-year full-recourse promissory
note at a 5.7% annual interest rate. The note is secured by the shares of
common stock purchased by Mr. McCarthy. As of June 30, 1999, a total of $8,456
in unpaid principal and interest was outstanding under the note.

    In June 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 112,549 shares of common stock. Mr. Hahn paid the $5,627 exercise
price by delivering a five-year full-recourse promissory note at a 5.7% annual
interest rate. The note is secured by the shares of common stock purchased by
Mr. Hahn. As of June 30, 1999, a total of $5,948 in unpaid principal and
interest was outstanding under the note.

    In June 1998, Mr. Poler, one of Kana's directors, exercised options to
purchase 250,000 shares of common stock.

    In July 1998, Dr. Holloway exercised an option to purchase 40,000 shares of
common stock. Dr. Holloway paid the $2,000 exercise price by delivering a five-
year full-recourse promissory note at a 5.7% annual interest rate. The note is
secured by the shares of common stock purchased by Dr. Holloway. As of June 30,
1999, a total of $2,105 in unpaid principal and interest was outstanding under
the note.

    In February 1999, Mr. Phelps, Kana's Vice President, Professional Services,
exercised an option to purchase 275,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. Phelps paid the
$63,250 exercise price by delivering a five-year full-recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. Phelps. As of June 30, 1999, a total of $64,452 in
unpaid principal and interest was outstanding under the note.

                                       63
<PAGE>

    In June 1999, Mr. McCloskey, Kana's Chief Executive Officer, exercised an
option to purchase 1,400,000 shares of common stock. Mr. McCloskey paid the
$630,000 exercise price by delivering a five-year full recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. McCloskey.

    In June 1999, Mr. McCarthy exercised an option to purchase 75,000 shares of
common stock. Mr. McCarthy paid the $33,750 exercise price by delivering a
five-year full recourse promissory note at 5.7% annual interest rate. The note
is secured by the shares of common stock purchased by Mr. McCarthy.

    In June 1999, Mr. Phelps exercised an option to purchase 35,000 shares of
common stock. Mr. Phelps paid the $15,750 exercise price by delivering a five-
year full recourse promissory note at a 5.7% annual interest rate. The note is
secured by the shares of common stock purchased by Mr. Phelps.

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

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

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

                          Transactions with Promoters

    Each of Mr. Gainey, Kana's President and Chairman of the Board, and Michael
T. Horvath, the former Treasurer and a former director of Kana, is a co-founder
of Kana and may be deemed a promoter for purposes of the federal securities
laws. In July 1996, Kana sold to Mr. Gainey 3,750,000 shares of common stock at
a purchase price of $0.0001 per share. In April 1997, Kana repurchased those
shares and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase
price of $0.01 per share. In July 1996, Kana sold to Mr. Horvath 1,250,000
shares of common stock at a purchase price of $0.0001 per share. In April 1997,
Kana repurchased those shares and sold to Mr. Horvath 625,000 shares of common
stock at a purchase price of $0.01 per share. All other material transactions
with Mr. Gainey and Mr. Horvath are described in this section or elsewhere in
this prospectus. See "Management--Executive Compensation".

    In April 1997, Kana entered into a consulting agreement with Mr. Horvath.
Under the agreement, Mr. Horvath agreed to provide up to 20 hours of consulting
services to Kana per month, at a rate of $25.00 per hour, until July 1, 2000.
In connection with the agreement, Mr. Horvath was granted a right to purchase
625,000 shares of common stock, which he purchased in April 1997, as described
above.

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

                                       64
<PAGE>

                             PRINCIPAL STOCKHOLDERS

    The table below sets forth information regarding the beneficial ownership
of Kana's common stock as of July 9, 1999, by the following individuals or
groups:

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

  . each of the Named Executive Officers;

  . each director of Kana; and

  . all directors and executive officers as a group.

    Applicable percentage ownership in the following table is based on
30,736,568 shares of common stock outstanding as of July 9, 1999, as adjusted
to reflect the conversion of all outstanding shares of preferred stock upon the
closing of this offering and treating as outstanding all options exercisable
within 60 days of July 9, 1999 held by the particular stockholder and that are
included in the first column. The numbers shown in the table below assume no
exercise by the underwriters of their over-allotment option.

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

<TABLE>
<CAPTION>
                                                                 Percentage of Shares
                                                                  Beneficially Owned
                                       Number of Shares  ------------------------------------
 Name and Address of Beneficial Owner Beneficially Owned Prior to Offering After the Offering
 ------------------------------------ ------------------ ----------------- ------------------
<S>                                   <C>                <C>               <C>
Entities affiliated
 with Draper Fisher
 Jurvetson (1).........                    7,673,592           25.0%
Entities affiliated
 with Benchmark Capital
 Partners L.P. (2).....                    6,468,190           21.0
Entities affiliated
 with Amerindo
 Investment Advisors,
 Inc. (3)..............                    2,132,030            6.9
Mark S. Gainey (4).....                    3,464,000           11.3
Michael J. McCloskey
 (5)...................                    1,400,000            4.6
Paul R. Holland (6)....                      608,558            2.0
William R. Phelps (7)..                      310,000            1.0
Joseph D. McCarthy
 (8)...................                      235,000              *
Christopher M. Noble...                       94,791              *
Steven T. Jurvetson
 (1)...................                    7,673,592           25.0
David M. Beirne (2)....                    6,468,190           21.0
Eric A. Hahn (9).......                      325,426            1.1
Ariel Poler (10).......                      250,000              *
Dr. Charles A. Holloway
 (11)..................                      120,000              *
All directors and
 executive officers as
 a group (11 persons)..                   21,255,766           69.2
</TABLE>
--------
  * Less than one percent.
 (1) Principal address is 400 Seaport Court, Suite 250, Redwood City, CA 94063.
     Represents 5,611,247 shares of common stock held by Draper Fisher
     Associates Fund IV, L.P. and 422,353 shares of common stock held by Draper
     Fisher Partners IV, LLC. Mr. Jurvetson disclaims beneficial ownership of
     these shares, except to the extent of his pecuniary interest in the Draper
     Fisher Jurvetson Funds. Also includes 1,639,992 shares of common stock
     held by the Draper 1999 Grandchildren's Trust.

                                       65
<PAGE>

 (2) Principal address is 2480 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
     Includes 5,675,021 shares of common stock held by Benchmark Capital
     Partners, L.P., and 793,169 shares of common stock held by Benchmark
     Founders' Fund L.P. Mr. Beirne, one of Kana's directors, is a Managing
     Member of Benchmark Capital Management Co., LLC. Mr. Beirne disclaims
     beneficial ownership of these shares, except to the extent of his
     pecuniary interest in the Benchmark funds.
 (3) Principal address is 399 Park Avenue, 22nd Floor, New York, NY 10022.
     Represents 1,654,115 shares of common stock held by ATGF II, a Panamanian
     corporation, 250 shares of common stock held by Daniel Chapey, 50,000
     shares of common stock held by the Ralph H. Cechettini 1995 Trust, 11,000
     shares of common stock held by Anthony Ciulla, 4,500 shares of common
     stock held by Joaquin Garcia-Larrieu, 12,500 shares of common stock held
     by Mathew D. Fitzmaurice, 131,815 shares of common stock held by the
     Litton Master Trust, 182,500 shares of common stock held by Emeric
     McDonald, 350 shares of common stock held by William Slattery, 75,000
     shares of common stock held by Pivotal Partners L.P., and 10,000 shares of
     common stock held by James Stableford.
 (4) Represents shares of common stock held by the Mark and Elisabeth Gainey
     Family Trust. Includes 703,125 shares of common stock subject to Kana's
     right of repurchase. This repurchase right lapses with respect to 78,125
     shares per month.
 (5) Includes 1,120,000 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 23,333 shares per
     month.
 (6) Includes 342,315 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 12,678 shares per
     month.
 (7) Includes 235,418 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 5,729 shares per
     month. Also includes 35,000 shares of common stock subject to Kana's right
     of repurchase, which lapses with respect to 8,750 shares in June 2000 and
     729 shares per month thereafter.
 (8) Includes 100,001 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 3,333 shares per
     month. Also includes 75,000 shares of common stock subject to Kana's right
     of repurchase, which lapses with respect to 18,750 shares in June 2000 and
     1,563 shares per month thereafter.
 (9) Includes 79,723 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 2,345 shares per
     month.
(10) Includes 27,778 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 6,944 shares per
     month.
(11) Includes 26,667 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 3,333 shares per
     month.

                                       66
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

    At the closing of this offering, the authorized capital stock of Kana will
consist of 60,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value, after giving effect to the
amendment of Kana's certificate of incorporation to delete references to the
existing preferred stock following conversion of that stock. The following
description of capital stock gives effect to the certificate of incorporation
to be filed upon the closing of this offering. Immediately following the
completion of this offering, and assuming no exercise of the underwriters'
over-allotment option, an aggregate of   shares of common stock will be issued
and outstanding, and no shares of preferred stock will be issued and
outstanding.

    The following description of Kana's capital stock is subject to and
qualified by Kana's certificate of incorporation and bylaws and by the
provisions of the applicable Delaware law.

                                  Common Stock

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

                                Preferred Stock

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

                              Registration Rights

    Upon completion of the offering, the holders of 24,401,670 shares of common
stock will be entitled to rights with respect to the registration of the shares
under the Securities Act. Under the terms of the registration rights agreement,
if Kana proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, these holders are entitled to notice of the
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations,

                                       67
<PAGE>

among them the right of the underwriters of an offering subject to the
registration to limit the number of shares included in the registration.
Holders of these rights may also require Kana to file a registration statement
under the Securities Act of 1933 at its expense with respect to their shares of
common stock, and Kana is required to use its best efforts to effect the
registration, subject to conditions and limitations. Furthermore, stockholders
with registration rights may require Kana to file additional registration
statements on Form S-3, subject to conditions and limitations.

    Antitakeover Effects of Provisions of the Certificate of Incorporation,
                            Bylaws and Delaware Law

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

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

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

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

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

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

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

                                       68
<PAGE>

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

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

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

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

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

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

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

                          Transfer Agent and Registrar

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

                                       69
<PAGE>

                        SHARES AVAILABLE FOR FUTURE SALE

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

    Upon the completion of this offering, Kana will have     shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of the outstanding shares, all
of the shares sold in this offering will be freely tradable, except that any
shares held by Kana's "affiliates," as that term is defined in Rule 144
promulgated under the Securities Act, may only be sold in compliance with the
limitations described below. The remaining 30,736,568 shares of common stock
will be deemed "restricted securities" as defined under Rule 144. Restricted
shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. Subject to the
lock-up agreements described below and the provisions of Rules 144, 144(k) and
701, additional shares will be available for sale in the public market as
follows:

<TABLE>
<CAPTION>
 Number of
   Shares                                  Date
 ---------                                 ----
 <C>        <S>
            After the date of this prospectus, freely tradable shares sold in
            this offering and shares saleable under Rule 144(k) that are not
            subject to the 180-day lock-up
 24,402,670 After 180 days from the date of this prospectus, the 180-day lock-
            up terminates and these shares are saleable under Rule 144
            (subject, in some cases, to volume limitations) or Rule 144(k)
  6,333,898 After 180 days from the date of this prospectus, the 180-day lock-
            up is released and these shares are saleable under Rule 701
            (subject to repurchase by the Company)
  1,257,708 After 180 days from the date of this prospectus, restricted
            securities that are held for less than one year and are not yet
            saleable under Rule 144
</TABLE>

                                    Rule 144

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

                                 Stock Options

    As of June 30, 1999, options to purchase a total of 264,800 shares of
common stock were outstanding, all of which were currently exercisable. Kana
intends to file a Form S-8 registration

                                       70
<PAGE>

statement under the Securities Act to register all shares of common stock
issuable under its 1999 Stock Incentive Plan and its 1999 Employee Stock
Purchase Plan. Accordingly, shares of common stock underlying these options
will be eligible for sale in the public markets, subject to vesting
restrictions or the lock-up agreement described below. See "Management--Benefit
Plans".

                               Lock-up Agreements

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

    Following this offering, under specified circumstances and subject to
customary conditions, holders of 24,401,670 shares of Kana's outstanding common
stock will have demand registration rights with respect to their shares of
common stock, subject to the 180-day lock-up arrangement described above, to
require Kana to register their shares of common stock under the Securities Act,
or rights to participate in any future registration of securities by Kana. If
the holders of these registrable securities request that Kana register their
shares, and if the registration is effected, these shares will become freely
tradable without restriction under the Securities Act. Any sales of securities
by these stockholders could have a material adverse effect on the trading price
of Kana's common stock. See "Description of Capital Stock--Registration
Rights".

                                       71
<PAGE>

                                 LEGAL MATTERS

    The validity of the common stock offered will be passed upon for Kana by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Members of the firm
Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 25,000 shares
of Kana's common stock. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Fenwick & West LLP, Palo Alto,
California.

                             CHANGE IN ACCOUNTANTS

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

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

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

                                    EXPERTS

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

                             ADDITIONAL INFORMATION

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

                                       72
<PAGE>

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

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

                                       73
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                               Table of Contents

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

                                      F-1
<PAGE>

                      Form of Independent Auditors' Report

The Board of Directors
Kana Communications, Inc.

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

                                          /s/ KPMG LLP

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

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

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

  Mountain View, California
  June 25, 1999, except as to Note 7,
  which is as of July 8, 1999

                                      F-2
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                   December 31,
                                                  ----------------   March 31,
                                                   1997     1998       1999
                                                  -------  -------  -----------
                                                                    (Unaudited)
<S>                                               <C>      <C>      <C>
                     Assets
Current assets:
  Cash and cash equivalents...................... $ 3,303  $ 9,792    $ 8,471
  Short-term investments.........................     210      160        160
  Accounts receivable............................     --       817      1,023
  Prepaid expenses and other current assets......      37       96        156
                                                  -------  -------    -------
    Total current assets.........................   3,550   10,865      9,810
Property and equipment, net......................     261      943      1,171
Other assets.....................................      13      161        157
                                                  -------  -------    -------
    Total assets................................. $ 3,824  $11,969    $11,138
                                                  =======  =======    =======
      Liabilities and Stockholders' Equity
Current liabilities:
  Current portion of notes payable............... $    34  $   360    $   360
  Accounts payable...............................     130      253        470
  Accrued payroll and related expenses...........      37      285        454
  Other accrued liabilities......................      68      263        333
  Deferred revenue...............................     --       410        627
                                                  -------  -------    -------
    Total current liabilities....................     269    1,571      2,244
Notes payable, less current portion..............      51      360        360
                                                  -------  -------    -------
    Total liabilities............................     320    1,931      2,604
                                                  -------  -------    -------
Commitments
Stockholders' equity:
  Convertible preferred stock, $0.001 par value;
   29,000,000, 50,000,000, and 50,000,000 shares
   authorized; 13,376,782 18,768,962, and
   18,768,962 shares issued and outstanding;
   aggregate liquidation preference of $4,795,
   $16,524, and $16,524..........................      13       19         19
  Common stock, $0.001 par value; 40,000,000,
   60,000,000, and 60,000,000 shares authorized;
   4,456,000, 8,288,107, and 8,357,607 shares
   issued and outstanding........................       4        8          8
  Additional paid-in capital.....................   5,654   19,335     22,797
  Deferred stock-based compensation..............    (784)  (1,444)    (4,463)
  Notes receivable from stockholders.............     --      (155)      (243)
  Accumulated other comprehensive losses.........     --        (5)       (19)
  Accumulated deficit............................  (1,383)  (7,720)    (9,565)
                                                  -------  -------    -------
    Total stockholders' equity...................   3,504   10,038      8,534
                                                  -------  -------    -------
    Total liabilities and stockholders' equity... $ 3,824  $11,969    $11,138
                                                  =======  =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

       CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS

                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                          Years Ended     Three Months Ended
                                         December 31,          March 31,
                                        ----------------  --------------------
                                         1997     1998      1998       1999
                                        -------  -------  ---------  ---------
                                                              (Unaudited)
<S>                                     <C>      <C>      <C>        <C>
Revenues:
  License.............................. $   --   $ 1,793  $     161  $   1,165
  Service..............................     --       256         16        258
                                        -------  -------  ---------  ---------
    Total revenues.....................     --     2,049        177      1,423
                                        -------  -------  ---------  ---------
Cost of revenues:
  License..............................     --        54          4         34
  Service..............................     --       519         26        402
                                        -------  -------  ---------  ---------
    Total cost of revenues.............     --       573         30        436
                                        -------  -------  ---------  ---------
    Gross profit.......................     --     1,476        147        987
                                        -------  -------  ---------  ---------
Operating expenses:
  Sales and marketing..................     366    3,796        498      1,539
  Research and development.............     699    2,254        403        823
  General and administrative...........     257      721        104        227
  Amortization of stock-based
   compensation........................     113    1,230        184        355
                                        -------  -------  ---------  ---------
    Total operating expenses...........   1,435    8,001      1,189      2,944
                                        -------  -------  ---------  ---------
    Operating loss.....................  (1,435)  (6,525)    (1,042)    (1,957)
Other income, net......................      52      188         30        112
                                        -------  -------  ---------  ---------
    Net loss...........................  (1,383)  (6,337)    (1,012)    (1,845)
Other comprehensive loss...............     --        (5)       --         (14)
                                        -------  -------  ---------  ---------
    Comprehensive loss................. $(1,383) $(6,342) $  (1,012) $  (1,859)
                                        =======  =======  =========  =========
Net loss per share:
  Basic and diluted.................... $ (0.62) $ (2.48) $   (0.55) $   (0.47)
                                        =======  =======  =========  =========
  Weighted-average shares used in
   computation.........................   2,246    2,555      1,824      3,939
                                        =======  =======  =========  =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                   KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                     (In thousands, except share amounts)

<TABLE>
<CAPTION>
                     Convertible                                                 Notes      Accumulated
                   Preferred Stock    Common Stock    Additional   Deferred    Receivable      Other                     Total
                  ----------------- -----------------  Paid-in   Stock-based      from     Comprehensive Accumulated Stockholders'
                    Shares   Amount  Shares    Amount  Capital   Compensation Stockholders    Losses       Deficit      Equity
                  ---------- ------ ---------  ------ ---------- ------------ ------------ ------------- ----------- -------------
<S>               <C>        <C>    <C>        <C>    <C>        <C>          <C>          <C>           <C>         <C>
Issuance of
common stock to
founders........         --   $--   5,000,000   $ 5    $    (4)    $   --        $ --          $--         $   --       $     1
Issuance of
common stock
upon exercise of
stock options...         --    --      80,000   --         --          --          --           --             --           --
Repurchase of
founders' common
stock, net......         --          (625,000)   (1)         1         --          --           --             --           --
Issuance of
Series A
convertible
preferred stock,
net.............   5,923,078     6        --    --         754         --          --           --             --           760
Issuance of
shares of common
stock in
exchange for
services .......         --             1,000   --           7         --          --           --             --             7
Issuance of
Series B
convertible
preferred stock,
net.............   7,453,704     7        --    --       4,006         --          --           --             --         4,013
Deferred stock-
based
compensation....         --    --         --    --         890        (890)        --           --             --           --
Amortization of
stock-based
compensation....         --    --         --    --         --          106         --           --             --           106
Net loss........         --    --         --    --         --          --          --           --          (1,383)      (1,383)
                  ----------  ----  ---------   ---    -------     -------       -----         ----        -------      -------
Balances,
December 31,
1997............  13,376,782    13  4,456,000     4      5,654        (784)        --           --          (1,383)       3,504
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases.....         --    --   3,832,107     4        169         --         (155)         --             --            18
Issuance of
Series A
convertible
preferred stock
upon exercise of
warrant.........     102,208   --         --    --         --          --          --           --             --           --
Issuance of
Series B
convertible
preferred stock,
net.............     168,824     1        --    --          90         --          --           --             --            91
Issuance of
Series C
convertible
preferred stock,
net.............   5,121,148     5        --    --      11,532         --          --           --             --        11,537
Deferred stock-
based
compensation....         --    --         --    --       1,890      (1,890)        --           --             --           --
Amortization of
stock-based
compensation....         --    --         --    --         --        1,230         --           --             --         1,230
Other
comprehensive
loss............         --    --         --    --         --          --          --            (5)           --            (5)
Net loss........         --    --         --    --         --          --          --           --          (6,337)      (6,337)
                  ----------  ----  ---------   ---    -------     -------       -----         ----        -------      -------
Balances,
December 31,
1998............  18,768,962    19  8,288,107     8     19,335      (1,444)       (155)          (5)        (7,720)      10,038
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited).....         --    --      69,500   --          88         --          (88)                        --           --
Deferred stock-
based
compensation
(unaudited).....         --    --         --    --       3,374      (3,374)        --           --             --           --
Amortization of
stock-based
compensation
(unaudited).....         --    --         --    --         --          355         --           --             --           355
Other
comprehensive
loss
(unaudited).....         --               --    --         --          --          --           (14)                        (14)
Net loss
(unaudited).....         --    --         --    --         --          --          --           --          (1,845)      (1,845)
                  ----------  ----  ---------   ---    -------     -------       -----         ----        -------      -------
Balances, March
31, 1999
(unaudited).....  18,768,962  $ 19  8,357,607   $ 8    $22,797     $(4,463)      $(243)        $(19)       $(9,565)     $ 8,534
                  ==========  ====  =========   ===    =======     =======       =====         ====        =======      =======
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

<TABLE>
<CAPTION>
                                          Years Ended     Three Months Ended
                                         December 31,          March 31,
                                        ----------------  --------------------
                                         1997     1998      1998       1999
                                        -------  -------  ---------  ---------
                                                              (Unaudited)
<S>                                     <C>      <C>      <C>        <C>
Cash flows from operating activities:
 Net loss.............................. $(1,383) $(6,337) $  (1,012) $  (1,845)
 Adjustments to reconcile net loss to
  net cash used in operating
  activities:
  Depreciation and amortization........      27      222         32        103
  Amortization of stock-based
   compensation........................     113    1,230        184        355
  Changes in operating assets and
   liabilities:
   Accounts receivable.................     --      (817)      (139)      (206)
   Prepaid expenses and other assets...     (50)    (207)       --         (56)
   Accounts payable and accrued
    liabilities........................     235      566        218        442
   Deferred revenue....................     --       410         21        217
                                        -------  -------  ---------  ---------
   Net cash used in operating
    activities.........................  (1,058)  (4,933)      (696)      (990)
                                        -------  -------  ---------  ---------
Cash flows from investing activities:
 Property and equipment purchases......    (288)    (904)      (185)      (331)
 (Purchases) sales of short-term
  investments..........................    (210)      50        --         --
                                        -------  -------  ---------  ---------
   Net cash used in investing
    activities.........................    (498)    (854)      (185)      (331)
                                        -------  -------  ---------  ---------
Cash flows from financing activities:
 Proceeds from issuance of common
  stock................................       1       13        --         --
 Proceeds from issuance of convertible
  preferred stock, net.................   4,603   11,628        --         --
 Proceeds from convertible notes
  payable..............................     170      --         --         --
 Proceeds from notes payable...........      85      720        437        --
 Payments on notes payable.............     --       (85)       --         --
                                        -------  -------  ---------  ---------
   Net cash provided by financing
    activities.........................   4,859   12,276        437        --
                                        -------  -------  ---------  ---------
Net change in cash and cash
 equivalents...........................   3,303    6,489       (444)    (1,321)
Cash and cash equivalents at beginning
 of period.............................     --     3,303      3,303      9,792
                                        -------  -------  ---------  ---------
Cash and cash equivalents at end of
 period................................ $ 3,303  $ 9,792  $   2,859  $   8,471
                                        =======  =======  =========  =========
Supplemental disclosure of cash flow
 information:
 Cash paid during period for interest.. $     3  $    36  $       9  $      17
                                        =======  =======  =========  =========
 Noncash investing and financial
  activities:
  Issuance of Series A convertible
   preferred stock upon conversion of
   stockholder loan.................... $   170  $   --   $     --   $     --
                                        =======  =======  =========  =========
  Issuance of common stock in exchange
   for notes receivable from
   stockholders........................ $   --   $   155  $     --   $      88
                                        =======  =======  =========  =========
  Grant of options to purchase common
   stock with an exercise price below
   fair value.......................... $   890  $ 1,890  $     673  $ 3,374
                                        =======  =======  =========  =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

    (a) Description of Business

    Kana Communications, Inc. and subsidiary (the Company) was incorporated on
July 11, 1996, but did not commence operations until 1997. The Company
develops, markets and supports an integrated suite of e-Business infrastructure
solutions addressing online customer interactions. The Company sells its
products primarily in the United States and, to a lesser extent, in Europe,
through its direct sales force.

