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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2004



OR



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



For the transition period from  to



Commission File No. 0-30260



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eGAIN COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0466366                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



345 E. Middlefield,
Mountain View, CA

(Address of principal executive offices)



94043

(Zip Code)



(650) 230-7500

(Registrants telephone number, including area code)



N/A

(Former name, former address
and former fiscal year, if changed since last report)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    YES  x    NO ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):    Yes ̈No  x.



Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                              |  |                                  
|----------------------------- |  | ---------------------------------
|Class                         |  | Outstanding at September 30, 2004
|Common Stock $0.001 par value |  | 3,695,739                        



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##### Table of Contents

eGAIN COMMUNICATIONS CORPORATION



TABLE OF CONTENTS



|         |  |                                                                                                        |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                        |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                                  |  | 1   
|         |  |                                                                                                       
|Item 1.  |  | Financial Statements (unaudited)                                                                       |  | 1   
|         |  |                                                                                                       
|         |  | Condensed Consolidated Balance Sheets at September 30, 2004 and June 30, 2004                          |  | 1   
|         |  |                                                                                                       
|         |  | Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2004 and 2003 |  | 2   
|         |  |                                                                                                       
|         |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2004 and 2003 |  | 3   
|         |  |                                                                                                       
|         |  | Notes to Condensed Consolidated Financial Statements                                                   |  | 4   
|         |  |                                                                                                       
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 12  
|         |  |                                                                                                       
|Item 3.  |  | Quantitative and Qualitative Disclosure About Market Risk                                              |  | 34  
|         |  |                                                                                                       
|Item 4.  |  | Control and Procedures                                                                                 |  | 34  
|         |  |                                                                                                       
|PART II. |  | OTHER INFORMATION                                                                                      |  | 36  
|         |  |                                                                                                       
|Item 1.  |  | Legal Proceedings                                                                                      |  | 36  
|         |  |                                                                                                       
|Item 2.  |  | Changes in Securities                                                                                  |  | 36  
|         |  |                                                                                                       
|Item 3.  |  | Defaults upon Senior Securities                                                                        |  | 36  
|         |  |                                                                                                       
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                    |  | 36  
|         |  |                                                                                                       
|Item 5.  |  | Other Information                                                                                      |  | 36  
|         |  |                                                                                                       
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                       |  | 37  
|         |  |                                                                                                       
|         |  | Signatures                                                                                             |  | 38  
|         |  |                                                                                                       
|         |  | Certifications                                                                                         |  |     



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



eGAIN COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS



(in thousands)



|                                                                                                                    |  |                   |          |   |              |   |          |  
|------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                    |  | September 30,2004 |          |   | June 30,2004 |  
|                                                                                                                    |  | (unaudited)       |          |   |              |  
|ASSETS                                                                                                              |  |                   |          |   |              |   |          |  
|                                                                                                                    |  |                  
|Current assets:                                                                                                     |  |                   |          |   |              |   |          |  
|Cash and cash equivalents                                                                                           |  | $                 | 4,438    |   |              | $ | 5,181    |  
|Restricted cash                                                                                                     |  |                   | 12       |   |              |   | 12       |  
|Accounts receivable, net                                                                                            |  |                   | 3,887    |   |              |   | 2,876    |  
|Prepaid and other current assets                                                                                    |  |                   | 1,230    |   |              |   | 1,408    |  
|                                                                                                                    |  |                   |          |   |              |   |          |  
|Total current assets                                                                                                |  |                   | 9,567    |   |              |   | 9,477    |  
|                                                                                                                    |  |                  
|Property and equipment, net                                                                                         |  |                   | 482      |   |              |   | 473      |  
|Goodwill, net                                                                                                       |  |                   | 4,880    |   |              |   | 4,880    |  
|Other assets                                                                                                        |  |                   | 286      |   |              |   | 331      |  
|                                                                                                                    |  |                   |          |   |              |   |          |  
|                                                                                                                    |  | $                 | 15,215   |   |              | $ | 15,161   |  
|                                                                                                                    |  |                   |          |   |              |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                |  |                   |          |   |              |   |          |  
|                                                                                                                    |  |                  
|Current liabilities:                                                                                                |  |                   |          |   |              |   |          |  
|Accounts payable                                                                                                    |  | $                 | 1,113    |   |              | $ | 1,036    |  
|Accrued compensation                                                                                                |  |                   | 845      |   |              |   | 765      |  
|Accrued liabilities                                                                                                 |  |                   | 1,486    |   |              |   | 1,335    |  
|Deferred revenue                                                                                                    |  |                   | 3,799    |   |              |   | 3,731    |  
|Current portion of accrued restructuring                                                                            |  |                   | 76       |   |              |   | 86       |  
|Current portion of bank borrowings                                                                                  |  |                   | 615      |   |              |   | 506      |  
|Current portion of capital lease obligations                                                                        |  |                   | 5        |   |              |   | 9        |  
|                                                                                                                    |  |                   |          |   |              |   |          |  
|Total current liabilities                                                                                           |  |                   | 7,939    |   |              |   | 7,468    |  
|                                                                                                                    |  |                  
|Related party notes payable                                                                                         |  |                   | 6,839    |   |              |   | 6,607    |  
|Accrued restructuring, net of current portion                                                                       |  |                   | 1,247    |   |              |   | 1,264    |  
|Other long term liabilities                                                                                         |  |                   | 239      |   |              |   | 242      |  
|                                                                                                                    |  |                   |          |   |              |   |          |  
|Total liabilities                                                                                                   |  |                   | 16,264   |   |              |   | 15,581   |  
|                                                                                                                    |  |                  
|Commitments                                                                                                         |  |                   |          |   |              |   |          |  
|                                                                                                                    |  |                  
|Stockholders equity:                                                                                               |  |                   |          |   |              |   |          |  
|Series A cumulative convertible preferred stock; Aggregate liquidation preference of $111,603 at September 30, 2004 |  |                   | 110,705  |   |              |   | 108,755  |  
|Common stock                                                                                                        |  |                   | 4        |   |              |   | 4        |  
|Additional paid-in capital                                                                                          |  |                   | 204,771  |   |              |   | 206,721  |  
|Notes receivable from stockholders                                                                                  |  |                   | (95      | ) |              |   | (94      | )
|Accumulated other comprehensive income (loss)                                                                       |  |                   | (346     | ) |              |   | (290     | )
|Accumulated deficit                                                                                                 |  |                   | (316,088 | ) |              |   | (315,516 | )
|                                                                                                                    |  |                   |          |   |              |   |          |  
|Total shareholders equity (deficit)                                                                                |  |                   | (1,049   | ) |              |   | (420     | )
|                                                                                                                    |  |                   |          |   |              |   |          |  
|                                                                                                                    |  | $                 | 15,215   |   |              | $ | 15,161   |  
|                                                                                                                    |  |                   |          |   |              |   |          |  



See accompanying
notes



1



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eGAIN COMMUNICATIONS CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                      |  |                                  |        |   |      |   |        |  
|------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                      |  | Three Months Ended September 30, |       
|                                                                                      |  | 2004                             |        |   | 2003 |  
|Revenue:                                                                              |  |                                  |        |   |      |   |        |  
|License                                                                               |  |                                  | 1,273  |   |      |   | 790    |  
|Support and Services                                                                  |  |                                  | 3,448  |   |      |   | 3,783  |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Total revenue                                                                         |  |                                  | 4,721  |   |      |   | 4,573  |  
|Cost of license                                                                       |  |                                  | 173    |   |      |   | 451    |  
|Cost of support and services                                                          |  |                                  | 1,455  |   |      |   | 1,509  |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Gross profit                                                                          |  |                                  | 3,093  |   |      |   | 2,613  |  
|                                                                                      |  |                                 
|Operating costs and expenses:                                                         |  |                                  |        |   |      |   |        |  
|Research and development                                                              |  |                                  | 538    |   |      |   | 1,065  |  
|Sales and marketing                                                                   |  |                                  | 2,101  |   |      |   | 2,125  |  
|General and administrative                                                            |  |                                  | 750    |   |      |   | 909    |  
|Amortization of other intangible assets                                               |  |                                  |       |   |      |   | 306    |  
|Restructuring and other                                                               |  |                                  |       |   |      |   | 127    |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Total operating costs and expenses                                                    |  |                                  | 3,389  |   |      |   | 4,532  |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Loss from operations                                                                  |  |                                  | (296   | ) |      |   | (1,919 | )
|Non-operating (expenses)                                                              |  |                                  | (276   | ) |      |   | (153   | )
|                                                                                      |  |                                  |        |   |      |   |        |  
|Net loss                                                                              |  |                                  | (572   | ) |      |   | (2,072 | )
|                                                                                      |  |                                 
|Dividends on convertible preferred stock                                              |  |                                  | (1,951 | ) |      |   | (1,825 | )
|                                                                                      |  |                                  |        |   |      |   |        |  
|Net loss applicable to common stockholders                                            |  | $                                | (2,523 | ) |      | $ | (3,897 | )
|                                                                                      |  |                                  |        |   |      |   |        |  
|Per Share information:                                                                |  |                                  |        |   |      |   |        |  
|Basic and diluted net loss per common share                                           |  | $                                | (0.68  | ) |      | $ | (1.06  | )
|                                                                                      |  |                                  |        |   |      |   |        |  
|Weighted average shares used in computing basic and diluted net loss per common share |  |                                  | 3,696  |   |      |   | 3,676  |  
|                                                                                      |  |                                  |        |   |      |   |        |  



See accompanying
notes



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eGAIN COMMUNICATIONS CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                            |  |                                 |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months EndedSeptember 30, |       
|                                                                            |  | 2004                            |        |   | 2003 |  
|Cash flows from operating activities:                                       |  |                                 |        |   |      |   |        |  
|Net loss                                                                    |  | $                               | (572   | ) |      | $ | (2,072 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |        |   |      |   |        |  
|Depreciation                                                                |  |                                 | 95     |   |      |   | 412    |  
|Loss on disposal of fixed assets                                            |  |                                 |       |   |      |   | 6      |  
|Amortization of other intangible assets                                     |  |                                 |       |   |      |   | 306    |  
|Accrued interest and amortization of discount on related party notes        |  |                                 | 232    |   |      |   | 69     |  
|Changes in operating assets and liabilities:                                |  |                                 |        |   |      |   |        |  
|Restricted cash                                                             |  |                                 |       |   |      |   | 285    |  
|Accounts receivable                                                         |  |                                 | (1,011 | ) |      |   | 425    |  
|Prepaid and other current assets                                            |  |                                 | 178    |   |      |   | 335    |  
|Other assets                                                                |  |                                 | 45     |   |      |   | 147    |  
|Accounts payable                                                            |  |                                 | 77     |   |      |   | 20     |  
|Accrued compensation                                                        |  |                                 | 80     |   |      |   | (61    | )
|Accrued liabilities                                                         |  |                                 | 151    |   |      |   | (377   | )
|Accrued restructuring                                                       |  |                                 | (27    | ) |      |   | (185   | )
|Deferred revenue                                                            |  |                                 | 68     |   |      |   | (248   | )
|Other long term liabilities                                                 |  |                                 | (3     | ) |      |   | 1      |  
|                                                                            |  |                                 |        |   |      |   |        |  
|Net cash (used in) operating activities                                     |  |                                 | (687   | ) |      |   | (937   | )
|                                                                            |  |                                
|Cash flows from investing activities:                                       |  |                                 |        |   |      |   |        |  
|Purchases of property and equipment                                         |  |                                 | (104   | ) |      |   | (64    | )
|                                                                            |  |                                 |        |   |      |   |        |  
|Net cash (used in) investing activities                                     |  |                                 | (104   | ) |      |   | (64    | )
|                                                                            |  |                                
|Cash flows from financing activities:                                       |  |                                 |        |   |      |   |        |  
|Payments on borrowings                                                      |  |                                 | (506   | ) |      |   | (1,077 | )
|Payments on capital lease obligations                                       |  |                                 | (4     | ) |      |   | (3     | )
|Proceeds from borrowings                                                    |  |                                 | 615    |   |      |   | 536    |  
|Net proceeds from issuance of common stock                                  |  |                                 | (1     | ) |      |   | 45     |  
|                                                                            |  |                                 |        |   |      |   |        |  
|Net cash provided by / (used in) financing activities                       |  |                                 | 104    |   |      |   | (499   | )
|                                                                            |  |                                
|Effect of exchange rate differences on cash                                 |  |                                 | (56    | ) |      |   | (7     | )
|                                                                            |  |                                 |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                   |  |                                 | (743   | ) |      |   | (1,507 | )
|Cash and cash equivalents at beginning of period                            |  |                                 | 5,181  |   |      |   | 4,407  |  
|                                                                            |  |                                 |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                  |  | $                               | 4,438  |   |      | $ | 2,900  |  
|                                                                            |  |                                 |        |   |      |   |        |  
|Supplemental cash flow disclosures:                                         |  |                                 |        |   |      |   |        |  
|Cash paid for interest                                                      |  | $                               | 29     |   |      | $ | 84     |  
|Tax expense                                                                 |  |                                 | 88     |   |      |   | 11     |  



See accompanying
notes



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eGAIN COMMUNICATIONS CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note
1. Organization, Nature of Business and Basis of Presentation



We are a leading provider of customer service and contact center software, used by global enterprises for over a decade. eGain Service 6, our software suite, available through licensed or hosted models, includes integrated, best-in-class applications for customer email management, live
web collaboration, virtual agent customer service, knowledge management, and web self-service. These robust applications are built on the eGain SMP, a scalable next-generation framework that includes end-to-end service process management, multi-channel, multi-site contact center management, a
flexible integration approach, and certified out-of-the-box integrations with leading call center and business systems.



We have prepared the condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission and
included the accounts of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.



