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UNITED
STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





(Mark One)


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




For the quarterly period ended March 31, 2002





OR





| ̈ |  | TRANSACTION 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





eGAIN COMMUNICATIONS CORPORATION


(Exact name of registrant as specified in its charter)





Delaware (State or other jurisdiction
of incorporation or organization)

77-0466366 (I.R.S. Employer Identification
No.)





714 E. Evelyn Avenue, Sunnyvale, CA


(Address of principal executive offices)





94086


(Zip Code)





(408) 2123400


(Registrants telephone number, including area code)





N/A


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





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





Class

Outstanding at March 31, 2002Common Stock $0.001 par value

36,484,025





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##### Table of Contents




eGAIN COMMUNICATIONS CORPORATION





TABLE OF CONTENTS





PagePART I.

FINANCIAL INFORMATION

1Item 1.

Financial Statements

1Condensed Consolidated Balance Sheets at March 31, 2002 and June 30, 2001

1Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2002 and 2001

2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2002 and 2001

3Notes to Condensed Consolidated Financial Statements

4Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

10Item 3.

Quantitative and Qualitative Disclosure About Market Risk

25PART II.

OTHER INFORMATION

26Item 1.

Legal Proceedings

26Item 2.

Changes in Securities

26Item 3.

Defaults upon Senior Securities

26Item 4.

Submission of Matters to a Vote of Security Holders

26Item 5.

Other Information

26Item 6.

Exhibits and Reports on Form 8-K

26Signatures

27Index to Exhibits

28




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##### Table of Contents




Part I.    
FINANCIAL INFORMATION





Item 1.    
Financial Statements





eGAIN COMMUNICATIONS CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)





March 31, 2002


June 30, 2001(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
15,894


$
42,613Accounts receivable, net


5,873



13,803Prepaid and other current assets


4,451



4,690Total current assets


26,218



61,106Property and equipment, net


7,493



11,677Goodwill, net


47,927



74,616Intangible assets, net


4,911



6,890Other assets


3,843



3,862$
90,392


$
158,151LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,728


$
5,397Accrued compensation


2,390



6,309Accrued liabilities


3,983



3,460Deferred revenue


3,627



5,438Current portion of bank borrowings


2,537



4,268Current portion of notes payable


206



199Current portion of capital lease obligations


596



952Total current liabilities


16,067



26,023Bank borrowings, net of current portion


1,064



1,167Notes payable, net of current portion






161Capital lease obligations, net of current portion


73



392Other long term liabilities


1,984



597Total liabilities


19,188



28,340CommitmentsStockholders equity:Series A cumulative convertible preferred stock


92,847



88,034Common stock


36



36Additional paid-in capital


221,944



227,375Notes receivable from stockholders


(106
)


(380
)Deferred stock compensation


(426
)


(1,844
)Accumulated other comprehensive income (loss)


236



(84
)Accumulated deficit


(243,327
)


(183,326
)Total shareholders equity


71,204



129,811$
90,392


$
158,151





See accompanying notes




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eGAIN COMMUNICATIONS CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)


(unaudited)





Three Months Ended March 31,


Nine Months Ended March 31,2002


2001


2002


2001Revenue:Hosting

$
931


$
2,539


$
4,503


$
8,056License


1,242



5,930



7,739



16,809Services


3,737



4,951



11,875



14,450Total revenue


5,910



13,420



24,117



39,315Cost of revenuedirect


3,592



7,580



12,444



24,087Cost of revenueacquisition related


362



362



1,086



1,086Gross profit


1,956



5,478



10,587



14,142Operating costs and expenses:Research and development


2,452



5,615



9,058



17,560Sales and marketing


6,003



11,599



20,098



37,061General and administrative


2,401



4,221



7,333



12,739Amortization of goodwill and other intangible assets


9,194



9,200



27,582



27,600Amortization of deferred compensation


233



750



793



2,725Restructuring


327



388



5,578



388Total operating costs and expenses


20,610



31,773



70,442



98,073Loss from operations


(18,654
)


(26,295
)


(59,855
)


(83,931
)Non-operating income (expense)


(352
)


745



(146
)


2,344Net loss


(19,006
)


(25,550
)


(60,001
)


(81,587
)Dividends on convertible preferred stock


(1,617
)


(1,513
)


(4,813
)


(3,903
)Beneficial conversion feature on convertible preferred stock










(43,834
)


(19,335
)Net loss applicable to common stockholders

$
(20,623
)

$
(27,063
)

$
(108,648
)

$
(104,825
)Per Share information:Basic and diluted net loss per common share

$
(0.57
)

$
(0.77
)

$
(3.01
)

$
(3.00
)Weighted average shares used in computing basic and diluted net loss per common share


36,318



35,353



36,137



34,958





See accompanying notes




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eGAIN COMMUNICATIONS CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Nine Months Ended March 31,2002


2001Cash flows from operating activities:Net loss

$
(60,001
)

$
(81,587
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


4,992



4,403Loss on disposal of fixed assets


1,093



Amortization of goodwill and other intangible assets


28,668



28,686Amortization of deferred compensation


793



2,725Changes in operating assets and liabilities:Accounts receivable


7,930



(6,237
)Prepaid and other current assets


(523
)


125Other assets


19



53Accounts payable


(2,669
)


441Accrued compensation


(3,919
)