    (b) Basis of Presentation

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

    (c) Interim Financial Statements

    The unaudited interim consolidated financial statements of the Company as
of March 31, 1999 and for the three months ended March 31, 1998 and 1999
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements.

    In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position of the Company as of March 31, 1999, and the results of its operations
and its cash flows for the three months ended March 31, 1998 and 1999. Results
for the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the entire year.

    (d) Use of Estimates

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

    (e) Foreign Currency Translation

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

                                      F-7
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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


    (f) Cash Equivalents and Short-Term Investments

    The Company considers all highly liquid investments with an original
maturity or reset date of three months or less to be cash equivalents. As of
December 31, 1997 and 1998 and March 31, 1999, cash equivalents consisted of
auction-rate securities and money market funds in the amounts of $3,213,000,
$9,647,000, and $8,299,000, respectively. The contractual maturities for the
auction-rate securities exceed 10 years; however, the Company has the option of
adjusting the interest rates or liquidating these investments on their
respective reset dates, which generally occur every 30 days.

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

    As of December 31, 1998, the Company has an outstanding standby letter of
credit for $150,000 to secure deposits on its current facility. The letter of
credit expired on January 15, 1999 and was secured by a certificate of deposit.

    (g) Property and Equipment

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

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

    (h) Fair Value of Financial Instruments

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

    (i) Concentration of Credit Risk

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

                                      F-8
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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


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

    (j) Revenue Recognition

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

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

    (k) Software Development Costs

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

    (l) Income Taxes

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

    (m) Stock-Based Compensation

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

                                      F-9
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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


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

    (n) Comprehensive Loss

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

    (o) Net Loss Per Share

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

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

<TABLE>
<CAPTION>
                                Years Ended December   Three Months Ended
                                         31,                March 31,
                                --------------------- ---------------------
                                   1997       1998       1998       1999
                                ---------- ---------- ---------- ----------
                                                           (Unaudited)
<S>                             <C>        <C>        <C>        <C>        <C>
Stock options and warrants....   2,682,473    225,300  3,426,858    316,300
Common stock subject to
 repurchase...................   2,734,373  4,709,156  2,552,081  4,244,855
Convertible preferred stock ..  13,376,782 18,768,962 13,478,990 18,768,962
                                ---------- ---------- ---------- ----------
                                18,793,628 23,703,418 19,457,929 23,330,117
                                ========== ========== ========== ==========
</TABLE>

    (p) Segment Reporting

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


                                      F-10
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

    (q) Recent Accounting Pronouncements

    In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Hedging Activities, effective for fiscal years beginning after June 15, 1999.
This standard requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measures those instruments at
fair value. The type and use of the derivative, and whether it qualifies for
hedge accounting, will determine the treatment of gains or losses resulting
from changes in the derivative. The Company believes the adoption of SFAS No.
133 will not have a material effect on its results of operations, financial
position, or cash flows. The statement will be effective for the Company
beginning January 1, 2000.

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

(2) Property and Equipment

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

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

(3) Notes Payable

    On January 23, 1998, the Company obtained a $1,000,000 line of credit from
a bank, of which up to $750,000 could be used for qualified property and
equipment purchases and $250,000 for working capital financing. Borrowings
under the line of credit are collateralized by all of the Company's assets and
bear interest at the bank's prime rate (7.75% as of December 31, 1998). The

                                      F-11
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

Company was able to draw against the line of credit through January 22, 1999,
after which all borrowings are to be repaid in 24 equal monthly installments.
As of December 31, 1998, $720,000 was outstanding under this agreement. The
aggregate principal payments due under the line of credit subsequent to
December 31, 1998 are as follows: 1999, $360,000 and 2000, $360,000.

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

(4) Stockholders' Equity

    (a) Convertible Preferred Stock

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

<TABLE>
<CAPTION>
                                                       Noncumulative Liquidation
                                             Shares      Dividend    Preference
                                           Outstanding   per Share    per Share
                                           ----------- ------------- -----------
   <S>                                     <C>         <C>           <C>
   Series A...............................  6,025,286      $0.01        $0.13
   Series B...............................  7,622,528       0.04         0.54
   Series C...............................  5,121,148       0.18         2.27
                                           ----------
                                           18,768,962
                                           ==========
</TABLE>

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

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

    In connection with the Series A preferred stock issuance, the Company
issued a warrant to two investors to purchase 134,615 shares of Series A
preferred stock with an exercise price of $0.13 per share. The warrants were
exercisable any time prior to April 7, 1998. The fair value of the warrants
computed using the Black-Scholes option pricing model on the date of grant was
not material. In lieu of paying cash upon exercise of the warrants in 1998, the
warrant holders surrendered 32,407 shares of Series A perferred stock back to
the Company.

    (b) Common Stock

    The Company has issued to the Company's founders 5,000,000 shares of common
stock, which are subject to repurchase on termination of employment. Such
repurchase rights lapse in a series of equal monthly installments over a four
year period ending June 4, 2000. As of December 31, 1998, 1,550,000 shares were
subject to repurchase. During 1997, the Company repurchased a net of 625,000
shares from one founder at the original exercise price of $0.0001 per share.

                                      F-12
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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


    Certain option holders have exercised options to purchase shares of
restricted common stock in exchange for five-year full recourse promissory
notes. The notes bear interest at 5.7% and expire on various dates through
2004. The Company has the right to repurchase all unvested shares purchased by
the notes at the original exercise price in the event of employee termination.
The number of shares subject to this repurchase right decreases as the shares
vest under the original option terms, generally over four years. As of December
31, 1998, there were 3,068,535 shares subject to repurchase. These options were
exercised at prices ranging from $0.01 to $0.23 with a weighted-average
exercise price of $0.04 per share. The options exercised to date have a
weighted-average fair value of $0.70 per share.

    (c) Stock Option Plan

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

    A summary of stock option activity follows:

<TABLE>
<CAPTION>
                                          Years Ended
                          --------------------------------------------  Three Months Ended
                                  1997                  1998              March 31, 1999
                          --------------------- ---------------------- ---------------------
                                      Weighted-              Weighted-             Weighted-
                                       Average                Average               Average
                            Options   Exercise    Options    Exercise    Options   Exercise
                          Outstanding   Price   Outstanding    Price   Outstanding   Price
                          ----------- --------- -----------  --------- ----------- ---------
                                                                            (Unaudited)
<S>                       <C>         <C>       <C>          <C>       <C>         <C>
Outstanding at beginning
 of period..............         --     $0.01    2,547,858     $0.03     225,300     $0.06
 Options granted........   2,627,858     0.03    1,734,549      0.07     550,500      0.24
 Options exercised......     (80,000)    0.01   (3,892,107)     0.05    (439,500)     0.23
 Options canceled.......         --       --      (165,000)     0.05     (20,000)     0.23
                           ---------            ----------              --------
Outstanding at end of
 period.................   2,547,858     0.03      225,300      0.06     316,300      0.08
                           =========            ==========              ========
Shares available for
 future grant...........   1,858,142             1,198,593               943,302
                           =========            ==========              ========
</TABLE>

    At December 31, 1998, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $0.02 to $0.23 and 9.18
years, respectively.

    At December 31, 1997 and 1998, the number of vested shares under options
was 319,747 and 169,900, respectively, and the weighted-average exercise price
of those options was $0.03 and $0.05, respectively.

    The Company uses the intrinsic-value method in accounting for its stock-
based compensation plans. Accordingly, compensation cost has been recognized in
the financial statements for those

                                      F-13
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

options issued with exercise prices at less than fair value at date of grant.
With respect to the stock options granted from inception through March 31,
1999, the Company recorded deferred stock-based compensation of $6,154,000 for
the difference at the grant date between the exercise price and the fair value
of the common stock underlying the options. Had compensation costs been
determined in accordance with SFAS No. 123 for all of the Company's stock-based
compensation plans, net loss and basic and diluted net loss per share would not
have been materially impacted.

    The Company calculated the fair value of each option grant on the grant
date using the minimum value method with the following assumptions: dividend
yield at 0%; weighted-average expected option term of three years; risk-free
interest rate of 6.22% and 5.15% for the years ended December 31, 1997 and
1998, respectively. The weighted-average fair value of options granted during
1997 and 1998 was $0.34 and $1.22 per share, respectively.

(5) Commitments

    The Company leases its facilities under noncancelable operating leases with
various expiration dates through June 30, 2003. The Company also subleases its
previous facility under a noncancelable sublease expiring in January 2003. Rent
expense, net of sublease payments, was $37,000 and $360,000 for the years ended
December 31, 1997 and 1998, respectively. Sublease payments approximated
$113,000 in the year ended December 31, 1998.

    Future minimum lease payments under noncancelable operating leases and
subleases, as of December 31, 1998, are as follows (in thousands):

<TABLE>
<CAPTION>
     Year ending                                             Operating
     December 31,                                             Leases   Subleases
     ------------                                            --------- ---------
   <S>                                                       <C>       <C>
     1999...................................................  $  794     $244
     2000...................................................     809      209
     2001...................................................     834      218
     2002...................................................     860      227
     2003...................................................     342      --
                                                              ------     ----
                                                              $3,639     $898
                                                              ======     ====
</TABLE>

(6) Income Taxes

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

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

                                      F-14
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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


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

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

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

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

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

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

(7) Subsequent Events

    (a) Initial Public Offering

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

                                      F-15
<PAGE>

                    KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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


    (b) Reincorporation

    On July 7, 1999, the Company's Board of Directors authorized the
reincorporation of the Company into the State of Delaware. As part of the
reincorporation the common stock will be assigned a par value equal to $0.001
per share. The accompanying financial statements have been retroactively
restated to reflect the effect of this reincorporation.

    (c) Stock Plans

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

    (d) Series D Convertible Preferred Stock

    On July 8, 1999, the Company issued 1,257,708 shares of Series D
Convertible Preferred Stock at a purchase price of $8.11 per share for total
proceeds of approximately $10.2 million. Holders of Series D Preferred Stock
are entitled to receive annual noncumulative dividends at a rate of $0.6488 per
share. Each outstanding share is convertible into common stock on a one-for-one
basis. Upon liquidation, the holders of the Series D Preferred Stock will be
entitled to receive $8.11 per share. Holders of the Series D Preferred stock
are subject to all other rights and preferences of the previously issued series
of preferred stock.

                                      F-16
<PAGE>

                                  UNDERWRITING

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

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

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

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

    The following tables show the per share and total underwriting discount to
be paid to the underwriters by Kana. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares.

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

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

    Kana and its officers, directors who hold shares of common stock and
substantially all of its securityholders have agreed with the underwriters not
to dispose of or hedge any of their common stock or securities convertible into
or exchangeable for shares of common stock during the period from the date of
this prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. on
behalf of the underwriters. See "Shares Available for Future Sale" for a
discussion of these and other transfer restrictions.

                                      U-1
<PAGE>

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

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

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

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

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

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

    At the request of Kana, the underwriters have reserved for sale, at the
initial public offering price, up to    shares of common stock in the offering
to directors, officers, employees and friends of Kana through a directed share
program. Of this total,     shares have been reserved for entities affiliated
with Amerindo Investment Advisors,     shares have been reserved for purchasers
of Kana's Series C preferred stock and     shares have been reserved for the
directors, officers, employees and friends of Kana. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these persons purchase these reserved shares. The underwriters will
offer any reserved shares not purchased by these persons to the general public
on the same basis as other shares in the offering.

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

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

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

                                      U-2
<PAGE>

Inside back cover

A depiction of the screens viewed by the user of the Kana solution, centered on
the page, cascading to the right side. At the top of the screen shot is a
depiction of the Kana logo, consisting of the letter "K" surrounded by a
partially open oval. Left to right over the top of the screen are the titles of
options available to the user, including "more," "new," "find," "sender
history," "view source," "note," "no answer," "route," and "categorize." Below
this tool bar is a representation of unread e-mail messages entering the Kana
system. Below this middle band is a sample response message which contains a
salutation and a sample question, "do you have any job openings."
<PAGE>

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

  No dealer, salesperson or any other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.

                                  -----------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   3
Risk Factors.............................................................   7
Use of Proceeds..........................................................  20
Dividend Policy..........................................................  20
Preemptive Rights........................................................  20
Capitalization...........................................................  21
Dilution.................................................................  22
Selected Consolidated Financial Data.....................................  23
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  24
Business.................................................................  35
Management...............................................................  49
Transactions and Relationships with Related Parties......................  62
Principal Stockholders...................................................  65
Description of Capital Stock.............................................  67
Shares Available for Future Sale.........................................  70
Legal Matters............................................................  72
Change in Accountants....................................................  72
Experts..................................................................  72
Additional Information...................................................  72
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>

                                  -----------

  Through and including     , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

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

                                       Shares

                           Kana Communications, Inc.

                                 Common Stock

                                  -----------

                         [LOGO OF KANA COMMUNICATIONS]

                                  -----------

                             Goldman, Sachs & Co.

                               Hambrecht & Quist

                            Wit Capital Corporation

                      Representatives of the Underwriters

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

                                    PART II

                    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

    The following table sets forth the costs and expenses, other than the
underwriting discounts payable by Kana in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fee.

<TABLE>
   <S>                                                                  <C>
   SEC Registration Fee................................................ $11,190
   NASD Filing Fee.....................................................   4,525
   Nasdaq National Market Listing Fee..................................    *
   Printing and Engraving Expenses.....................................    *
   Legal Fees and Expenses.............................................    *
   Accounting Fees and Expenses........................................    *
   Blue Sky Fees and Expenses..........................................    *
   Transfer Agent Fees.................................................    *
   Miscellaneous.......................................................    *
                                                                        -------
     Total.............................................................    *
                                                                        =======
</TABLE>
--------
*To be filed by amendment

Item 14. Indemnification of Directors and Officers

    Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit this
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of Kana's Bylaws
provides for mandatory indemnification of its directors and executive officers
and permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. Kana's Certificate
of Incorporation provides that, subject to Delaware law, its directors will
not be personally liable for monetary damages for breach of the directors'
fiduciary duty as directors to Kana and its stockholders. This provision in
the Certificate of Incorporation does not eliminate the directors' fiduciary
duty, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware
law. In addition, each director will continue to be subject to liability for
breach of the director's duty of loyalty to Kana or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. Kana has entered into
indemnification agreements with its officers and directors, a form of which
will be filed with the Securities and Exchange Commission (the "Commission")
as an Exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-   ) (the "Indemnification Agreements"). The Indemnification
Agreements provide Kana's executive officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is also made to Section 8 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of Kana against certain liabilities, and Section 1.10 of the Third Amended and
Restated Investors' Rights Agreement contained in Exhibit 4.2 hereto,
indemnifying certain of Kana's stockholders, including controlling
stockholders, against certain liabilities.

                                     II-1
<PAGE>

Item 15. Recent Sales of Unregistered Securities

    During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:

      (a) In July 1996, the Registrant issued and sold 5,000,000 shares of
  its Common Stock to Mark S. Gainey and Michael T. Horvath for an aggregate
  purchase price of $500 pursuant to Common Stock Purchase Agreements. In
  April 1997, the Registrant repurchased those shares of Common Stock for
  $43,812.

      (b) In April 1997, the Registrant issued and sold 4,375,000 shares of
  its Common Stock to Mark S. Gainey and Michael T. Horvath for an aggregate
  purchase price of $43,750 pursuant to Restricted Stock Purchase
  Agreements.

      (c) In April 1997, the Registrant issued and sold 5,923,078 shares of
  its Series A Preferred Stock to investors for an aggregate purchase price
  of $770,000, which included $170,000 of cancellation of indebtedness.

      (d) In April 1997, the Registrant issued warrants to investors to
  purchase up to 134,615 shares of its Series A Preferred Stock at an
  exercise price of $0.13 per share.

      (e) In March 1998, the Registrant issued 102,208 shares of its Series
  A Preferred Stock pursuant to the net exercise of warrants issued to
  investors.

      (f) In June 1997, the Registrant issued 1,000 shares of its Common
  Stock to a consultant as consideration for services rendered to the
  Registrant pursuant to a Stock Issuance Agreement.

      (g) In September 1997, the Registrant issued and sold 7,453,704 shares
  of its Series B Preferred Stock to investors for an aggregate purchase
  price of $4,025,000.

      (h) In July 1998, the Registrant issued and sold 168,824 shares of its
  Series B Preferred Stock to a director for an aggregate purchase price of
  $91,165.

      (i) In August and September 1998, the Registrant issued and sold
  5,121,148 shares of its Series C Preferred Stock to investors for an
  aggregate purchase price of $11,625,006.

      (j) In July 1999, the Registrant issued and sold 1,257,707 shares of
  its Series D Preferred Stock to investors for an aggregate purchase price
  of $10,200,004.

      (k) Since inception, the Registrant has issued and sold an aggregate
  of 330,000 shares of its Common Stock to two of the Registrant's directors
  for an aggregate consideration of $3,300.

      (l) Since inception, the Registrant has granted stock options to its
  employees, directors and consultants under its 1997 Stock Option/Stock
  Issuance Plan exercisable for up to an aggregate of 6,814,907 shares of
  its Common Stock, with exercise prices ranging from $0.01 to $1.50. The
  Registrant has issued and sold an aggregate of 6,360,107 shares of its
  Common Stock to its employees, directors and consultants under this plan
  for an aggregate consideration of $34,477 in cash and $1.3 million in
  promissory notes with a five year term and interest rate of 5.7% per
  annum, compounding annually.

    None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients in these
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in these transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.

                                     II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

    The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.

    (a) Exhibits

<TABLE>
<CAPTION>
   Exhibit
   Number                              Exhibit Title
   -------                             -------------
   <C>     <S>
     1.1*  Form of Underwriting Agreement among the Registrant, Goldman Sachs &
            Co., Hambrecht & Quist LLC and Wit Capital Corporation.
     3.1   Amended and Restated Certificate of Incorporation, to be effective
            upon consummation of this offering.
     3.2   Amended and Restated Bylaws, to be effective upon consummation of
            this offering.
     4.1*  Form of Registrant's Specimen Common Stock Certificate.
     4.2   Third Amended and Restated Investors' Rights Agreement dated July 8,
            1999 by and among the Registrant and parties listed on Schedule A
            therein.
     5.1*  Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
            Registrant, with respect to the common stock being registered.
    10.1   Registrant's 1997 Stock Option/Stock Issuance Plan.
    10.2*  Registrant's 1999 Stock Incentive Plan.
    10.3*  Registrant's 1999 Employee Stock Purchase Plan.
    10.4   Form of Registrant's Directors' and Officers' Indemnification
            Agreement.
    10.5   Form of Registrant's License Agreement.
    10.6*  Letter of Credit, dated July  , 1999, with Silicon Valley Bank and
            the Registrant.
    10.7   Lease, dated May 1998, by and between Encina Properties and the
            Registrant.
    10.8*  Office/R&D Lease, dated June 17, 1999, by and between Chestnut Bay
            LLC and the Registrant.
    10.9   Form of Registrant's Kana Online Service Agreement.
   10.10   Form of Registrant's Restricted Stock Purchase Agreement.
    16.1   Letter from PricewaterhouseCoopers LLP, dated July 8, 1999 regarding
            change in accountant.
    21.1   Subsidiaries of the Registrant.
    23.1   Consent of KPMG LLP, Independent Auditors.
    23.2*  Consent of Brobeck, Phleger & Harrison LLP (contained in their
            opinion filed as Exhibit 5.1).
    24.1   Power of Attorney. Reference is made to Page II-5.
    27.1   Financial Data Schedule. (In EDGAR format only)
</TABLE>
--------
*To be filed by amendment

    (b) Financial Statement Schedule

      None.

Item 17. Undertakings

    Kana hereby undertakes to provide to the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations
and registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

    Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Kana
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of Kana, Indemnification Agreements entered into

                                     II-3
<PAGE>

between Kana and its officers and directors, the Underwriting Agreement, or
otherwise, Kana has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Kana of
expenses incurred or paid by a director, officer, or controlling person of
Kana in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, Kana will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

    The undersigned registrant hereby undertakes:

      (1) For purposes of determining any liability under the Securities
  Act, the information omitted from the form of Prospectus filed as part of
  this registration statement in reliance upon Rule 430A and contained in a
  form of Prospectus filed by Kana pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Securities Act shall be deemed to be part of this
  Registration Statement as of the time it was declared effective;

      (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of Prospectus
  shall be deemed to be a new registration statement relating to the
  securities offered therein, and the offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.

                                     II-4
<PAGE>

                                  SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Palo Alto, State of California, on
this 9th day of July, 1999.

                                          KANA COMMUNICATIONS, INC.

                                                  /s/ Michael J. McCloskey
                                          By: _________________________________
                                                    Michael J. McCloskey
                                                  Chief Executive Officer

                               POWER OF ATTORNEY

    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Mark S. Gainey
and Joseph D. McCarthy, and each one of them, his true and lawful attorneys-
in-fact and agents, each with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that each of said attorneys-in-fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

    IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

    Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
              Signature                          Title                   Date

<S>                                    <C>                        <C>
       /s/ Michael J. McCloskey        Chief Executive Officer       July 9, 1999
______________________________________  (Principal Executive
         Michael J. McCloskey           Officer)

        /s/ Joseph D. McCarthy         Vice President, Finance       July 9, 1999
______________________________________  and Operations (Principal
          Joseph D. McCarthy            Financial and Accounting
                                        Officer)

         /s/ David M. Beirne           Director                      July 9, 1999
______________________________________
           David M. Beirne
</TABLE>

                                     II-5
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date

<S>                                    <C>                        <C>
          /s/ Mark S. Gainey           President and Chairman of     July 9, 1999
______________________________________  the Board
            Mark S. Gainey

           /s/ Eric A. Hahn            Director                      July 9, 1999
______________________________________
             Eric A. Hahn

     /s/ Dr. Charles A. Holloway       Director                      July 9, 1999
______________________________________
       Dr. Charles A. Holloway

       /s/ Steven T. Jurvetson         Director                      July 9, 1999
______________________________________
         Steven T. Jurvetson

           /s/ Ariel Poler             Director                      July 9, 1999
______________________________________
             Ariel Poler
</TABLE>

                                      II-6
<PAGE>


<TABLE>
<CAPTION>
   Exhibit
   Number                          Exhibit Title                           Page
   -------                         -------------                           ----
   <C>     <S>                                                             <C>
     1.1*  Form of Underwriting Agreement among the Registrant, Goldman
            Sachs & Co., Hambrecht & Quist LLC and Wit Capital
            Corporation.
     3.1   Amended and Restated Certificate of Incorporation, to be
            effective upon consummation of this offering.
     3.2   Amended and Restated Bylaws, to be effective upon
            consummation of this offering.
     4.1*  Form of Registrant's Specimen Common Stock Certificate.
     4.2   Third Amended and Restated Investors' Rights Agreement dated
            July 8, 1999 by and among the Registrant and parties listed
            on Schedule A therein.
     5.1*  Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
            Registrant, with respect to the common stock being
            registered.
    10.1   Registrant's 1997 Stock Option/Stock Issuance Plan.
    10.2*  Registrant's 1999 Stock Incentive Plan.
    10.3*  Registrant's 1999 Employee Stock Purchase Plan.
    10.4   Form of Registrant's Directors' and Officers' Indemnification
            Agreement.
    10.5   Form of Registrant's License Agreement.
    10.6*  Letter of Credit, dated July  , 1999, with Silicon Valley
            Bank and the Registrant.
    10.7   Lease, dated May 1998, by and between Encina Properties and
            the Registrant.
    10.8*  Office/R&D Lease, dated June 17, 1999, by and between
            Chestnut Bay LLC and the Registrant.
    10.9   Form of Registrant's Kana Online Service Agreement.
   10.10   Form of Registrant's Restricted Stock Purchase Agreement.
    16.1   Letter from PricewaterhouseCoopers LLP, dated July 8, 1999
            regarding change in accountant.
    21.1   Subsidiaries of the Registrant.
    23.1   Consent of KPMG LLP, Independent Auditors.
    23.2*  Consent of Brobeck, Phleger & Harrison LLP (contained in
            their opinion filed as Exhibit 5.1).
    24.1   Power of Attorney. Reference is made to Page II-5.
    27.1   Financial Data Schedule. (In EDGAR format only)
</TABLE>
--------
*To be filed by amendment
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 357177}]
{"company-data": {"conformed-name": "KANA COMMUNICATIONS INC", "cik": "0001089907", "assigned-sic": "0000", "irs-number": "770435679", "state-of-incorporation": "CA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-82587", "film-number": "99662122"}, "business-address": {"street1": "87 ENCINA AVENUE", "city": "PALO ALTO", "state": "CA", "zip": "94301", "phone": "6503259850"}, "mail-address": {"street1": "87 ENCINA AVENUE", "city": "PALO ALTO", "state": "CA", "zip": "94301"}}
As filed with the Securities and Exchange Commission on July 9, 1999
                                                     Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     Under
                          THE SECURITIES ACT OF 1933
                                ---------------
                           KANA COMMUNICATIONS, INC.
            (Exact name of registrant as specified in its charter)
                                ---------------
         Delaware                  7372                    77-0435679
     (State or other          (Primary Standard         (I.R.S. Employer
     jurisdiction of              Industrial          Identification No.)
     incorporation or        Classification Code
      organization)                Number)
                               87 Encina Avenue
                          Palo Alto, California 94301
                                (650) 325-9850
  (Address, including zip code, and telephone number, including area code, of
                 the registrant's principal executive offices)
                                ---------------
                             Michael J. McCloskey
                            Chief Executive Officer
                           Kana Communications, Inc.
                               87 Encina Avenue
                          Palo Alto, California 94301
                                (650) 325-9850
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                                ---------------
                                  Copies to:
        Warren T. Lazarow, Esq.              Laird H. Simons III, Esq.
      David A. Makarechian, Esq.           Katherine Tallman Schuda, Esq.
     Kimberley E. Henningsen, Esq.             Sayre E. Stevick, Esq.
        Taylor L. Stevens, Esq.                  FENWICK & WEST LLP
    BROBECK, PHLEGER & HARRISON LLP             Two Palo Alto Square
         Two Embarcadero Place              Palo Alto, California 94301
            2200 Geng Road                         (650) 494-0600
      Palo Alto, California 94303
            (650) 424-0160
                                ---------------
  Approximate date of commencement of proposed sale to the public:  As soon as
practicable after the effective date of this Registration Statement.
                                ---------------
  If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                                ---------------
                        CALCULATION OF REGISTRATION FEE

------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Title of Each Class of                                                       Amount of
     Securities to be                                           Amount to     Registration
        Registered                                           be Registered(1)     Fee
------------------------------------------------------------------------------------------
Common Stock, $.001 per share..............................    $40,250,000      $11,190
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o).
                                ---------------
  The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this preliminary prospectus is not complete and  +
+may be changed. These securities may not be sold until the registration       +
+statement filed with the Securities and Exchange Commission is effective.     +
+This preliminary prospectus is not an offer to sell nor does it seek an offer +
+to buy these securities in any jurisdiction where the offer or sale is not    +
+permitted.                                                                    +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   Subject to Completion. Dated July 9, 1999.