Certain information and footnote 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. In our opinion, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our financial position, results of operations and cash flows for the periods presented. These financial statements and notes should be read in conjunction with our audited consolidated financial statements and notes thereto for
the year ended June 30, 2004, included in our Annual Report on Form 10-K. The condensed consolidated balance sheet at June 30, 2004 has been derived from audited financial statements as of that date but does not include all the information and
footnotes required by generally accepted accounting principals for complete financial statements. The results of our operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending June 30, 2005.



Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the current year presentation.



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, 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. The estimates are
based upon information available as of the date of the financial statements. Actual results could differ from those estimates.



Note 2. Software Revenue Recognition



We recognize revenue in accordance with Statement of Position 97-2, Software Revenue Recognition (SOP 97- 2), as amended. Under SOP 97-2,
revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations for us remain, the fee is fixed or determinable, and collectibility is probable. License
revenue in multiple element contracts is recognized using the residual method when there is vendor specific objective evidence of the fair value of all undelivered elements in an arrangement but vendor specific objective evidence of fair value does
not exist for one or more of the delivered elements in an arrangement. Under the residual method, the total fair value of the undelivered elements, as indicated by vendor specific objective evidence, is deferred and the difference between the total
arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. If sufficient vendor specific objective evidence does not exist for undelivered elements in an arrangement, all revenue
from the arrangement is deferred until the earlier of the point at which (a) such sufficient vendor specific objective evidence does exist for the undelivered elements or (b) all elements of the arrangement without sufficient vendor specific
objective evidence have been delivered.



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Support and Service revenues are primarily derived from hosting fees, consulting fees, maintenance
agreements, and training. Revenue from hosting services is recognized ratably over the period of the agreement as services are provided. Hosting agreements are typically for a period of one year and automatically renew unless either party cancels
the agreement. Service revenue from consulting and training, billed on a time and materials basis, is recognized as performed. Service revenue on fixed price service arrangements is recognized upon completion of specific contractual milestone
events, or based on an estimated percentage of completion as work progresses. Maintenance agreements typically include the right to software updates on an if-and-when-available basis. The fair value of maintenance revenue, established by annual
maintenance renewals of existing customers, is deferred and recognized on a straight-line basis as service revenue over the life of the related agreement, which is typically one year.



In all cases, we assess whether the service element of the arrangement is essential to the functionality of the other
elements of the arrangement. In this determination, we focus on whether the services include significant alterations to the features and functionality of the software, whether the services involve the building of complex interfaces, the timing of
payments and the existence of milestones. In making this determination, we consider the following: (1) the relative fair value of the services compared to the software, (2) the amount of time and effort subsequent to delivery of the software until
the interfaces or other modifications are completed, (3) the degree of technical difficulty in building the interfaces or other modifications, and (4) any contractual cancellation, acceptance, or termination provisions for failure to complete the
interfaces. In those instances where we determine that the service elements are essential to the other elements of the arrangement, we account for the entire arrangement in accordance with Accounting Research Bulletin (ARB) No. 45, Long-Term
Construction-Type Contracts, using the relevant guidance from SOP 97-2 and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.



Revenue from sales to resellers are recognized either upon delivery to the
reseller or on a sell-through basis, depending on the facts and circumstances of the transaction, such as our understanding of the resellers use of our software, the resellers financial status and our past experience with the particular
reseller. Accordingly, the decision of whether to recognize revenue to resellers upon delivery or on a sell-through basis requires significant management judgment. This judgment can materially impact the timing of revenue recognition.



Note 3. Stock-Based Compensation



We account for our stock-based compensation arrangements with employees
using the intrinsic-value method in accordance with Accounting Principles Board 25, Accounting for Stock Issued to Employees. Deferred stock-based compensation is recorded on the date of grant when the deemed fair value of the underlying common
stock exceeds the exercise price for stock options or the purchase price for the shares of common stock. As of September 30, 2004 and June 30, 2004, there was no outstanding balance of deferred stock compensation.



We have adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. Pro forma information regarding net income (loss) has been determined as if we had accounted for our employee stock options under the fair value method
prescribed by SFAS 123 (in thousands, except per share data):



|                                                                                                 |  |                                  |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                 |  | Three months ended September 30, |       
|                                                                                                 |  | 2004                             |        |   | 2003 |  
|As Reported :                                                                                    |  |                                  |        |   |      |   |        |  
|Net loss applicable to common stockholders                                                       |  | $                                | (2,523 | ) |      | $ | (3,897 | )
|Basic and diluted net loss per share                                                             |  |                                  | (0.68  | ) |      |   | (1.06  | )
|                                                                                                 |  |                                 
|Add: Stock-based employee compensation expense included in reported net loss                     |  |                                  |       |   |      |   |       |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method |  |                                  | (58    | ) |      |   | (188   | )
|                                                                                                 |  |                                 
|Pro Forma:                                                                                       |  |                                  |        |   |      |   |        |  
|Net loss applicable to common stockholders                                                       |  | $                                | (2,581 | ) |      | $ | (4,085 | )
|Basic and diluted net loss per share                                                             |  |                                  | (0.70  | ) |      |   | (1.11  | )



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Note 4. Goodwill and Other Intangible Assets



Effective July 1, 2002, we adopted SFAS No. 142 and ceased amortization of goodwill and began reviewing it annually (or more
frequently if impairment indicators arise) for impairment. In addition, we evaluated our remaining purchased intangible assets to determine that all such assets have determinable lives. We operate under a single reporting unit and accordingly, all
of our goodwill is associated with the entire company. Prior to the adoption of SFAS No. 142, we amortized goodwill on a straight-line basis over its estimated useful life of three years. The purchased intangible assets including customer base and
acquired technology are being amortized over the assets useful life, which ranges from three to four years.



We performed our annual goodwill impairment review as of April 1, 2004 and found no impairment. We did not perform a goodwill impairment review in the
first fiscal quarter of 2005 as we did not identify any unfavorable indicators during the quarter.



In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144), we review long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be
fully recoverable. Under SFAS 144, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any,
is assessed using discounted cash flows. During the first quarter of fiscal 2005, we did not have any such losses.



The following table provides a summary of the carrying amount of goodwill which includes amounts originally allocated to assembled workforce (in thousands):



|                                                          |  |                   |         |  
|--------------------------------------------------------- |  | ----------------- | ------- | -
|                                                          |  | September 30,2004 |        
|Gross carrying amount of goodwill after impairment charge |  | $                 | 86,664  |  
|Accumulated amortization of goodwill                      |  |                   | (81,784 | )
|Net carrying amount of goodwill                           |  | $                 | 4,880   |  



Purchased intangible
assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3 to 4 years. The intangible assets were fully amortized as of June 30, 2004.



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Note 5. Net Loss Per Common Share



Basic net loss per common share is computed using the weighted-average number of shares of common stock outstanding.



The following table sets forth the calculation of basic and
diluted net loss per common share (in thousands, except per share data):



|                                                                                      |  |                                 |        |   |      |   |        |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                      |  | Three Months EndedSeptember 30, |       
|                                                                                      |  | 2004                            |        |   | 2003 |  
|Net loss applicable to common stockholders                                            |  | $                               | (2,523 | ) |      | $ | (3,897 | )
|                                                                                      |  |                                 |        |   |      |   |        |  
|Basic and diluted:                                                                    |  |                                 |        |   |      |   |        |  
|                                                                                      |  |                                
|Weighted-average shares outstanding                                                   |  |                                 | 3,696  |   |      |   | 3,676  |  
|Less weighted-average shares subject to repurchase                                    |  |                                 | 0      |   |      |   | 0      |  
|                                                                                      |  |                                 |        |   |      |   |        |  
|Weighted-average shares used in computing basic and diluted net loss per common share |  |                                 | 3,696  |   |      |   | 3,676  |  
|                                                                                      |  |                                 |        |   |      |   |        |  
|Basic and diluted net loss per common share                                           |  | $                               | (0.68  | ) |      | $ | (1.06  | )
|                                                                                      |  |                                 |        |   |      |   |        |  



Outstanding options
and warrants to purchase 1,175,388 and 958,184 shares of common stock at September 30, 2004 and 2003, respectively, and convertible preferred stock convertible into 2,050,165 and 1,918,139 shares of common stock at September 30, 2004 and 2003,
respectively, were not included in the computation of diluted net loss per common share for the periods presented as a result of their anti-dilutive effect. Such securities could have a dilutive effect in future periods.



Note 6. Comprehensive Loss



We report comprehensive loss and the components in accordance with Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). Under SFAS 130, comprehensive income includes all changes in equity during a period except those resulting from investments by or distributions to
owners. Total comprehensive loss was $628,000 and $2.1 million for the quarters ended September 30, 2004 and 2003, respectively. Accumulated other comprehensive loss presented in the accompanying consolidated balance sheets at September 30, 2004
consists solely of accumulated foreign currency translation adjustments.



Note 7. Segment Information



Operating
segments are identified as components of an enterprise for which discrete financial information is available and regularly reviewed by our chief operating decision-makers to make decisions about resources to be allocated to the segment and assess
its performance. Our chief operating decision-makers, as defined under SFAS No. 131, are our executive management team. Our chief operating decision makers review financial information presented on a consolidated basis, accompanied by separate
information about operating results by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, we operate in one segment, the development, license, implementation and support of our customer
service infrastructure software solutions.



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Information relating to our geographic areas is as follows (in thousands):



|                         |  |                                 |       |   |      |   |        |  
|------------------------ |  | ------------------------------- | ----- | - | ---- | - | ------ | -
|                         |  | Three months endedSeptember 30, |      
|                         |  | 2004                            |       |   | 2003 |  
|Total Revenue:           |  |                                 |       |   |      |   |        |  
|North America            |  | $                               | 2,310 |   |      | $ | 2,530  |  
|Europe                   |  |                                 | 2,310 |   |      |   | 2,000  |  
|Asia Pacific             |  |                                 | 101   |   |      |   | 43     |  
|India                    |  |                                 |      |   |      |   |       |  
|                         |  |                                 |       |   |      |   |        |  
|                         |  | $                               | 4,721 |   |      | $ | 4,573  |  
|                         |  |                                 |       |   |      |   |        |  
|Operating Income (Loss): |  |                                 |       |   |      |   |        |  
|North America            |  | $                               | (225  | ) |      | $ | (1,358 | )
|Europe                   |  |                                 | 432   |   |      |   | 50     |  
|Asia Pacific             |  |                                 | (45   | ) |      |   | (70    | )
|India                    |  |                                 | (458  | ) |      |   | (535   | )
|                         |  |                                 |       |   |      |   |        |  
|                         |  | $                               | (296  | ) |      | $ | (1,913 | )
|                         |  |                                 |       |   |      |   |        |  



In addition,
identifiable tangible assets corresponding to our geographic areas are as follows (in thousands):



|              |  |               |        |               |   |      
|------------- |  | ------------- | ------ | ------------- | - | -----
|              |  | September 30, |        | September 30,
|              |  | 2004          |        | 2003         
|North America |  | $             | 5,646  |               | $ | 5,394
|Europe        |  |               | 3,835  |               |   | 3,591
|Asia Pacific  |  |               | 220    |               |   | 296  
|India         |  |               | 634    |               |   | 620  
|              |  |               |        |               |   |      
|              |  | $             | 10,335 |               | $ | 9,901
|              |  |               |        |               |   |      



During the quarter
ended September 30, 2004, one customer accounted for more than 10% of total revenue. No single customer accounted for more than 10% of total revenue in any other period presented above.



Note 8. Related Party Notes Payable



On December 24, 2002, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, pursuant to which Mr. Roy will
make loans to us evidenced by one or more subordinated secured promissory notes and will receive warrants to purchase shares of our common stock in connection with each of such loans. The five year subordinated secured promissory note bears interest
at an effective annual rate of 12% due and payable upon the term of such note. We have the option to prepay each note at any time subject to the prepayment penalties set forth in such note. On December 31, 2002, Mr. Roy loaned to us $2.0 million
under the agreement and received warrants that allow him to purchase up to 236,742 shares at an exercise price equal to $2.11 per share. In connection with this loan, we recorded $1.83 million in related party notes payable and $173,000 of discount
on the note related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the note. The fair value of these warrants was determined using the Black-Scholes valuation
method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 2%, and a dividend yield of 0%. On October, 31, 2003, we entered into an amendment to the 2002 note and
warrant purchase agreement with Mr. Roy, pursuant to which he loaned to us an additional $2.0 million and received additional warrants to purchase up to 128,766 shares at $3.88 per share. In connection with this additional loan we recorded $1.8
million in related party notes payable and $195,000 of discount on the notes related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the note. The fair value of
these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 2.25%, and a dividend yield of 0%.



On March 31, 2004, we entered into a note and warrant purchase
agreement with Ashutosh Roy, our Chief Executive Officer, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors



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L.P. (the lenders) pursuant to which the lenders loaned to us $2.5 million evidenced by secured promissory
notes and received warrants to purchase shares of our common stock in connection with such loan. The secured promissory notes have a term of five years and bear interest at an effective annual rate of 12% due and payable upon the maturity of such
notes. We have the option to prepay the notes at any time subject to the prepayment penalties set forth in such notes. The warrants allow the lenders to purchase up to 312,500 shares at an exercise price of $2.00. The warrants become exercisable as
to fifty percent (50%) of the warrant shares nine months after issuance of the warrants and as to one hundred percent (100%) of the remaining warrant shares on the first anniversary of the issuance of the warrants. We recorded $2.28 million in
related party notes payable and $223,000 of discount on the notes related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the notes. The fair value of these
warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 1.93%, and a dividend yield of 0%. The principal
and interest due on the loan as of September 30, 2004 was $2.4 million. As of September 30, 2004, warrants to purchase 312,501 shares of common stock were outstanding but not yet vested.