(1,146
)Accrued liabilities


523



(3,817
)Deferred revenue


(1,811
)


(1,368
)Other liabilities


1,387



365Net cash used in operating activities


(23,518
)


(57,357
)Cash flows from investing activities:Purchases of property and equipment


(1,108
)


(4,794
)Proceeds from sale of property and equipment


12



Proceeds from sale of short-term securities






3,140Net cash used in investing activities


(1,096
)


(1,654
)Cash flows from financing activities:Payments on borrowings


(5,959
)


(118
)Payments on capital lease obligations


(718
)


(872
)Proceeds from borrowings


3,971



980Net proceeds from issuance of convertible preferred stock






82,601Net proceeds from issuance of common stock


281



2,506Net cash provided by (used in) financing activities


(2,425
)


85,097Effect of exchange rate differences on cash


320



(89
)Net increase (decrease) in cash and cash equivalents


(26,719
)


25,997Cash and cash equivalents at beginning of period


42,613



27,201Cash and cash equivalents at end of period

$
15,894


$
53,198Supplemental cash flow disclosures:Cash paid for interest

$
378


$
Equipment acquired under capital leases


43



660





See accompanying notes




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Note 1.    Basis of Presentation





The condensed consolidated financial statements have been prepared by eGain pursuant to the rules and regulations of the Securities and
Exchange Commission and include the accounts of eGain and its 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 the opinion of eGain, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of
eGains financial position, results of operations and cash flows for the periods presented. These financial statements and notes should be read in conjunction with eGains audited consolidated financial statements and notes thereto for the
year ended June 30, 2001, included in eGains Annual Report on Form 10-K. The condensed consolidated balance sheet at June 30, 2001 has been derived from audited financial statements as of that date. The results of eGains 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, 2002.





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those estimates.





Certain
reclassifications have been made to prior period amounts in order to conform to the current periods presentation.





Note
2.    Software Revenue Recognition





eGain recognizes 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 arrangement exists, delivery of the product has occurred, no significant eGain obligations
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 or (b) all elements
of the arrangement have been delivered. License revenue from all distributors and resellers are generally recognized by eGain when the distributor or reseller has resold the product to an end user.





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 is primarily derived from
consulting fees, maintenance agreements, and training. 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 include the right to software updates on an if-and-when-available basis. Maintenance revenue is deferred and
recognized on a straight-line basis as service revenue over the life of the related agreement, which is typically one year.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







In all cases, eGain assesses whether the service element of the arrangement is
essential to the functionality of the other elements of the arrangement. In this determination, eGain focuses 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, eGain considers 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 eGain determines that the service elements are essential to the other elements of the arrangement, eGain accounts 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.





Note 3.    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 Ended March 31,


Nine Months Ended March 31,2002


2001


2002


2001Net loss applicable to common stockholders

$
(20,623
)

$
(27,063
)

$
(108,648
)

$
(104,825
)Basic and diluted:Weighted-average shares outstanding


36,484



36,197



36,466



36,028Less weighted-average shares subject to repurchase


(166
)


(844
)


(329
)


(1,043
)Weighted-average shares used in computing basic and diluted net loss per common share


36,318



35,353



36,137



34,985Basic and diluted net loss per common share

$
(0.57
)

$
(0.77
)

$
(3.01
)

$
(3.00
)





Options and warrants to purchase 10,061,000 and 10,336,000 shares of common stock
were outstanding at March 31, 2002 and 2001, respectively. In addition, convertible preferred stock convertible into 17,362,000 and 9,998,000 shares of common stock were outstanding at March 31, 2002 and 2001, respectively. The above amounts were
excluded from the computation of net loss per common share, as their effect is anti-dilutive.





Note 4.    Comprehensive Loss





eGains comprehensive loss is comprised of net loss, foreign currency translation adjustments and unrealized gains or
losses on short-term investments held as available-for-sale. Comprehensive loss was $18.7 million and $25.7 million for the three months ended March 31, 2002 and 2001, respectively, and $59.7 million and $81.5 million for the nine months ended March
31, 2002 and 2001, respectively. These amounts were not materially different from net loss as reported in the consolidated statements of operations.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 5.    Segment Information





Operating segments are identified as components of an enterprise for which discrete financial information is available and regularly reviewed by
eGains chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance. eGains chief operating decision-maker, as defined under SFAS No. 131, is its executive management team. To
date, eGain has viewed its operations and manages its business as principally one segment, the development, license, implementation and support of its customer interaction management software solutions. eGains chief operating decision maker
reviews 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.





Information relating to eGains geographic areas is as follows (in thousands):





Three Months Ended March 31,

Nine Months Ended March 31,2002

2001

2002

2001Total Revenue:North America

$
3,393

$
10,208

$
14,659

$
30,480Europe


2,266


3,098


7,992


8,467Asia Pacific


251


114


1,466


368India











$
5,910

$
13,420

$
24,117

$
39,315Operating Loss:North America

$
17,513

$
24,261

$
56,010

$
78,944Europe


296


1,071


675


3,373Asia Pacific


325


963


1,594


1,614India


520





1,576


$
18,654

$
26,295

$
59,855

$
83,931





In addition, identifiable assets corresponding to eGains geographic areas
are as follows (in thousands):





March 31,2002

2001North America

$
31,276

$
81,184Europe


4,923


4,740Asia Pacific


705


463India


650


$
37,554

$
86,387





During the three months ended March 31, 2001, one customer accounted for 11% of
eGains total revenue. No single customer accounted for more than 10% of eGains total revenue in any other period presented above.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 6.    Preferred Stock





On August 8, 2000, eGain 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 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, the Investors received warrants to purchase 3,826,000 shares of eGains common stock (the Warrants). The net cash proceeds of the
offering, after expenses, were $82,601,000. The Series A shares have a liquidation preference of $100,000 per share which increases on a daily basis at an annual rate of 6.75% from August 8, 2000, compounded on a semi-annual basis. The Series A
stockholders are entitled cash dividends only when and if declared by the board of directors.