                                       Shares

                         [LOGO OF KANA COMMUNICATIONS]

                           Kana Communications, Inc.
                                  Common Stock

                                  -----------

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

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

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

                                  -----------

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

                                  -----------
Per Share Total
                                                                --------- ------
Initial public offering price..................................   $       $
Underwriting discount..........................................   $       $
Proceeds, before expenses, to Kana.............................   $       $
The underwriters may, under specific circumstances, purchase up to an
additional     shares from Kana at the initial public offering price less the
underwriting discount.

                                  -----------

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

Goldman, Sachs & Co.

                 Hambrecht & Quist

                                                         Wit Capital Corporation

                                  -----------

                         Prospectus dated      , 1999.
Description No. 1

Inside Front Cover

A logo bearing the words "powered by Kana" in lower case letters, immediately
above and to the left of the Kana logo, which consists of the letter "K"
surrounded by a partially open oval and the words "Kana Communications."

Below the logo is a band of white space, and below the white space are logos of
the following customers:

eBay Inc., eToys Inc., Priceline.com Incorporated, Chase Manhattan Bank, Ford
Motor Company and Northwest Airlines.
Inside Gatefold

Centered across the top of the gatefold, in stylized letters, the words "Kana
develops, markets and supports an integrated suite of e-Business infrastructure
solutions addressing online customer interactions." Immediately to the left of
this phrase appears the Kana logo, which consists of a stylized "K" surrounded
by a partially open oval and the words "Kana Communications."

Below the phrase, centered in the page, a trapezoidal shape design which covers
most of the gatefold that has within it two large shaded trapezoidal shapes,
with one such shape on the far left of the trapezoid and another shape on the
far right of the trapezoid. The smaller shape on the right is entitled the "Kana
Architecture." The smaller shape on the left is labeled "Customers and Web
Sites." Shading covers and extends over the smaller trapezoids. Extending from
the design that is labeled Kana Architecture is a series of broken an unbroken
lines to boxes labeled with the main heading "Kana Applications." Each box has a
subheading that represents a different application of Kana's suite of
applications, including Kana Control, Kana Mail, Kana Direct, Kana Reports, Kana
Link, Kana Classify and Kana Web Connect. Extending from the boxes entitled
"Kana Applications" toward the smaller shape labeled Customers and Web Sites is
a series of broken and unbroken lines which are interrupted by the phrases
"upselling to customers," "defining new products and services," and "optimizing
performance."

Below this graphic is a band of white space. Below the white space is a shaded
area covering the lower eighth of the gatefold, with the phrase "Kana business
benefits" on the far left of the shaded region. Within the shared region appears
the words "enhanced customer relationships," "reduced operating and IT costs,"
and "increased revenue opportunities."
PROSPECTUS SUMMARY

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

                                  Our Business

    We develop, market and support an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.

    We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to manage important customer data
and monitor real-time, hands-on customer feedback on our software.

    We believe that our solution differs from those of our competitors as a
result of several core capabilities, including an advanced, scaleable, Web-
based architecture that supports industry standards, workflow optimization and
tools for enhanced productivity. In addition, our solution offers comprehensive
data analysis and reporting, and advanced messaging analysis technologies,
which permit e-Businesses to choose the level of automation appropriate for
their needs. We believe that our solution helps e-Businesses enhance customer
relationships, lower operating and IT costs and create new revenue
opportunities.

    Our customers include e-Businesses in the communications, Internet,
retailing and technology industries, and companies employing e-Business
strategies in traditional industries such as financial services, energy,
automobile and airlines. As of June 30, 1999, more than 100 customers have
licensed our software, including:

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

                             Our Market Opportunity

    With the advent of the Internet and the proliferation of e-mail, the manner
in which businesses communicate with their customers has undergone a
fundamental change: customers are now demanding that businesses be accessible
and communicate online. Given the emerging shift to online customer
interaction, traditional solutions are not addressing the changes required by
e-Businesses. Negative consequences, such as lost customers, result from a
failure to respond effectively to online communications. In addition, e-
Businesses may lose the opportunity to take advantage of new revenue-generating
opportunities by failing to capitalize upon the wealth of information conveyed
through online customer interactions.

                                       3
We believe that in order for companies to compete effectively in today's
rapidly changing e-Business environment, they must differentiate themselves by
providing the highest quality customer experience with a software solution
that:

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

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

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

                                  Our Strategy

    Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. The
key elements of our strategy include:

    Extend Market Leadership Position. Our objective is to extend our position
as a leader in the e-Business infrastructure market for managing online
customer interactions by leveraging our suite of software applications and
establishing ourselves as the solution of choice. We believe that by broadening
our platform and suite of applications, we can expand our market opportunities
and solidify our position as a leading provider of comprehensive e-Business
infrastructure solutions.

    Expand Our Suite of Products to Enter New Markets. We intend to expand our
suite of products to include additional e-commerce and content management
applications in order to enter new markets. We are working with our customers
to identify the strategic and functional needs of e-Businesses that operate in
the rapidly changing Internet environment. Our focus is to develop applications
that address those needs and integrate them seamlessly with our existing
platform to help e-Businesses establish broader and deeper customer
relationships.

    Increase Global Distribution Capabilities and Partnerships. We intend to
broaden and increase our worldwide distribution capabilities by combining the
efforts of our direct sales force and our partnerships with leading e-Business
service and infrastructure providers. By expanding existing partnerships and
aggressively developing new alliances, we can leverage our partners' sales,
marketing and deployment capabilities.

    Establish Technology Leadership with Open, Scaleable, Web-based
Architecture. Our objective is to establish the Kana architecture as the
leading technology platform and market standard for e-Business infrastructure
solutions addressing online customer interactions. Because our advanced
architecture is based on industry standards such as Java and Extensible Mark-up
Language (XML), e-Businesses and third parties are able to develop and deploy
new applications on top of the Kana platform. We intend to continue to develop
and enhance our advanced architecture to efficiently handle the growing volume
of online customer interactions while providing increased functionality across
e-Businesses.

    Leverage Hosted Web-Based Application Service. Kana Online, our hosted Web-
based application service, allows us to manage important customer data and
monitor real-time, hands-on customer feedback on our software. We intend to
continue developing this service because it allows us to target additional
markets that are complementary to our software-based solution, provides us with
recurring revenue streams and may, in the future, allow us to enter into new
business opportunities.

                                       4
Emphasize Customer Advocacy and Satisfaction. We believe that delivering
complete customer satisfaction is vital to growing our business. We intend to
remain focused on providing the highest level of satisfaction to our customers
and to continue to design our solutions to address their online customer
interactions needs. In addition, we intend to continue to build our
professional services group, which maintains customer relationships beyond the
implementation phase and is responsible for providing a superior customer
experience.

                             Corporate Information

    Kana Communications, Inc. was incorporated in California in July 1996 as
Kana Net Works, Inc., changed its name to Kana.com, Inc. in January 1997 and
then changed its name to Kana Communications, Inc. in October 1997. Kana
Communications, Inc. plans to reincorporate in Delaware prior to the
consummation of this offering. References in this prospectus to "Kana", "we",
"our", and "us" collectively refer to Kana Communications, Inc., a Delaware
corporation, its subsidiary and its California predecessor, and not to the
underwriters. Kana's principal executive offices are located at 87 Encina
Avenue, Palo Alto, California 94301 and its telephone number is (650) 325-9850.

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

                                  The Offering
Common stock offered....      shares
Common stock to be
 outstanding after the
 offering...............      shares
Use of proceeds.........  For general corporate purposes, including working
                          capital, product development, possible acquisitions and
                          capital expenditures. See "Use of Proceeds".
Proposed Nasdaq National
 Market symbol..........  KANA
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999, and includes
1,257,708 shares of common stock issuable upon conversion of preferred stock
issued subsequent to June 30, 1999 and excludes:

  . 264,800 shares of common stock issuable upon exercise of stock options
    outstanding as of June 30, 1999 at a weighted average exercise price of
    $0.28 per share;

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

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

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

                                       5
Summary Consolidated Financial Data

                     (In thousands, except per share data)
Year Ended      Three Months Ended
                                         December 31,          March 31,
                                        ----------------  --------------------
                                         1997     1998      1998       1999
                                        -------  -------  ---------  ---------
Consolidated Statement of Operations
 Data:
Total revenues........................  $   --   $ 2,049  $     177  $   1,423
Gross profit..........................      --     1,476        147        987
Operating loss........................   (1,435)  (6,525)    (1,042)    (1,957)
Net loss..............................  $(1,383) $(6,337) $  (1,012) $  (1,845)
                                        =======  =======  =========  =========
Basic and diluted net loss per share..  $ (0.62) $ (2.48) $   (0.55) $   (0.47)
                                        =======  =======  =========  =========
Shares used in computing basic and
 diluted net loss per share...........    2,246    2,555      1,824      3,939
                                        =======  =======  =========  =========
Pro forma basic and diluted net loss
 per share............................           $ (0.35)            $   (0.47)
                                                 =======             =========
Shares used in computing pro forma
 basic and diluted net loss per
 share................................            17,979                22,708
                                                 =======             =========
Shares used in computing pro forma basic and diluted net loss per share
include the shares used in computing basic and diluted net loss per share
adjusted for the conversion of preferred stock to common stock, as if the
conversion occurred at the date of original issuance.
March 31, 1999
                                                 -----------------------------
                                                 Actual  Pro Forma As Adjusted
                                                 ------- --------- -----------
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
 investments.................................... $ 8,631  $18,831     $
Working capital.................................   7,566   17,766
Total assets....................................  11,138   21,338
Notes payable, less current portion.............     360      360
Total stockholders' equity......................   8,534   18,734
The consolidated balance sheet data as of March 31, 1999 is set forth on an
actual basis; on a pro forma basis to give effect to the sale in July 1999 of
1,257,708 shares of our Series D preferred stock and the conversion of all of
our outstanding preferred stock into common stock upon completion of this
offering; and on an as adjusted basis to reflect the sale of     shares of
common stock offered at an assumed initial public offering price of $    per
share and after deducting the estimated underwriting discount and the estimated
offering expenses. See "Use of Proceeds" and "Capitalization".

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

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

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

  . assumes the completion of a   for one reverse stock split;

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

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

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

                                       6
RISK FACTORS

    You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.

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

                         Risks Related to Our Business

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

    We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. We
were incorporated in July 1996 and we first recorded revenue in February 1998.
As an early stage company in the new and rapidly evolving market for e-Business
customer interactions solutions, we face numerous risks and uncertainties. Some
of these risks include our ability to:

  . anticipate and adapt to the changing e-Business market;

  . attract more customers;

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

  . build and maintain relationships with system integrators and other
    strategic partners;

  . attract, retain and motivate qualified personnel;

  . execute our product development activities;

  . respond to actions taken by our competitors; and

  . continue to build an infrastructure to manage our growth effectively.

We may not successfully address any of these risks.

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

    Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of investors or public market
analysts, the price of our common stock could decline substantially. Factors
that might cause quarterly fluctuations in our operating results include:

  . the evolving and varying demand for e-Business customer interactions
    solutions, particularly the Kana solution;

  . the timing of sales of our products and services and the timing of new
    releases of our products;

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

  . delays in introducing our products and services, or new releases of our
    products;

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

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

  . our ability to develop and attain market acceptance of the Kana
    solution, additional products and enhancements to our products;

  . the entrance of new competitors;

                                       7
. new product announcements or introductions by competitors;

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

  . the mix of domestic and international sales;

  . the timing of releases of new versions of third-party software and
    hardware products that work with our products;

  . costs related to acquisitions of technologies or businesses;

  . our ability to attract, integrate, train, retain and motivate a
    substantial number of sales and marketing, research and development,
    administrative and product management personnel;

  . costs related to the customization of our products;

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

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

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

  . governmental regulation surrounding the Internet and e-mail in
    particular.

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

    Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. See "--We may not be able to forecast our revenues accurately
because our products have a long and variable sales cycle" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

We have a history of losses and may not be profitable in the future

    Since we began operations in 1997, we have incurred substantial operating
losses in every quarter. As a result of accumulated operating losses, at March
31, 1999, we had an accumulated deficit of approximately $9.6 million. Since
inception, we have funded our business primarily through selling our stock, not
from cash generated by our business. Our growth in recent periods has been from
a limited base of customers, and we may not be able to sustain these growth
rates. We expect to continue to increase our operating expenses and our
expenditures on our professional services organization. As a result, we expect
to continue to experience losses and negative cash flows, even if sales of the
Kana solution continue to grow, and may not generate sufficient revenues to
achieve profitability in the future. If we do achieve profitability, we may not
be able to sustain or increase any profitability on a quarterly or annual basis
in the future. See "--Our quarterly revenues and operating results may
fluctuate in future periods and we may fail to meet expectations, which may
cause the price of our common stock to decline", "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".

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

    The market for our solution is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any one of which could
seriously harm our business.

                                       8
We currently face competition for our products from systems designed by in-
house and third-party development efforts. We expect that these solutions will
continue to be a principal source of competition for the foreseeable future.
Our competitors include a number of companies offering one or more solutions
for the e-Business infrastructure market, some of which compete directly with
our products. For example, our competitors include companies providing stand-
alone point solutions, including Brightware, Inc., eGain Communications Corp.
and Mustang Software, Inc. In addition, we may compete with companies providing
customer management and communications solutions, such as Clarify Inc., Genesys
Telecommunications Laboratories, Inc., Lucent Technologies, Inc., Oracle
Corporation, Pivotal Corporation, Siebel Systems, Inc., Silknet Software, Inc.
and Vantive Corporation.

    Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than do we.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. In the past, we have lost potential customers to competitors for
various reasons, including the ability or willingness of our competitors to
offer lower prices and other incentives that we did not match. In addition,
current and potential competitors, particularly enterprise or call center
software providers that market integrated suites of products, have established
or may establish co-operative relationships among themselves or with third
parties to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidations.

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

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

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

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

    To date, the sales cycle for the Kana solution has taken three to 12 months
and has required pre-purchase evaluation by a significant number of individuals
in our customers' organizations. Many of our customers evaluate our software
slowly and deliberately, depending on the specific technical capabilities of
the customer, the size of the deployment, the complexity of the customer's
network environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy the Kana solution. The long sales cycle for
our products may cause license revenue and operating results to vary
significantly from period to period.

    Along with our partners, we invest significant amounts of time and
resources educating and providing information to our prospective customers
regarding the use and benefits of our products. We may not recoup this
investment if the prospective customer does not ultimately license our
solution. See "--Our quarterly revenues and operating results may fluctuate in
future periods and we may fail to meet expectations, which may cause the price
of our common stock to decline".

                                       9
Difficulties in implementing our solution could harm our revenues and margins

    Forecasting our revenues depends upon the timing of implementation of the
Kana solution. This implementation typically involves working with
sophisticated software, computing and communications systems. If we experience
difficulties with implementation or do not meet project milestones in a timely
manner, we could be obligated to devote more customer support, engineering and
other resources to a particular project. Some customers may also require us to
develop customized features or capabilities. If new or existing customers have
difficulty deploying our products or require significant amounts of our
professional services support or customized features, our revenue recognition
could be further delayed and our costs could increase, causing increased
variability in our operating results. See "--Our quarterly revenues and
operating results may fluctuate in future periods and we may fail to meet
expectations, which may cause the price of our common stock to decline".

Our business depends on the acceptance of the Kana solution, and it is
uncertain whether the market will accept this product

    Substantially all of our revenue is currently derived from licenses of our
software and related services. We are not certain that our target customers
will widely adopt and deploy the Kana solution. Our future financial
performance will depend on the successful development, introduction and
customer acceptance of new and enhanced versions of the Kana solution. In the
future, we may not be successful in marketing the Kana solution or any new or
enhanced products.

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

    We intend to hire a significant number of additional sales, marketing,
engineering, professional services and product management personnel in 1999 and
beyond. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel in the future. Our
business cannot continue to grow if we cannot attract qualified personnel. Our
failure to attract and retain the highly trained personnel that are integral to
our product development and professional services organizations may limit the
rate at which we can develop and install new products or product enhancements,
which would harm our business. As of June 30, 1999, we had only a 20-person
professional services organization. We will need to increase our staff to
support new customers and the expanding needs of our existing customers,
without compromising the quality of our customer service. Hiring qualified
professional services personnel, as well as sales, marketing, administrative
and research and development personnel, is very competitive in our industry,
particularly in the San Francisco Bay Area, where Kana is headquartered, due to
the limited number of people available with the necessary technical skills. We
expect to face greater difficulty attracting these personnel with equity
incentives as a public company than we did as a privately held company. See
"Business--Employees".

We may face difficulties in hiring and retaining qualified sales personnel to
sell the Kana solution

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

Loss of key personnel could harm our business

    Our future success depends to a significant degree on the skills,
experience and efforts of our senior management and other key personnel. The
loss of the services of any of these individuals

                                       10
could harm our business and operations. In addition, we have not obtained key
person life insurance on any of our key employees. If any of our key employees
left or was seriously injured and unable to work and we were unable to find a
qualified replacement, our business could be harmed.

Our business will suffer if we fail to manage our growth successfully

    Our ability to offer the Kana solution successfully in a rapidly evolving
market requires an effective planning and management process. We have limited
experience in managing rapid growth. In addition, we have recently hired a new
Chief Executive Officer, and many of our other officers are relatively
inexperienced. We are experiencing a period of growth that is placing a
significant strain on our managerial, financial and personnel resources. Our
business will suffer if this growth continues and we fail to manage this
growth. On June 30, 1999, we had a total of 98 full-time employees compared to
38 on June 30, 1998. We expect to continue to hire new employees at a rapid
pace. The rate of our recent growth has made management of that growth more
difficult.

    In addition, the proceeds of this offering will be used in part to expand
product offerings and expand international operations, as well as sales and
marketing capabilities. Any additional growth will further strain our
management, financial, personnel, internal training and other resources. To
manage any future growth effectively, we must improve our financial and
accounting systems and controls, reporting systems and procedures, integrate
new personnel and manage expanded operations. Any failure to do so could
negatively affect the quality of our products and our ability to respond to our
customers, retain key personnel and our business in general. We plan to move
our corporate offices to a new location in October 1999. This move may disrupt
our business and operations. See "Business--Facilities".

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

    To be competitive, we must develop and introduce on a timely basis new
products and product enhancements for companies with significant e-Business
customer interactions needs. Any failure to do so could harm our business. In
the past, we have failed to ship some new products or product enhancements by
our planned shipment date. If we experience similar delays in the future, we
may face:

  . customer dissatisfaction;

  . cancellation of orders and license agreements;

  . negative publicity;

  . loss of revenues;

  . slower market acceptance; and

  . legal action by customers against us.

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

Technical problems with our Kana Online service could harm our business

    The success of our Kana Online service depends on the efficient and
uninterrupted operation of our own and outsourced computer and communications
hardware and software systems. These systems and operations are vulnerable to
damage or interruption from human error, natural disasters, telecommunications
failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar adverse events. We have no formal disaster recovery plan, and our
insurance policies may

                                       11
not adequately compensate us for any losses that we may incur. Any system
failure that causes an interruption in our service or a decrease in
responsiveness could harm our relationships with our customers and result in
reduced revenues. See "Business--Products and Services--Kana Online".

    We have entered into an Internet-hosting agreement with Exodus
Communications, Inc. to maintain all of our Kana Online servers at Exodus' data
center in Santa Clara, California. Our operations depend on Exodus' ability to
protect its and our systems in its data center against damage from human error,
natural disasters, telecommunications failures, break-ins, sabotage, computer
viruses, intentional acts of vandalism and similar adverse events. Exodus does
not guarantee that our Internet access will be uninterrupted, error-free or
secure. Any disruption in the Internet services provided by Exodus could harm
our business.

We need to quickly and successfully build skills relating to our Kana Online
service

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

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

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

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

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

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

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

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

See "Business--Intellectual Property".

We also rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which are only of limited value

    We also rely on a combination of laws, such as copyright, trademark and
trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. We
currently have a registered trademark, "Kana", and pending trademark
applications for our logo and "KANA COMMUNICATIONS and Design". However, none
of our

                                       12
trademarks is registered outside of the United States, nor do we have any
trademark applications pending outside of the United States. Moreover, despite
any precautions that we have taken:

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

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

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

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

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

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

    Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software in our industry may be increasingly subject
to third-party infringement claims as the number of competitors grows and the
functionality of products in different industry segments overlaps. Third
parties may currently have, or may eventually be issued, patents that our
products or technology infringe. Any of these third parties might make a claim
of infringement against us. Many of our software license agreements require us
to indemnify our customers from any claim or finding of intellectual property
infringement. Any litigation, brought by us or others, could result in the
expenditure of significant financial resources and the diversion of
management's time and efforts. In addition, litigation in which we are accused
of infringement may cause product shipment delays, require us to develop non-
infringing technology or require us to enter into royalty or license
agreements, which may not be available on acceptable terms, or at all. If a
successful claim of infringement were made against us and we could not develop
non-infringing technology or license the infringed or similar technology on a
timely and cost-effective basis, our business could be significantly harmed.
See "Business--Intellectual Property".

We may face liability and lost sales if our software contains errors

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

  . loss of or delay in revenues and loss of market share;

  . loss of customers;

  . failure to achieve market acceptance;

  . diversion of development resources;

  . injury to our reputation;

                                       13
. increased service and warranty costs;

  . legal actions by customers against us; and

  . increased insurance costs.