Note 9. Bank Borrowings



On September 20, 2002, we entered into a new accounts receivable purchase agreement (the AR Facility) with Silicon Valley Bank
(SVB) (see Note 6 to Consolidated Financial Statements), which replaced the existing revolving line of credit. The AR Facility provides for the sale of up to $5.0 million in certain qualified receivables, bears interest at a rate of
prime plus 5.0% per annum and carries a 0.5% monthly administrative fee. In addition, when entering into the AR Facility, we also combined the existing term loan and equipment loan with SVB into one term loan facility in the amount of $2.6 million.
This new term loan was secured by establishing a restricted certificate of deposit and was reduced by scheduled amortization payments until the term loan was paid in full on February 27, 2004. There are no financial or operational covenant
requirements under this agreement. On March 25, 2003, we entered into a modification agreement with SVB which extended the term of the AR Facility through June 30, 2003 and revised the sale amount of qualified receivables from $5.0 million to $1.9
million. On June 25, 2003, we entered into a modification agreement for the AR Facility with SVB that extended the term of the AR Facility through September 30, 2003. On September 25, 2003, we entered into a modification agreement with SVB that
extended the term of the AR Facility through December 31, 2003 and revised the interest to a rate of 7% per annum or prime plus 3% or, whichever is greater. On December 19, 2003 we entered into a modification agreement with SVB that extended the
term of the AR Facility through June 30, 2004. On June 25, 2004, we entered into a modification agreement that extended the term of the agreement through September 30, 2004. In September 2004 we entered into a modification agreement with SVB
that extended the term of the AR Facility through October 30, 2004. As of September 30, 2004, the outstanding balance under the AR Facility was $615,000, collateralized by $770,000 of receivables. See also Note 15 to Consolidated Financial
Statements.



Note 10. Restructuring



Background



Beginning in fiscal 2001 and continuing through the first quarter of fiscal 2004, economic conditions in North America and
many of the other countries in which we operate either deteriorated or stabilized at depressed levels. This continuing weak economic environment, and in particular spending in technology, has had an adverse impact on sales of enterprise software. As
a result, we have seen a decline in our revenues over the last three fiscal years. In response to this decline, we initiated a series of steps to streamline operations and better align operating costs and expenses with revenue trends. Specifically,
we took the following actions:



| | We reduced the discretionary portion of our operating costs through various cost control initiatives, including: (i) reducing marketing expenditures; (ii) movement of certain key
business functions from North America to India; (iii) temporary reduction in salaries (fiscal 2002) in North America and Europe; (iv) eliminating the majority of bonuses or realigning bonuses more closely with achievement of financial objectives;
(v) reducing depreciation, primarily through reduced capital expenditures; and (vi) reducing other discretionary expenditures, such as costs related to outside consultants, travel and recruiting.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | In order to further align our operating structure with anticipated revenue levels, we restructured our operations towards the end of fiscal 2001 (the Fiscal 2001 Plan).
The Fiscal 2001 Plan consisted primarily of reductions in our workforce and office closures in North America. The plan was completed and paid in full in fiscal year 2004.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Based on our continued evaluation of economic conditions and a continued decline in our revenues we initiated a further restructuring of our operations in fiscal 2002 (the
Fiscal 2002 Plan). The Fiscal 2002 Plan consisted primarily of the consolidation of excess facilities, the abandonment of certain assets in connection with the consolidation of excess facilities and further reductions in our workforce.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Based on our continued evaluation of economic conditions and a continued decline in our revenues we initiated a further restructuring of our operations in fiscal 2003 (the
Fiscal 2003 Plan). The Fiscal 2003 Plan consisted primarily of the further reductions in our workforce, the consolidation of excess facilities in North America and the closure of several local offices throughout the world. The plan was
completed and paid in full as of September 30, 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Based on our continued evaluation of economic conditions and a continued decline in our revenues we initiated a further restructuring of our operations in the first fiscal quarter
of 2004 (the Fiscal 2004 Plan). The Fiscal 2004 Plan consisted of further reductions in our workforce in Europe. The employee severance payments relating to the Fiscal 2004 Plan have been paid in full in fiscal year 2004.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the quarter ended
September 30, 2004, we did not record any additional restructuring charges. The total payment made in the quarter was $27,000 and applied to both the Fiscal 2003 plan and the Fiscal 2002 plan.



Fiscal 2003 Plan



In fiscal year 2003, the total restructuring charge relating to the Fiscal 2003 Plan was $2.3 million. The $2.3 million
expense included $772,000 related to the closure of local offices in Holland, France, Germany, Australia and Singapore, $225,000 for additional consolidation of excess facilities in North America, $1.2 million in employee severance payments and
$61,000 in professional services and miscellaneous charges related to the restructuring. The plan was completed and paid in full as of September 30, 2004.



In addition, during fiscal 2003 we made a provisional adjustment to the Fiscal 2002 Plan by reversing $1.7 million, previously recorded as a restructuring
expense in fiscal 2002. The reversal related to the early termination of a facility lease agreement in Sunnyvale, California.



The total payments of $3.3 million in fiscal year 2003 consisted of $1.9 million, $1.4 million and $40,000 of expenses accrued in fiscal year 2003, 2002
and 2001, respectively. The $1.9 million included $1.3 million for employee severance payments, professional services and miscellaneous charges related to the restructuring and $613,000 for excess worldwide facilities recorded in fiscal year 2003.



Fiscal 2002 Plan



In fiscal year 2002, the total restructuring charge relating to the Fiscal
2002 Plan was $9.0 million. These charges included $6.4 million for the consolidation of our facilities in North America, $1.3 million in write-offs of leasehold improvement and $15,000 in professional services and miscellaneous charges associated
with the exited facilities. In addition, we recorded a total severance charge of $1.2 million that was primarily due to the reduction in worldwide workforce of 190 employees across all departments. Both of the employee severance and professional
charges have been paid in full in fiscal year 2002.



Total
payments of $4.0 million in fiscal year 2002 consisted of $1.5 million for excess facilities in North America, $1.3 million in write-offs of leasehold improvement and $1.2 million in employee severance, professional services and miscellaneous
charges accrued in the same fiscal year. Of the total payments, $88,000 was applied to the excess facilities accrued in the Fiscal 2001 Plan.



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As of September 30, 2004, the remaining accrual for the Fiscal 2002 Plan includes estimated contingent
payments related to two lease settlements for excess facilities that were originally included in the Fiscal 2002 Plan. As part of separate settlement agreements with the two landlords, in the event we make a distribution of cash, stock or other
consideration to holders of our Series A Preferred with respect to the shares of Series A Preferred held by such Series A Preferred holders, each of the two landlords would receive a payment equal to the lesser of (i) $1.0 million or (ii) the amount
payable to a holder of shares of Series A Preferred with an aggregate stated value of $1.0 million. As of September 30, 2004, we estimated the combined value of these two contingent payments to be $1.2 million.



The following table sets forth an analysis of the restructuring accrual
activity for the three months ended September 30, 2004 (in thousands):



|                                       |  |                    |     |                  |           |   |       |  |                    |   |  |           |       |       |  |       |   |  |   |   |  |   |       |  
|-------------------------------------- |  | ------------------ | --- | ---------------- | --------- | - | ----- |  | ------------------ | - |  | --------- | ----- | ----- |  | ----- | - |  | - | - |  | - | ----- | -
|                                       |  | Fiscal 2003 plan   |     | Fiscal 2002 plan |           |   |      
|                                       |  | Facilities related |     |                  | Severance |   | Other |  | Facilities related |   |  | Severance |       | Other |  | Total |  
|Balance as of June 30, 2004            |  | $                  | 15  |                  |           | $ |      |  | $                  |  |  | $         | 1,335 |       |  | $     |  |  | $ |  |  | $ | 1,350 |  
|                                       |  |                    |     |                  |           |   |      
|Excess facilities                      |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|Employee severance                     |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|Professional and miscellaneous charges |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|Provision adjustment                   |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|                                       |  |                    |     |                  |           |   |       |  |                    |   |  |           |       |       |  |       |   |  |   |   |  |   |       |  
|Total charges                          |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|Cash paid                              |  |                    | (15 | )                |           |   |      |  |                    |  |  |           | (12   | )     |  |       |  |  |   |  |  |   | (27   | )
|Non-cash paid                          |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|                                       |  |                    |     |                  |           |   |       |  |                    |   |  |           |       |       |  |       |   |  |   |   |  |   |       |  
|Balance as of September 30, 2004       |  | $                  |    |                  |           | $ |      |  | $                  |  |  | $         | 1,323 |       |  | $     |  |  | $ |  |  | $ | 1,323 |  



Note 11. Other income and expense



During the quarter ended September 30, 2004, we recorded
other expense of $276,000 compared to $153,000 in the comparable year-ago quarter. The non-operating expense for the quarter ended September 30, 2004 primarily consisted of interest expense of $230,000, tax expense of $88,000 and partially offset by
$42,000 gain on foreign exchange.



Note 12. Warranties



We generally warrant that the program portion of our software will perform
substantially in accordance with certain specifications for a period of 90 days. Our liability for a breach of this warranty is either a return of the license fee or providing a fix, patch, work-around or replacement of the software.



We also provide standard warranties against and indemnification for the
potential infringement of third party intellectual property rights to our customers relating to the use of our products, as well as indemnification agreements with certain officers and employees under which we may be required to indemnify such
persons for liabilities arising out of their duties to us. The terms of such obligations vary. Generally, the maximum obligation is the amount permitted by law.



Historically, costs related to these guarantees have not been significant, however we cannot guarantee that a warranty reserve will not become
necessary in the future.



Note 13. New Accounting Pronouncements



In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.
SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted this statement on July 1, 2003 and the
adoption did not have a material impact on our financial position or results of operations.



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Note 14. Litigation



Beginning on October 25, 2001, a number of securities class action complaints were filed against us, and certain of our then officers and directors and
underwriters connected with our initial public offering of common stock in the U.S. District Court for the Southern District of New York (consolidated into In re Initial Public Offering Sec. Litig.). The complaints alleged generally that the
prospectus under which such securities were sold contained false and misleading statements with respect to discounts and excess commissions received by the underwriters as well as allegations of laddering whereby underwriters required
their customers to purchase additional shares in the aftermarket in exchange for an allocation of IPO shares. The complaints sought an unspecified amount in damages on behalf of persons who purchased the common stock between September 23, 1999 and
December 6, 2000. Similar complaints were filed against 55 underwriters and more than 300 other companies and other individuals. The over 1,000 complaints were consolidated into a single action. We reached an agreement with the plaintiffs to resolve
the cases as to our liability and that of our officers and directors. The settlement involved no monetary payment or other consideration by us or our officers and directors and no admission of liability. The Court has not yet approved the
settlement.



On February 12, 2004, we filed suit against
Insight Enterprises, Inc., the acquirer of Comark, Inc., a value-added reseller of our software, claiming inter alia breach of contract and failure to pay in connection with a sale of our software to one customer. The lawsuit seeks in excess
of $600,000 in damages.



With the exception of these matters,
we are not a party to any other material pending legal proceedings, nor is our property the subject of any material pending legal proceeding, except routine legal proceedings arising in the ordinary course of our business and incidental to our
business, none of which are expected to have a material adverse impact, as taken individually or in the aggregate, upon our business, financial position or results of operations. However, even if these claims are not meritorious, the ultimate
outcome of any litigation is uncertain, and it could divert managements attention and impact other resources.



Note 15. Subsequent Event



On October 29, 2004, we entered into a new loan and security agreement (the Credit Facility) with Silicon Valley Bank (SVB) which
replaced the existing accounts receivable purchase agreement. The Credit Facility provides for the advance of up to the lesser of $1.5 million or 80% of certain qualified receivables. The Credit Facility bears interest at a rate of prime plus 2.5%
per annum, provided that if we maintain an adjusted quick ratio of greater than 2.00 to 1.00, then the rate shall be reduced to a rate of prime plus 1.75%. In addition, the Credit Facility carries a $750 per month collateral monitoring fee. There
are financial covenants under this agreement that require us to meet certain minimum rolling three-month operating losses during the term of the Credit Facility.



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



This report on Form 1O-Q and the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties.
These statements may be identified by the use of the words such as anticipates, believes, continue, could, would, estimates, forecasts, expects,
intends, may, might, plans, potential, predicts, should, or will and similar expressions or the negative of those terms. The forward-looking statements
include, but are not limited to, risks stemming from strategic and operational choices in recent quarters, failure to improve our sales results and grow revenue, failure to compete successfully in the markets in which we do business, our continued
net losses since inception, our limited operating history, our equity structure and the significant risk of dilution, the adequacy of our capital resources and need for additional financing, liquidation preferences related to our preferred stock,
continued lengthy and delayed sales cycles, the development of our strategic relationships and third party distribution channels, broad economic and political instability around the world affecting the market for our goods and services, the
continued need for customer service and contact center software solutions and the continued acceptance of our Web-native architecture, our ability to respond to rapid technological change and competitive challenges, the effects of cost reductions on
our workforce and ability to service customers, risks from our substantial international operations, adverse results in pending litigation, legal and regulatory uncertainties and other risks related to protection of our intellectual



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property assets and the operational integrity and maintenance of our systems. Our actual results could differ
materially from those discussed in statements relating to our future plans, product releases, objectives, expectations and intentions, and other assumptions underlying or relating to any of these statements. Factors that could contribute to such
differences include those discussed in Factors That May Affect Future Results and elsewhere in this document. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or understanding to
release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.



Overview



We are a leading provider of customer service and contact center software,
used by global enterprises for over a decade. eGain Service 6, our software suite, available through licensed or hosted models, includes integrated, best-in-class applications for customer email management, live web collaboration, virtual agent customer service, knowledge
management, and web self-service. These robust applications are built on the eGain Service Management Platform (eGain SMP), a scalable next-generation framework that includes end-to-end service process management, multi-channel, multi-site contact center management, a
flexible integration approach, and certified out-of-the-box integrations with leading call center and business systems.