If not sooner converted, eGain
has the option to convert the Series A shares into common stock after August 8, 2003 if the closing bid price of eGains common stock on 20 of the 30 consecutive trading days prior to the date of notice requesting conversion is equal to or
greater than 250% of the initial conversion price (or $23.13). If not sooner converted, on August 8, 2005 eGain must either, at its option, redeem the Series A shares for cash or 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 eGains common stock on the 20 consecutive trading days immediately prior to the redemption date.





Pursuant to the terms and conditions of the Series A and Warrant agreements, on August 8, 2001, the conversion price of the Series A shares and warrants were reset from the original
conversion price of $9.2517 per share to $5.6875 per share.





As a result of the reset of the original conversion price of the
Series A shares, an additional beneficial conversion charge of $43,834,000 was recorded during the nine months ended March 31, 2002. Based upon the accounting literature in effect at the time of the issuance of the Series A shares, (EITF 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios), the initial beneficial conversion charge of $19,335,000 was measured using an intrinsic value methodology at the
date of issuance (the commitment date) and recognized at the date the Series A became convertible. In addition, a contingent beneficial conversion charge was measured at the commitment date but not recognized as the contingency (reset on
August 8, 2001) had not been resolved. The incremental amount recognized at the date of reset was limited to the allocated proceeds of $63,169,000, less the initial charge of $19,335,000. The amount representing the beneficial conversion feature was
included in net loss applicable to common stockholders.





Accrued dividends, representing the increase in liquidation value at
the rate of 6.75% per annum, are charged against additional paid-in capital and are included in net loss applicable to common stockholders.





Note
7.    Bank Borrowings





In March 2002, eGain terminated its loan agreement dated August 7, 1998, as
amended, repaid its existing bank borrowings under that agreement and entered into a new loan agreement dated March 27, 2002. The new agreement provides for a $5.0 million revolving line of credit (the Revolver), reduced by any
outstanding standby letters of credit, and a $2.5 million equipment term loan (the Term Loan). The balance under the Revolver becomes due at maturity (March 25, 2003), while the current amount outstanding under the Term Loan is payable
in twenty-four equal monthly payments of principal and interest through March 2004. Any additional advances under the Term Loan will be repaid in thirty-six equal monthly payments of principal and interest. Borrowings under the loan agreement are
secured by all of eGains assets. As of March 31, 2002, $1,433,000 was outstanding under the Revolver, which bears interest at the banks prime rate plus 0.25%, while $2,168,000 was outstanding under the Term Loan, which bears interest at
the banks prime rate plus 0.50%.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 8.    Restructuring





During the nine months ended March 31, 2002, pursuant to a plan approved by the required level of management necessary to execute its components, eGain recorded restructuring
charges totaling $5,578,000. These charges were primarily related to the consolidation of eGains facilities in North America during the three months ended September 30, 2001, which resulted in a charge of $4,336,000. This amount includes
estimated future net rental payments on exited facilities of $3,511,000, as well as $810,000 in write-offs of leasehold improvements and $15,000 in professional services associated with the exited facilities. In addition, eGain incurred severance
costs of $259,000 and $1,174,000 during the three and nine months ended March 31, 2002, respectively. During the nine months ended March 31, 2002, eGain reduced its worldwide workforce by 127 employees across all departments pursuant to the adoption
of eGains expense management strategy. Furthermore, in the three months ended March 31, 2002, eGain recorded an additional charge of $138,000 related to exited facilities and a $70,000 restructuring credit related to cash received for
leasehold improvements that were previously written off.





Details of the cumulative restructuring charges during the nine months
ended March 31, 2002 are as follows (in thousands):





Cash/Non-cash

Original Charge

Amount Adjusted


Amount Paid/Used

Balance at 03/31/02Excess facilities

Cash

$
3,511

$
138


$
846

$
2,803Leasehold improvement write-offs

Non-cash


810


(70
)


740


Employee severance

Cash


1,174






1,174


Professional services

Cash


15






15


Total restructuring charges



$
5,510

$
68


$
2,775

$
2,803





Note 9.    Stock Exchange Program





On September 7, 2001, eGain filed a final amendment to a tender offer statement on Schedule TO dated May 24, 2001 announcing the final results of its
offer to exchange certain eligible options outstanding under eGains stock option plans for new options to purchase shares of eGain common stock. Accordingly, on February 11, 2002, eGain issued new options to purchase 878,000 shares of eGain
common stock in exchange for the options surrendered in the offer to exchange. In addition, there are 14,000 untendered options associated with the exchange program that are subject to variable accounting. There was no compensation expense
associated with these options during the three and nine months ended March 31, 2002.