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

Our ability to increase revenues depends on our ability to expand and manage
our international operations

    For the three months ended March 31, 1999, we derived approximately six
percent of our total revenues from sales outside North America. We also have
established an office in the United Kingdom. As a result, we face risks from
doing business on an international basis, including:

  . reduced protection for intellectual property rights in some countries;

  . licenses, tariffs and other trade barriers;

  . difficulties in staffing and managing foreign operations;

  . longer sales and payment cycles;

  . greater difficulties in collecting accounts receivable;

  . political and economic instability;

  . seasonal reductions in business activity;

  . potentially adverse tax consequences;

  . compliance with a wide variety of complex foreign laws and treaties; and

  . variation and unexpected changes in local laws and regulations.

    We plan to expand our existing international operations and establish
additional facilities in other parts of the world. The expansion of our
existing international operations and entry into additional international
markets will require significant management attention and financial resources.
In addition, in order to expand our international sales operations, we will
need to, among other things:

  . expand our international sales channel management and support
    organizations;

  . customize products for local markets; and

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

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

                                       14
Our international revenues are denominated in local currency. Therefore, a
strengthening of other currencies versus the U.S. dollar could make our
products less competitive in foreign markets. We do not currently engage in
currency hedging activities. To the extent that we are unable to manage a
successful expansion of our business into international markets, our business
could be severely harmed.

Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel and
operations

    Although we have not done so in the past, we may acquire or invest in other
companies, products or technologies. If we make any acquisitions, we will be
required to assimilate the operations, products and personnel of the acquired
businesses and train, retain and motivate key personnel from the acquired
businesses. We may be unable to maintain uniform standards, controls,
procedures and policies if we fail in these efforts. Similarly, acquisitions
may cause disruptions in our operations and divert management's attention from
day-to-day operations, which could impair our relationships with our current
employees, customers and strategic partners. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets.

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

    We may need to raise additional funds to develop or enhance our products or
services, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. Additional financing may
not be available on terms that are acceptable to us. If we raise additional
funds through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders would be reduced and these securities
might have rights, preferences and privileges senior to those of our current
stockholders. If adequate funds are not available on acceptable terms, our
ability to fund our expansion, take advantage of unanticipated opportunities,
develop or enhance products or services, or otherwise respond to competitive
pressures would be significantly limited.

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

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

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

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

                                       15
Our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase Kana. These
provisions, coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest involving
Kana. Furthermore, our board of directors will be divided into three classes,
only one of which will be elected each year. Directors will only be removable
by the affirmative vote of at least 66 2/3% of all classes of voting stock.
These factors may further delay or prevent a change of control of Kana. See
"Description of Capital Stock--Anti-takeover Effects of Provisions of the
Certificate of Incorporation, Bylaws and Delaware Law".

                         Risks Related to Our Industry

Our future product demand will depend on our ability to manage multiple
technologies and technological change

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

  . rapid technological change;

  . frequent new product introductions;

  . changes in customer requirements; and

  . evolving industry standards.

    The Kana solution is designed to work on a variety of hardware and software
platforms used by our customers. However, our software may not operate
correctly on evolving versions of hardware and software platforms, programming
languages, database environments and other systems that our customers use. For
example, the server component of the current version of the Kana solution runs
on the Windows NT operating system from Microsoft, and we must develop a
solution that is compatible with UNIX and other operating systems to meet the
demands of our customers. If we cannot successfully develop these products in
response to customer demands, our business could suffer. Also, we must
constantly modify and improve our products to keep pace with changes made to
these platforms and to database systems and other back-office applications and
Internet-related applications. This may result in uncertainty relating to the
timing and nature of new product announcements, introductions or modifications,
which may cause confusion in the market and harm our business. If we fail to
modify or improve our products in response to evolving industry standards, our
products could rapidly become obsolete, which would harm our business.

We may not be able to respond to changing customer preferences in our market

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

Our business substantially depends upon the continued acceptance and growth of
the Internet and e-mail as a medium of communication

    We sell the Kana solution primarily to organizations that receive large
volumes of e-mail and Web-based communications. Consequently, our future
revenues and profits, if any, substantially

                                       16
depend upon the continued acceptance and use of the Internet and e-mail, which
is evolving as a medium of communication. Rapid growth in the use of e-mail is
a recent phenomenon and may not continue. Many of our customers have business
models that are based on the continued growth of the Internet. As a result, a
broad base of enterprises that use e-mail as a primary means of communication
may not develop or be maintained. In addition, the market may not accept
recently introduced services and products that process e-mail, including our
solution. Moreover, companies that have already invested significant resources
in other methods of communications with customers, such as call centers, may be
reluctant to adopt a new strategy that may limit or compete with their existing
investments. If businesses do not continue to accept the Internet and e-mail as
a medium of communication, our business would suffer.

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

    Due to the increasing popularity and use of the Internet, it is possible
that state and federal regulators could adopt laws and regulations that may
impose additional burdens on those companies that conduct business online.

    The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws or laws that may inhibit the
use of Internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may decrease
the expansion of the Internet. A decline in the growth of the Internet,
particularly as it relates to online communication, could decrease demand for
our products and services and increase our costs of doing business, or
otherwise harm our business. Moreover, the applicability to the Internet of
existing laws in various jurisdictions governing issues such as property
ownership, sales tax, libel and personal privacy is uncertain and may take
years to resolve. Our costs could increase and our growth could be harmed by
any new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services.

Year 2000 issues present technological risks, could cause disruption to our
business and could harm sales of the Kana solution

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

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

                         Risks Related to This Offering

We will have broad discretion in using the proceeds from this offering

    We intend to use the proceeds from this offering for general corporate
purposes, including working capital, and we may use a portion of the proceeds
to acquire other businesses, products or

                                       17
technologies. We will nonetheless have broad discretion in how we use these
proceeds. You will not have the opportunity to evaluate the economic, financial
or other information on which we base our decisions regarding how to use the
proceeds from this offering, and we may spend these proceeds in ways with which
you may disagree. Pending any of these uses, we plan to invest the proceeds of
this offering in short-term, investment-grade, interest-bearing securities. We
cannot predict whether these investments will yield a favorable return. See
"Use of Proceeds".

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

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

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

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

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

    Immediately after this offering, we will have outstanding     shares of our
common stock, assuming no exercise of the underwriters' over-allotment option.
Of these shares, the     shares sold in this offering will be freely tradable
and 24,402,670 shares will be available for resale in the public market under
Rule 144 (subject in some cases to volume limitations) or Rule 144(k) under the
Securities Act following a lock-up period that expires 180 days after the date
of this prospectus. In addition, upon expiration of the 180-day lock up period,
6,333,898 shares will be available for resale in the public market under Rule
701, subject in some cases to a right of repurchase by the Company, and
1,257,708 shares will not be saleable under Rule 144 until July 2000.

    Holders of approximately 24,401,670 shares of our common stock have the
right to require us to register their shares of common stock with the
Securities and Exchange Commission. In addition, after this offering, we intend
to register approximately     shares of our common stock that we may issue
under our stock option plans. Once we register these shares, they can be freely
sold in the public market upon issuance, in some instances subject to the lock-
up agreements described above. If these holders cause a large number of
securities to be sold in the public market, the sales could materially and
adversely affect the market price of our common stock. In addition, any of
these sales could impede our ability to raise needed capital. See "Shares
Available for Future Sale" and "Underwriting".

                                       18
Investors will experience immediate and substantial dilution in the book value
of their investment

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

                 Cautionary Note on Forward-Looking Statements

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

                                       19
USE OF PROCEEDS

    The net proceeds to Kana from the sale and issuance of the     shares of
common stock offered are estimated to be $    million (approximately $
million if the underwriters' over-allotment option is exercised in full), at
the assumed initial public offering price of $    per share after deducting the
underwriting discount and estimated offering expenses. We are conducting this
offering primarily to increase our equity capital, to create a public market
for our common stock and to facilitate our future access to public equity
markets. We intend to use the net proceeds for general corporate purposes,
including working capital, product development and capital expenditures. In
addition, we may use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. However, we currently have no plan for use of the
expected offering proceeds, nor have we sought the advice of or received
reports from any of our professional advisors regarding the use of the offering
proceeds. In addition, we have no agreements or commitments with respect to any
acquisition or investment, and we are not involved in any negotiations with
respect to any similar transaction. Pending these uses, we will invest the net
proceeds of this offering in short-term, interest-bearing, investment-grade
securities. See "Risk Factors--We will have broad discretion in using the
proceeds from this offering".

                                DIVIDEND POLICY

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

                               PREEMPTIVE RIGHTS

    As of the date of this prospectus, holders of at least 6,378,856 shares of
our preferred stock have preemptive rights that entitle them to purchase
approximately five percent of the shares to be issued in this offering. The
number of shares that may be purchased under these rights, however, may be
limited at the discretion of the underwriters. Shares purchased by these
stockholders under their preemptive rights will reduce the number of shares
available to new investors in this offering. See "Underwriting".

                                       20
CAPITALIZATION

    The following table sets forth the capitalization of Kana as of March 31,
1999:

  . on an actual basis;

  . on a pro forma basis giving effect to the sale of 1,257,708 shares of
    our Series D preferred stock for total proceeds of $10.2 million and the
    conversion of all shares of the convertible preferred stock into
    20,026,670 shares of common stock upon the completion of this offering;
    and

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

    This table should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements appearing elsewhere
in this prospectus.
March 31, 1999
                                                  -----------------------------
                                                  Actual  Pro Forma As Adjusted
                                                  ------  --------- -----------
                                                  (In thousands, except share
                                                      and per share data)
Notes payable, less current portion.............. $  360   $   360     $
                                                  ------   -------     ----
Stockholders' equity:
 Convertible preferred stock: $0.001 par value
  per share; 50,000,000, 50,000,000 and 5,000,000
  shares authorized actual, pro forma and as
  adjusted, respectively; 18,768,962, 0 and 0
  shares issued and outstanding actual, pro forma
  and as adjusted, respectively..................     19        --
 Common stock: $0.001 par value per share;
  60,000,000 shares authorized actual, pro forma
  and as adjusted; 8,357,607, 28,384,277 and
  shares issued and outstanding actual, pro forma
  and as adjusted, respectively..................      8        28
 Additional paid-in capital...................... 22,797    32,996
 Deferred stock-based compensation............... (4,463)   (4,463)
 Notes receivable from stockholders..............   (243)     (243)
 Accumulated other comprehensive losses..........    (19)      (19)
 Accumulated deficit............................. (9,565)   (9,565)
                                                  ------   -------     ----
 Total stockholders' equity......................  8,534    18,734
                                                  ------   -------     ----
Total capitalization............................. $8,894   $19,094     $
                                                  ======   =======     ====
The number of shares outstanding as of March 31, 1999 excludes:

  . 316,300 shares of common stock issuable upon exercise of stock options
    outstanding at a weighted average exercise price of $0.08 per share;

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

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

    Also excludes 2,232,000 shares of common stock that have been issued or are
issuable upon exercise of stock options granted between March 31, 1999 and June
30, 1999 at a weighted average exercise price of $0.46 per share.

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

                                       21
DILUTION

    The pro forma net tangible book value of Kana at March 31, 1999, was
approximately $18.7 million, or $0.66 per share. Pro forma net tangible book
value per share represents total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all outstanding convertible preferred stock. After giving
effect to the sale in July 1999 of 1,257,708 shares of our Series D preferred
stock and the sale of     shares of common stock offered by Kana at an assumed
initial public offering price of $    per share, and after deducting the
estimated underwriting discount and commissions and estimated offering
expenses, Kana's pro forma net tangible book value at March 31, 1999, would
have been $   , or $    per share. This represents an immediate increase in net
tangible book value of $    per share to existing stockholders and an immediate
dilution of $    per share to new investors purchasing shares of common stock
in this offering. Dilution is defined as the diminution in the proportion of
income, or earnings per share, to which each share is entitled due to the
issuance of additional shares. With the sale and issuance of     shares in this
offering, existing stockholders will suffer an immediate reduction in the net
tangible book value of their shares because the additional shares decrease the
percentage of ownership of the existing stockholders. The following table
illustrates this dilution:
Assumed initial public offering price per share......................       $
  Pro forma net tangible book value per share as of March 31, 1999... $0.66
  Increase per share attributable to new investors...................
                                                                      -----
Pro forma net tangible book value per share after the offering.......
                                                                            ----
Dilution per share to new investors..................................       $
                                                                            ====
The following table summarizes, as of March 31, 1999, on a pro forma basis,
the total number of shares and consideration paid to Kana and the average price
per share paid by existing stockholders and by new investors purchasing shares
of common stock in this offering at an assumed initial public offering price of
$    per share, before deducting the estimated underwriting discount and
estimated offering expenses:
Shares Purchased  Total Consideration      Average
                            ------------------ ---------------------     Price
                              Number   Percent  Amount     Percent     Per Share
                            ---------- ------- ---------  ----------   ---------
Existing stockholders...... 28,384,277       %  $                    %   $
New public investors.......
                            ----------  -----   ---------  ----------
  Totals...................             100.0%  $               100.0%
                            ==========  =====   =========  ==========
The foregoing computations are based on the number of shares of common
stock outstanding as of March 31, 1999 and exclude:

  . 316,300 shares of common stock issuable upon exercise of stock options
    outstanding at a weighted average exercise price of $0.08 per share;

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

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

    Also excludes 2,232,000 shares of common stock that have been issued or are
issuable upon exercise of stock options granted between March 31, 1999 and June
30, 1999 at a weighted average exercise price of $0.46 per share.

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

                                       22
SELECTED CONSOLIDATED FINANCIAL DATA

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

   Kana was incorporated in July 1996 but had no significant operations until
1997. The consolidated statement of operations data for each of the years in
the two-year period ended December 31, 1998, and the consolidated balance sheet
data at December 31, 1997 and 1998, are derived from our consolidated financial
statements. These consolidated financial statements have been audited by KPMG
LLP, independent auditors, and are included elsewhere in this prospectus. The
consolidated statement of operations data for each of the three-month periods
ended March 31, 1998 and 1999, and the consolidated balance sheet data at March
31, 1999, are derived from our unaudited interim consolidated financial
statements included elsewhere in this prospectus. The unaudited interim
consolidated financial statements have been prepared on substantially the same
basis as the audited consolidated financial statements and, in our opinion,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations and financial
position for these periods. The diluted net loss per share computation excludes
potential shares of common stock (preferred stock, options to purchase common
stock and common stock subject to repurchase rights held by Kana), since their
effect would be antidilutive. See Note 1 of Notes of Consolidated Financial
Statements for a detailed explanation of the determination of the shares used
to compute actual and pro forma basic and diluted net loss per share. Pro forma
basic and diluted net loss per share gives effect to the conversion of
preferred stock as if it had occurred at the beginning of the periods
presented. The historical results are not necessarily indicative of results to
be expected for any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Years Ended     Three Months Ended
                                         December 31,          March 31,
                                        ----------------  --------------------
                                         1997     1998      1998       1999
                                        -------  -------  ---------  ---------
                                               (In thousands, except
                                                  per share data)
Consolidated Statement of Operations
 Data:
Revenues:
 License..............................  $   --   $ 1,793  $     161  $   1,165
 Service..............................      --       256         16        258
                                        -------  -------  ---------  ---------
   Total revenues.....................      --     2,049        177      1,423
Cost of revenues:
 License..............................      --        54          4         34
 Service..............................      --       519         26        402
                                        -------  -------  ---------  ---------
   Total cost of revenues.............      --       573         30        436
                                        -------  -------  ---------  ---------
Gross profit..........................      --     1,476        147        987
Operating expenses:
 Sales and marketing..................      366    3,796        498      1,539
 Research and development.............      699    2,254        403        823
 General and administrative...........      257      721        104        227
 Amortization of stock-based
  compensation........................      113    1,230        184        355
                                        -------  -------  ---------  ---------
Total operating expenses..............    1,435    8,001      1,189      2,944
                                        -------  -------  ---------  ---------
Operating loss........................   (1,435)  (6,525)    (1,042)    (1,957)
Other income, net.....................       52      188         30        112
                                        -------  -------  ---------  ---------
Net loss..............................  $(1,383) $(6,337) $  (1,012) $  (1,845)
                                        =======  =======  =========  =========
Basic and diluted net loss per share..  $ (0.62) $ (2.48) $   (0.55) $   (0.47)
                                        =======  =======  =========  =========
Shares used in computing basic and
 diluted net loss per share...........    2,246    2,555      1,824      3,939
                                        =======  =======  =========  =========
Pro forma basic and diluted net loss
 per share............................           $ (0.35)            $   (0.47)
                                                 =======             =========
Shares used in computing pro forma
 basic and diluted net loss per
 share................................            17,979                22,708
                                                 =======             =========
December 31,
                                                        ------------- March 31,
                                                         1997   1998    1999
                                                        ------ ------ ---------
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments...... $3,513 $9,952  $8,631
Working capital........................................  3,281  9,294   7,566
Total assets...........................................  3,824 11,969  11,138
Notes payable, less current portion....................     51    360     360
Total stockholders' equity.............................  3,504 10,038   8,534
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                    Overview

    Kana develops, markets and supports an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.

    We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to manage important customer data
and monitor real-time, hands-on customer feedback on our software.

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

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

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

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

                                       24
We allocate the total costs for information services and facilities to each
functional area that uses the information services and facilities based on its
relative headcount. These allocated costs include rent and other facility-
related costs for the corporate office, communication charges and depreciation
expense for furniture and equipment.

    In connection with the granting of stock options to our employees, we
recorded deferred stock-based compensation totaling approximately $6.2 million
through March 31,1999. This amount represents the total difference between the
exercise prices of stock options and the deemed fair value of the underlying
common stock for accounting purposes on the date these stock options were
granted. This amount is included as a component of stockholders' equity and is
being amortized on an accelerated basis by charges to operations over the
vesting period of the options, consistent with the method described in
Financial Accounting Standards Board, or FASB, Interpretation No. 28. We
recorded $1.2 million of stock-based compensation amortization expense during
the year ended December 31, 1998, and approximately $355,000 of stock-based
compensation amortization expense during the three months ended March 31, 1999.
As of March 31, 1999, we had a total of $4.5 million of deferred stock-based
compensation that had not been amortized. We expect to record additional
deferred stock-based compensation of at least $12.0 million for stock option
grants made during the three months ended June 30, 1999. The amortization of
the remaining deferred stock-based compensation will result in additional
charges to operations through July 2003. The amortization of stock-based
compensation is classified as a separate component of operating expenses
in our consolidated statement of operations.

    Although revenues have increased consistently from quarter to quarter,
since the beginning of 1997 we have incurred substantial costs to develop our
products and to recruit, train and compensate personnel for our engineering,
sales, marketing, client services and administration departments. As a result,
we have incurred substantial losses since inception and, as of March 31, 1999,
had an accumulated deficit of $9.6 million. We believe our future success is
contingent upon providing superior customer service, increasing our customer
base and developing our products. We intend to invest heavily in sales,
marketing, research and development, client services and infrastructure to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future.

    We had 98 full-time employees as of June 30, 1999 and intend to hire a
significant number of employees in the future. This expansion places
significant demands on our management and operational resources. To manage this
rapid growth, we must invest in and implement scaleable operational systems,
procedures and controls. We expect future expansion to continue to challenge
our ability to hire, train, manage and retain employees.

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

                                       25
Results of Operations

    The following table presents selected financial data for the periods
indicated as a percentage of total revenues. Data for the year ended December
31, 1997 is not presented because we had no revenues during that period.
Three Months
                                                   Year Ended      Ended
                                                  December 31,   March 31,
                                                  ------------ ---------------
                                                      1998      1998     1999
                                                  ------------ ------   ------
Revenues:
  License........................................      87.5%     91.0%    81.9%
  Service........................................      12.5       9.0     18.1
                                                     ------    ------   ------
    Total revenues...............................     100.0     100.0    100.0
Cost of revenues:
  License........................................       2.6       2.3      2.4
  Service........................................      25.3      14.7     28.3
                                                     ------    ------   ------
    Total cost of revenues.......................      27.9      17.0     30.7
                                                     ------    ------   ------
Gross profit.....................................      72.1      83.0     69.3
Operating expenses:
  Sales and marketing............................     185.3     281.4    108.2
  Research and development.......................     110.0     227.7     57.8
  General and administrative.....................      35.2      58.8     16.0
  Amortization of stock-based compensation.......      60.0     104.0     24.9
                                                     ------    ------   ------
    Total operating expenses.....................     390.5     671.9    206.9
                                                     ------    ------   ------
Operating loss...................................    (318.4)   (588.7)  (137.5)
Other income, net................................       9.2      16.9      7.9
                                                     ------    ------   ------
    Net loss.....................................    (309.2)%  (571.8)% (129.6)%
                                                     ======    ======   ======
Three Months Ended March 31, 1998 and 1999

Revenues

    Total revenues increased from $177,000 in the quarter ended March 31, 1998
to $1.4 million in the quarter ended March 31, 1999. License revenue increased
from $161,000 in the quarter ended March 31, 1998 to $1.2 million in the
quarter ended March 31, 1999. This increase in license revenue was due
primarily to increased market acceptance of our products, expansion of our
product line and increased sales generated by our expanded sales force. Total
headcount in our sales department increased from four people at March 31, 1998
to 17 people at March 31, 1999. License revenue represented 91.0% of total
revenues for the quarter ended March 31, 1998 and 81.9% of total revenues for
the quarter ended March 31, 1999.

    Service revenue increased from $16,000 in the quarter ended March 31, 1998
to $258,000 in the quarter ended March 31, 1999. This increase in service
revenue was due primarily to the increased licensing activity described above,
resulting in increased revenue from customer implementations, customization
projects and maintenance contracts, and the introduction of our hosted service.
Service revenue represented 9.0% of total revenues for the quarter ended March
31, 1998 and 18.1% of total revenues for the quarter ended March 31, 1999.

    During the three months ended March 31, 1998, six customers each accounted
for more than 10% of total revenues. During the three months ended March 31,
1999, no customer accounted for

                                       26
more than 10% of total revenues. Revenue from international sales for the three
months ended March 31, 1998 and 1999 were less than 10% of total revenues.

Cost of Revenues

    Cost of license revenue increased from $4,000 for the quarter ended March
31, 1998 to $34,000 for the quarter ended March 31, 1999. As a percentage of
license revenue, cost of license revenue was 2.5% for the quarter ended March
31, 1998 and 2.9% for the quarter ended March 31, 1999. The increase in the
cost of license revenue was due primarily to royalties, product documentation
costs and delivery costs for shipments to customers. We anticipate that the
cost of license revenue will increase in absolute dollars as we license
additional technologies, although cost of license revenue will vary as a
percentage of license revenue from period to period.

    Cost of service revenue increased from $26,000 for the quarter ended March
31, 1998 to $402,000 for the quarter ended March 31, 1999. The growth in cost
of service revenue was attributable primarily to an increase in personnel
dedicated to support our growing number of customers. Cost of service revenue
as a percent of service revenue was 163% for the quarter ended March 31, 1998
and 156% for the quarter ended March 31, 1999. We anticipate that cost of
service revenue will increase in absolute dollars, but decline as a percentage
of service revenue, as we continue to expand our service offerings.

Operating Expenses

    Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel and
promotional expenditures, including public relations, advertising, trade shows,
and marketing collateral materials. Sales and marketing expenses increased from
$498,000 in the quarter ended March 31, 1998 to $1.5 million in the quarter
ended March 31, 1999. This increase was attributable primarily to the addition
of sales and marketing personnel and an increase in sales commissions
associated with increased revenues and, to a lesser extent, to higher marketing
costs. As a percentage of total revenues, sales and marketing expenses were
281% for the quarter ended March 31, 1998 and 108% for the quarter ended
March 31, 1999. This decrease in sales and marketing expense as a percent of
total revenues was due primarily to the increase in total revenues over the
period. We expect to continue to increase our marketing and promotional efforts
and hire additional sales personnel. Accordingly, we anticipate that sales and
marketing expenses will increase in absolute dollars, but will vary as a
percentage of total revenues from period to period.

    Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors. Research and development expenses increased from
$403,000 in the quarter ended March 31, 1998 to $823,000 in the quarter ended
March 31, 1999. This increase was attributable primarily to the addition of
personnel associated with product development. As a percentage of total
revenues, research and development expenses were 228% for the quarter ended
March 31, 1998 and 57.8% for the quarter ended March 31, 1999. This decrease in
research and development expense as a percent of total revenues was due
primarily to the increase in total revenues over the period. We expect to
continue to make substantial investments in research and development and
anticipate that research and development expenses will continue to increase in
absolute dollars, but will vary as a percentage of total revenues from period
to period.