Recent Developments



Effective September 29, 2004, eGain Communications Corporation and certain holders of its 6.75% Series A Cumulative Convertible Preferred Stock
(Series A Preferred) entered into a restructuring agreement and a voting agreement and proxy whereby such Series A Preferred holders have agreed to vote in favor of an amendment to the Companys certificate of incorporation
providing for the conversion of all outstanding shares of Series A Preferred into approximately 11.6 million shares of common stock. The holders of the converted shares would have rights to register the shares of common stock received in such
conversion for resale. The proposed conversion is subject to the approval of the holders of a majority of the outstanding common stock. We are submitting the proposal to approve the conversion at our 2004 Annual Meeting of Stockholders to be held in
December 2004. If approved, the conversion would be effected promptly following common stockholder approval.



Absent an agreement to the contrary, the Series A Preferred is scheduled to be redeemed in August 2005 for approximately $123.3 million (the amount of
$88.5 million plus accretion from August 2000), payable at the companys option in (1) cash or (2) common stock based on a price equal to 95% of the then-current trading value of the common stock.



Critical Accounting Policies and Estimates



Managements Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements 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. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, valuation allowances and accrued liabilities, long-lived assets and restructuring. Management bases its
estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



Revenue Recognition



We derive revenues from two sources: license fees, and support and services. Support and services includes hosting, software maintenance and support,
training, and system implementation consulting. Maintenance and support consists of technical support and software upgrades and enhancements. Significant management judgments and estimates are made and used to determine the revenue recognized in any
accounting period. Material differences may result in the amount and timing of our revenue for any period if different conditions were to prevail.



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We apply the provisions of Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions to all transactions involving the sale of software products.



We recognize license revenue when persuasive evidence of an arrangement
exists, the product has been delivered, no significant obligations remain, the fee is fixed or determinable, and collection of the resulting receivable is probable. In software arrangements that include rights to multiple software products and/or
services, we use the residual method under which revenue is allocated to the undelivered elements based on vendor specific objective evidence of the fair value of such undelivered elements. The residual amount of revenue is allocated to the
delivered elements and recognized as revenue. Such undelivered elements in these arrangements typically consist of services.



We recognize hosting services revenue ratably over the period of the applicable agreement as services are provided. Hosting agreements are typically for a
period of one year and automatically renew unless either party cancels the agreement.



We use signed software license and services agreements and order forms as evidence of an arrangement for sales of software, hosting, maintenance and support. We use signed engagement letters to evidence an arrangement
for system implementation consulting and training.



Software is
delivered to customers electronically or on a CD-ROM. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. Our standard payment terms are generally less than 90 days. In instances where
payments are subject to extended payment terms, revenue is deferred until payments become due. We assess collectability based on a number of factors, including the customers past payment history and its current creditworthiness. If we
determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is
recognized upon the earlier of customer acceptance or the expiration of the acceptance period.



When licenses are sold together with consulting and implementation services, license fees are recognized upon shipment, provided that (1) the above criteria have been met, (2) payment of the license fees is not
dependent upon the performance of the consulting and implementation services, and (3) the services are not essential to the functionality of the software. For arrangements that do not meet the above criteria, both the product license revenues and
services revenues are recognized in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction Type and Certain Production Type Contracts. When reliable estimates are available for the costs and efforts
necessary to complete the implementation services, we account for the arrangements under the percentage of completion method pursuant to SOP 81-1. When such estimates are not available, the completed contract method is utilized.



The majority of our consulting and implementation services and accompanying
agreements qualify for separate accounting. We use vendor specific objective evidence of fair value for the services and maintenance to account for the arrangement using the residual method, regardless of any separate prices stated within the
contract for each element. Our consulting and implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. For a fixed-fee contract, we recognize revenue upon completion of specific contractual milestones or
by using the percentage of completion method. For time-and-materials contracts, we recognize revenue as services are performed.



Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. Training revenue is
recognized when training is provided.



Revenue from sales to
resellers is recognized either upon delivery to the reseller or on a sell-through basis depending on the facts and circumstances of the transaction, such as our understanding of the resellers use of our software, the resellers financial
status and our past experience with the particular reseller. Accordingly, the decision of whether to recognize revenue to resellers upon delivery or on a sell-through basis requires significant management judgment. This judgment can materially
impact the timing of revenue recognition.



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Valuation of Long-Lived Assets



Effective July 1, 2002, we adopted SFAS No. 142 and ceased amortization of goodwill and began reviewing it annually (or more
frequently if impairment indicators arise) for impairment. In addition, we evaluated our remaining purchased intangible assets to determine that all such assets have determinable lives. We operate under a single reporting unit and accordingly, all
of our goodwill is associated with the entire company. Prior to the adoption of SFAS No. 142, we amortized goodwill on a straight-line basis over its estimated useful life of three years.



We performed our annual goodwill impairment review as of April 1, 2004 and found no impairment. We did not perform a
goodwill impairment review in the first fiscal quarter of 2005 as we did not identify any unfavorable indicators during the quarter.



In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144), we review long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully
recoverable. Under SFAS 144, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is
assessed using discounted cash flows. Significant management judgment is required in the forecasting of future operating results which are used in the preparation of projected discounted cash flows and, should different conditions prevail or
judgments be made, material write-downs of net intangible assets and/or goodwill could occur. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.



Restructuring



We have taken restructuring charges related to excess facilities and have established reserves at the low end of the range
of estimable cost (as required by accounting standards) against outstanding commitments for leased properties that we have abandoned. These reserves are based upon our estimate of triggering events, such as the time required to sublease the property
and the amount of sublease income that might be generated from the date of abandonment and the expiration of the lease. These estimates are reviewed based on changes in these triggering events. Adjustments to the restructuring charge will be made in
future periods, if necessary, should different conditions prevail from those anticipated in our original estimate.



Allowance for Doubtful Accounts



We maintain an allowance for doubtful accounts to reserve for potential uncollectable trade receivables. We review our trade receivables by aging category
to identify specific customers with known disputes or collectability issues. We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general economic conditions in the U.S. and internationally,
and changes in customer financial conditions. If we made different judgments or utilized different estimates, material differences may result in additional reserves for trade receivables, which would be reflected by charges in general and
administrative expenses for any period presented.



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Results of Operations



The following table sets forth the results of operations for the periods presented expressed as a percentage of total revenue:



|                                        |  |                            |    |  |      |   
|--------------------------------------- |  | -------------------------- | -- |  | ---- | --
|                                        |  | Three Months September 30, |   
|                                        |  | 2004                       |    |  | 2003 |   
|Revenue:                                |  |                            |    |  |      |   
|License                                 |  | 27                         | %  |  | 17   | % 
|Support and Services                    |  | 73                         | %  |  | 83   | % 
|                                        |  |                            |    |  |      |   
|Total revenue                           |  | 100                        | %  |  | 100  | % 
|Cost of license                         |  | 4                          | %  |  | 10   | % 
|Cost of support and services            |  | 31                         | %  |  | 33   | % 
|                                        |  |                            |    |  |      |   
|Gross profit                            |  | 65                         | %  |  | 57   | % 
|                                        |  |                           
|Operating costs and expenses:           |  |                            |    |  |      |   
|Research and development                |  | 11                         | %  |  | 23   | % 
|Sales and marketing                     |  | 44                         | %  |  | 46   | % 
|General and administrative              |  | 16                         | %  |  | 20   | % 
|Amortization of other intangible assets |  |                           | %  |  | 7    | % 
|Amortization of deferred compensation   |  |                           | %  |  | 0    | % 
|Restructuring and other                 |  |                           | %  |  | 3    | % 
|                                        |  |                            |    |  |      |   
|Total operating costs and expenses      |  | 71                         | %  |  | 99   | % 
|                                        |  |                            |    |  |      |   
|Loss from operations                    |  | (6                         | )% |  | (42  | )%
|                                        |  |                            |    |  |      |   



Revenues



Total revenue increased 3% to $4.7 million in the quarter ended September
30, 2004 from $4.6 million in the quarter ended September 30, 2003. During the quarter ended September 30, 2004, one customer accounted for more than 10% of total revenue. No single customer accounted for more than 10% of total revenue for the
quarter ended September 30, 2003. Based upon current sales activities we anticipate total revenue to increase slightly in future quarters.



License



License revenue increased 61% to $1.3 million in the quarter ended September 30, 2004 from $790,000 in the quarter ended September 30, 2003. The increase
was primarily due to the purchase by existing customers of additional licenses for previously purchased products, as well as licenses for new products purchased in the current quarter. License revenue represented 27% and 17% of total revenue for the
quarters ended September 30, 2004 and 2003, respectively. Given the general unpredictability of the length of current sales cycles, license revenue may increase or decrease in future periods as a result of the timing of license transactions being
completed.



Support and Services



Support and services revenue, that includes hosting
services, training, maintenance and support and consulting and implementation services revenue, decreased 9% to $3.4 million in the quarter ended September 30, 2004 from $3.8 million in the quarter ended September 30, 2003. Support and services
revenue represented 73% and 83% of total revenue for the quarters ended September 30, 2004 and 2003, respectively.



Hosting services revenue increased 27% to $928,000, in the quarter ended September 30, 2004 from $732,000 in the quarter ended September 30, 2003. The
increase was primarily due to the reduction in the number



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of hosted customer terminations and an increase in the number of new hosted customer contracts signed over the past year.
We expect hosting revenue to be relatively constant in future periods based upon current renewal rates for existing hosted customers and the rate that we are signing up new hosted customers.



Maintenance and support revenue decreased 5% to $1.9 million in the quarter
ended September 30, 2004 from $2.0 million in the quarter ended September 30, 2003. We expect maintenance and support revenue to be relatively constant in future periods based upon current renewal rates for existing maintenance and support customers
and the current levels of new license sales.



Consulting and
implementation services and training revenue decreased 37% to $677,000 in the quarter ended September 30, 2004 from $1.1 million in the quarter ended September 30, 2003. The decrease was due in part to increased revenue recognized in the quarter
ended September 30, 2003 associated with existing customers upgrading to our recently released eGain Service 6 product. In addition, certain consulting and implementation service engagements were delayed in the quarter ended September 30, 2004 due
to the wave of hurricanes that impacted business operations for certain of our customers located on the east coast of North America. We expect consulting and implementation services revenue to increase slightly in subsequent quarters as we complete
certain contracts that were delayed in the quarter ended September 30, 2004.



Cost of Revenues



Total cost of revenues
decreased 17% to $1.6 million in the quarter ended September 30, 2004, from $2.0 million in the quarter ended September 30, 2003 and decreased as a percentage of total revenues to 35% (a gross margin of 65%) in the 2004 period from 43% (a gross
margin of 57%) during the 2003 period.



Cost of License



Cost of license primarily
includes the amortization of prepaid third-party software royalties and delivery costs for shipments to customers. Cost of license decreased 62% to $173,000 in the quarter ended September 30, 2004, from $451,000 in the quarter ended September 30,
2003. The decrease was primarily due to the expiration of certain royalty agreements that resulted in a reduction in the amortization of prepaid royalties. Based upon the expiration of one royalty agreement part way through the quarter ended
September 30, 2004, we anticipate a further decrease in cost of license in future periods.



Cost of Support and Services



Cost of support and services includes personnel costs for our hosting services, consulting services and customer support. It also includes depreciation of
capital equipment used in our hosted network, cost of support for the third-party software and lease costs paid to remote co-location centers. Cost of support and services decreased 4% or $54,000 to $1.5 million in the quarter ended September 30,
2004 from the quarter ended September 30, 2003. Based upon current revenue expectations, we do not anticipate a significant increase or decrease in cost of support and services in future periods.



Research and Development



Research and development expenses primarily consist of compensation and
benefits of engineering, product management and quality assurance personnel and, to a lesser extent, occupancy costs and related overhead. Research and development expenses decreased 49% to $538,000 in the quarter ended September 30, 2004 from $1.1
million in the quarter ended September 30, 2003. The decrease was primarily due to the headcount reduction in North America and the migration of development resources to eGain India. Our occupancy costs and related overhead were also reduced due to
the consolidation of excess facilities, the asset write-offs related to the reduction of work force and the closure of offices. Based upon current revenue expectations, we do not anticipate a significant increase or decrease in research development
in future periods.



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Sales and Marketing



Sales expenses primarily consist of compensation and benefit of our sales and business development personnel expenses and, to a lesser extent, occupancy
costs and related overhead. Sales expenses decreased 10% or $182,000 to $1.7 million in the quarter ended September 30, 2004 from the quarter ended September 30, 2003. The decrease was primarily due to the reduction in commission expense.



Marketing expenses primarily consist of compensation and
benefits, advertising, trade show and other promotional costs and, to a lesser extent, occupancy costs and related overhead. Marketing expenses increased 55% or $158,000 to $444,000 in the quarter ended September 30, 2004 from the quarter ended
September 30, 2003. The increase was primarily due to the increase in marketing programs and lead generation activities. Based upon current revenue expectations, we anticipate a slight increase in sales and marketing expenses in future periods.



General and Administrative



General and administrative expenses primarily consist of compensation and
benefits for our finance, human resources, administrative and legal services personnel, fees for outside professional services, provision for doubtful accounts and, to a lesser extent, occupancy costs and related overhead. General and administrative
expenses decreased 17% to $750,000 in the quarter ended September 30, 2004 from $909,000 in the quarter ended September 30, 2003. The decrease was primarily due to the reduction in premiums for directors and officers liabilities
insurance, a reduction in executive personnel and compensation expense and a reduction in depreciation expense due to assets being fully depreciated. Based upon current revenue expectations, we do not anticipate a significant increase or decrease in
general and administrative expenses in future periods.



Amortization of
Other Intangible Assets



Amortization of other intangibles
decreased to $0 during the quarter ended September 30, 2004 from $306,000 during the quarter ended September 30, 2003. The other intangible assets were fully amortized as of June 30, 2004.



Impairment of Long Lived Assets



In connection with the transitional goodwill impairment evaluation
provisions of SFAS 142, we performed our annual goodwill impairment review as of April 1, 2004 and found no impairment. We did not perform a goodwill impairment review in the first fiscal quarter of 2005 as we did not identify any unfavorable
indicators during the quarter.