Note 10.    New Accounting
Pronouncements





In July 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with SFAS No. 142. Other intangibles will continue to be amortized over their useful lives. eGain will adopt SFAS No. 142 in its first quarter of fiscal 2003. As a result of the
discontinuance of the amortization of goodwill and excluding the impact of potential impairment charges, the application of SFAS No. 142 is expected to result in an increase in eGains results of operations of approximately $24,129,000 during
fiscal 2003. Goodwill related to acquisitions subsequent to June 30, 2001 will not be amortized. During fiscal 2003, eGain will perform the first of the required impairment tests of goodwill and intangible assets deemed to have indefinite lives as
of July 1, 2002. eGain anticipates that it will have to record an impairment charge during the quarter ended September 30, 2002 resulting from these tests, but it is impracticable to reasonably estimate the charge as of the date of this report.





In October 2001, the FASB issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Long-Lived Assets to be Disposed Of,and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. Adoption of this statement is not expected to have a material impact on eGains financial position or results of
operations.







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##### Table of Contents




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





This
report on Form 10-Q contains 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, the expansion of eGains multi-channel interaction management platform, the continued expansion of eGains global
distribution capabilities, the development of eGains strategic relationships, the factors influencing competition in eGains market, eGains limited operating history and expected net losses, the adequacy of eGains capital
resources, the continued need for online customer communications, the continued acceptance of eGains Web-native architecture, eGains levels of investment in research and development and sales and marketing and the overall volatility of
Internet-related technology companies. eGains actual results could differ materially from those discussed in statements relating to eGains 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. eGain expressly disclaims any obligation or understanding to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in eGains expectations with regard
thereto or any change in events, conditions or circumstances on which any such statement is based.





Overview





eGain is a leading provider of interaction management software for the Internet that enables companies to transform traditional customer call centers
into multi-channel contact centers. To help businesses deliver a superior customer experience and establish profitable, long-term customer relationships, while reducing operating and technology costs, eGain offers best-of-breed applications that
enable online customers to communicate through each of the three primary channels for online customer interactionemail, real-time and self-service. Built using a 100% Web-native architecture, eGains comprehensive eService solutions are
designed to provide robust scalability, global access, diverse integration capabilities and rapid deployment. In addition, eGains solution is designed to integrate with leading customer relationship management, enterprise relationship
management and call center systems, enabling customers to leverage investments in existing systems and providing an enterprise wide solution.





On April 30, 1999, eGain acquired Sitebridge Corporation and added its real-time Web collaboration product to eGains platform. The product, eGain Live, is an application that allows ecommerce companies to
interact in real-time with visitors to their Web sites. eGain acquired Sitebridge in exchange for common stock and the transaction was accounted for under the purchase method of accounting.





On March 7, 2000, eGain acquired Big Science Company and added its Web-native self-service product to eGains platform. The resulting product, eGain Assistant, enables personalized
customer assistance on Web sites through virtual service agents. Customers interact in natural language dialogue with a life-like character, which answers questions and leads customers through problem resolution and sales situations. eGain acquired
Big Science in exchange for common stock and cash and the transaction was accounted for under the purchase method of accounting.





On June 29, 2000, eGain acquired Inference Corporation in exchange for its common stock and assumption of outstanding options to purchase Inference common stock. The acquisition brought together eGains strength in Web-native,
multi-channel customer communications with Inferences powerful customer profiling and contact center support capabilities. It also significantly expanded eGains European business and added critical new product and technology components
to the eGain platform. The merger was accounted for under the purchase method of accounting.





On April 23, 2001, eGain acquired
all of the outstanding capital stock of eGain Communications Private Limited (eGain India) for cash. The acquisition enhances eGains product development, licensed customer support, information technology and hosted business
services capabilities. The transaction was accounted for under the purchase method of accounting.




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eGain intends to continue to make investments in product development and technology to enhance
its current products and services, develop new products and services and further advance its solution offerings. In addition, eGain has incurred significant losses since its inception and had an accumulated deficit of $243.3 million as of March 31,
2002. eGain has not achieved profitability on a quarterly or annual basis. In view of the rapidly evolving nature of its business and limited operating history, eGain believes that period to period comparisons of its revenue and operating results
may not be meaningful and should not be relied upon as indications of future performance.





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 March 31,


Nine Months Ended March 31,2002


2001


2002


2001Revenue:Hosting

16
%

19
%

19
%

20
%License

21
%

44
%

32
%

43
%Services

63
%

37
%

49
%

37
%Total revenue

100
%

100
%

100
%

100
%Cost of revenuedirect

61
%

56
%

52
%

61
%Cost of revenueacquisition related

6
%

3
%

4
%

3
%Gross profit

33
%

41
%

44
%

36
%Operating costs and expenses:Research and development

41
%

42
%

38
%

45
%Sales and marketing

102
%

86
%

83
%

94
%General and administrative

41
%

31
%

31
%

32
%Amortization of goodwill and other intangible assets

156
%

69
%

114
%

70
%Amortization of deferred compensation

4
%

6
%

3
%

7
%Restructuring

5
%

3
%

23
%

1
%Total operating costs and expenses

349
%

237
%

292
%

249
%Loss from operations

(316
%)

(196
%)

(248
%)

(213
%)





Revenue





eGain recognizes 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 eGain obligations 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 or (b) all elements of the arrangement have been delivered. License revenue from all distributors and resellers are generally recognized by eGain when the distributor or reseller has
resold the product to an end user.