    General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for administrative personnel,
legal, accounting and other general corporate expenses. General and
administrative expenses increased from $104,000 in the quarter ended March 31,
1998 to $227,000 in the quarter ended March 31, 1999, due primarily to
increased

                                       27
personnel and facilities expenses necessary to support our growth. As a
percentage of total revenues, general and administrative expenses were 58.8%
for the quarter ended March 31, 1998 and 16.0% for the quarter ended March 31,
1999. This decrease in general and administrative expenses as a percent of
total revenues was due primarily to the increase in total revenues over the
period. We expect that general and administrative expenses will increase in
absolute dollars as we add personnel and incur additional costs related to the
anticipated growth of our business and operation as a public company. However,
we expect that these expenses will vary as a percentage of total revenues from
period to period.

Other Income, Net

    Other income, net consists primarily of interest earned on cash and short-
term investments, offset by interest expense related to a note payable. Other
income, net was $30,000 in the quarter ended March 31, 1998 and $112,000 in the
quarter ended March 31, 1999. The increase in other income, net was due
primarily to increased interest income earned on higher cash balances as a
result of our Series C preferred stock financing in September 1998.

                     Years Ended December 31, 1997 and 1998

Revenues

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

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

Cost of Revenues

    Cost of license revenue was $54,000 in 1998. As a percentage of license
revenue, cost of license revenue was 3.0% in 1998. Cost of license revenue
consisted of royalties paid to a third party, product documentation costs and
delivery costs for shipments to customers.

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

Operating Expenses

    Sales and Marketing.  Sales and marketing expenses were $366,000 for 1997
and $3.8 million for 1998. The increase was due primarily to the addition of
sales and marketing personnel, increased sales commissions related to increased
total revenues and, to a lesser extent, increased marketing costs. As a
percentage of total revenues, sales and marketing expenses were 185% for 1998.

    Research and Development.  Research and development expenses were $699,000
for 1997 and $2.3 million for 1998. The increase was attributable primarily to
the addition of personnel associated with product development. As a percentage
of total revenues, research and development expenses were 110% for 1998.

    General and Administrative. General and administrative expenses were
$257,000 for 1997 and $721,000 for 1998. The increase was due primarily to the
addition of management and financial

                                       28
personnel necessary to support our growth. As a percentage of total revenues,
general and administrative expenses were 35.2% for 1998.

Other Income, Net

    Other income, net was $52,000 for 1997 and $188,000 for 1998. The increase
was due primarily to an increase in interest income earned on higher balances
of cash and short-term investments due primarily to our Series C preferred
stock financing in September 1998.

                           Provision for Income Taxes

    We have incurred operating losses for all periods from inception through
March 31, 1999, and therefore have not recorded a provision for income taxes.
We have recorded a valuation allowance for the full amount of our net deferred
tax assets, as the future realization of the tax benefit is not currently
likely.

    As of December 31, 1998, we had net operating loss carryforwards for
federal and state tax purposes of approximately $6.1 million. These federal and
state loss carryforwards are available to reduce future taxable income and
expire at various dates into the year 2018. Under the provisions of the
Internal Revenue Code, certain substantial changes in our ownership may limit
the amount of net operating loss carryforwards that could be utilized annually
in the future to offset taxable income.

                                       29
Quarterly Results of Operations

    The following tables set forth a summary of our unaudited quarterly
operating results for each of the five quarters in the period ended March 31,
1999. The information has been derived from our consolidated unaudited
financial statements that, in management's opinion, have been prepared on a
basis consistent with the audited consolidated financial statements contained
elsewhere in this prospectus and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of such
information when read in conjunction with our audited consolidated financial
statements and notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
Quarter Ended
                          ----------------------------------------------------
                          Mar. 31,   June 30,   Sept. 30,  Dec. 31,   Mar. 31,
                            1998       1998       1998       1998       1999
                          --------   --------   ---------  --------   --------
                                         (In thousands)
Consolidated Statement
 of Operations Data:
Revenues:
 License................  $   161    $   454     $   478   $   699    $ 1,165
 Service................       16         25          97       119        258
                          -------    -------     -------   -------    -------
 Total revenues.........      177        479         575       818      1,423
                          -------    -------     -------   -------    -------
Cost of revenues:
 License................        4         12          17        21         34
 Service................       26         32         189       273        402
                          -------    -------     -------   -------    -------
 Total cost of
  revenues..............       30         44         206       294        436
                          -------    -------     -------   -------    -------
Gross profit............      147        435         369       524        987
                          -------    -------     -------   -------    -------
Operating expenses:
 Sales and marketing....      498        900       1,111     1,287      1,539
 Research and
  development...........      403        462         668       721        823
 General and
  administrative........      104        177         217       221        227
 Amortization of stock-
  based compensation....      184        246         352       448        355
                          -------    -------     -------   -------    -------
 Total operating
  expenses..............    1,189      1,785       2,348     2,677      2,944
                          -------    -------     -------   -------    -------
Operating loss..........   (1,042)    (1,350)     (1,979)   (2,153)    (1,957)
Other income, net.......       30         10          37       111        112
                          -------    -------     -------   -------    -------
Net loss................  $(1,012)   $(1,340)    $(1,942)  $(2,042)   $(1,845)
                          =======    =======     =======   =======    =======
As a Percentage of Total
 Revenues:
Revenues:
 License................     91.0%      94.8%       83.1%     85.5%      81.9%
 Service................      9.0        5.2        16.9      14.5       18.1
                          -------    -------     -------   -------    -------
 Total revenues.........    100.0      100.0       100.0     100.0      100.0
                          -------    -------     -------   -------    -------
Cost of revenues:
 License................      2.3        2.5         3.0       2.6        2.4
 Service................     14.7        6.7        32.9      33.4       28.3
                          -------    -------     -------   -------    -------
 Total cost of
  revenues..............     17.0        9.2        35.9      36.0       30.7
                          -------    -------     -------   -------    -------
Gross profit............     83.0       90.8        64.1      64.0       69.3
                          -------    -------     -------   -------    -------
Operating expenses:
 Sales and marketing....    281.4      187.9       193.2     157.3      108.2
 Research and
  development...........    227.7       96.5       116.2      88.1       57.8
 General and
  administrative........     58.8       37.0        37.7      27.0       16.0
 Amortization of stock-
  based compensation....    104.0       51.4        61.2      54.8       24.9
                          -------    -------     -------   -------    -------
 Total operating
  expenses..............    671.9      372.8       408.3     327.2      206.9
                          -------    -------     -------   -------    -------
Operating loss..........   (588.7)    (281.8)     (344.2)   (263.2)    (137.5)
Other income, net.......     16.9        2.1         6.4      13.6        7.9
                          -------    -------     -------   -------    -------
Net loss................   (571.8)%   (279.7)%    (337.7)%  (249.6)%   (129.6)%
                          =======    =======     =======   =======    =======
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on our level of actual and anticipated business
activities. Our revenues and operating results are difficult to forecast and
will fluctuate, and we believe that period-to-period comparisons of our
operating results will not necessarily be meaningful. As a result, you should
not rely upon them as an indication of future performance.

                                       30
Liquidity and Capital Resources

    Since inception, we have financed our operations primarily from private
sales of convertible preferred stock totaling $16.4 million and, to a lesser
extent, from bank borrowings and lease financing.

    Our operating activities used $1.1 million during 1997, $4.9 million during
1998 and $1.0 million during the first quarter of 1999. This negative operating
cash flow resulted principally from our net losses experienced during these
periods as we invested in the development of our products, expanded our sales
force and expanded our infrastructure to support our growth.

    Our investing activities, consisting of purchases of furniture, fixtures
and computer equipment to support our growing number of employees, used
$498,000 during 1997, $854,000 during 1998 and $331,000 during the first
quarter of 1999.

    Our financing activities generated $4.9 million in cash during 1997 and
$12.3 million in cash during 1998. Of these financing activities, the issuance
of convertible preferred stock generated net proceeds of $4.6 million during
1997 and $11.6 million during 1998. We also had proceeds from bank borrowings
of $720,000 in 1998. There were no financing activities during the first
quarter of 1999.

    At March 31, 1999, we had cash and cash equivalents aggregating $8.5
million and short-term investments totaling $160,000. Our short-term
investments secure a letter of credit issued in connection with the lease of
our corporate offices. In addition, our bank debt was $720,000 and we had
available $280,000 under an existing line of credit.

    We expect to devote substantial resources to continue our research and
development efforts, expand our sales, support, marketing and product
development organizations, establish additional facilities worldwide and build
the infrastructure necessary to support our growth. Although we believe that
the proceeds of this offering, together with our current cash and cash
equivalents and our borrowing capacity, will be sufficient to fund our
activities for at least the next 12 months, there can be no assurance that we
will not require additional financing within this time frame or that such
additional funding, if needed, will be available on terms acceptable to us or
at all. In addition, although there are no present understandings, commitments
or agreements with respect to any acquisition of other businesses, products or
technologies, we may, from time to time, evaluate potential acquisitions of
other businesses, products and technologies. In order to consummate potential
acquisitions, we may issue additional securities or need additional equity or
debt financing and any financing may be dilutive to existing investors.

                              Year 2000 Compliance

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

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

                                       31
Scope of Year 2000 Assessment

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

    .products;

    .software applications;

    .facilities;

    .suppliers and vendors; and

    .computer systems.

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

Budget and Schedule

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

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

Products

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

Third-party Hardware and Software Systems and Services

    We are in the process of evaluating all of the material third-party systems
and software we use in our business. We have received assurances of Year 2000
compliance from substantially all of the providers of hardware used in our
business. We have identified approximately 20 different software

                                       32
vendors that provide software products in our business. To date, we have not
received adequate assurances from the provider of our accounting software, but
we anticipate a Year 2000 upgrade to be received in the next month. If any of
the assurances we have received from our third-party software or hardware
providers are false, our internal systems and our ability to ship our product
would by materially harmed.

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

Contingency Plan

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

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

    .delay or loss of revenue;

    .cancellation of customer contracts;

    .diversion of development resources;

    .damage to our reputation;

    .increased service and warranty costs; and

    .litigation costs.

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

                      Recently Issued Accounting Standards

    The FASB issued Statement of Financial Accounting Standards, or SFAS, No.
133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we do not currently hold any derivative instruments and do not engage
in hedging activities, we expect that the adoption of SFAS No. 133 will not
have a material impact on our financial position or results of operations. We
will adopt SFAS No. 133 effective January 1, 2000.

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

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

                                       33
. vendor specific evidence of fair value does not exist for one or more of
    the delivered elements; and

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

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

           Qualitative and Quantitative Disclosures About Market Risk

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

                                       34
BUSINESS

    Kana develops, markets and supports an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.

    We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to to manage important customer
data and monitor real-time, hands-on customer feedback on our software.

    Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. We
intend to use our advanced Web-based architecture, which uses industry
standards, such as the Java programming language, and Extensible Mark-up
Language (XML) to facilitate scaleability and the integration of our platform
with other e-Business and legacy systems. In addition, we intend to expand our
suite of products to enter new markets, increase our global distribution
capabilities and partnerships, leverage our hosted application service and
continue to emphasize customer advocacy and satisfaction.

    Our customers include e-Businesses in the communications, Internet,
retailing and technology industries, and companies employing e-Business
strategies in traditional industries such as financial services, energy,
automobile and airlines. As of June 30, 1999, more than 100 customers have
licensed our software, including:

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

                              Industry Background

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

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

    Given the emerging shift to online customer interaction, traditional
solutions are not addressing the fundamental changes required by e-Businesses.
The Gartner Group estimates that companies

                                       35
will receive 25% of all customer inquiries via e-mail and Web-based forms by
2001, so the incorporation of these new online communications channels is
critical to continued success. However, most companies remain unprepared to
address the dramatic growth of e-mail and Web-based customer interactions. A
survey of 125 companies with content, consumer brands, travel, retail and
financial services Web sites conducted by Jupiter Communications in late 1998
found that 42% of the surveyed companies' Web sites took longer than five days
to reply to e-mail inquiries, never replied or were not accessible by e-mail.

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

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

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

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

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

                               The Kana Solution

    We develop, market and support an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows e-Businesses to manage high volumes of e-mail
and Web-based customer communications. Furthermore, our software is designed to
integrate with enterprise applications and systems to capitalize upon the
extensive customer information contained within online customer communications.
The Kana solution enables enterprises to manage their online customer
communications in order to enhance customer relationships, reduce operating and
IT costs and generate additional revenue opportunities. Kana Online, our Web-
based service, offers the Kana solution on a hosted basis.

    We believe our software solution provides the following business benefits:

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

                                       36
Reduced Operating and IT Costs. Our solution reduces the operating and IT
costs of e-Businesses by increasing the efficiency and effectiveness of online
communications, and by migrating customer interactions from expensive
telephony-based environments to the more cost-effective mediums of e-mail and
the Web. The Kana solution utilizes a combination of automation, intelligent
workflow and advanced messaging analysis technologies to allow e-Businesses to
respond to customer messages rapidly and accurately, which can decrease the
number of repeat inquiries received and increase the efficiency of users. Our
open, scaleable Web-based architecture is designed to be readily integrated
with e-Businesses' legacy systems, extending these systems' useful lives and
allowing e-Businesses to avoid expensive upgrades. In addition, our hosted Web-
based service, Kana Online, allows e-Businesses to utilize a customized Kana
solution while minimizing IT infrastructure costs.

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

  . strategically cross-sell and up-sell existing products and services
    during the response process;

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

  . identify and develop new product and service offerings.

    In addition to these business benefits, our solution differs from those of
our competitors as a result of the following core capabilities, which we
believe enable us to deliver superior value to e-Businesses:

    Advanced Architecture.  Our solution features an advanced, scaleable, Web-
based architecture based on industry standards.

  . Web-Based. The Kana solution is based upon an advanced Web-based
    architecture that supports multiple hardware and software platforms and
    browser-based and thin client interfaces. Our solution runs on multiple
    hardware resources simultaneously in order to enhance scalability. In
    addition, our software is readily deployable and performs in demanding
    operating environments.

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

  . Open and Standards-Based.  Our software supports industry-standard
    application programming interfaces (APIs) and integrates easily with:

      .existing enterprise software environments;

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

      .product and other databases; and

      .a broad range of other information systems.

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

    Intelligent Workflow.  Our software is designed to optimize workflow,
information and communications associated with online customer interactions.
The Kana solution can be configured

                                       37
to trigger not only a message response but also other actions within an
organization. For example, our software can alert an e-Business' engineering
department when the e-Business receives repeat inquiries about a software
defect or the human resources department if a resume is attached to a
communication.

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

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

    Advanced Message Classification.  Our software enables e-Businesses to
rapidly and accurately classify and respond to customer messages with the
desired level of human intervention. We are developing advanced messaging
analysis technologies that significantly increase the efficiency of the message
management process. e-Businesses experiencing a high volume of inbound messages
can choose the level of automation appropriate for their needs, including
routing a message to a particular queue or user for response, categorizing a
message for a fully automated response or allowing the creation of a fully
personalized response to the inquiry.

                               The Kana Strategy

    Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. The
key elements of our strategy include:

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

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

                                       38
Increase Global Distribution Capabilities and Partnerships.  We intend to
broaden and increase our worldwide distribution capabilities by combining the
efforts of our direct sales force and our partnerships with leading e-Business
service and infrastructure providers. By expanding existing partnerships and
aggressively developing new alliances, we can leverage their additional sales,
marketing and deployment capabilities to help establish Kana as a global
provider of e-Business infrastructure solutions addressing online customer
interactions.

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

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

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

                                       39
Products and Services

Kana Platform and Suite of Applications

    The Kana solution is comprised of a platform and a suite of software
applications that work together to create an advanced and scaleable online
customer interactions solution for e-Businesses. The Kana platform consists of
the Kana Core Technology and Kana Control. The suite of software applications
consists of Kana Mail, Kana Direct, Kana Reports, Kana Link, Kana Classify and
Kana Web Connect. We generally license our software based on the number of
concurrent users of the system and the application components purchased.

Kana Application Components

Kana Technology Platform

Corporate Infrastructure

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

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

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

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

                                       40
Kana Direct.  Kana Direct is the outbound e-mail application of the Kana
solution. Kana Direct enables e-Businesses to use the information obtained
through Kana Mail and other systems to send targeted e-mail to their customers.
Using Kana Direct, administrators can take advantage of the e-mail
communication channel to strengthen customer relationships, improve loyalty and
generate revenue. Since Kana Direct integrates seamlessly with Kana Mail,
customer responses to Kana Direct mailings are automatically processed by the
platform for maximum efficiency.

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

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

    Kana Classify. Kana Classify is our advanced messaging analysis technology
that drives automated actions. Kana Classify categorizes customer messages and
can automatically respond to customers, suggest responses for user review or
route messages to skill-based queues. Kana Classify is currently in limited
release with selected Kana customers.

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

Kana Online

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

    The hardware and core technology supporting Kana Online is pre-installed
and managed at Exodus Communications, Inc., a leading provider of Internet
server hosting and management solutions. We believe that Exodus is equipped to
provide the security, reliability and performance required for hosting our
solution through its nationwide network operating centers and high-speed wide
area network backbone.

    Kana Online offers several key benefits to e-Businesses:

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

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

                                       41
. Rapid Deployment. Since e-Businesses run the Kana solution locally, they
    are not responsible for purchasing and configuring the appropriate
    hardware and the system can often be set up in a matter of days. A Kana
    Online representative works with the e-Business to ensure that the
    system is configured to meet their specific needs.

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

Professional Services

    Our professional services group consists of client services, technical
services and solution services. As of June 30, 1999, our professional services
group consisted of 20 full-time employees.

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

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

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

                                   Technology

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

Open, Standards-Based Architecture

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

  . Java;

  . JDBC (Java DataBase Connectivity);

  . XML (Extensible Mark-up Language);

  . standard relational databases from Oracle and Microsoft; and

  . Microsoft ASP (Active Server Pages).

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

Multi-Tier Web-Based Architecture

    The Kana platform relies on an advanced multi-tier Web-based architecture.
This architecture separates the different system components into logical
layers, supports multiple hardware and software platforms, supports browser-
based and thin client interfaces and enables the system to run

                                       42
on multiple hardware resources simultaneously in order to enhance scalability.
The tiers are the presentation, user interface, workflow, business object and
data layers.

Web- and Windows-Based Interfaces

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

Advanced Messaging Analysis Technologies

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

Ease of Platform Upgrade

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

                              Sales and Marketing

Sales

    Our sales strategy is to pursue targeted accounts through a combination of
our direct sales force and our strategic partners. To date, we have targeted
our sales efforts at the e-Business divisions of Global 2000 companies and
rapidly growing Internet companies. We maintain direct sales personnel
domestically in California, Connecticut, Georgia, Illinois, Maryland,
Massachusetts, New York and Texas, and internationally in the United Kingdom.
The direct sales force is organized into regional teams, which include both
sales representatives and systems engineers. Our direct sales force is
complemented by telemarketing representatives based at our headquarters in Palo
Alto, California.

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

                                       43
Marketing

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

  . conducting seminars;

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

  . establishing and maintaining close relationships with recognized
    industry analysts;

  . conducting direct mailings and ongoing public relations campaigns;

  . managing and maintaining our Web site;

  .conducting market research; and

  .creating and placing advertisements.

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

                                    Partners

    Kana has three types of partnerships, service partnerships, marketing
alliance partnerships and reseller partnerships, that are designed to leverage
our services, software development and sales capabilities. We view these
partners as critical to our success in providing enterprise-wide e-Business
interactions solutions.

    Service Partners.  Our service partners include system integrators, such as
Andersen Consulting and Scient Corporation, that provide implementation
consulting services that allow us to leverage the size and scope of their
organizations.

    Marketing Alliance Partners.  We have established a series of relationships
with marketing alliance partners across a variety of industries such as
customer relationship management software, sales force automation software,
telephony systems and IT hardware, that allow us to provide a comprehensive
solution to e-Businesses.

    Reseller and Strategic Sales Partners.  We complement our direct sales
force with a series of reseller and strategic sales partnerships with industry
leaders, such as MCI WorldCom, Inc. and Convergys Corporation.

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

    We rely to a significant degree on our relationships with our partners.
Many of these partners also work with competing software companies, and our
success will depend on their willingness and ability to devote sufficient
resources and efforts to the Kana solution. Our arrangements with these

                                       44
parties typically are in the form of non-exclusive agreements that may be
terminated by either party without cause or penalty and with limited notice.
Therefore, we can provide no guarantee that any of our partners will continue
their relationship with us.

                                   Customers

    Our customers range from Global 2000 companies pursuing an e-Business
strategy to rapidly growing Internet companies. As of June 30, 1999, we have
licensed our solution to more than 100 customers in a variety of industries
worldwide. Kana's representative customers include:

  Portals                      e-Tailing                Internet

    Excite@Home                barnesandnoble.com       Critical Path
    Lycos                      CDNOW                    eBay
    GoTo.com                   eToys                    Priceline.com

  Financial                    Technology               Airlines

  Chase Manhattan Bank         Hewlett-Packard          Canadian Airlines
  Dime Savings Bank            Netscape                 KLM Airlines
  Dow Jones/Wall Street JournalPeopleSoft               Northwest Airlines

    Communications             Call Centers             Other

  Ameritech                    Convergys                Ford Motor Company
  TCI.Net                      Modus Media              The Gap
  US West                      Stream International     Shell International

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

                            Research and Development

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

    Our research and development expenses totaled approximately $2.3 million
for the year ended December 31, 1998 and $699,000 for the year ended December
31, 1997. As of June 30, 1999, approximately 29 of our employees were engaged
in research and development activities. Our success depends, in part, on our
ability to enhance our existing customer interactions solutions and to develop
new services, functionality and technology that address the increasingly
sophisticated and varied needs of our prospective customers. Delays in bringing
to market new products or their

                                       45
enhancements, or the existence of defects in new products or enhancements,
could be exploited by our competitors. If we were to lose market share as a
result of lapses in our product management, our business would suffer.

                                  Competition

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

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

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

                             Intellectual Property

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

  . An e-Business infrastructure solution for online customer interactions,
    using rules and message categories to codify workflow, including use of
    standard phrases, response templates, recipient lists and routing;

  . An e-Business infrastructure solution for online customer interactions
    in which advanced workflow features are used in conjunction with rules,
    queues and timers;

  . An e-Business infrastructure solution for online customer interactions
    that uses queues and timers to track, route and escalate the priority of
    messages; and

  . An e-Business infrastructure solution for online customer interactions
    that combines a rule-based workflow engine with a text classification
    system to automate e-mail response.

                                       46
These patents, if allowed, will cover a material portion of our solution.

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

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

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

  . Kana ceases to do business without a successor; or

  . Kana discontinues providing maintenance and support.

    Substantial litigation regarding intellectual property rights exists in the
software industry. Our software products may be increasingly subject to third-
party infringement claims as the number of competitors in the industry segments
grows and the functionality of products in different industry segments
overlaps. Some of our competitors in the market for customer communications
software may have filed or may intend to file patent applications covering
aspects of their technology that they may claim Kana's technology infringes. We
cannot be certain that any of these competitors will not make a claim of
infringement against us with respect to its products and technology.

                                   Employees

    As of June 30, 1999, we had 98 full-time employees, 20 of whom were engaged
in customer service and support, 35 in sales and marketing, 29 in research and
development, and 14 in finance, administration and operations. Our future
performance depends in significant part upon the continued service of our key
technical, sales and marketing, and senior management personnel, none of whom
is bound by an employment agreement requiring service for any defined period of
time. The loss of the services of one or more of our key employees could harm
our business.

    Our future success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense, particularly in the San Francisco
Bay Area where we are headquartered. Due to the limited number of people
available with the necessary technical skills and understanding of the
Internet, we can give no assurance that we can retain or attract key personnel
in the future. None of our employees is represented by a labor union. We have
not experienced any work stoppages and consider our relations with our
employees to be good. See "Risk Factors--We may be unable to hire and retain
the skilled personnel necessary to develop our engineering, professional
services and support capabilities" and "--We may face difficulties in hiring
and retaining qualified sales personnel to sell the Kana solution".

                                       47
Facilities

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

                               Legal Proceedings

    We are not currently a party to any legal proceedings.