As of July 1, 2002, in
accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), we review long-lived assets, including property and equipment and
intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Under SFAS 144, an impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. During fiscal 2004, we did not have any such losses.



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Restructuring and Other Expense



Restructuring and other expenses decreased to $0 for the quarter ended September 30, 2004 from $127,000 for the quarter
ended September 30, 2003.



Beginning in fiscal 2001 and
continuing through the first quarter of fiscal 2004, economic conditions in North America and many of the other countries in which we operate either deteriorated or stabilized at depressed levels. This continuing weak economic environment, and in
particular spending in technology, has had an adverse impact on sales of enterprise software. As a result, we have seen a decline in our revenues over the last three fiscal years. In response to this decline, we initiated a series of steps to
streamline operations and better align operating costs and expenses with revenue trends. Specifically, we took the following actions:



| | We reduced the discretionary portion of our operating costs through various cost control initiatives, including: (i) reducing marketing expenditures; (ii) movement of certain key
business functions from North America to India; (iii) temporary reduction in salaries (fiscal 2002) in North America and Europe; (iv) eliminating the majority of bonuses or realigning bonuses more closely with achievement of financial objectives;
(v) reducing depreciation, primarily through reduced capital expenditures; and (vi) reducing other discretionary expenditures, such as costs related to outside consultants, travel and recruiting.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | In order to further align our operating structure with anticipated revenue levels, we restructured our operations towards the end of fiscal 2001 (the Fiscal 2001 Plan).
The Fiscal 2001 Plan consisted primarily of reductions in our workforce and office closures in North America. The plan was completed and paid in full in fiscal year 2004.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Based on our continued evaluation of economic conditions and a continued decline in our revenues we initiated a further restructuring of our operations in fiscal 2002 (the
Fiscal 2002 Plan). The Fiscal 2002 Plan consisted primarily of the consolidation of excess facilities, the abandonment of certain assets in connection with the consolidation of excess facilities and further reductions in our workforce.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Based on our continued evaluation of economic conditions and a continued decline in our revenues we initiated a further restructuring of our operations in fiscal 2003 (the
Fiscal 2003 Plan). The Fiscal 2003 Plan consisted primarily of the further reductions in our workforce, the consolidation of excess facilities in North America and the closure of several local offices throughout the world. The plan was
completed and paid in full as of September 30, 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Based on our continued evaluation of economic conditions and a continued decline in our revenues we initiated a further restructuring of our operations in the first fiscal quarter
of 2004 (the Fiscal 2004 Plan). The Fiscal 2004 Plan consisted of further reductions in our workforce in Europe. The employee severance payments relating to the Fiscal 2004 Plan have been paid in full in fiscal year 2004.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the quarter ended
September 30, 2004, we did not record any additional restructuring charges. The total payment made in the quarter was $27,000 and applied to both the Fiscal 2003 plan and the Fiscal 2002 plan.



Fiscal 2003 Plan



In fiscal year 2003, the total restructuring charge relating to the Fiscal 2003 Plan was $2.3 million. The $2.3 million
expense included $772,000 related to the closure of local offices in Holland, France, Germany, Australia and Singapore, $225,000 for additional consolidation of excess facilities in North America, $1.2 million in employee severance payments and
$61,000 in professional services and miscellaneous charges related to the restructuring. The plan was completed and paid in full as of September 30, 2004.



In addition, during fiscal 2003 we made a provisional adjustment to the Fiscal 2002 Plan by reversing $1.7 million, previously recorded as a restructuring
expense in fiscal 2002. The reversal related to the early termination of a facility lease agreement in Sunnyvale, California.



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The total payments of $3.3 million in fiscal year 2003 consisted of $1.9 million, $1.4 million and
$40,000 of expenses accrued in fiscal year 2003, 2002 and 2001, respectively. The $1.9 million included $1.3 million for employee severance payments, professional services and miscellaneous charges related to the restructuring and $613,000 for
excess worldwide facilities recorded in fiscal year 2003.



Fiscal 2002
Plan



In fiscal year 2002, the total restructuring charge
relating to the Fiscal 2002 Plan was $9.0 million. These charges included $6.4 million for the consolidation of our facilities in North America, $1.3 million in write-offs of leasehold improvement and $15,000 in professional services and
miscellaneous charges associated with the exited facilities. In addition, we recorded a total severance charge of $1.2 million that was primarily due to the reduction in worldwide workforce of 190 employees across all departments. Both of the
employee severance and professional charges have been paid in full in fiscal year 2002.



Total payments of $4.0 million in fiscal year 2002 consisted of $1.5 million for excess facilities in North America, $1.3 million in write-offs of leasehold improvement and $1.2 million in employee severance,
professional services and miscellaneous charges accrued in the same fiscal year. Of the total payments, $88,000 was applied to the excess facilities accrued in the Fiscal 2001 Plan.



As of September 30, 2004, the remaining accrual for the Fiscal 2002 Plan includes estimated contingent payments related to
two lease settlements for excess facilities that were originally included in the Fiscal 2002 Plan. As part of separate settlement agreements with the two landlords, in the event we make a distribution of cash, stock or other consideration to holders
of our Series A Preferred with respect to the shares of Series A Preferred held by such Series A Preferred holders, each of the two landlords would receive a payment equal to the lesser of (i) $1.0 million or (ii) the amount payable to a holder of
shares of Series A Preferred with an aggregate stated value of $1.0 million. As of September 30, 2004, we estimated the combined value of these two contingent payments to be $1.2 million.



The following table sets forth an analysis of the restructuring accrual activity for the three months ended September 30,
2004 (in thousands):



|                                       |  |                    |     |                  |           |   |       |  |                    |   |  |           |       |       |  |       |   |  |   |   |  |   |       |  
|-------------------------------------- |  | ------------------ | --- | ---------------- | --------- | - | ----- |  | ------------------ | - |  | --------- | ----- | ----- |  | ----- | - |  | - | - |  | - | ----- | -
|                                       |  | Fiscal 2003 plan   |     | Fiscal 2002 plan |           |   |      
|                                       |  | Facilities related |     |                  | Severance |   | Other |  | Facilities related |   |  | Severance |       | Other |  | Total |  
|Balance as of June 30, 2004            |  | $                  | 15  |                  |           | $ |      |  | $                  |  |  | $         | 1,335 |       |  | $     |  |  | $ |  |  | $ | 1,350 |  
|                                       |  |                    |     |                  |           |   |      
|Excess facilities                      |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|Employee severance                     |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|Professional and miscellaneous charges |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|Provision adjustment                   |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|                                       |  |                    |     |                  |           |   |       |  |                    |   |  |           |       |       |  |       |   |  |   |   |  |   |       |  
|Total charges                          |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|Cash paid                              |  |                    | (15 | )                |           |   |      |  |                    |  |  |           | (12   | )     |  |       |  |  |   |  |  |   | (27   | )
|Non-cash paid                          |  |                    |    |                  |           |   |      |  |                    |  |  |           |      |       |  |       |  |  |   |  |  |   |      |  
|                                       |  |                    |     |                  |           |   |       |  |                    |   |  |           |       |       |  |       |   |  |   |   |  |   |       |  
|Balance as of September 30, 2004       |  | $                  |    |                  |           | $ |      |  | $                  |  |  | $         | 1,323 |       |  | $     |  |  | $ |  |  | $ | 1,323 |  



Non-operating Income (expense)



Non-operating expense increased 80% to $276,000 during
the quarter ended September 30, 2004 from $153,000 during the quarter ended September 30, 2003. This increase was primarily due to the increase in the interest expense accrued on related party notes. The non-operating expense for the quarter ended
September 31, 2004 primarily consisted of interest expense of $230,000, tax expense of $88,000 and partially offset by $42,000 gain on foreign exchange.



Liquidity and Capital Resources



As of September 30, 2004, we had working capital of $1.6 million, compared to a working capital deficit of $1.4 million at September 30, 2003. We believe
that existing capital resources will enable us to maintain current and planned operations for the next 12 months.



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On March 31, 2004, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief
Executive Officer, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P. (the lenders) pursuant to which the lenders loaned to us $2.5 million evidenced by secured promissory notes and received
warrants to purchase shares of our common stock in connection with such loan. The secured promissory notes have a term of five years and bear interest at an effective annual rate of 12% due and payable upon the maturity of such notes. We have the
option to prepay the notes at any time subject to the prepayment penalties set forth in such notes. The warrants allow the lenders to purchase up to 312,500 shares at an exercise price of $2.00 per share. The warrants become exercisable as to fifty
percent (50%) of the warrant shares nine months after issuance of the warrants and as to one hundred percent (100%) of the warrant shares on the first anniversary of the issuance of the warrants. We recorded $2.28 million in related party notes
payable and $223,000 of discount on the notes related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the notes. The fair value of these warrants was determined
using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 1.93%, and a dividend yield of 0%.



On December 24, 2002, we entered into a note and warrant purchase agreement
with Ashutosh Roy, our Chief Executive Officer, pursuant to which Mr. Roy will make loans to us evidenced by one or more subordinated secured promissory notes and will receive warrants to purchase shares of our common stock in connection with each
of such loans. The five year subordinated secured promissory note bears interest at an effective annual rate of 12% due and payable upon the term of such note. We have the option to prepay each note at any time subject to the prepayment penalties
set forth in such note. On December 31, 2002, Mr. Roy loaned to us $2.0 million under the agreement and received warrants that allow him to purchase up to 236,742 shares at an exercise price equal to $2.11 per share. In connection with this loan, we
recorded $1.83 million in related party notes payable and $173,000 of discount on the note related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the note. The
fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 2%, and a dividend yield of 0%.
On October, 31, 2003, we entered into an amendment to the 2002 note and warrant purchase agreement with Mr. Roy, pursuant to which he loaned to us an additional $2.0 million and received additional warrants to purchase up to 128,766 shares at $3.88
per share. In connection with this additional loan we recorded $1.8 million in related party notes payable and $195,000 of discount on the notes related to the relative value of the warrants issued in the transaction that will be amortized to
interest expense over the five year life of the note. The fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a
risk free interest rate of 2.25%, and a dividend yield of 0%.



On August 8, 2000, we raised and received net proceeds of $82.6 million through the issuance of shares of convertible preferred stock and warrants to purchase approximately 383,000 shares of common stock in a private placement. The
convertible preferred stock liquidation value accretes at a rate of 6.75% per annum. During the quarter ended September 30, 2004, the accretion of the convertible preferred shares totaled $1.9 million. The cumulative accretion through September 30,
2004 totals $28.1 million.



On September 20, 2002, we entered
into a new accounts receivable purchase agreement (the AR Facility) with Silicon Valley Bank (SVB) (see Note 6 to Consolidated Financial Statements), which replaced the existing revolving line of credit. The AR Facility
provides for the sale of up to $5.0 million in certain qualified receivables, bears interest at a rate of prime plus 5.0% per annum and carries a 0.5% monthly administrative fee. In addition, when entering into the AR Facility, we also combined the
existing term loan and equipment loan with SVB into one term loan facility in the amount of $2.6 million. This new term loan was secured by establishing a restricted certificate of deposit and was reduced by scheduled amortization payments until the
term loan was paid in full on February 27, 2004. There are no financial or operational covenant requirements under this agreement. On March 25, 2003, we entered into a modification agreement with SVB which extended the term of the AR Facility
through



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June 30, 2003 and revised the sale amount of qualified receivables from $5.0 million to $1.9 million. On June 25, 2003,
we entered into a modification agreement for the AR Facility with SVB that extended the term of the AR Facility through September 30, 2003. On September 25, 2003, we entered into a modification agreement with SVB that extended the term of the AR
Facility through December 31, 2003 and revised the interest to a rate of 7% per annum or prime plus 3% or, whichever is greater. On December 19, 2003 we entered into a modification agreement with SVB that extended the term of the AR Facility through
June 30, 2004. On June 25, 2004, we entered into a modification agreement that extended the term of the agreement through September 30, 2004. In September 2004 we entered into a modification agreement with SVB that extended the term of the AR
Facility through October 30, 2004. As of September 30, 2004, the outstanding balance under the AR Facility was $615,000, collateralized by $770,000 of receivables. See also Note 15 to Consolidated Financial Statements.



On September 30, 2004, cash and cash equivalents were $4.4 million, a
decrease of $743,000 from $5.2 million at June 30, 2004. Working capital at September 30, 2004 was $1.6 million representing a decrease of $381,000 from June 30, 2004.



Net cash used in operating activities was $687,000 and $937,000 during the quarters ended September 30, 2004 and 2003,
respectively. Cash used in operating activities was primarily the result of the increase in accounts receivables during the period and the net loss, partially offset by non-cash charges.



Net cash used in investing was $104,000 and $64,000 during the quarters ended September 30, 2004 and 2003, respectively.
Cash used in investing activities was primarily due to equipment purchases.



Net cash provided by financing activities was $104,000 during the quarter ended September 30, 2004 compared to $499,000 of net cash used in financing activities during the quarter ended September 30, 2003. Cash
provided by financing activities in the quarter ended September 30, 2004 was primarily due to the increase in borrowing under the SVB AR Facility. Cash used in financing activities in the quarter ended September 30, 2003, was primarily due to the
payments on borrowings and capital leases, accrued interest and amortization of discount on related party notes, partially offset by proceeds from borrowings and the issuance of common stock.