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.




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Service revenue is primarily derived from consulting fees, maintenance agreements, and
training. 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 include the right to software updates on an if-and-when-available basis. Maintenance revenue 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, eGain assesses whether the service
element of the arrangement is essential to the functionality of the other elements of the arrangement. In this determination, eGain focuses 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, eGain considers 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 eGain determines that the service elements are essential to the other elements of the arrangement, eGain accounts 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.





Total revenue decreased 56% to $5.9 million in the quarter ended
March 31, 2002 from $13.4 million in the quarter ended March 31, 2001. Total revenue for the nine months ended March 31, 2002 decreased 39% to $24.1 million, compared to $39.3 million in the same period last year. The decrease in each period was
primarily attributable to a sharp decline in licensed and hosted customer orders worldwide resulting from the weak macro-economic environment. During the quarter ended March 31, 2002 and the nine months ended March 31, 2002 and 2001, no single
customer accounted for more than 10% of total revenue. During the quarter ended March 31, 2001, one customer accounted for 11% of total revenue.





Hosting revenue decreased 63% to $931,000 in the quarter ended March 31, 2002 from $2.5 million in the quarter ended March 31, 2001. Hosting revenue for the nine months ended March 31, 2002 decreased 44% to $4.5
million, compared to $8.1 million in the same period last year. The decrease in each period was primarily attributable to a decline in new hosted customer contracts, coupled with the termination of existing hosted customer contracts. Hosting revenue
represented 16% and 19% of total revenue for the quarters ended March 31, 2002 and 2001, respectively, and 19% and 20% of total revenue for the nine months ended March 31, 2002 and 2001, respectively.





License revenue decreased 79% to $1.2 million in the quarter ended March 31, 2002 from $5.9 million in the quarter ended March 31, 2001. License revenue
for the nine months ended March 31, 2002 decreased 54% to $7.7 million, compared to $16.8 million in the same period last year. The decrease in each period was primarily due to the large decline in customer orders worldwide. License revenue
represented 21% and 44% of total revenue for the quarters ended March 31, 2002 and 2001, respectively, and 32% and 43% of total revenue for the nine months ended March 31, 2002 and 2001, respectively.





Services revenue decreased 25% to $3.7 million in the quarter ended March 31, 2002 from $5.0 million in the quarter ended March 31, 2001. Services
revenue for the nine months ended March 31, 2002 decreased 18% to $11.9 million, compared to $14.5 million in the same period last year. The decrease in each period was mainly attributable to a decline in licensed customer orders in North America
during the nine months ended March 31, 2002, compared to the same period last year. This decline resulted in decreased services revenue in North America from a decline in maintenance contracts, customer implementations and system integration
projects. In addition we experienced a decline in professional services projects for our existing customer base in North America due to reduced IT spending. Services revenue represented 63% and 37% of total revenue for the quarters ended March 31,
2002 and 2001, respectively, and 49% and 37% of total revenue for the nine months ended March 31, 2002 and 2001, respectively.




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Cost of RevenueDirect





Cost of revenuedirect includes personnel costs for eGains hosting services, consulting services and customer support. It also includes depreciation of capital equipment used
in eGains hosted network, third-party software royalties, lease costs paid to remote co-location centers and, to a lesser extent, occupancy costs and related overhead. Cost of revenue-direct decreased 53% to $3.6 million in the quarter ended
March 31, 2002 from $7.6 million in the quarter ended March 31, 2001. Cost of revenue-direct for the nine months ended March 31, 2002 decreased 48% to $12.4 million, compared to $24.1 million in the same period last year. The decrease in each period
was primarily due to a decline in headcount through planned workforce reductions, a decline in outside contractor services and a reduction in co-location lease costs and third-party software royalties. Additionally, there was a reduction in
facilities-related expenses in each period resulting from the consolidation of eGains excess facilities in North America during the quarter ended September 30, 2001. eGain anticipates that costs of revenue will decrease slightly in the
following quarter as a result of ongoing cost control measures, but will be relatively stable in subsequent periods.





Cost of RevenueAcquisition
Related





Cost of revenue  acquisition related expense was $362,000 in each of the quarters ended March 31, 2002 and
2001 and $1.1 million in each of the nine-month periods ended March 31, 2002 and 2001. These amounts consisted of amortization of developed technology resulting from eGains business combinations in fiscal 2000.





Research and Development





Research and
development expenses primarily consist of compensation and benefits of engineering and quality assurance personnel and, to a lesser extent, occupancy costs and related overhead. Research and development expenses decreased 56% to $2.5 million in the
quarter ended March 31, 2002 from $5.6 million in the quarter ended March 31, 2001. Research and development expenses for the nine months ended March 31, 2002 decreased 48% to $9.1 million, compared to $17.6 million in the same period last year. The
decrease in each period was primarily due to a decline in headcount through planned workforce reductions, a decline in outside contractor services and the ongoing migration of development resources to eGain India. Additionally, there was a reduction
in facilities-related expenses in each period resulting from the consolidation of eGains excess facilities in North America during the quarter ended September 30, 2001. eGain anticipates that research and development expenses will decrease
slightly in the following quarter as a result of ongoing cost control measures, but will be relatively stable in subsequent periods.