                                       48
MANAGEMENT

                        Executive Officers and Directors

    The following table sets forth certain information regarding the executive
officers and directors of Kana as of June 30, 1999:
Name                      Age                     Position
----                      ---                     --------
Michael J. McCloskey.....  42 Chief Executive Officer and Director
Mark S. Gainey...........  31 President and Chairman of the Board of Directors
Joseph D. McCarthy.......  34 Vice President, Finance and Operations
Michael R. Wolfe.........  30 Vice President, Engineering
Paul R. Holland..........  38 Vice President, Worldwide Sales
William R. Phelps........  37 Vice President, Professional Services
David M. Beirne..........  35 Director
Eric A. Hahn.............  39 Director
Charles A. Holloway,
 Ph.D....................  63 Director
Steven T. Jurvetson......  32 Director
Ariel Poler..............  32 Director
Michael J. McCloskey. Mr. McCloskey joined Kana in June 1999 as Chief
Executive Officer and a director. Prior to joining Kana, from September 1996 to
February 1999, Mr. McCloskey served in various positions with Genesys
Telecommunications Laboratories, Inc., a provider of enterprise interaction
management software, including President from July 1998 to December 1998, Chief
Operating Officer from September 1997 to July 1998 and Vice President, Finance
and International, Chief Financial Officer and Secretary from September 1996 to
July 1998. From May 1995 to September 1996, he served as Vice President,
Finance, Chief Financial Officer and Vice President, Operations at Network
Appliance, Inc., a network data storage device company. From September 1993 to
May 1995, Mr. McCloskey served as Executive Vice President and Chief Financial
Officer at Digital Microwave Corporation, a telecommunications company. From
1991 to 1993, Mr. McCloskey was the Chief Operating Officer and a member of the
board of directors of Wavefront Technologies, a 3-D graphics visualization
software development company. Mr. McCloskey holds a B.S. in Business
Administration from Santa Clara University.

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

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

    Michael R. Wolfe. Mr. Wolfe joined Kana in May 1997 as Director of
Engineering and has served as Vice President, Engineering since April 1998.
Prior to joining Kana, from March 1995 to February 1997, Mr. Wolfe served as
Director of Engineering at Internet Profiles Corporation, an internet marketing
company. From February 1994 to March 1995, Mr. Wolfe was an associate at

                                       49
Wells Fargo Nikko specializing in software development. From June 1991 to
February 1994, Mr. Wolfe was a software programming analyst at Goldman, Sachs &
Co. Mr. Wolfe has taught computer science at Stanford University and the
University of California at Berkeley. Mr. Wolfe holds a B.S. and M.S. in
Computer Science from Stanford University.

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

    William R. Phelps. Mr. Phelps joined Kana in December 1998 as Vice
President, Professional Services. Prior to joining Kana, from March 1997 to
November 1998, Mr. Phelps served as Vice President, Professional Services for
CrossWorlds Software, Inc., an application integration software company. From
January 1994 to February 1997, Mr. Phelps served as a principal consultant at
Booz, Allen & Hamilton, a management consulting firm. Mr. Phelps holds a B.S.
in Industrial Engineering from Stanford University.

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

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

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

    Steven T. Jurvetson. Mr. Jurvetson has served as a Director of Kana since
April 1997. Mr. Jurvetson has been a Managing Director of Draper Fisher
Jurvetson, a venture capital firm, since June 1995. Prior to joining Draper
Fisher Jurvetson, from July 1990 to September 1993,

                                       50
Mr. Jurvetson served as a consultant with Bain & Company, a management
consulting firm. Mr. Jurvetson served as a research and development engineer at
Hewlett-Packard during the summer months from June 1987 to August 1989. Mr.
Jurvetson serves on the boards of directors of Cognigine Corporation,
FastParts, Inc., iTv Corp., Tacit Knowledge Corporation, Third Voice, Inc. and
ReleaseNow.com Corporation. Mr. Jurvetson holds a B.S. and an M.S. in
Electrical Engineering from Stanford University and an M.B.A. from the Stanford
Graduate School of Business.

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

                       Board of Directors and Committees

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

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

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

          Compensation Committee Interlocks and Insider Participation

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

                             Director Compensation

    Kana currently does not compensate any non-employee member of the board.
Directors who are also employees of Kana do not receive additional compensation
for serving as directors. In 1998, Kana granted an option to purchase 40,000
shares of common stock to Dr. Holloway at an exercise price of $0.05 per share
and an option to purchase 112,549 shares of common stock to Mr. Hahn at an
exercise price of $0.05 per share.

                                       51
Non-employee directors will be eligible to receive discretionary option
grants and stock issuances under the 1999 Stock Incentive Plan. In addition,
under the 1999 Stock Incentive Plan, non-employee directors will receive
automatic option grants upon becoming directors and on the date of each annual
meeting of stockholders. The 1999 Stock Incentive Plan also contains a director
fee option grant program. Should this program be activated in the future, each
non-employee board member would have the opportunity to apply all or a portion
of any annual retainer fee otherwise payable in cash to the acquisition of an
option with an exercise price below the then fair market value. See
"Management--Benefit Plans".

                             Executive Compensation

Summary Compensation Table

    The following table sets forth information concerning compensation during
the year ended December 31, 1998 of Kana's Chief Executive Officer and each of
the four other most highly compensated executive officers who earned an
annualized salary of more than $100,000 for the fiscal year ended December 31,
1998, referred to in this prospectus as the Named Executive Officers. In June
1999, Mr. Michael J. McCloskey joined Kana as its Chief Executive Officer. Mr.
McCloskey's annualized salary for 1999 is $150,000. In June 1999, the
compensation committee approved an increase in Mr. Gainey's annual salary to
$150,000. No individual who would otherwise have been includable in the table
on the basis of salary and bonus earned during 1998 has resigned or otherwise
terminated their employment during 1998. The compensation table excludes other
compensation in the form of perquisites and other personal benefits that
constitutes the lesser of $50,000 or 10% of the total annual salary and bonus
of each of the Named Executive Officers in 1998.
Long-Term
                                                        Compensation
                                   Annual Compensation     Awards
                                   -------------------- ------------
                                                         Securities
                             Year                        Underlying   All Other
Name and Principal Position  Ended  Salary     Bonus    Options (#)  Compensation
---------------------------  ----- -------------------- ------------ ------------
Mark S. Gainey.............  1998  $  72,500        --        --         --
 President and former Chief
  Executive
  Officer
Joseph D. McCarthy(1)......  1998     92,917        --    160,000        --
 Vice President, Finance
  and Operations
Paul R. Holland............  1998     75,000 $  139,022       --         --
 Vice President, Worldwide
  Sales
William R. Phelps(2).......  1998      8,917        --        --         --
 Vice President, Profes-
  sional Services
Christopher M. Noble(3)....  1998    109,374        --    350,000        --
 Former Vice President,
  Marketing
--------
(1) Mr. McCarthy joined Kana in March 1998. His annualized salary for 1998 was
    $120,000.
(2) Mr. Phelps joined Kana in December 1998. His annualized salary for 1998 was
    $130,000.
(3) Mr. Noble joined Kana in February 1998. His annualized salary for 1998 was
    $125,000. Mr. Noble left Kana in March 1999.

                                       52
Option Grants in Last Fiscal Year

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

                             Option Grants in 1998
Individual Grants
                         -----------------------------------------------
                                                                         Potential Realizable Value
                                                                              at Assumed Annual
                                                                            Rates of Stock Price
                         Number of                                         Appreciation for Option
                         Securities Percent of Total Exercise                  Term at Public
                         Underlying Options Granted   Price                    Offering Price
                          Options   to Employees in    Per    Expiration ---------------------------
Name                     Granted(#)       1998        Share      Date         5%            10%
----                     ---------- ---------------- -------- ---------- ------------- -------------
Mark S. Gainey..........      --           --           --          --
Joseph D. McCarthy......  160,000         9.22%       $0.05    03/19/08
Paul R. Holland.........      --           --           --          --
William R. Phelps.......      --           --           --          --
Christopher M. Noble....  350,000        20.18         0.05    02/12/08
In 1998, Kana granted options to purchase up to a total of 1,734,549 shares
to employees, directors and consultants under Kana's 1997 Stock Option/Stock
Issuance Plan at exercise prices equal to the then existing fair market value
of Kana's common stock on the dates of grant, as determined in good faith by
the board of directors. Options granted are immediately exercisable in full,
but any shares purchased under these options that are not vested are subject to
repurchase by Kana at the option exercise price. Generally this repurchase
right lapses as to 25% of the shares after one year of service and as to the
remaining shares in equal monthly installments over an additional three-year
period.

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

    In June 1999, Kana granted to Mr. McCloskey, Kana's Chief Executive
Officer, an option to purchase 1,400,000 shares of common stock at an exercise
price of $0.45 per share. The option is immediately exercisable for vested and
unvested shares, but any shares purchased under these options that are not
vested are subject to repurchase by Kana at the option exercise price. This
repurchase right lapsed as to 280,000 shares on June 17, 1999 and lapses as to
the remaining shares in equal monthly installments over the 48-month period
following June 17, 1999. The option expires on June 16, 2009.

    In June 1999, Kana granted to Mr. McCarthy an option to purchase 75,000
shares of common stock and granted to Mr. Phelps an option to purchase 35,000
shares of common stock, each at an exercise price of $0.45 per share. Each
option is immediately exercisable for vested and unvested shares, but any
shares purchased under these options that are not vested are subject to
repurchase by Kana at the option exercise price. The repurchase right lapses
for each of the grants as to 25% of the shares after one year of service from
June 17, 1999 and as to the remaining shares in equal monthly installments over
the 36-month period following June 17, 2000. Each option expires on June 16,
2009.

                                       53
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values

    The following table sets forth information concerning the number and value
of shares of common stock underlying the unexercised options held by the Named
Executive Officers. No stock appreciation rights were exercised during 1998 and
no stock options granted to the Named Executive Officers or stock appreciation
rights were outstanding as of December 31, 1998. The value realized is based on
the fair market value of Kana's common stock on the date of exercise, as
determined by the board, less the exercise price payable for the shares.
Number of
                                                        Shares Acquired  Value
     Name                                                 on Exercise   Realized
     ----                                               --------------- --------
Mark S. Gainey....................................          --        --
     Joseph D. McCarthy................................     160,000       $ 0
     Paul R. Holland...................................     608,558         0
     William R. Phelps.................................          --        --
     Christopher M. Noble..............................     350,000         0
In February and June 1999, Mr. Phelps exercised options to purchase a total
of 310,000 shares of common stock. The exercise price for each grant equaled
the fair market value on the date of exercise and accordingly, Mr. Phelps did
not realize value on the exercises. In June 1999, Mr. McCloskey exercised an
option to purchase 1,400,000 shares of common stock. The exercise price equaled
the fair market value on the date of exercise and accordingly, Mr. McCloskey
did not realize value on the exercise. In June 1999, Mr. McCarthy exercised an
option to purchase 75,000 shares of common stock. The exercise price equaled
the fair market value on the date of exercise and accordingly, Mr. McCarthy did
not realize any value on the exercise.

                                 Benefit Plans

1999 Stock Incentive Plan

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

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

                                       54
Programs.  Our 1999 plan has five separate programs:

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

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

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

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

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

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

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

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

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

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

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

                                       55
Change in Control.  The 1999 plan will include the following change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:

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

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

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

  . The options currently outstanding under our 1997 plan will immediately
    vest in the event we are acquired and the acquiring company does not
    assume those options. Certain of those options, however, contain an
    additional vesting acceleration feature which will result in the
    immediate vesting of all or part of those options upon an involuntary
    termination of the optionee's employment within 18 months following an
    acquisition in which those options are assumed.

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

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

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

                                       56
share, any shares purchased under the option which are not vested at the time
of the optionee's cessation of board service. The shares subject to each annual
automatic grant will be fully vested when granted. The shares subject to each
initial 20,000-share automatic option grant will vest in a series of eight
successive semi-annual installments upon the optionee's completion of each six-
months of board service over the 48-month period measured from the grant date.
However, the shares will immediately vest in full upon certain changes in
control or ownership or upon the optionee's death or disability while a board
member.

    The FASB recently issued an exposure draft of a proposed interpretation of
the current accounting principles applicable to equity incentive plans. Under
the proposed interpretation, option grants made to non-employee board members
after December 15, 1998 will result in a direct charge to the company's
reported earnings based upon the fair value of the option measured initially as
of the grant date of that option and then subsequently on the vesting date of
each installment of the underlying option shares. If the proposed
interpretation is adopted, then the following changes will be made to our
automatic stock option grant program:

  . The initial 20,000-share option grant will not be made to a newly
    elected or appointed non-employee board member until the first annual
    stockholders meeting held more than 12 months after the date of his or
    her initial election or appointment to the board. At that annual
    meeting, the board member will also receive an option grant for an
    additional 5,000 shares under the annual grant portion of the program.

  . One-half of the shares subject to the initial 20,000-share option grant
    will be immediately vested at the time of the option grant, and the
    remaining shares will vest in a series of 24 successive equal monthly
    installments upon the optionee's completion of each month of board
    service over the 24-month period measured from the grant date. However,
    the shares will immediately vest in full upon certain changes in control
    or ownership or upon the optionee's death or disability while a board
    member.

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

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

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

  . Limited stock appreciation rights will automatically be included as part
    of each grant made under the salary investment option grant program and
    the automatic and director fee option grant programs, and these rights
    may also be granted to one or more officers as part of their option
    grants under the discretionary option grant program. Options with this
    feature may be

                                       57
surrendered to us upon the successful completion of a hostile tender
    offer for more than 50% of our outstanding voting stock. In return for
    the surrendered option, the optionee will be entitled to a cash
    distribution from us in an amount per surrendered option share based
    upon the highest price per share of our common stock paid in that tender
    offer.

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

1999 Employee Stock Purchase Plan

    Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
board in July 1999 and we expect it to be approved by the stockholders in
August 1999. The plan will become effective immediately upon the signing of
the underwriting agreement for this offering. The plan is designed to allow
our eligible employees and the eligible employees of our participating
subsidiaries to purchase shares of common stock, at semi-annual intervals,
with their accumulated payroll deductions.

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

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

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

    Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and October
each year. In no event, however, may any participant purchase more than 750
shares on any purchase date, and not more than 75,000 shares may be purchased
in total by all participants on any purchase date.

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

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

                                      58
Plan Provisions. The following provisions will also be in effect under the
plan:

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

  . The board may at any time amend, suspend or discontinue the plan.
    However, certain amendments may require stockholder approval.

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

Restricted Stock Purchase Agreements

    In July 1996, Kana sold to Mr. Gainey, Kana's co-founder, President and
Chairman of the Board, 3,750,000 shares of common stock at a purchase price of
$0.0001 per share. In April 1997, Kana repurchased those shares of common stock
and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase price of
$0.01 per share. These shares are subject to a right of repurchase granted to
Kana that lapses in a series of equal monthly installments over a four-year
period measured from June 4, 1996. In addition, Kana's right to repurchase 50%
of any unvested shares will lapse in the event of an acquisition of Kana by
merger or asset sale and if Mr. Gainey is not offered employment or is
terminated without cause by Kana or its successor.

Stock Purchase Agreements

    In February 1997, Dr. Holloway, one of Kana's directors, exercised an
option to purchase 80,000 shares of common stock and entered into a stock
purchase agreement for the purchase of the shares. These shares are subject to
a right of repurchase granted to Kana. Under the stock purchase agreement, upon
an acquisition of Kana by merger or asset sale, Kana's right to repurchase all
of the unvested shares will automatically lapse in its entirety and the shares
will vest in full unless the repurchase right is assigned to the successor
entity.

    In April 1998, Mr. Holland, Kana's Vice President, Worldwide Sales,
exercised an option to purchase 608,558 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, upon an acquisition of Kana by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity. In addition, in the event of both an acquisition of Kana by
merger or asset sale and if Mr. Holland is not offered comparable employment by
the successor entity, Kana's right to repurchase all of the unvested shares
will automatically lapse and the shares will vest in full.

    In June 1998, Mr. McCarthy, Kana's Vice President, Finance and Operations,
exercised an option to purchase 160,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, upon an acquisition of Kana by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity. In addition, in the event of both an acquisition of Kana by
merger or asset sale and if Mr. McCarthy is not offered employment by the
successor entity, Kana's right to repurchase 50% of the unvested shares will
automatically lapse and the shares will vest in full.

                                       59
In July 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 112,549 shares of common stock and entered into a stock purchase
agreement for the purchase of the shares. These shares are subject to a right
of repurchase granted to Kana. Under the stock purchase agreement, upon an
acquisition of Kana by merger or asset sale, Kana's right to repurchase all of
the unvested shares will automatically lapse in its entirety and the shares
will vest in full.

    In July 1998, Dr. Holloway exercised an option to purchase 40,000 shares of
common stock and entered into a stock purchase agreement for the purchase of
the shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Dr. Holloway does
not provide services to the successor entity, Kana's right to repurchase 25% of
the unvested shares will automatically lapse and the shares will vest in full.

    In February and June 1999, Mr. Phelps, Kana's Vice President, Professional
Services, exercised options to purchase a total of 310,000 shares of common
stock and entered into a stock purchase agreement for the purchase of the
shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Mr. Phelps is not
offered employment by the successor entity, Kana's right to repurchase 25% of
the unvested shares will automatically lapse and the shares will vest in full.

    In June 1999, Mr. McCloskey, Kana's Chief Executive Officer, exercised an
option to purchase 1,400,000 shares of common stock and entered into a stock
purchase agreement for the purchase of the shares. These shares are subject to
a right of repurchase granted to Kana. Under the stock purchase agreement and
the terms of Mr. McCloskey's employment arrangement, this stock is subject to
vesting, which accelerates under certain circumstances. See "--Employment
Arrangements".

    In June 1999, Mr. McCarthy exercised an option to purchase 75,000 shares of
common stock and entered into a stock purchase agreement for the purchase of
the shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Mr. McCarthy is
not offered employment by the successor entity, Kana's right to repurchase 25%
of the unvested shares will automatically lapse and the shares will vest in
full.

Employment Arrangements

    In June 1999, Kana entered into an employment arrangement with Mr.
McCloskey. Mr. McCloskey serves as Chief Executive Officer on an at-will basis.
However, under the terms of the employment arrangement, upon a change of
control:

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

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

                                       60
. if Mr. McCloskey is offered full-time employment with the successor
    corporation as other than that corporation's chief executive officer,
    the rate at which his then unvested shares of common stock vest will
    double, such that his shares of common stock will vest at a rate
    equivalent to 46,667 shares of common stock per month;

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

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

                  Limitation of Liability and Indemnification

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

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

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

  . unlawful payments of dividends or unlawful stock repurchases or
    redemptions as provided in Section 174 of the Delaware General
    Corporation Law; or

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

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

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

                                       61
TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES

                              Sales of Securities

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

  . In July 1996, Kana sold to Mark S. Gainey 3,750,000 shares of common
    stock for a total consideration of $375. In April 1997, Kana repurchased
    those shares and sold to Mr. Gainey 3,750,000 shares of common stock for
    total consideration of $37,500.

  . In July 1996, Kana sold to Michael T. Horvath 1,250,000 shares of common
    stock for a total consideration of $125. In April 1997, Kana repurchased
    those shares and sold to Mr. Horvath 625,000 shares of common stock for
    total consideration of $6,250.

  . In April 1997, Kana sold to various investors, including entities
    affiliated with Draper Fisher Jurvetson, a total of 5,923,078 shares of
    Series A preferred stock for total consideration of $770,000.

  . In September 1997, Kana sold to various investors, including entities
    affiliated with Draper Fisher Jurvetson and entities affiliated with
    Benchmark Capital, a total of 7,453,704 shares of Series B preferred
    stock for total consideration of $4,025,000.

  . In June 1998, Kana sold to Eric A. Hahn 168,824 shares of Series B
    preferred stock for total consideration of $91,165.

  . In August and September 1998, Kana sold to various investors, including
    entities affiliated with Draper Fisher Jurvetson, entities affiliated
    with Benchmark Capital, entities affiliated with Amerindo Investment
    Advisors, Inc. and Eric A. Hahn, a total of 5,121,148 shares of Series C
    preferred stock for total consideration of $11,625,006.

  . In July 1999, Kana sold to various investors, including entities
    affiliated with Draper Fisher Jurvetson, entities affiliated with
    Benchmark Capital and entities affiliated with Amerindo Investment
    Advisors, a total of 1,257,707 shares of Series D preferred stock for
    total consideration of $10,200,004.

    The following table summarizes the shares of preferred stock purchased by
Kana's executive officers, directors and five percent stockholders and persons
associated with them since July 1996. The number of total shares on an as-
converted basis reflects a one-to-one conversion to common stock ratio for
each share of Series A, Series B, Series C and Series D preferred stock.
Total Shares
                                                                  of Preferred Stock
                          Series A  Series B  Series C  Series D      on an As-
                          Preferred Preferred Preferred Preferred     Converted
        Investor            Stock     Stock     Stock     Stock         Basis
        --------          --------- --------- --------- --------- ------------------
Entities affiliated with
 Draper Fisher
 Jurvetson..............  4,530,289 1,966,297   930,397  246,609      7,673,592
Entities affiliated with
 Benchmark Capital......          0 5,183,704 1,013,216  271,270      6,468,190
Entities affiliated with
 Amerindo Investment
 Advisors...............          0         0 1,762,115  369,915      2,132,030
Eric A. Hahn............          0   168,824    44,053        0        212,877
Holders of shares of preferred stock have registration rights in respect
of the common stock issued or issuable upon conversion thereof. See
"Description of Capital Stock--Registration Rights".

    In February 1997, in connection with an option exercise, Kana issued
80,000 shares of common stock to Dr. Holloway, one of Kana's directors, for an
aggregate exercise price of $800.

                                      62
In June 1998, in connection with option exercises, Kana issued 250,000
shares of common stock to Mr. Poler, one of Kana's directors, for an aggregate
exercise price of $2,500.

                     Agreements with Officers and Directors

    In February 1997, Dr. Holloway, one of Kana's directors, exercised an
option to purchase a total of 80,000 shares of common stock.

    In July 1996, Kana sold to Mr. Gainey, Kana's co-founder, President and
Chairman of the Board, 3,750,000 shares of common stock at a purchase price of
$0.0001 per share. In April 1997, Kana repurchased those shares of common stock
and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase price of
$0.01 per share. These shares are subject to a right of repurchase granted to
Kana that lapses in equal monthly installments over a four-year period from
June 4, 1996. In addition, Kana's right to repurchase 50% of his then unvested
shares will lapse if Mr. Gainey is terminated without cause by Kana or its
successor.

    In April 1998, Mr. Holland, Kana's Vice President, Worldwide Sales,
exercised an option to purchase 608,558 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. Holland paid the
$30,428 exercise price by delivering a five-year full-recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. Holland. As of June 30, 1999, a total of $32,452 in
unpaid principal and interest was outstanding under the note.

    In June 1998, Mr. McCarthy, Kana's Vice President, Finance and Operations,
exercised an option to purchase 160,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. McCarthy paid
the $8,000 exercise price by delivering a five-year full-recourse promissory
note at a 5.7% annual interest rate. The note is secured by the shares of
common stock purchased by Mr. McCarthy. As of June 30, 1999, a total of $8,456
in unpaid principal and interest was outstanding under the note.

    In June 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 112,549 shares of common stock. Mr. Hahn paid the $5,627 exercise
price by delivering a five-year full-recourse promissory note at a 5.7% annual
interest rate. The note is secured by the shares of common stock purchased by
Mr. Hahn. As of June 30, 1999, a total of $5,948 in unpaid principal and
interest was outstanding under the note.

    In June 1998, Mr. Poler, one of Kana's directors, exercised options to
purchase 250,000 shares of common stock.

    In July 1998, Dr. Holloway exercised an option to purchase 40,000 shares of
common stock. Dr. Holloway paid the $2,000 exercise price by delivering a five-
year full-recourse promissory note at a 5.7% annual interest rate. The note is
secured by the shares of common stock purchased by Dr. Holloway. As of June 30,
1999, a total of $2,105 in unpaid principal and interest was outstanding under
the note.

    In February 1999, Mr. Phelps, Kana's Vice President, Professional Services,
exercised an option to purchase 275,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. Phelps paid the
$63,250 exercise price by delivering a five-year full-recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. Phelps. As of June 30, 1999, a total of $64,452 in
unpaid principal and interest was outstanding under the note.

                                       63
In June 1999, Mr. McCloskey, Kana's Chief Executive Officer, exercised an
option to purchase 1,400,000 shares of common stock. Mr. McCloskey paid the
$630,000 exercise price by delivering a five-year full recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. McCloskey.