The following table summarizes our contractual obligations at September 30,
2004 and the effect such obligations are expected to have on its liquidity and cash flow in future periods (in thousands):



|                           |  |                     |       |      |   |      |  |      |     |      |   |            |  |       |       |  |   |     |  |   |      
|-------------------------- |  | ------------------- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | ---------- |  | ----- | ----- |  | - | --- |  | - | -----
|                           |  | Year Ended June 30, |       |      |   |     
|                           |  | 2005                |       | 2006 |   | 2007 |  | 2008 |     | 2009 |   | Thereafter |  | Total
|Capital leases             |  | $                   | 5     |      | $ |     |  | $    |    |      | $ |           |  | $     |      |  | $ |    |  | $ | 5    
|Operating leases           |  |                     | 560   |      |   | 557  |  |      | 571 |      |   | 433        |  |       | 171   |  |   | 342 |  |   | 2,634
|Bank borrowings            |  |                     | 615   |      |   |     |  |      |    |      |   |           |  |       |      |  |   |    |  |   | 615  
|Related Party Note Payable |  |                     |      |      |   |     |  |      |    |      |   | 2,000      |  |       | 4,500 |  |   |    |  |   | 6,500
|                           |  |                     |       |      |   |      |  |      |     |      |   |            |  |       |       |  |   |     |  |   |      
|Total                      |  |                     | 1,180 |      |   | 557  |  |      | 571 |      |   | 2,433      |  |       | 4,671 |  |   | 342 |  |   | 9,754
|                           |  |                     |       |      |   |      |  |      |     |      |   |            |  |       |       |  |   |     |  |   |      



Effective September
29, 2004, eGain Communications Corporation and certain holders of its 6.75% Series A Cumulative Convertible Preferred Stock (Series A Preferred) entered into a restructuring agreement and a voting agreement and proxy whereby such Series
A Preferred holders have agreed to vote in favor of an amendment to the Companys certificate of incorporation providing for the conversion of all outstanding shares of Series A Preferred into approximately 11.6 million shares of common stock.
The holders of the converted shares would have rights to register the shares of common stock received in such conversion for resale. The proposed conversion is subject to the approval of the holders of a majority of the outstanding common stock. We
are submitting the proposal to approve the conversion at our 2004 Annual Meeting of Stockholders to be held in December 2004. If approved, the conversion would be effected promptly following common stockholder approval.



Absent an agreement to the contrary, the Series A Preferred is scheduled to
be redeemed in August 2005 for approximately $123.3 million (the amount of $88.5 million plus accretion from August 2000), payable at the companys option in (1) cash or (2) common stock based on a price equal to 95% of the then-current trading
value of the common stock.



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Additional Factors That May Affect Future Results



We have a history of losses and expect continuing losses and may never achieve
profitability



We incurred a net loss of $572,000 for the
quarter ended September 30, 2004. As of September 30, 2004, we had an accumulated deficit of approximately $316.1 million. We do not know when or if we will become profitable in the foreseeable future. However, we must continue to spend resources on
maintaining and strengthening our business, and this may, in the near term, have a continued negative effect on our operating results and our financial condition. If we continue to incur net losses in future periods, we may not be able to retain
employees, or fund investments in capital equipment, sales and marketing programs, and research and development to successfully compete against our competitors. We also expect to continue to spend financial and other resources at reduced levels on
developing and introducing product and service offerings. Accordingly, if our revenue declines despite such investments, our business and operating results could suffer. We also may never obtain sufficient revenues to exceed our cost structure and
achieve profitability. If we do not become profitable within the timeframe expected by financial analysts or investors, the market price of our common stock may further decline. Even if we achieve profitability, we may be unable to sustain or
increase profitability in the future. This may also, in turn, cause the price of our common stock to demonstrate volatility and/or continue to decline.



If we fail to expand and improve our sales and marketing activities, we may be unable to grow our business, negatively impacting our operating results and financial
condition.



Expansion and growth of our business is
dependent on our ability to develop a productive North American sales force. Moreover, many of our competitors have sizeable sales forces and greater resources to devote to sales and marketing, which results in their enhanced ability to develop and
maintain customer relationships. Thus, failure to develop our sales force and/or failure of our sales and marketing investments to translate into increased sales volume and enhanced customer relationships may hamper our efforts to achieve
profitability. This may impede our efforts to ameliorate operations in other areas of the company and may result in further decline of our common stock price.



Due to the complexity of our eService platform and related products and services, we must utilize highly trained sales personnel to educate prospective
customers regarding the use and benefits of our products and services as well as provide effective customer support. Because, in the past, we have experienced turnover in our sales force and have fewer resources than many of our competitors, our
sales and marketing organization may not be able to successfully compete with those of our competitors.



We must compete successfully in our market segment



The market for customer service and contact center software is intensely competitive. Other than product development and existing customer relationships, there are no substantial barriers to entry in this market, and
established or new entities may enter this market in the near future. While home-grown software developed by enterprises represents indirect competition, we also compete directly with packaged application software vendors in the customer service
arena, including Art Technology Group, Inc., Avaya, Inc., Epiphany, Inc., Genesys Telecommunications (a wholly-owned subsidiary of Alcatel), Kana Software, Inc., RightNow Technologies, Inc., Serviceware, and Talisma Corp. In addition, we face actual
or potential competition from larger software companies such as Siebel Systems, Inc., PeopleSoft, Inc., Oracle Corporation, SAP, Inc. and similar companies who may attempt to sell customer service software to their installed base.



We believe competition will continue to be fierce and increase as current
competitors enhance the sophistication of their offerings and as new participants enter the market. Many of our current and potential competitors have longer operating histories, larger customer bases, broader brand recognition, and significantly
greater financial, marketing and other resources. More established and better-financed, these companies may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, and make more attractive offers to
businesses to induce them to use their products or services.



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Further, any delays in the roll out or general market acceptance of our applications would likely harm
our competitive position by allowing our competitors additional time to improve their product and service offerings, and also provide time for new competitors to develop applications and solicit prospective customers within our target markets.
Increased competition could result in pricing pressures, reduced operating margins and loss of market share.



We face a variety of risks stemming from strategic and operational decisions we have made in recent quarters



In recent quarters we have made a series of key decisions relating to cost reduction, debt accrual and operational structure. Such decisions have posed
challenges to and will continue to affect the infrastructure, debt and equity structure and the operations of the company. If such decisions have unanticipated consequences, they may have a material adverse effect on our financial condition and
future results of operations. We have significantly cut the cost structure through reductions in force and the movement of certain key business functions to operations in India. We have also reduced our work force overall by 45% since fiscal year
ended 2002. In addition, in excess of 50% of all employees and the majority of all software development is now done in India with an Indian workforce. As a result, our cash position, although sustainable to fund operations in the short term, leaves
little room for error in the forecasting and achievement of revenue goals.



While we have achieved significant cost savings through such measures, we will be unable to quickly reverse the course of such actions and the initial costs associated with such restructuring may be lost if the
infrastructure changes do not enhance our results. In addition, the continued and aggressive restructuring over time has reduced our personnel and resources to minimal levels where the margin of operational error is very low. To the extent we have
made poor decisions about the cutting of certain resources, such loss of assets may contribute to an inability to effectively operate our company, properly serve customers or successfully achieve sales goals. Finally, a failure to meet our revenue
forecasts despite such cost-cutting measures, will leave us with insufficient resources to fund growth initiatives and, accordingly, our results and future financial condition will likely suffer.



Due to our limited operating history and the emerging market for our products and
services, revenue and operating expenses are unpredictable and may fluctuate, which may harm our operating results and financial condition



Due to the emerging nature of the multi-channel contact center market and other similar factors, our revenue and operating results may fluctuate from
quarter to quarter. Our revenues in certain past quarters fell and could continue to fall short of expectations if we experience delays or cancellations of even a small number of orders. It is possible that our operating results in some quarters
will be below the expectations of financial analysts or investors. In this event, the market price of our common stock is also likely to decline.



A number of factors are likely to cause fluctuations in our operating results, including, but not limited to, the following:



| |  | demand for our software and budget and spending decisions by information technology departments of our customers;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | seasonal trends in technology purchases;
| | - | ----------------------------------------



| |  | the announcement or introduction of new or enhanced products and services by us or by our competitors and other competitive pressure from new and existing market participants;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to attract and retain customers;
| | - | --------------------------------------------



| |  | litigation relating to our intellectual proprietary rights; and
| | - | ---------------------------------------------------------------



| |  | budget, purchasing and payment cycles, timing and revenue recognition of customer contracts and potential customer contracts.
| | - | -----------------------------------------------------------------------------------------------------------------------------



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In addition, we base our expense levels in part on expectations regarding future revenue levels. In the
short term, expenses, such as employee compensation and rent, are relatively fixed. If revenue for a particular quarter is below expectations, we may be unable to proportionately reduce our operating expenses for that quarter. Accordingly, such a
revenue shortfall would have a disproportionate effect on expected operating results for that quarter. Moreover, we believe that any further significant reductions in expenses would be difficult to achieve given current operating levels. For this
reason, period-to-period comparisons of our operating results may also not be a good indication of our future performance.



We may need additional capital, and raising such additional capital may be difficult or impossible and will likely significantly dilute existing stockholders



As of September 30, 2004, we have working capital of $1.6
million, compared to a working capital of $2.0 million at June 30, 2004. We believe that existing capital resources will enable us to maintain current and planned operations for the next 12 months. However, our working capital requirements in the
foreseeable future are subject to numerous risks and will depend on a variety of factors, in particular, that revenues maintain at the levels achieved in fiscal year 2004 and that customers continue to pay on a timely basis, and we may need to
secure additional financing due to unforeseen or unanticipated market conditions. Such financing may be difficult to obtain on terms acceptable to us and will almost certainly dilute existing stockholder value.



The conversion of our preferred shares and the exercise of the related warrants would
result in a very significant number of additional shares being issued, which could result in a decline in the market price of our common stock



On August 8, 2000, we issued 35.11 shares of non-voting Series A Cumulative Convertible Preferred Stock (Series A), $100,000 stated value per
share, and 849.89 shares of non-voting Series B Cumulative Convertible Preferred Stock (Series B), $100,000 stated value per share in a private placement to certain investors. The Series B shares automatically converted into Series A
shares upon stockholder approval on November 20, 2000 at the annual stockholders meeting. In addition, investors received warrants to purchase an aggregate of 383,000 shares of our common stock with a current warrant exercise price of $56.875 per
share. The Series A shares have a liquidation preference of $100,000 per share, or an aggregate liquidation preference of $88.5 million, which increases on a daily basis at an annual rate of 6.75% from August 8, 2000, compounded on a semi-annual
basis (the Liquidation Value). The Series A shares are convertible into common stock (including all amounts accreted from August 8, 2000) at a conversion price of $56.875 per share.



To the extent the preferred shares are converted into common stock (including
all amounts accreted from August 8, 2000), a very significant number of shares of common stock may be sold into the market, which could decrease the price of our common stock. If not sooner converted, on August 8, 2005 we must either, at our option,
(i) redeem each outstanding share of Series A, at a redemption price equal to the Liquidation Value plus any declared but unpaid dividends or (ii) convert the Series A shares into common stock at a price per share equal to 95% of the average closing
bid price per share of the common stock on the 20 consecutive trading days immediately prior to the redemption date.



On September 29, 2004 we and certain Series A holders entered into a restructuring agreement and a voting agreement and proxy whereby such Series A
holders have agreed to vote in favor of an amendment to our certificate of incorporation providing for the conversion of all outstanding shares of Series A into approximately 11.6 million shares of common stock. This proposed conversion, while
eliminating the Series A liquidation preference, which currently exceeds $116 million, would be highly dilutive to holders of our common stock. The holders of the converted shares would have rights to register the shares of common stock received in
such conversion for resale. The proposed conversion is subject to the approval of the holders of majority of the outstanding common stock. We are submitting the proposal to approve the conversion to the holders of common stock at our 2004 Annual
Meeting of Stockholders to be held in December 2004. If approved, the conversion would be effected promptly following common stockholder approval.



Our preferred stock carries a substantial liquidation preference



In the event of our liquidation, dissolution or winding up, the holders of Series A shares would be entitled to receive, prior to distribution of any
proceeds to holders of common stock, proceeds equal to the greater of (i) $88.5 million (plus increases in such liquidation preference at an annual rate of 6.75% from August 8, 2000) or (ii)



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the amount the holders of the Series A shares would have received had they converted their shares into common stock
immediately prior to such liquidation, dissolution or winding up. If we enter into a transaction pursuant to which we sell or transfer all or substantially all of our assets or we enter into a merger with another company, then at the option of the
holder of Series A shares, (A) each share of Series A may be converted into convertible equity securities of the entity acquiring us, or (B) each Series A share may convert into shares of common stock based on the Liquidation Value, calculated as of
the later of (x) the closing date of such transaction or (y) August 8, 2003. In the event that we entered into a merger or sale in which the total value of the transaction would be less than the Liquidation Value, a buyer would unlikely be willing
to assume the liquidation preferences and other obligations represented by the Series A shares. Consequently, based on our current capital structure, we anticipate that a transaction resulting in such a sale would result in substantially all of the
proceeds of such transaction being distributed to the holders of Series A shares with little, if any, consideration, available to our common stock holders.



Our common stock has been delisted and thus the price and liquidity of our common stock has been affected and our ability to obtain future equity financing may be
further impaired



In February 2004, we were delisted from
the Nasdaq SmallCap Market due to noncompliance with Marketplace Rule 4310(c)(2)(B), which requires companies listed to have a minimum of $2,500,000 in stockholders equity or $35,000,000 market value of listed securities or $500,000 of net
income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.



Our common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for
securities that do not meet the listing requirements of the Nasdaq National Market or the Nasdaq SmallCap Market. The OTC Bulletin Board is generally considered less efficient than the Nasdaq SmallCap Market. Consequently, selling our common stock
is likely more difficult because of diminished liquidity in smaller quantities of shares likely being bought and sold, transactions could be delayed, and securities analysts and news media coverage of us may be further reduced. These factors
could result in lower prices and larger spreads in the bid and ask prices for shares of common stock.



Our listing on the OTC Bulletin Board, or further declines in our stock price, may greatly impair our ability to raise additional necessary capital
through equity or debt financing, and significantly increase the dilution to our current stockholders caused by any issuance of equity in financing or other transactions. The price at which we would issue shares in such transactions is generally
based on the market price of our common stock and a decline in the stock price could result in our need to issue a greater number of shares to raise a given amount of funding.