Sales and
Marketing





Sales and marketing expenses primarily consist of compensation and benefits of eGains sales, marketing and
business development personnel, advertising, trade show and other promotional costs and, to a lesser extent, occupancy costs and related overhead. Sales and marketing expenses decreased 48% to $6.0 million in the quarter ended March 31, 2002 from
$11.6 million in the quarter ended March 31, 2001. Sales and marketing expenses for the nine months ended March 31, 2002 decreased 46% to $20.1 million, compared to $37.1 million in the same period last year. The decrease in each period was
primarily due to a decline in headcount through planned workforce reductions and a decrease in spending on advertising and marketing programs. Additionally, there was a reduction in facilities-related expenses in each period resulting from the
consolidation of eGains excess facilities in North America during the quarter ended September 30, 2001. eGain anticipates that sales and marketing expenses will decrease slightly in the following quarter as a result of ongoing cost control
measures, but will be relatively stable in subsequent periods.





General and Administrative





General and administrative expenses primarily consist of compensation and benefits for eGains finance, human resources, administrative and legal services personnel, fees for
outside professional services and, to a lesser extent, bad debt expense, occupancy costs and related overhead. General and administrative expenses decreased 43% to $2.4 million in the quarter ended March 31, 2002 from $4.2 million in the quarter
ended March 31, 2001.




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General and administrative expenses for the nine months ended March 31, 2002 decreased 42% to $7.3 million, compared to
$12.7 million in the same period last year. The decrease in each period was primarily due to a decline in headcount through planned workforce reductions, as well as a decline in outside professional services during the nine months ended March 31,
2002. Additionally, there was a reduction in facilities-related expenses in each period resulting from the consolidation of eGains excess facilities in North America during the quarter ended September 30, 2001. Furthermore, the decrease in the
quarter ended March 31, 2002 included a decrease in bad debt expense, while the decrease in the nine months ended March 31, 2002 included an increase in bad debt expense. eGain anticipates that general and administrative expenses will decrease
slightly in the following quarter as a result of ongoing cost control measures, but will be relatively stable in subsequent periods.





Amortization of
Goodwill and Other Intangible Assets





Goodwill and other intangible assets are being amortized using the straight-line
method. The amounts allocated to goodwill, customer base, acquired technology, workforce and trademark are being amortized over the assets estimated useful lives, which range from three to four years. Amortization of goodwill and other
intangible assets was $9.2 million in each of the quarters ended March 31, 2002 and 2001 and $27.6 million in each of the nine-month periods ended March 31, 2002 and 2001. Amortization of intangible assets principally relates to goodwill acquired in
connections with eGains acquisitions of Inference Corporation, Big Science Company and Sitebridge Corporation.





Amortization of Deferred
Compensation





Deferred compensation is recorded in connection with grants of stock options to employees on the date of grant
when the deemed fair value of the underlying common stock exceeds the exercise price for stock options. Deferred compensation is amortized on a graded vesting method over the vesting period of the individual grants. In addition, eGain records
compensation expense in connection with grants of stock options to non-employees pursuant to Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). These grants are
periodically revalued as they vest in accordance with SFAS 123 and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. eGain recorded
amortization of deferred compensation of $233,000 and $750,000 in the quarters ended March 31, 2002 and 2001, respectively, and $793,000 and $2.7 million in the nine months ended March 31, 2002 and 2001, respectively.





Restructuring





During the nine months ended March
31, 2002, pursuant to a plan approved by the required level of management necessary to execute its components, eGain recorded restructuring charges totaling $5,578,000. These charges were primarily related to the consolidation of eGains
facilities in North America during the three months ended September 30, 2001, which resulted in a charge of $4,336,000. This amount includes estimated future net rental payments on exited facilities of $3,511,000, as well as $810,000 in write-offs
of leasehold improvements and $15,000 in professional services associated with the exited facilities. In addition, eGain incurred severance costs of $259,000 and $1,174,000 during the three and nine months ended March 31, 2002, respectively. During
the nine months ended March 31, 2002, eGain reduced its worldwide workforce by 127 employees across all departments pursuant to the adoption of eGains expense management strategy. Furthermore, in the three months ended March 31, 2002, eGain
recorded an additional charge of $138,000 related to exited facilities and a $70,000 restructuring credit related to cash received for leasehold improvements that were previously written off.





Non-operating Income (expense)





Non-operating expense was $352,000 in the
quarter ended March 31, 2002, compared to non-operating income of $745,000 in the quarter ended March 31, 2001. Non-operating expense was $146,000 in the nine months ended March 31, 2002, compared to non-operating income of $2.3 million in the same
period last year. The decrease in each period primarily consisted of a decrease in interest income resulting from a decline in eGains average cash balance and lower interest rates, coupled by an increase in interest expense from increased bank
borrowings. Additionally, a loss on disposal of fixed assets of $281,000 in the quarter and nine months ended March 31, 2002 contributed to the decrease in those periods.




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Liquidity and Capital Resources





Prior to eGains initial public offering, operations were primarily financed through the private placement of convertible preferred stock, a bank line of credit, and financing for
capital purchases. On September 28, 1999, eGain completed an initial public offering of common stock, in which 5.8 million shares of common stock were sold (including exercise of an over-allotment option in October 1999), at a price of $12.00 per
share. Net proceeds from the offering were $63.0 million.