    In June 1999, Mr. McCarthy exercised an option to purchase 75,000 shares of
common stock. Mr. McCarthy paid the $33,750 exercise price by delivering a
five-year full recourse promissory note at 5.7% annual interest rate. The note
is secured by the shares of common stock purchased by Mr. McCarthy.

    In June 1999, Mr. Phelps exercised an option to purchase 35,000 shares of
common stock. Mr. Phelps paid the $15,750 exercise price by delivering a five-
year full recourse promissory note at a 5.7% annual interest rate. The note is
secured by the shares of common stock purchased by Mr. Phelps.

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

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

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

                          Transactions with Promoters

    Each of Mr. Gainey, Kana's President and Chairman of the Board, and Michael
T. Horvath, the former Treasurer and a former director of Kana, is a co-founder
of Kana and may be deemed a promoter for purposes of the federal securities
laws. In July 1996, Kana sold to Mr. Gainey 3,750,000 shares of common stock at
a purchase price of $0.0001 per share. In April 1997, Kana repurchased those
shares and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase
price of $0.01 per share. In July 1996, Kana sold to Mr. Horvath 1,250,000
shares of common stock at a purchase price of $0.0001 per share. In April 1997,
Kana repurchased those shares and sold to Mr. Horvath 625,000 shares of common
stock at a purchase price of $0.01 per share. All other material transactions
with Mr. Gainey and Mr. Horvath are described in this section or elsewhere in
this prospectus. See "Management--Executive Compensation".

    In April 1997, Kana entered into a consulting agreement with Mr. Horvath.
Under the agreement, Mr. Horvath agreed to provide up to 20 hours of consulting
services to Kana per month, at a rate of $25.00 per hour, until July 1, 2000.
In connection with the agreement, Mr. Horvath was granted a right to purchase
625,000 shares of common stock, which he purchased in April 1997, as described
above.

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

                                       64
PRINCIPAL STOCKHOLDERS

    The table below sets forth information regarding the beneficial ownership
of Kana's common stock as of July 9, 1999, by the following individuals or
groups:

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

  . each of the Named Executive Officers;

  . each director of Kana; and

  . all directors and executive officers as a group.

    Applicable percentage ownership in the following table is based on
30,736,568 shares of common stock outstanding as of July 9, 1999, as adjusted
to reflect the conversion of all outstanding shares of preferred stock upon the
closing of this offering and treating as outstanding all options exercisable
within 60 days of July 9, 1999 held by the particular stockholder and that are
included in the first column. The numbers shown in the table below assume no
exercise by the underwriters of their over-allotment option.

    Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Kana Communications, Inc., 87 Encina Avenue, Palo
Alto, CA 94301. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
Percentage of Shares
                                                                  Beneficially Owned
                                       Number of Shares  ------------------------------------
 Name and Address of Beneficial Owner Beneficially Owned Prior to Offering After the Offering
 ------------------------------------ ------------------ ----------------- ------------------
Entities affiliated
 with Draper Fisher
 Jurvetson (1).........                    7,673,592           25.0%
Entities affiliated
 with Benchmark Capital
 Partners L.P. (2).....                    6,468,190           21.0
Entities affiliated
 with Amerindo
 Investment Advisors,
 Inc. (3)..............                    2,132,030            6.9
Mark S. Gainey (4).....                    3,464,000           11.3
Michael J. McCloskey
 (5)...................                    1,400,000            4.6
Paul R. Holland (6)....                      608,558            2.0
William R. Phelps (7)..                      310,000            1.0
Joseph D. McCarthy
 (8)...................                      235,000              *
Christopher M. Noble...                       94,791              *
Steven T. Jurvetson
 (1)...................                    7,673,592           25.0
David M. Beirne (2)....                    6,468,190           21.0
Eric A. Hahn (9).......                      325,426            1.1
Ariel Poler (10).......                      250,000              *
Dr. Charles A. Holloway
 (11)..................                      120,000              *
All directors and
 executive officers as
 a group (11 persons)..                   21,255,766           69.2
--------
  * Less than one percent.
 (1) Principal address is 400 Seaport Court, Suite 250, Redwood City, CA 94063.
     Represents 5,611,247 shares of common stock held by Draper Fisher
     Associates Fund IV, L.P. and 422,353 shares of common stock held by Draper
     Fisher Partners IV, LLC. Mr. Jurvetson disclaims beneficial ownership of
     these shares, except to the extent of his pecuniary interest in the Draper
     Fisher Jurvetson Funds. Also includes 1,639,992 shares of common stock
     held by the Draper 1999 Grandchildren's Trust.

                                       65
(2) Principal address is 2480 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
     Includes 5,675,021 shares of common stock held by Benchmark Capital
     Partners, L.P., and 793,169 shares of common stock held by Benchmark
     Founders' Fund L.P. Mr. Beirne, one of Kana's directors, is a Managing
     Member of Benchmark Capital Management Co., LLC. Mr. Beirne disclaims
     beneficial ownership of these shares, except to the extent of his
     pecuniary interest in the Benchmark funds.
 (3) Principal address is 399 Park Avenue, 22nd Floor, New York, NY 10022.
     Represents 1,654,115 shares of common stock held by ATGF II, a Panamanian
     corporation, 250 shares of common stock held by Daniel Chapey, 50,000
     shares of common stock held by the Ralph H. Cechettini 1995 Trust, 11,000
     shares of common stock held by Anthony Ciulla, 4,500 shares of common
     stock held by Joaquin Garcia-Larrieu, 12,500 shares of common stock held
     by Mathew D. Fitzmaurice, 131,815 shares of common stock held by the
     Litton Master Trust, 182,500 shares of common stock held by Emeric
     McDonald, 350 shares of common stock held by William Slattery, 75,000
     shares of common stock held by Pivotal Partners L.P., and 10,000 shares of
     common stock held by James Stableford.
 (4) Represents shares of common stock held by the Mark and Elisabeth Gainey
     Family Trust. Includes 703,125 shares of common stock subject to Kana's
     right of repurchase. This repurchase right lapses with respect to 78,125
     shares per month.
 (5) Includes 1,120,000 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 23,333 shares per
     month.
 (6) Includes 342,315 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 12,678 shares per
     month.
 (7) Includes 235,418 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 5,729 shares per
     month. Also includes 35,000 shares of common stock subject to Kana's right
     of repurchase, which lapses with respect to 8,750 shares in June 2000 and
     729 shares per month thereafter.
 (8) Includes 100,001 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 3,333 shares per
     month. Also includes 75,000 shares of common stock subject to Kana's right
     of repurchase, which lapses with respect to 18,750 shares in June 2000 and
     1,563 shares per month thereafter.
 (9) Includes 79,723 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 2,345 shares per
     month.
(10) Includes 27,778 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 6,944 shares per
     month.
(11) Includes 26,667 shares of common stock subject to Kana's right of
     repurchase. This repurchase right lapses with respect to 3,333 shares per
     month.

                                       66
DESCRIPTION OF CAPITAL STOCK

    At the closing of this offering, the authorized capital stock of Kana will
consist of 60,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value, after giving effect to the
amendment of Kana's certificate of incorporation to delete references to the
existing preferred stock following conversion of that stock. The following
description of capital stock gives effect to the certificate of incorporation
to be filed upon the closing of this offering. Immediately following the
completion of this offering, and assuming no exercise of the underwriters'
over-allotment option, an aggregate of   shares of common stock will be issued
and outstanding, and no shares of preferred stock will be issued and
outstanding.

    The following description of Kana's capital stock is subject to and
qualified by Kana's certificate of incorporation and bylaws and by the
provisions of the applicable Delaware law.

                                  Common Stock

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

                                Preferred Stock

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

                              Registration Rights

    Upon completion of the offering, the holders of 24,401,670 shares of common
stock will be entitled to rights with respect to the registration of the shares
under the Securities Act. Under the terms of the registration rights agreement,
if Kana proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, these holders are entitled to notice of the
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations,

                                       67
among them the right of the underwriters of an offering subject to the
registration to limit the number of shares included in the registration.
Holders of these rights may also require Kana to file a registration statement
under the Securities Act of 1933 at its expense with respect to their shares of
common stock, and Kana is required to use its best efforts to effect the
registration, subject to conditions and limitations. Furthermore, stockholders
with registration rights may require Kana to file additional registration
statements on Form S-3, subject to conditions and limitations.

    Antitakeover Effects of Provisions of the Certificate of Incorporation,
                            Bylaws and Delaware Law

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

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

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

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

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

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

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

                                       68
Section 203 defines "business combination" to include the following:

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

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

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

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

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

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

                          Transfer Agent and Registrar

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

                                       69
SHARES AVAILABLE FOR FUTURE SALE

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

    Upon the completion of this offering, Kana will have     shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of the outstanding shares, all
of the shares sold in this offering will be freely tradable, except that any
shares held by Kana's "affiliates," as that term is defined in Rule 144
promulgated under the Securities Act, may only be sold in compliance with the
limitations described below. The remaining 30,736,568 shares of common stock
will be deemed "restricted securities" as defined under Rule 144. Restricted
shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. Subject to the
lock-up agreements described below and the provisions of Rules 144, 144(k) and
701, additional shares will be available for sale in the public market as
follows:
Number of
   Shares                                  Date
 ---------                                 ----
After the date of this prospectus, freely tradable shares sold in
            this offering and shares saleable under Rule 144(k) that are not
            subject to the 180-day lock-up
 24,402,670 After 180 days from the date of this prospectus, the 180-day lock-
            up terminates and these shares are saleable under Rule 144
            (subject, in some cases, to volume limitations) or Rule 144(k)
  6,333,898 After 180 days from the date of this prospectus, the 180-day lock-
            up is released and these shares are saleable under Rule 701
            (subject to repurchase by the Company)
  1,257,708 After 180 days from the date of this prospectus, restricted
            securities that are held for less than one year and are not yet
            saleable under Rule 144
Rule 144

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

                                 Stock Options

    As of June 30, 1999, options to purchase a total of 264,800 shares of
common stock were outstanding, all of which were currently exercisable. Kana
intends to file a Form S-8 registration

                                       70
statement under the Securities Act to register all shares of common stock
issuable under its 1999 Stock Incentive Plan and its 1999 Employee Stock
Purchase Plan. Accordingly, shares of common stock underlying these options
will be eligible for sale in the public markets, subject to vesting
restrictions or the lock-up agreement described below. See "Management--Benefit
Plans".

                               Lock-up Agreements

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

    Following this offering, under specified circumstances and subject to
customary conditions, holders of 24,401,670 shares of Kana's outstanding common
stock will have demand registration rights with respect to their shares of
common stock, subject to the 180-day lock-up arrangement described above, to
require Kana to register their shares of common stock under the Securities Act,
or rights to participate in any future registration of securities by Kana. If
the holders of these registrable securities request that Kana register their
shares, and if the registration is effected, these shares will become freely
tradable without restriction under the Securities Act. Any sales of securities
by these stockholders could have a material adverse effect on the trading price
of Kana's common stock. See "Description of Capital Stock--Registration
Rights".

                                       71
LEGAL MATTERS

    The validity of the common stock offered will be passed upon for Kana by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Members of the firm
Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 25,000 shares
of Kana's common stock. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Fenwick & West LLP, Palo Alto,
California.

                             CHANGE IN ACCOUNTANTS

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

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

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

                                    EXPERTS

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

                             ADDITIONAL INFORMATION

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

                                       72
Kana intends to furnish holders of its common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed consolidated financial information for the first
three quarters of each fiscal year. Kana intends to furnish other reports as it
may determine or as may be required by law.

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

                                       73
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                               Table of Contents
Page
                                                                            ----
Form of Independent Auditors' Report....................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations and Other Comprehensive Loss......... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
Form of Independent Auditors' Report

The Board of Directors
Kana Communications, Inc.

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

                                          /s/ KPMG LLP

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

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

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

  Mountain View, California
  June 25, 1999, except as to Note 7,
  which is as of July 8, 1999

                                      F-2
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

                       (In thousands, except share data)
December 31,
                                                  ----------------   March 31,
                                                   1997     1998       1999
                                                  -------  -------  -----------
                                                                    (Unaudited)
Assets
Current assets:
  Cash and cash equivalents...................... $ 3,303  $ 9,792    $ 8,471
  Short-term investments.........................     210      160        160
  Accounts receivable............................     --       817      1,023
  Prepaid expenses and other current assets......      37       96        156
                                                  -------  -------    -------
    Total current assets.........................   3,550   10,865      9,810
Property and equipment, net......................     261      943      1,171
Other assets.....................................      13      161        157
                                                  -------  -------    -------
    Total assets................................. $ 3,824  $11,969    $11,138
                                                  =======  =======    =======
      Liabilities and Stockholders' Equity
Current liabilities:
  Current portion of notes payable............... $    34  $   360    $   360
  Accounts payable...............................     130      253        470
  Accrued payroll and related expenses...........      37      285        454
  Other accrued liabilities......................      68      263        333
  Deferred revenue...............................     --       410        627
                                                  -------  -------    -------
    Total current liabilities....................     269    1,571      2,244
Notes payable, less current portion..............      51      360        360
                                                  -------  -------    -------
    Total liabilities............................     320    1,931      2,604
                                                  -------  -------    -------
Commitments
Stockholders' equity:
  Convertible preferred stock, $0.001 par value;
   29,000,000, 50,000,000, and 50,000,000 shares
   authorized; 13,376,782 18,768,962, and
   18,768,962 shares issued and outstanding;
   aggregate liquidation preference of $4,795,
   $16,524, and $16,524..........................      13       19         19
  Common stock, $0.001 par value; 40,000,000,
   60,000,000, and 60,000,000 shares authorized;
   4,456,000, 8,288,107, and 8,357,607 shares
   issued and outstanding........................       4        8          8
  Additional paid-in capital.....................   5,654   19,335     22,797
  Deferred stock-based compensation..............    (784)  (1,444)    (4,463)
  Notes receivable from stockholders.............     --      (155)      (243)
  Accumulated other comprehensive losses.........     --        (5)       (19)
  Accumulated deficit............................  (1,383)  (7,720)    (9,565)
                                                  -------  -------    -------
    Total stockholders' equity...................   3,504   10,038      8,534
                                                  -------  -------    -------
    Total liabilities and stockholders' equity... $ 3,824  $11,969    $11,138
                                                  =======  =======    =======
See accompanying notes to consolidated financial statements.

                                      F-3
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

       CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS

                     (In thousands, except per share data)
Years Ended     Three Months Ended
                                         December 31,          March 31,
                                        ----------------  --------------------
                                         1997     1998      1998       1999
                                        -------  -------  ---------  ---------
                                                              (Unaudited)
Revenues:
  License.............................. $   --   $ 1,793  $     161  $   1,165
  Service..............................     --       256         16        258
                                        -------  -------  ---------  ---------
    Total revenues.....................     --     2,049        177      1,423
                                        -------  -------  ---------  ---------
Cost of revenues:
  License..............................     --        54          4         34
  Service..............................     --       519         26        402
                                        -------  -------  ---------  ---------
    Total cost of revenues.............     --       573         30        436
                                        -------  -------  ---------  ---------
    Gross profit.......................     --     1,476        147        987
                                        -------  -------  ---------  ---------
Operating expenses:
  Sales and marketing..................     366    3,796        498      1,539
  Research and development.............     699    2,254        403        823
  General and administrative...........     257      721        104        227
  Amortization of stock-based
   compensation........................     113    1,230        184        355
                                        -------  -------  ---------  ---------
    Total operating expenses...........   1,435    8,001      1,189      2,944
                                        -------  -------  ---------  ---------
    Operating loss.....................  (1,435)  (6,525)    (1,042)    (1,957)
Other income, net......................      52      188         30        112
                                        -------  -------  ---------  ---------
    Net loss...........................  (1,383)  (6,337)    (1,012)    (1,845)
Other comprehensive loss...............     --        (5)       --         (14)
                                        -------  -------  ---------  ---------
    Comprehensive loss................. $(1,383) $(6,342) $  (1,012) $  (1,859)
                                        =======  =======  =========  =========
Net loss per share:
  Basic and diluted.................... $ (0.62) $ (2.48) $   (0.55) $   (0.47)
                                        =======  =======  =========  =========
  Weighted-average shares used in
   computation.........................   2,246    2,555      1,824      3,939
                                        =======  =======  =========  =========
See accompanying notes to consolidated financial statements.

                                      F-4
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                     (In thousands, except share amounts)
Convertible                                                 Notes      Accumulated
                   Preferred Stock    Common Stock    Additional   Deferred    Receivable      Other                     Total
                  ----------------- -----------------  Paid-in   Stock-based      from     Comprehensive Accumulated Stockholders'
                    Shares   Amount  Shares    Amount  Capital   Compensation Stockholders    Losses       Deficit      Equity
                  ---------- ------ ---------  ------ ---------- ------------ ------------ ------------- ----------- -------------
Issuance of
common stock to
founders........         --   $--   5,000,000   $ 5    $    (4)    $   --        $ --          $--         $   --       $     1
Issuance of
common stock
upon exercise of
stock options...         --    --      80,000   --         --          --          --           --             --           --
Repurchase of
founders' common
stock, net......         --          (625,000)   (1)         1         --          --           --             --           --
Issuance of
Series A
convertible
preferred stock,
net.............   5,923,078     6        --    --         754         --          --           --             --           760
Issuance of
shares of common
stock in
exchange for
services .......         --             1,000   --           7         --          --           --             --             7
Issuance of
Series B
convertible
preferred stock,
net.............   7,453,704     7        --    --       4,006         --          --           --             --         4,013
Deferred stock-
based
compensation....         --    --         --    --         890        (890)        --           --             --           --
Amortization of
stock-based
compensation....         --    --         --    --         --          106         --           --             --           106
Net loss........         --    --         --    --         --          --          --           --          (1,383)      (1,383)
                  ----------  ----  ---------   ---    -------     -------       -----         ----        -------      -------
Balances,
December 31,
1997............  13,376,782    13  4,456,000     4      5,654        (784)        --           --          (1,383)       3,504
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases.....         --    --   3,832,107     4        169         --         (155)         --             --            18
Issuance of
Series A
convertible
preferred stock
upon exercise of
warrant.........     102,208   --         --    --         --          --          --           --             --           --
Issuance of
Series B
convertible
preferred stock,
net.............     168,824     1        --    --          90         --          --           --             --            91
Issuance of
Series C
convertible
preferred stock,
net.............   5,121,148     5        --    --      11,532         --          --           --             --        11,537
Deferred stock-
based
compensation....         --    --         --    --       1,890      (1,890)        --           --             --           --
Amortization of
stock-based
compensation....         --    --         --    --         --        1,230         --           --             --         1,230
Other
comprehensive
loss............         --    --         --    --         --          --          --            (5)           --            (5)
Net loss........         --    --         --    --         --          --          --           --          (6,337)      (6,337)
                  ----------  ----  ---------   ---    -------     -------       -----         ----        -------      -------
Balances,
December 31,
1998............  18,768,962    19  8,288,107     8     19,335      (1,444)       (155)          (5)        (7,720)      10,038
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited).....         --    --      69,500   --          88         --          (88)                        --           --
Deferred stock-
based
compensation
(unaudited).....         --    --         --    --       3,374      (3,374)        --           --             --           --
Amortization of
stock-based
compensation
(unaudited).....         --    --         --    --         --          355         --           --             --           355
Other
comprehensive
loss
(unaudited).....         --               --    --         --          --          --           (14)                        (14)
Net loss
(unaudited).....         --    --         --    --         --          --          --           --          (1,845)      (1,845)
                  ----------  ----  ---------   ---    -------     -------       -----         ----        -------      -------
Balances, March
31, 1999
(unaudited).....  18,768,962  $ 19  8,357,607   $ 8    $22,797     $(4,463)      $(243)        $(19)       $(9,565)     $ 8,534
                  ==========  ====  =========   ===    =======     =======       =====         ====        =======      =======
See accompanying notes to consolidated financial statements.

                                      F-5
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)
Years Ended     Three Months Ended
                                         December 31,          March 31,
                                        ----------------  --------------------
                                         1997     1998      1998       1999
                                        -------  -------  ---------  ---------
                                                              (Unaudited)
Cash flows from operating activities:
 Net loss.............................. $(1,383) $(6,337) $  (1,012) $  (1,845)
 Adjustments to reconcile net loss to
  net cash used in operating
  activities:
  Depreciation and amortization........      27      222         32        103
  Amortization of stock-based
   compensation........................     113    1,230        184        355
  Changes in operating assets and
   liabilities:
   Accounts receivable.................     --      (817)      (139)      (206)
   Prepaid expenses and other assets...     (50)    (207)       --         (56)
   Accounts payable and accrued
    liabilities........................     235      566        218        442
   Deferred revenue....................     --       410         21        217
                                        -------  -------  ---------  ---------
   Net cash used in operating
    activities.........................  (1,058)  (4,933)      (696)      (990)
                                        -------  -------  ---------  ---------
Cash flows from investing activities:
 Property and equipment purchases......    (288)    (904)      (185)      (331)
 (Purchases) sales of short-term
  investments..........................    (210)      50        --         --
                                        -------  -------  ---------  ---------
   Net cash used in investing
    activities.........................    (498)    (854)      (185)      (331)
                                        -------  -------  ---------  ---------
Cash flows from financing activities:
 Proceeds from issuance of common
  stock................................       1       13        --         --
 Proceeds from issuance of convertible
  preferred stock, net.................   4,603   11,628        --         --
 Proceeds from convertible notes
  payable..............................     170      --         --         --
 Proceeds from notes payable...........      85      720        437        --
 Payments on notes payable.............     --       (85)       --         --
                                        -------  -------  ---------  ---------
   Net cash provided by financing
    activities.........................   4,859   12,276        437        --
                                        -------  -------  ---------  ---------
Net change in cash and cash
 equivalents...........................   3,303    6,489       (444)    (1,321)
Cash and cash equivalents at beginning
 of period.............................     --     3,303      3,303      9,792
                                        -------  -------  ---------  ---------
Cash and cash equivalents at end of
 period................................ $ 3,303  $ 9,792  $   2,859  $   8,471
                                        =======  =======  =========  =========
Supplemental disclosure of cash flow
 information:
 Cash paid during period for interest.. $     3  $    36  $       9  $      17
                                        =======  =======  =========  =========
 Noncash investing and financial
  activities:
  Issuance of Series A convertible
   preferred stock upon conversion of
   stockholder loan.................... $   170  $   --   $     --   $     --
                                        =======  =======  =========  =========
  Issuance of common stock in exchange
   for notes receivable from
   stockholders........................ $   --   $   155  $     --   $      88
                                        =======  =======  =========  =========
  Grant of options to purchase common
   stock with an exercise price below
   fair value.......................... $   890  $ 1,890  $     673  $ 3,374
                                        =======  =======  =========  =========
See accompanying notes to consolidated financial statements.

                                      F-6
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

    (a) Description of Business

    Kana Communications, Inc. and subsidiary (the Company) was incorporated on
July 11, 1996, but did not commence operations until 1997. The Company
develops, markets and supports an integrated suite of e-Business infrastructure
solutions addressing online customer interactions. The Company sells its
products primarily in the United States and, to a lesser extent, in Europe,
through its direct sales force.

    (b) Basis of Presentation

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

    (c) Interim Financial Statements

    The unaudited interim consolidated financial statements of the Company as
of March 31, 1999 and for the three months ended March 31, 1998 and 1999
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements.

    In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position of the Company as of March 31, 1999, and the results of its operations
and its cash flows for the three months ended March 31, 1998 and 1999. Results
for the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the entire year.

    (d) Use of Estimates

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

    (e) Foreign Currency Translation

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

                                      F-7
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

    (f) Cash Equivalents and Short-Term Investments

    The Company considers all highly liquid investments with an original
maturity or reset date of three months or less to be cash equivalents. As of
December 31, 1997 and 1998 and March 31, 1999, cash equivalents consisted of
auction-rate securities and money market funds in the amounts of $3,213,000,
$9,647,000, and $8,299,000, respectively. The contractual maturities for the
auction-rate securities exceed 10 years; however, the Company has the option of
adjusting the interest rates or liquidating these investments on their
respective reset dates, which generally occur every 30 days.

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

    As of December 31, 1998, the Company has an outstanding standby letter of
credit for $150,000 to secure deposits on its current facility. The letter of
credit expired on January 15, 1999 and was secured by a certificate of deposit.