In addition, as our common stock is not listed on a principal national exchange, we are subject to Rule 15g-9 under the
Securities and Exchange Act of 1934, as amended. That rule imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For
transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchasers written consent to the transaction prior to sale. Consequently, the rule may affect the ability
of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. Moreover, investors may be less interested in purchasing low-priced securities because the brokerage
commissions, as a percentage of the total transaction value, tend to be higher for such securities, and some investment funds will not invest in low-priced securities (other than those which focus on small-capitalization companies or low-priced
securities).



Our lengthy sales cycles and the difficulty in predicting
timing of sales or delays may impair our operating results



The long sales cycle for our products may cause license revenue and operating results to vary significantly from period to period. The sales cycle for our products can be six months or more and varies substantially from customer to
customer. Because we sell complex and deeply integrated solutions, it can take many months of customer education to secure sales. While our potential customers are evaluating our products before, if ever, executing definitive agreements, we may
incur substantial expenses and spend significant management effort in connection with the potential customer. Our multi-product offering and the increasingly complex needs of our customers contribute to a longer and unpredictable sales cycle.
Consequently, we often face difficulty predicting the quarter in which expected sales will actually occur. This contributes to the uncertainty and fluctuations in our future



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operating results. In particular, the economic slowdown in North America and globally has caused and may continue to
cause potential customers to delay or cancel major information technology purchasing decisions. In addition, general weakness in the global securities markets, recessionary corporate spending levels and the protracted slump in technology spending
specifically, has caused our average sales cycle to further increase and, in some cases, has prevented deals from closing that we believed were likely to close. Consequently, we may miss our revenue forecasts and may incur expenses that are not
offset by corresponding revenue.



Our failure to expand strategic and
third-party distribution channels would impede our revenue growth



To grow our revenue base, we need to increase the number of our distribution partners, including software vendors and resellers. Our existing or future distribution partners may choose to devote greater resources to marketing and supporting
the products of our competitors that could also harm our financial condition or results of operations. Our failure to expand third-party distribution channels would impede our future revenue growth. Similarly, to increase our revenue and
implementation capabilities, we must continue to develop and expand relationships with systems integrators. We sometimes rely on systems integrators to recommend our products to their customers and to install and support our products for their
customers. We likewise depend on broad market acceptance by these systems integrators of our product and service offerings. Our agreements generally do not prohibit competitive offerings and systems integrators may develop, market or recommend
software applications that compete with our products. Moreover, if these firms fail to implement our products successfully for their customers, we may not have the resources to implement our products on the schedule required by their customers. To
the extent we devote resources to these relationships and the partnerships do not proceed as anticipated or provide revenue or other results as anticipated our business may be harmed. Once partnerships are forged, there can be no guarantee that such
relationships will be renewed in the future or available on acceptable terms. If we lose strategic third party relationships, fail to renew or develop new relationships, or fail to fully exploit revenue opportunities within such relationships, our
results of operations and future growth may suffer.



We may experience a
further decrease in market demand due to the slowed economy, which has also been further stymied by the concerns of terrorism, war, and social and political instability in the regions in which we do business



Spending on technology solutions by corporations and government enterprises
has been markedly slow to rebound and the industry continues to be mired in an economic slump. In addition, the terrorist attacks in the United States and Europe and turmoil and war in the Middle East, Asia and elsewhere has increased the
uncertainty in the United States, the European Union and Asian economies and may further add to the prolonged decline in the United States business environment. The war on terrorism, along with the effects of a terrorist attack and other similar
events, the war in Iraq, military activities in Afghanistan, and hostilities between India and Pakistan, could contribute further to the slowdown of the already slumping market demand for goods and services, including digital communications software
and services. If the economy continues to decline as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States and Europe, or as a result of the war in the Middle East and Asia,
particularly India, we may experience further decreases in the demand for our products and services, which may harm our operating results.



We depend on broad market acceptance of our applications and of our business model



We depend on the widespread acceptance and use of our applications as an effective solution for businesses seeking to manage
high volumes of customer communication over the Internet while providing improved customer service. While we believe the potential to be very large, we cannot accurately estimate the size or growth rate of the potential market for such product and
service offerings generally, and we do not know whether our products and services in particular will achieve broad market acceptance. The market for eService software is relatively new and rapidly evolving, and concerns over the security and
reliability of online transactions, the privacy of users and quality of service or other issues may inhibit the growth of the Internet and commercial online services. If the market for our applications fails to grow or grows more slowly than we
currently anticipate, our business will be seriously harmed.



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Furthermore, our business model is premised on business assumptions that are still evolving.
Historically, customer service has been conducted primarily in person or over the telephone. Our business model assumes that both customers and companies will increasingly elect to communicate via the Internet (assisted and unassisted online
service), as well as demanding integration of the online channels into the traditional telephone-based call center. Our business model also assumes that many companies recognize the benefits of a hosted delivery model and will seek to have their
eService applications hosted by us. If any of these assumptions is incorrect, our business will be seriously harmed and our stock price will decline.



We may not be able to respond to the rapid technological change of the customer service and contact center industry



The eService industry is characterized by rapid technological change,
changes in customer requirements and preferences, and the emergence of new industry standards and practices that could render our existing services, proprietary technology and systems obsolete. We must continually develop or introduce and improve
the performance, features and reliability of our products and services, particularly in response to competitive offerings. Our success depends, in part, on our ability to enhance our existing services and to develop new services, functionality and
technology that address the increasingly sophisticated and varied needs of prospective customers. If we do not properly identify the feature preferences of prospective customers, or if we fail to deliver product features that meet the standards of
these customers, our ability to market our service and compete successfully and to increase revenues could be impaired. The development of proprietary technology and necessary service enhancements entails significant technical and business risks and
requires substantial expenditures and lead-time. We may not be able to keep pace with the latest technological developments. We may also be unable to use new technologies effectively or adapt services to customer requirements or emerging industry
standards or regulatory or legal requirements. More generally, if we cannot adapt or respond in a cost-effective and timely manner to changing industry standards, market conditions or customer requirements, our business and operating results will
suffer.



Cost reduction initiatives may adversely affect the morale and
performance of our personnel, which could affect our ability to retain high performers



To streamline operations and better align operating costs and expenses with revenue trends, we have restructured our organization several times in recent years. The result has been substantial reductions in our
workforce over time and reductions in our employees salaries numerous times since the quarter ended December 31, 2001. Such reductions in workforce and salary levels may continue to affect employee morale, create concern among existing
employees about job security, and contribute to distractions that drain productivity. These issues may also lead to attrition beyond our planned workforce reductions and reduce our ability to meet the needs of our current and future customers. In
addition, many of the employees who were terminated may have possessed specific knowledge or expertise and their absence may create significant difficulties. This personnel reduction may also subject us to the risk of litigation, which may adversely
impact our ability to conduct our operations and may cause us to incur significant expense. In addition, the workforce reductions previously completed have increased our dependence on our remaining employees and senior management. Any attrition
beyond our planned workforce reductions could reduce our ability to develop new products and services, provide acceptable levels of customer service and meet the needs of our current and future customers and harm our results of operations. In
particular, increased levels of attrition in the Indian workforce on which we deeply rely for research and development and where we have moved significant resources in recent years would have significant effects on the company and its results of
operations.



Our success will also depend in large part on the
skills, experience and performance of highly motivated senior management, engineering, sales, marketing and other key personnel. The loss of the services of any of our senior management or other key personnel, including our Chief Executive Officer
and co-founder, Ashutosh Roy, could harm our business.



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Our international operations involve various risks



We derived 51% of our revenues from international sales for the quarter ended September 30, 2004 compared to 45% for the
quarter ended September 30, 2003. Including those discussed above, our international sales operations are subject to a number of specific risks, such as:



| |  | foreign currency fluctuations and imposition of exchange controls;
| | - | ------------------------------------------------------------------



| |  | expenses associated with complying with differing technology standards and language translation issues;
| | - | -------------------------------------------------------------------------------------------------------



| |  | difficulty and costs in staffing and managing our international operations;
| | - | ---------------------------------------------------------------------------



| |  | difficulties in collecting accounts receivable and longer collection periods;
| | - | -----------------------------------------------------------------------------



| |  | various trade restrictions and tax consequences; and
| | - | ----------------------------------------------------



| |  | reduced intellectual property protections in some countries.
| | - | ------------------------------------------------------------



In addition, we intend to continue to expand and move our operations into international environments and to spend significant amounts of resources to do
so. Through eGain India, we currently have a significant number of employees representing in excess of 50% of our total workforce located in India, more than a half employed in research and development. Although the movement of certain operations
internationally was principally motivated by cost cutting, the continued management of these remote operations will require significant management attention and financial resources that could adversely affect our operating performance. Our reliance
on our workforce in India makes us particularly susceptible to disruptions in the business environment in that region. In particular, sophisticated telecommunications links, high speed data communications with other eGain offices and customers, and
overall consistency and stability of our business infrastructure are vital to our day to day operations, and any impairment of such infrastructure will cause our financial condition and results to suffer. The maintenance of stable political
relations between both the United States and the European Union, and India are also of great importance to our operations.



Any of these risks could have a significant impact on our product development, customer support or professional services. To the extent the benefit of
maintaining these operations abroad does not exceed the expense of establishing and maintaining such activities, our operating results and financial condition will suffer.



Difficulties in implementing our products could harm our revenues and margins



We generally recognize revenue from a customer sale when persuasive evidence
of an arrangement exists, the product has been delivered, the arrangement does not involve significant customization of the software, the license fee is fixed or determinable and collection of the fee is probable. If an arrangement requires
significant customization or implementation services from us, recognition of the associated license and service revenue could be delayed. The timing of the commencement and completion of the these services is subject to factors that may be beyond
our control, as this process requires access to the customers facilities and coordination with the customers personnel after delivery of the software. In addition, customers could delay product implementations. 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, revenue recognition could be further delayed or canceled and our costs could increase, causing increased variability in our operating results.



Our reserves may be insufficient to cover receivables we are unable to collect



We assume a certain level of credit risk with our
customers in order to do business. Conditions affecting any of our customers could cause them to become unable or unwilling to pay us in a timely manner, or at all, for products or services we have already provided them. For example, if the current
economic conditions continue to decline, our customers may experience financial difficulties and be unable to pay their bills. In the past, we have experienced collection delays from certain customers, and we cannot predict whether we will continue
to experience similar or more severe delays in the future. Although we have established reserves to cover losses due to delays or



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inability to pay, there can be no assurance that such reserves will be sufficient to cover our losses. If losses due to
delays or inability to pay are greater than our reserves, it could harm our business, operating results and financial condition.



Pending litigation and infringement claims could be costly to defend and distract our management team



We may be involved in legal proceedings and claims from time to time in the
ordinary course of our business, including claims of alleged infringement of the intellectual property or proprietary rights of third parties, employment claims and other commercial contract disputes. Third parties may also infringe or
misappropriate our copyrights, trademarks and other proprietary rights for which we may be required to file suit to protect or mediate our rights. In the past we have had lawsuits brought or threatened against us in a variety of contexts including
but not limited to claims related to issues associated with our initial public offering of common stock, breach of contract and litigation associated with the termination of employees.



From time to time, parties have also asserted or threatened infringement claims, and may continue to do so. Because the
contents of patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products. In particular, intellectual property litigation is expensive and
time-consuming and could also require us to develop non-infringing technology or enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at all, in the event of a
successful claim of infringement. Our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis would harm our business.



Where appropriate, we intend to vigorously defend all claims. However, any actual or threatened claims, even if not
meritorious or material, could result in the expenditure of significant financial and managerial resources. The continued defense of these claims and other types of lawsuits could result in and could divert managements attention away from
running our business. Negative developments in lawsuits could cause our stock price to decline as well. In addition, required amounts to be paid in settlement of any claims, and the legal fees and other costs associated with such settlement cannot
be estimated and could, individually or in the aggregate, materially harm our financial condition.



We rely on trademark, copyright, trade secret laws, contractual restrictions and patent rights to protect our intellectual property and proprietary rights and if these rights are impaired our ability to generate
revenue will be harmed



We regard our patents, copyrights,
service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers and
partners to protect our proprietary rights. We have numerous registered trademarks as well as common law trademark rights in the United States and internationally. In addition, we own several patents in the area of case-based reasoning. We will seek
additional trademark and patent protection in the future. We do not know if our trademark and patent applications will be granted, or whether they will provide the protection eGain desires, or whether they will subsequently be challenged or
invalidated. It is difficult to monitor unauthorized use of technology, particularly in foreign countries, where the laws may not protect our proprietary rights as fully as in the United States. Furthermore, our competitors may independently develop
technology similar to our technology.



Despite our efforts to
protect our proprietary rights through confidentiality and license agreements, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. These precautions may not prevent misappropriation or infringement of our
intellectual property. In addition, we routinely require employees, customers, and potential business partners to enter into confidentiality and nondisclosure agreements before we will disclose any sensitive aspects of our products, technology, or
business plans. In addition, we require employees to agree to surrender any proprietary information, inventions or other intellectual property they generate or come to possess while employed by us. In addition, some of our license agreements with
certain customers and partners require us to place the source code for our products into escrow. These agreements typically provide that some party will have a limited, non-exclusive right to access and use this code as authorized by the license
agreement if there is a bankruptcy proceeding instituted by or against us, or if we materially breach a contractual commitment to provide support and maintenance to the party.



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Unknown software defects could disrupt our products and services and problems arising from our vendors products
or services could disrupt operations, which could harm our business and reputation



Our product and service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects or errors in translation or integration, particularly
when first introduced or when new versions are released or localized for international markets. We may not discover software defects that affect our new or current services or enhancements until after they are deployed. It is possible that, despite
testing by us, defects may occur in the software and we can give no assurance that our products and services will not experience such defects in the future. Furthermore, our customers generally use our products together with products from other
companies. As a result, when problems occur in the integration or network, it may be difficult to identify the source of the problem. Even when our products do not cause these problems, these problems may cause us to incur significant warranty and
repair costs, divert the attention of our engineering personnel from product development efforts and cause significant customer relations problems. These defects or problems could result in damage to our reputation, lost sales, product liability
claims, delays in or loss of market acceptance of our products, product returns and unexpected expenses, and diversion of resources to remedy errors.