On August 8, 2000, eGain raised net proceeds of $82.6 million through
the issuance of convertible preferred stock and warrants to purchase approximately 3.8 million shares of common stock in a private placement. The convertible preferred stock liquidation value accretes at 6.75% per annum. eGain is using the net
proceeds from this private placement for general corporate purposes.





On March 31, 2002, cash and cash equivalents were $15.9
million, a decrease of $26.7 million since June 30, 2001. Working capital at March 31, 2002 was $10.2 million, a decrease of $24.9 million since June 30, 2001.





In March 2002, eGain terminated its loan agreement dated August 7, 1998, as amended, repaid its existing bank borrowings under that agreement and entered into a new loan agreement dated March 27, 2002. The new
agreement provides for a $5.0 million revolving line of credit (the Revolver), reduced by any outstanding standby letters of credit, and a $2.5 million equipment term loan (the Term Loan). The balance under the Revolver
becomes due at maturity (March 25, 2003), while the current amount outstanding under the Term Loan is payable in twenty-four equal monthly payments of principal and interest through March 2004. Any additional advances under the Term Loan will be
repaid in thirty-six equal monthly payments of principal and interest. Borrowings under the loan agreement are secured by all of eGains assets. As of March 31, 2002, $1.4 million was outstanding under the Revolver, which bears interest at the
banks prime rate plus 0.25%, while $2.2 was outstanding under the Term Loan, which bears interest at the banks prime rate plus 0.50%.





Net cash used in operating activities was $23.5 million and $57.4 million in the nine months ended March 31, 2002 and 2001, respectively. Cash used in operating activities in each period was primarily the result of
net losses, partially offset by non-cash charges.





Net cash used in investing activities of $1.1 million in the nine months
ended March 31, 2002 consisted primarily of property and equipment purchases, while net cash used in investing activities of $1.7 million in the nine months ended March 31, 2001 consisted of property and equipment purchases, partially offset by
proceeds from the sale of short-term securities.





Net cash used in financing activities of $2.4 million in the nine months ended
March 31, 2002 primarily consisted of payments on borrowings and capital leases, partially offset by proceeds from borrowings and the issuance of common stock. Cash provided by financing activities of $85.1 million in the nine months ended March 31,
2001 was primarily due to the issuance of preferred stock and common stock, which included net proceeds of $82.6 million through the private placement on August 8, 2000.





eGain intends to continue to make investments in product development and technology to enhance its current products and services, develop new products and services and further advance
its solution offerings. eGain believes that its existing capital resources will enable it to maintain its current and planned operations for the next twelve months. Additionally, eGains management has the ability to further reduce operating
expense, if necessary, to provide sufficient resources to meet its obligations as they become due through the next twelve months. eGains capital requirements depend on numerous factors, including the demand for eGains online
customer communications applications, eGains ability to attract and retain customers and maintain customer satisfaction and eGains ability to develop new products and services. To meet eGains longer-term liquidity needs, eGain may
need to raise additional funds, establish additional credit facilities or seek other financing arrangements. Additional funding may not be available in sufficient amounts or on terms acceptable to eGain.




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Additional Factors That May Affect Future Results





eGain expects continuing losses and may never achieve profitability, which in turn may harm its future operating performance and may cause the market price of eGain common
stock to decline





eGain incurred a net loss of $19.0 million for the quarter ended March 31, 2002. As of March 31, 2002,
eGain had an accumulated deficit of approximately $243.3 million. eGain does not know when or if it will become profitable. If eGain does not become profitable within the timeframe expected by financial analysts or investors, the market price of
eGain common stock may decline. If eGain does achieve profitability, it may not be able to sustain or increase profitability in the future.





eGains revenue and operating expenses may fluctuate as eGain builds its business, and this increase may harm its operating results and financial condition





eGain has spent heavily on technology and infrastructure development. eGain expects to continue to spend substantial financial and other resources on developing and introducing product
and service offerings. Accordingly, if eGains revenue does not correspondingly increase, its business and operating results could suffer.





eGain was incorporated in September 1997 and shipped its first product in September 1998. Because of this limited operating history and other factors, eGains quarterly revenue and operating results are difficult
to predict. In addition, due to the emerging nature of the online customer communications market and other factors, eGains revenue and operating results may fluctuate from quarter to quarter. It is possible that eGains operating results
in some quarters will be below the expectations of financial analysts or investors. In this event, the market price of eGain common stock is likely to decline.





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





| |  |  | the growth rate of ecommerce;
| | - |  | -----------------------------




| |  |  | demand for online customer communications applications;
| | - |  | -------------------------------------------------------




| |  |  | eGains ability to attract and retain customers and maintain customer satisfaction;
| | - |  | -----------------------------------------------------------------------------------




| |  |  | eGains ability to upgrade, develop and maintain its systems and infrastructure;
| | - |  | --------------------------------------------------------------------------------




| |  |  | eGains ability to develop new products and services;
| | - |  | -----------------------------------------------------




| |  |  | the amount and timing of operating costs and capital expenditures relating to eGains business and infrastructure;
| | - |  | ------------------------------------------------------------------------------------------------------------------




| |  |  | technical difficulties or system outages;
| | - |  | -----------------------------------------




| |  |  | eGains ability to attract and retain qualified personnel with software and Internet industry expertise, particularly sales and marketing personnel;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the announcement or introduction of new or enhanced products and services by eGains competitors;
| | - |  | -------------------------------------------------------------------------------------------------




| |  |  | changes in eGains pricing policies and those of its competitors;
| | - |  | -----------------------------------------------------------------




| |  |  | litigation relating to proprietary rights;
| | - |  | ------------------------------------------