    (g) Property and Equipment

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

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

    (h) Fair Value of Financial Instruments

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

    (i) Concentration of Credit Risk

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

                                      F-8
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

    (j) Revenue Recognition

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

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

    (k) Software Development Costs

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

    (l) Income Taxes

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

    (m) Stock-Based Compensation

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

                                      F-9
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

    (n) Comprehensive Loss

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

    (o) Net Loss Per Share

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

    Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
Years Ended December   Three Months Ended
                                         31,                March 31,
                                --------------------- ---------------------
                                   1997       1998       1998       1999
                                ---------- ---------- ---------- ----------
                                                           (Unaudited)
Stock options and warrants....   2,682,473    225,300  3,426,858    316,300
Common stock subject to
 repurchase...................   2,734,373  4,709,156  2,552,081  4,244,855
Convertible preferred stock ..  13,376,782 18,768,962 13,478,990 18,768,962
                                ---------- ---------- ---------- ----------
                                18,793,628 23,703,418 19,457,929 23,330,117
                                ========== ========== ========== ==========
(p) Segment Reporting

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

                                      F-10
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

    (q) Recent Accounting Pronouncements

    In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Hedging Activities, effective for fiscal years beginning after June 15, 1999.
This standard requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measures those instruments at
fair value. The type and use of the derivative, and whether it qualifies for
hedge accounting, will determine the treatment of gains or losses resulting
from changes in the derivative. The Company believes the adoption of SFAS No.
133 will not have a material effect on its results of operations, financial
position, or cash flows. The statement will be effective for the Company
beginning January 1, 2000.

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

(2) Property and Equipment

    Property and equipment as of December 31, 1997 and 1998 consisted of the
following (in thousands):
1997  1998
                                                                    ---- ------
Computer equipment.............................................. $220 $  810
   Furniture and fixtures..........................................   20    141
   Leasehold improvements..........................................   48    241
                                                                    ---- ------
                                                                     288  1,192
   Less accumulated depreciation and amortization..................   27    249
                                                                    ---- ------
                                                                    $261 $  943
                                                                    ==== ======
(3) Notes Payable

    On January 23, 1998, the Company obtained a $1,000,000 line of credit from
a bank, of which up to $750,000 could be used for qualified property and
equipment purchases and $250,000 for working capital financing. Borrowings
under the line of credit are collateralized by all of the Company's assets and
bear interest at the bank's prime rate (7.75% as of December 31, 1998). The

                                      F-11
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

Company was able to draw against the line of credit through January 22, 1999,
after which all borrowings are to be repaid in 24 equal monthly installments.
As of December 31, 1998, $720,000 was outstanding under this agreement. The
aggregate principal payments due under the line of credit subsequent to
December 31, 1998 are as follows: 1999, $360,000 and 2000, $360,000.

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

(4) Stockholders' Equity

    (a) Convertible Preferred Stock

    Convertible preferred stock as of December 31, 1998, consisted of the
following:
Noncumulative Liquidation
                                             Shares      Dividend    Preference
                                           Outstanding   per Share    per Share
                                           ----------- ------------- -----------
Series A...............................  6,025,286      $0.01        $0.13
   Series B...............................  7,622,528       0.04         0.54
   Series C...............................  5,121,148       0.18         2.27
                                           ----------
                                           18,768,962
                                           ==========
Each share of Series A, B, and C preferred stock is convertible at the
option of the holder into one share of common stock at any time, subject to
adjustment for antidilution. Each share of Series A, B, and C preferred stock
will be automatically converted upon written consent or agreement of holders of
at least two-thirds of the outstanding preferred shares or upon an initial
public offering of the Company's common stock. Each share of Series A, B, and C
preferred stock has voting rights equal to one share of common stock on an as-
if converted basis.

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

    In connection with the Series A preferred stock issuance, the Company
issued a warrant to two investors to purchase 134,615 shares of Series A
preferred stock with an exercise price of $0.13 per share. The warrants were
exercisable any time prior to April 7, 1998. The fair value of the warrants
computed using the Black-Scholes option pricing model on the date of grant was
not material. In lieu of paying cash upon exercise of the warrants in 1998, the
warrant holders surrendered 32,407 shares of Series A perferred stock back to
the Company.

    (b) Common Stock

    The Company has issued to the Company's founders 5,000,000 shares of common
stock, which are subject to repurchase on termination of employment. Such
repurchase rights lapse in a series of equal monthly installments over a four
year period ending June 4, 2000. As of December 31, 1998, 1,550,000 shares were
subject to repurchase. During 1997, the Company repurchased a net of 625,000
shares from one founder at the original exercise price of $0.0001 per share.

                                      F-12
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

    Certain option holders have exercised options to purchase shares of
restricted common stock in exchange for five-year full recourse promissory
notes. The notes bear interest at 5.7% and expire on various dates through
2004. The Company has the right to repurchase all unvested shares purchased by
the notes at the original exercise price in the event of employee termination.
The number of shares subject to this repurchase right decreases as the shares
vest under the original option terms, generally over four years. As of December
31, 1998, there were 3,068,535 shares subject to repurchase. These options were
exercised at prices ranging from $0.01 to $0.23 with a weighted-average
exercise price of $0.04 per share. The options exercised to date have a
weighted-average fair value of $0.70 per share.

    (c) Stock Option Plan

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

    A summary of stock option activity follows:
Years Ended
                          --------------------------------------------  Three Months Ended
                                  1997                  1998              March 31, 1999
                          --------------------- ---------------------- ---------------------
                                      Weighted-              Weighted-             Weighted-
                                       Average                Average               Average
                            Options   Exercise    Options    Exercise    Options   Exercise
                          Outstanding   Price   Outstanding    Price   Outstanding   Price
                          ----------- --------- -----------  --------- ----------- ---------
                                                                            (Unaudited)
Outstanding at beginning
 of period..............         --     $0.01    2,547,858     $0.03     225,300     $0.06
 Options granted........   2,627,858     0.03    1,734,549      0.07     550,500      0.24
 Options exercised......     (80,000)    0.01   (3,892,107)     0.05    (439,500)     0.23
 Options canceled.......         --       --      (165,000)     0.05     (20,000)     0.23
                           ---------            ----------              --------
Outstanding at end of
 period.................   2,547,858     0.03      225,300      0.06     316,300      0.08
                           =========            ==========              ========
Shares available for
 future grant...........   1,858,142             1,198,593               943,302
                           =========            ==========              ========
At December 31, 1998, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $0.02 to $0.23 and 9.18
years, respectively.

    At December 31, 1997 and 1998, the number of vested shares under options
was 319,747 and 169,900, respectively, and the weighted-average exercise price
of those options was $0.03 and $0.05, respectively.

    The Company uses the intrinsic-value method in accounting for its stock-
based compensation plans. Accordingly, compensation cost has been recognized in
the financial statements for those

                                      F-13
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

options issued with exercise prices at less than fair value at date of grant.
With respect to the stock options granted from inception through March 31,
1999, the Company recorded deferred stock-based compensation of $6,154,000 for
the difference at the grant date between the exercise price and the fair value
of the common stock underlying the options. Had compensation costs been
determined in accordance with SFAS No. 123 for all of the Company's stock-based
compensation plans, net loss and basic and diluted net loss per share would not
have been materially impacted.

    The Company calculated the fair value of each option grant on the grant
date using the minimum value method with the following assumptions: dividend
yield at 0%; weighted-average expected option term of three years; risk-free
interest rate of 6.22% and 5.15% for the years ended December 31, 1997 and
1998, respectively. The weighted-average fair value of options granted during
1997 and 1998 was $0.34 and $1.22 per share, respectively.

(5) Commitments

    The Company leases its facilities under noncancelable operating leases with
various expiration dates through June 30, 2003. The Company also subleases its
previous facility under a noncancelable sublease expiring in January 2003. Rent
expense, net of sublease payments, was $37,000 and $360,000 for the years ended
December 31, 1997 and 1998, respectively. Sublease payments approximated
$113,000 in the year ended December 31, 1998.

    Future minimum lease payments under noncancelable operating leases and
subleases, as of December 31, 1998, are as follows (in thousands):
Year ending                                             Operating
     December 31,                                             Leases   Subleases
     ------------                                            --------- ---------
1999...................................................  $  794     $244
     2000...................................................     809      209
     2001...................................................     834      218
     2002...................................................     860      227
     2003...................................................     342      --
                                                              ------     ----
                                                              $3,639     $898
                                                              ======     ====
(6) Income Taxes

    The 1997 and 1998 income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax income as a result
of the following (in thousands):
1997    1998
                                                               -----  -------
Federal tax benefit at statutory rate...................... $(424) $(1,736)
   Current year net operating loss and temporary differences
    for which no benefit has been recognized..................   424    1,736
                                                               -----  -------
     Total.................................................... $ --   $   --
                                                               =====  =======
F-14
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

    The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are set out below (in
thousands):
1997   1998
                                                                  ----  -------
Deferred tax assets:
     Net operating loss and credit carryforwards................. $567   $2,682
     Accruals and reserves.......................................   23       77
                                                                  ----  -------
       Total gross deferred tax assets...........................  590    2,759
     Valuation allowance......................................... (590)  (2,759)
                                                                  ----  -------
       Total deferred tax assets................................. $--   $   --
                                                                  ====  =======
Management has established a full valuation allowance against its net
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the carryforward periods.

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

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

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

(7) Subsequent Events

    (a) Initial Public Offering

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

                                      F-15
KANA COMMUNICATIONS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

    (b) Reincorporation

    On July 7, 1999, the Company's Board of Directors authorized the
reincorporation of the Company into the State of Delaware. As part of the
reincorporation the common stock will be assigned a par value equal to $0.001
per share. The accompanying financial statements have been retroactively
restated to reflect the effect of this reincorporation.

    (c) Stock Plans

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

    (d) Series D Convertible Preferred Stock

    On July 8, 1999, the Company issued 1,257,708 shares of Series D
Convertible Preferred Stock at a purchase price of $8.11 per share for total
proceeds of approximately $10.2 million. Holders of Series D Preferred Stock
are entitled to receive annual noncumulative dividends at a rate of $0.6488 per
share. Each outstanding share is convertible into common stock on a one-for-one
basis. Upon liquidation, the holders of the Series D Preferred Stock will be
entitled to receive $8.11 per share. Holders of the Series D Preferred stock
are subject to all other rights and preferences of the previously issued series
of preferred stock.

                                      F-16
UNDERWRITING

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

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

    The following tables show the per share and total underwriting discount to
be paid to the underwriters by Kana. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares.
Paid by Kana
                                                       -------------------------
                                                       No Exercise Full Exercise
                                                       ----------- -------------
Per Share..........................................   $            $
                                                         ------       ------
   Total..............................................   $            $
                                                         ======       ======
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $    per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $    per share from
the initial public offering price. If all of the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.

    Kana and its officers, directors who hold shares of common stock and
substantially all of its securityholders have agreed with the underwriters not
to dispose of or hedge any of their common stock or securities convertible into
or exchangeable for shares of common stock during the period from the date of
this prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. on
behalf of the underwriters. See "Shares Available for Future Sale" for a
discussion of these and other transfer restrictions.

                                      U-1
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be
negotiated among Kana and the representatives. Among the factors to be
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, will be Kana's historical
performance, estimates of Kana's business potential and earnings prospects, an
assessment of Kana's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.

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

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

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

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

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

    At the request of Kana, the underwriters have reserved for sale, at the
initial public offering price, up to    shares of common stock in the offering
to directors, officers, employees and friends of Kana through a directed share
program. Of this total,     shares have been reserved for entities affiliated
with Amerindo Investment Advisors,     shares have been reserved for purchasers
of Kana's Series C preferred stock and     shares have been reserved for the
directors, officers, employees and friends of Kana. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these persons purchase these reserved shares. The underwriters will
offer any reserved shares not purchased by these persons to the general public
on the same basis as other shares in the offering.

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

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

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

                                      U-2
Inside back cover

A depiction of the screens viewed by the user of the Kana solution, centered on
the page, cascading to the right side. At the top of the screen shot is a
depiction of the Kana logo, consisting of the letter "K" surrounded by a
partially open oval. Left to right over the top of the screen are the titles of
options available to the user, including "more," "new," "find," "sender
history," "view source," "note," "no answer," "route," and "categorize." Below
this tool bar is a representation of unread e-mail messages entering the Kana
system. Below this middle band is a sample response message which contains a
salutation and a sample question, "do you have any job openings."
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

  No dealer, salesperson or any other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.

                                  -----------

                               TABLE OF CONTENTS
Page
                                                                          ----
Prospectus Summary.......................................................   3
Risk Factors.............................................................   7
Use of Proceeds..........................................................  20
Dividend Policy..........................................................  20
Preemptive Rights........................................................  20
Capitalization...........................................................  21
Dilution.................................................................  22
Selected Consolidated Financial Data.....................................  23
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  24
Business.................................................................  35
Management...............................................................  49
Transactions and Relationships with Related Parties......................  62
Principal Stockholders...................................................  65
Description of Capital Stock.............................................  67
Shares Available for Future Sale.........................................  70
Legal Matters............................................................  72
Change in Accountants....................................................  72
Experts..................................................................  72
Additional Information...................................................  72
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
-----------

  Through and including     , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

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

                                       Shares

                           Kana Communications, Inc.

                                 Common Stock

                                  -----------

                         [LOGO OF KANA COMMUNICATIONS]

                                  -----------

                             Goldman, Sachs & Co.

                               Hambrecht & Quist

                            Wit Capital Corporation

                      Representatives of the Underwriters

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PART II

                    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

    The following table sets forth the costs and expenses, other than the
underwriting discounts payable by Kana in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fee.
SEC Registration Fee................................................ $11,190
   NASD Filing Fee.....................................................   4,525
   Nasdaq National Market Listing Fee..................................    *
   Printing and Engraving Expenses.....................................    *
   Legal Fees and Expenses.............................................    *
   Accounting Fees and Expenses........................................    *
   Blue Sky Fees and Expenses..........................................    *
   Transfer Agent Fees.................................................    *
   Miscellaneous.......................................................    *
                                                                        -------
     Total.............................................................    *
                                                                        =======
--------
*To be filed by amendment

Item 14. Indemnification of Directors and Officers

    Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit this
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of Kana's Bylaws
provides for mandatory indemnification of its directors and executive officers
and permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. Kana's Certificate
of Incorporation provides that, subject to Delaware law, its directors will
not be personally liable for monetary damages for breach of the directors'
fiduciary duty as directors to Kana and its stockholders. This provision in
the Certificate of Incorporation does not eliminate the directors' fiduciary
duty, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware
law. In addition, each director will continue to be subject to liability for
breach of the director's duty of loyalty to Kana or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. Kana has entered into
indemnification agreements with its officers and directors, a form of which
will be filed with the Securities and Exchange Commission (the "Commission")
as an Exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-   ) (the "Indemnification Agreements"). The Indemnification
Agreements provide Kana's executive officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is also made to Section 8 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of Kana against certain liabilities, and Section 1.10 of the Third Amended and
Restated Investors' Rights Agreement contained in Exhibit 4.2 hereto,
indemnifying certain of Kana's stockholders, including controlling
stockholders, against certain liabilities.

                                     II-1
Item 15. Recent Sales of Unregistered Securities

    During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:

      (a) In July 1996, the Registrant issued and sold 5,000,000 shares of
  its Common Stock to Mark S. Gainey and Michael T. Horvath for an aggregate
  purchase price of $500 pursuant to Common Stock Purchase Agreements. In
  April 1997, the Registrant repurchased those shares of Common Stock for
  $43,812.

      (b) In April 1997, the Registrant issued and sold 4,375,000 shares of
  its Common Stock to Mark S. Gainey and Michael T. Horvath for an aggregate
  purchase price of $43,750 pursuant to Restricted Stock Purchase
  Agreements.

      (c) In April 1997, the Registrant issued and sold 5,923,078 shares of
  its Series A Preferred Stock to investors for an aggregate purchase price
  of $770,000, which included $170,000 of cancellation of indebtedness.

      (d) In April 1997, the Registrant issued warrants to investors to
  purchase up to 134,615 shares of its Series A Preferred Stock at an
  exercise price of $0.13 per share.

      (e) In March 1998, the Registrant issued 102,208 shares of its Series
  A Preferred Stock pursuant to the net exercise of warrants issued to
  investors.

      (f) In June 1997, the Registrant issued 1,000 shares of its Common
  Stock to a consultant as consideration for services rendered to the
  Registrant pursuant to a Stock Issuance Agreement.

      (g) In September 1997, the Registrant issued and sold 7,453,704 shares
  of its Series B Preferred Stock to investors for an aggregate purchase
  price of $4,025,000.

      (h) In July 1998, the Registrant issued and sold 168,824 shares of its
  Series B Preferred Stock to a director for an aggregate purchase price of
  $91,165.

      (i) In August and September 1998, the Registrant issued and sold
  5,121,148 shares of its Series C Preferred Stock to investors for an
  aggregate purchase price of $11,625,006.

      (j) In July 1999, the Registrant issued and sold 1,257,707 shares of
  its Series D Preferred Stock to investors for an aggregate purchase price
  of $10,200,004.

      (k) Since inception, the Registrant has issued and sold an aggregate
  of 330,000 shares of its Common Stock to two of the Registrant's directors
  for an aggregate consideration of $3,300.

      (l) Since inception, the Registrant has granted stock options to its
  employees, directors and consultants under its 1997 Stock Option/Stock
  Issuance Plan exercisable for up to an aggregate of 6,814,907 shares of
  its Common Stock, with exercise prices ranging from $0.01 to $1.50. The
  Registrant has issued and sold an aggregate of 6,360,107 shares of its
  Common Stock to its employees, directors and consultants under this plan
  for an aggregate consideration of $34,477 in cash and $1.3 million in
  promissory notes with a five year term and interest rate of 5.7% per
  annum, compounding annually.

    None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients in these
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in these transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.

                                     II-2
Item 16. Exhibits and Financial Statement Schedules

    The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.

    (a) Exhibits
Exhibit
   Number                              Exhibit Title
   -------                             -------------
1.1*  Form of Underwriting Agreement among the Registrant, Goldman Sachs &
            Co., Hambrecht & Quist LLC and Wit Capital Corporation.
     3.1   Amended and Restated Certificate of Incorporation, to be effective
            upon consummation of this offering.
     3.2   Amended and Restated Bylaws, to be effective upon consummation of
            this offering.
     4.1*  Form of Registrant's Specimen Common Stock Certificate.
     4.2   Third Amended and Restated Investors' Rights Agreement dated July 8,
            1999 by and among the Registrant and parties listed on Schedule A
            therein.
     5.1*  Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
            Registrant, with respect to the common stock being registered.
    10.1   Registrant's 1997 Stock Option/Stock Issuance Plan.
    10.2*  Registrant's 1999 Stock Incentive Plan.
    10.3*  Registrant's 1999 Employee Stock Purchase Plan.
    10.4   Form of Registrant's Directors' and Officers' Indemnification
            Agreement.
    10.5   Form of Registrant's License Agreement.
    10.6*  Letter of Credit, dated July  , 1999, with Silicon Valley Bank and
            the Registrant.
    10.7   Lease, dated May 1998, by and between Encina Properties and the
            Registrant.
    10.8*  Office/R&D Lease, dated June 17, 1999, by and between Chestnut Bay
            LLC and the Registrant.
    10.9   Form of Registrant's Kana Online Service Agreement.
   10.10   Form of Registrant's Restricted Stock Purchase Agreement.
    16.1   Letter from PricewaterhouseCoopers LLP, dated July 8, 1999 regarding
            change in accountant.
    21.1   Subsidiaries of the Registrant.
    23.1   Consent of KPMG LLP, Independent Auditors.
    23.2*  Consent of Brobeck, Phleger & Harrison LLP (contained in their
            opinion filed as Exhibit 5.1).
    24.1   Power of Attorney. Reference is made to Page II-5.
    27.1   Financial Data Schedule. (In EDGAR format only)
--------
*To be filed by amendment

    (b) Financial Statement Schedule

      None.

Item 17. Undertakings

    Kana hereby undertakes to provide to the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations
and registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

    Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Kana
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of Kana, Indemnification Agreements entered into

                                     II-3
between Kana and its officers and directors, the Underwriting Agreement, or
otherwise, Kana has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Kana of
expenses incurred or paid by a director, officer, or controlling person of
Kana in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, Kana will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

    The undersigned registrant hereby undertakes:

      (1) For purposes of determining any liability under the Securities
  Act, the information omitted from the form of Prospectus filed as part of
  this registration statement in reliance upon Rule 430A and contained in a
  form of Prospectus filed by Kana pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Securities Act shall be deemed to be part of this
  Registration Statement as of the time it was declared effective;

      (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of Prospectus
  shall be deemed to be a new registration statement relating to the
  securities offered therein, and the offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.

                                     II-4
SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Palo Alto, State of California, on
this 9th day of July, 1999.

                                          KANA COMMUNICATIONS, INC.

                                                  /s/ Michael J. McCloskey
                                          By: _________________________________
                                                    Michael J. McCloskey
                                                  Chief Executive Officer

                               POWER OF ATTORNEY

    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Mark S. Gainey
and Joseph D. McCarthy, and each one of them, his true and lawful attorneys-
in-fact and agents, each with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that each of said attorneys-in-fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

    IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

    Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:
Signature                          Title                   Date
/s/ Michael J. McCloskey        Chief Executive Officer       July 9, 1999
______________________________________  (Principal Executive
         Michael J. McCloskey           Officer)

        /s/ Joseph D. McCarthy         Vice President, Finance       July 9, 1999
______________________________________  and Operations (Principal
          Joseph D. McCarthy            Financial and Accounting
                                        Officer)

         /s/ David M. Beirne           Director                      July 9, 1999
______________________________________
           David M. Beirne
II-5
Signature                          Title                   Date
/s/ Mark S. Gainey           President and Chairman of     July 9, 1999
______________________________________  the Board
            Mark S. Gainey

           /s/ Eric A. Hahn            Director                      July 9, 1999
______________________________________
             Eric A. Hahn

     /s/ Dr. Charles A. Holloway       Director                      July 9, 1999
______________________________________
       Dr. Charles A. Holloway

       /s/ Steven T. Jurvetson         Director                      July 9, 1999
______________________________________
         Steven T. Jurvetson

           /s/ Ariel Poler             Director                      July 9, 1999
______________________________________
             Ariel Poler
II-6
Exhibit
   Number                          Exhibit Title                           Page
   -------                         -------------                           ----
1.1*  Form of Underwriting Agreement among the Registrant, Goldman
            Sachs & Co., Hambrecht & Quist LLC and Wit Capital
            Corporation.
     3.1   Amended and Restated Certificate of Incorporation, to be
            effective upon consummation of this offering.
     3.2   Amended and Restated Bylaws, to be effective upon
            consummation of this offering.
     4.1*  Form of Registrant's Specimen Common Stock Certificate.
     4.2   Third Amended and Restated Investors' Rights Agreement dated
            July 8, 1999 by and among the Registrant and parties listed
            on Schedule A therein.
     5.1*  Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
            Registrant, with respect to the common stock being
            registered.
    10.1   Registrant's 1997 Stock Option/Stock Issuance Plan.
    10.2*  Registrant's 1999 Stock Incentive Plan.
    10.3*  Registrant's 1999 Employee Stock Purchase Plan.
    10.4   Form of Registrant's Directors' and Officers' Indemnification
            Agreement.
    10.5   Form of Registrant's License Agreement.
    10.6*  Letter of Credit, dated July  , 1999, with Silicon Valley
            Bank and the Registrant.
    10.7   Lease, dated May 1998, by and between Encina Properties and
            the Registrant.
    10.8*  Office/R&D Lease, dated June 17, 1999, by and between
            Chestnut Bay LLC and the Registrant.
    10.9   Form of Registrant's Kana Online Service Agreement.
   10.10   Form of Registrant's Restricted Stock Purchase Agreement.
    16.1   Letter from PricewaterhouseCoopers LLP, dated July 8, 1999
            regarding change in accountant.
    21.1   Subsidiaries of the Registrant.
    23.1   Consent of KPMG LLP, Independent Auditors.
    23.2*  Consent of Brobeck, Phleger & Harrison LLP (contained in
            their opinion filed as Exhibit 5.1).
    24.1   Power of Attorney. Reference is made to Page II-5.
    27.1   Financial Data Schedule. (In EDGAR format only)
--------
*To be filed by amendment