We may need to license third-party technologies and may be unable to do so



To the extent we need to license third-party technologies, we may be unable to do so on commercially reasonable terms or at
all. In addition, we may fail to successfully integrate any licensed technology into our products or services. Third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the diversion of
resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs. Our inability to obtain and successfully integrate any of
these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. This in turn would harm our business and operating results.



Our stock price has demonstrated volatility and overall declines since being listed on the
public market and continued market conditions may cause further declines or fluctuations



The price at which our common stock trades has been and will likely continue to be highly volatile and show wide fluctuations and substantial declines due to factors such as the following:



| |  | our capital structure, in particular the presence and terms of the preferred stock liquidation preferences and redemption rights;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | the thinly traded nature of our stock on the OTC Bulletin Board;
| | - | ----------------------------------------------------------------



| |  | concerns related to liquidity of our stock, financial condition or cash balances;
| | - | ---------------------------------------------------------------------------------



| |  | actual or anticipated fluctuations in our operating results, our ability to meet announced or anticipated profitability goals and changes in or failure to meet securities
analysts expectations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | announcements of technological innovations and/or the introduction of new services by us or our competitors;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | developments with respect to intellectual property rights and litigation, regulatory scrutiny and new legislation;
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | conditions and trends in the Internet and other technology industries; and
| | - | --------------------------------------------------------------------------



| |  | general market and economic conditions.
| | - | ---------------------------------------



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Furthermore, the stock market has in recent quarters experienced significant price and volume
fluctuations that have affected the market prices for the common stock of technology companies, particularly Internet companies, regardless of the specific operating performance of the affected company. These broad market fluctuations may cause the
market price of our common stock to increase and decline.



In
addition, in past periods of volatility in the market price of a particular companys securities, securities class action litigation has been brought against that company following such declines. To the extent our stock price precipitously
drops in the future, we may become involved in this type of litigation. Litigation of this kind, or involving intellectual property rights, is often expensive and diverts managements attention and resources, which could continue to harm our
business and operating results.



Unplanned system interruptions and capacity
constraints and failure to effect efficient transmission of data of customer communications and data over the Internet could harm our business and reputation



Our customers have, in the past experienced some interruptions with the eGain-hosted operations. We believe that these
interruptions will continue to occur from time to time. These interruptions could be due to hardware and operating system failures. As a result, our business will suffer if we experience frequent or long system interruptions that result in the
unavailability or reduced performance of our hosted operations or reduce our ability to provide remote management services. We expect to experience occasional temporary capacity constraints due to sharply increased traffic or other Internet wide
disruptions, which may cause unanticipated system disruptions, slower response times, impaired quality, and degradation in levels of customer service. If this were to continue to happen, our business and reputation could be seriously harmed.



The recent growth in the use of the Internet has caused
frequent interruptions and delays in accessing the Internet and transmitting data over the Internet. Interruptions also occur due to systems burdens brought on by unsolicited bulk email or Spam, malicious service attacks and hacking into
operating systems, viruses, worms and Trojan horses, the proliferation of which may be beyond our control and may seriously impact ours and our customers businesses.



Because we provide Internet-based eService software, interruptions or delays in Internet transmissions will harm our
customers ability to receive and respond to online interactions. Therefore, our market depends on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion.



Our success largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and network systems. Most of our computer and communications systems are located in Mountain View, California. Due to our locations, our systems and operations are vulnerable to damage or interruption from
fire, earthquake, power loss, telecommunications failure and similar events.



We have entered into service agreements with some of our customers that require minimum performance standards, including standards regarding the availability and response time of our remote management services. If we
fail to meet these standards, our customers could terminate their relationships with us, and we could be subject to contractual refunds and service credits to customers. Any unplanned interruption of services may harm our ability to attract and
retain customers.



We may be liable for activities of customers or others
using our hosted operations



As a provider of customer
service and contact center software for the Internet, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the actions of our customers, and their customers, or others using
our solutions or communicating through our networks. This liability could result from the nature and content of the communications transmitted by customers through the hosted operations. We do not and cannot screen all of the communications
generated by our customers, and we could be exposed to liability with respect to this content. Furthermore, some foreign governments, including Germany and China, have enforced laws and regulations related to content distributed over the Internet
that are more strict than those currently in place in the United States. In some instances criminal liability may arise in connection with the content of Internet transmissions.



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Although we carry general liability and umbrella liability insurance, our insurance may not cover claims
of these types or may not be adequate to indemnify us for all liability that may be imposed. There is a risk that a single claim or multiple claims, if successfully asserted against us, could exceed the total of our coverage limits. There also is a
risk that a single claim or multiple claims asserted against us may not qualify for coverage under our insurance policies as a result of coverage exclusions that are contained within these policies. Should either of these risks occur, capital
contributed by our stockholders might need to be used to settle claims. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage could harm our reputation and business and operating
results, or could result in the imposition of criminal penalties.



If our
system security is breached, our business and reputation could suffer and we may face liability associated with disclosure of sensitive customer information



A fundamental requirement for online communications and transactions is the secure transmission of confidential information
over public networks. Third parties may attempt to breach our security or that of our customers. We may be liable to our customers for any breach in our security and any breach could harm our business and reputation. Although we have implemented
network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, or loss of data. We may be required to expend significant capital and
other resources to license encryption technology and additional technologies to protect against security breaches or to alleviate problems caused by any breach. Since our applications frequently manage sensitive and personally identifiable customer
information, and we may also be subject to claims associated with invasion of privacy or inappropriate disclosure, use or loss of this information and fraud and identity theft crimes associated with such use or loss. Any imposition of liability,
particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm our reputation and our business and operating results.



The regulatory environment for and certain legal uncertainties in the operation of our business and our customers business could impair our growth or decrease
demand for our services or increase our cost of doing business



Few laws currently apply directly to activity on the Internet and related services for businesses operating commercial online service. However new laws are frequently proposed and other laws made applicable to Internet communications every
year both in the U.S. and internationally. In particular, in the operation of our business we face risks associated with privacy, confidentiality of user data and communications, consumer protection and pricing, taxation, content, copyright, trade
secrets, trademarks, antitrust, defamation and other legal issues. In particular, legal concerns with respect to communication of confidential data have affected our financial services and health care customers due to newly enacted federal
legislation. The growth of the industry and the proliferation of ecommerce services may prompt further legislative attention to our industry and thus invite more regulatory control of our business. Further, the growth and development of the market
for commercial online transactions may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies engaged in ecommerce. Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve.



In addition, the applicability of laws and regulations directly applicable to the businesses of our customers, particularly customers in the fields of
financial services, will continue to affect us. The security of information about our customers end-users continues to be an area where a variety of laws and regulations with respect to privacy and confidentiality are enacted. As our customers
implement the protections and prohibitions with respect to the transmission of end-user data, our customers will look to us to assist them in remaining in compliance with this evolving area of regulation. In particular the Gramm-Leach-Bliley Act
contains restrictions with respect to the use and protection of banking records for end-users whose information may pass through our system.



The imposition of more stringent protections and/or new regulations and the application of existing laws to our business could burden our company and
those with which we do business. Further, the adoption of additional laws and regulations could limit the growth of our business and that of our business partners and customers. Any decreased generalized demand for our services, or the loss of or
decrease, in business, by a key partner due to regulation or the expense of compliance with any regulation, could either increase the costs associated with our business or affect revenue, either of which could harm our financial condition or
operating results.



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Finally, we face increased regulatory scrutiny and potential criminal liability for our executives
associated with various accounting and corporate governance rules promulgated under the Sarbanes-Oxley Act of 2002. We have reviewed and will continue to monitor all of our accounting policies and practices, legal disclosure and corporate governance
policies under the new legislation, including those related to relationships with our independent accountants, enhanced financial disclosures, internal controls, board and board committee practices, corporate responsibility and loan practices, and
intend to fully comply with such laws. Nevertheless, such increased scrutiny and penalties involve risks to both eGain and our executive officers and directors in monitoring and insuring compliance. A failure to properly navigate the legal
disclosure environment and implement and enforce appropriate policies and procedures, if needed, could harm our business and prospects.



We may engage in future acquisitions or investments that could dilute our existing stockholders, cause us to incur significant expenses or harm our business



We may review acquisition or investment prospects that
might complement our current business or enhance our technological capabilities. Integrating any newly acquired businesses or their technologies or products may be expensive and time-consuming. To finance any acquisitions, it may be necessary for us
to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us, if at all, and, in the case of equity financings, may result in dilution to our existing stockholders. We may
not be able to operate acquired businesses profitably or otherwise implement our growth strategy successfully. If we are unable to integrate newly acquired entities or technologies effectively, our operating results could suffer. Future acquisitions
by us could also result in large and immediate write-offs, the conversion of our preferred stock into common stock, incurrence of debt and contingent liabilities, or amortization of expenses related to goodwill and other intangibles, any of which
could harm our operating results.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We develop products in the United States and India and sell these products internationally. Generally, 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. To date, the effect of changes in foreign currency exchange rates on revenues and operating expenses
has not been material. We do not currently use derivative instruments to hedge against foreign exchange risk.



ITEM 4. CONTROLS AND PROCEDURES



(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures, as such term is defined in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the Exchange
Act), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.



Based
on their evaluation as of a date within 90 days prior to the filing date of this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations



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noted above, our disclosure controls and procedures were effective to ensure that material information relating to us,
including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.



(b) Changes in internal controls. There were no significant
changes in our internal controls or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



Beginning on October 25, 2001, a number of securities class action complaints were filed against us, and certain of our then officers and directors and underwriters connected with our initial public offering of common stock in the U.S.
District Court for the Southern District of New York (consolidated into In re Initial Public Offering Sec. Litig.). The complaints alleged generally that the prospectus under which such securities were sold contained false and misleading
statements with respect to discounts and excess commissions received by the underwriters as well as allegations of laddering whereby underwriters required their customers to purchase additional shares in the aftermarket in exchange for
an allocation of IPO shares. The complaints sought an unspecified amount in damages on behalf of persons who purchased the common stock between September 23, 1999 and December 6, 2000. Similar complaints were filed against 55 underwriters and more
than 300 other companies and other individuals. The over 1,000 complaints were consolidated into a single action. We reached an agreement with the plaintiffs to resolve the cases as to our liability and that of our officers and directors. The
settlement involved no monetary payment or other consideration by us or our officers and directors and no admission of liability. The Court has not yet approved the settlement.



On December 13, 2002, Mindfabric, Inc. filed an action for patent infringement against us. The suit was settled and resolved
in April, 2004 with no cash payments and the execution of a cross-licensing agreement between the parties.



On February 26, 2003, Golden Gate Plaza, LLC filed a complaint for unlawful detainer against us. On December 23, 2003 we entered into a settlement
agreement (see Notes to Condensed Consolidated Financial Statements, Note 10: Restructuring) with the plaintiff to resolve the case. A Request for Dismissal was entered by the court on January 12, 2004 and the settlement was later approved.



On February 12, 2004, we filed suit against Insight
Enterprises, Inc., the acquirer of Comark, Inc., a value-added reseller of our software, claiming inter alia breach of contract and failure to pay in connection with a sale of our software to one customer. The lawsuit seeks in excess of
$600,000 in damages.



With the exception of these matters, we
are not a party to any other material pending legal proceedings, nor is our property the subject of any material pending legal proceeding, except routine legal proceedings arising in the ordinary course of our business and incidental to our
business, none of which are expected to have a material adverse impact, as taken individually or in the aggregate, upon our business, financial position or results of operations. However, even if these claims are not meritorious, the ultimate
outcome of any litigation is uncertain, and it could divert managements attention and impact other resources.



Item 2. Changes in Securities



None.



Item 3. Defaults upon Senior Securities



None.



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



None.



Item 5. Other Information



None.



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Item 6. Exhibits and Reports on Form 8-K



(a)



|             |  |                                                                                                                                                                 
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits No. |  | Description of Exhibits                                                                                                                                         
|31.1         |  | Rule 13a-15(e)/15d-15(e) Certification of Chief Executive Officer.                                                                                              
|             | 
|31.2         |  | Rule 13a-15(e)/15d-15(e) Certification of Chief Financial Officer.                                                                                              
|             | 
|32.1         |  | Certification pursuant to 18.U.S.C. Section 1350, as adopted pursuant to Section 906 if the Sarbanes Oxley Act of 2002 of Ashutosh Roy, Chief Executive Officer.
|             | 
|32.2         |  | Certification pursuant to 18.U.S.C. Section 1350, as adopted pursuant to Section 906 if the Sarbanes Oxley Act of 2002 of Eric Smit, Chief Financial Officer.   



|(b) | Reports on Form 8-K
|--- | -------------------



We filed two reports on Form 8-K for the quarter ended September 30, 2004 as follows:



|                  |  |                                                                                                                                                                                  
|----------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date              |  | Item Reported on                                                                                                                                                                 
|September 30,2004 |  | Restructuring Agreement between eGain Communications Corporation and certain holders of its 6.75% Series A Cumulative Convertible Preferred Stock dated as of September 29,
2004.
|                  | 
|November 3, 2004  |  | Press release filed announcing quarter ended September 30, 2004 results of operations and financial condition.                                                                   



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SIGNATURES



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



|                         |  |                                  |  |                                            
|------------------------ |  | -------------------------------- |  | -------------------------------------------
|Dated: November 15, 2004 |  | eGAIN COMMUNICATIONS CORPORATION
|                         |  | By                               |  | /s/ Eric N. Smit                           
|                         |  |                                  |  | Eric N. Smit                               
|                         |  |                                  |  | Chief Financial Officer                    
|                         |  |                                  |  | (Duly Authorized Officer and               
|                         |  |                                  |  | Principal Financial and Accounting Officer)



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