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




| |  |  | timing of large contracts;
| | - |  | --------------------------



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##### Table of Contents




| |  |  | changes in market conditions limiting eGains ability to raise capital;
| | - |  | -----------------------------------------------------------------------




| |  |  | general business conditions in the industry;
| | - |  | --------------------------------------------




| |  |  | failure to increase eGains international sales; and
| | - |  | ----------------------------------------------------




| |  |  | governmental regulation regarding the Internet and ecommerce in particular.
| | - |  | ---------------------------------------------------------------------------




eGain bases its expense levels in part on its expectations regarding future revenue levels. In the short term, eGains expenses are generally fixed and if eGains revenue for a
particular quarter is lower than it expects, it may be unable to proportionately reduce its operating expenses for that quarter. Period-to-period comparisons of eGains operating results may not be a good indication of its future performance.





Like all companies, eGains business is linked to the health of the U.S. and international economies. Economic growth has
slowed significantly and if the current economic slowdown continues, it could materially affect eGains business and results of operations.





eGain must compete successfully in its market segment





The market for online customer interaction management
software is relatively new, growing rapidly, and intensely competitive. There are no substantial barriers to entry in this market, and established or new entities may enter this market in the near future. eGain competes with companies that develop
and maintain internally developed customer interaction management applications. eGain also competes directly with companies that provide licensed software products to assist in handling customer interactions, including AskJeeves, Inc., Avaya, Inc.,
(which acquired the assets of Quintus Corp.), E.piphany, Inc., Firepond, Inc., Genesys Telecommunications (a wholly-owned subsidiary of Alcatel), Kana Software, Inc., (the combination of the former Kana Communications, Inc. and Broadbase Software),
Primus Knowledge Solutions, Inc., RightNow Technologies, Inc., Serviceware, and Talisma Corp. In addition, some of eGains competitors who currently offer licensed software products are now beginning to offer hosted approaches. eGain also faces
actual or potential competition from larger, front office software companies such as Clarify, Inc. (which was recently acquired by by Amdocs Limited), Onyx Software Corporation, PeopleSoft, Inc. and Siebel Systems, Inc. Furthermore, established
enterprise software companies, including Hewlett-Packard Company, IBM, Microsoft Corporation, Oracle Corporation, SAP, Inc., and similar companies, may seek to leverage their existing relationships and capabilities to offer online customer
interaction management solutions.





eGain believes competition will increase as its current competitors increase the
sophistication of their offerings and as new participants enter the market. Many of eGains current and potential competitors have:





| |  |  | longer operating histories;
| | - |  | ---------------------------




| |  |  | larger customer bases;
| | - |  | ----------------------




| |  |  | greater brand recognition;
| | - |  | --------------------------




| |  |  | more diversified lines of products and services; and
| | - |  | ----------------------------------------------------




| |  |  | significantly greater financial, marketing and other resources.
| | - |  | ---------------------------------------------------------------




These competitors may enter into strategic or commercial relationships with larger, more established and better-financed companies. These competitors may be able to:





| |  |  | undertake more extensive marketing campaigns;
| | - |  | ---------------------------------------------




| |  |  | adopt more aggressive pricing policies; and
| | - |  | -------------------------------------------



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| |  |  | make more attractive offers to businesses to induce them to use their products or services.
| | - |  | -------------------------------------------------------------------------------------------




Further, any delays in the general market acceptance of eGains ecommerce customer communications applications would likely harm its competitive position. Any delay would allow
eGains competitors additional time to improve their service or product offerings, and also provide time for new competitors to develop ecommerce customer communications applications and solicit prospective customers within eGains target
markets. Increased competition could result in pricing pressures, reduced operating margins and loss of market share.





eGain may need additional
capital, and raising additional capital may difficult or impossible and will likely dilute existing stockholders





eGain
believes that its existing capital resources will enable it to maintain its current and planned operations for the next twelve months. However, eGain may choose to, or be required to, raise additional funds due to unforeseen circumstances. If
eGains capital requirements vary materially from those currently planned, it may require additional financing sooner than anticipated. This financing may not be available in sufficient amounts or on terms acceptable to eGain and may be
dilutive to existing stockholders.





In addition, eGains working capital requirements could be adversely affected if it is
unable to meet certain financial covenants contained in a commercial credit agreement between eGain and Silicon Valley Bank. As of March 31, 2002, eGain had borrowed approximately $3.6 million under the loan agreement. As of March 31, 2002, eGain
was in compliance with these financial covenants, as amended. However, there can be no assurance that eGain will be in compliance with its covenants in future months. In the event eGain is in default of its covenants, the bank could require eGain to
repay all or a portion of the total borrowings outstanding on an accelerated basis, which would seriously impair eGains operating cash requirements and overall financial position.





eGains cost reduction initiatives may adversely affect the morale and performance of eGains personnel and its ability to hire new personnel





In connection with eGains effort to streamline operations and reduce costs to better align operating costs and expenses with revenue trends, eGain
has been restructuring its organization for the past several quarters, with substantial reductions in eGains workforce. eGain also reduced its employees salaries in the quarter ended December 31, 2001 in order to reduce operating
expenses. eGains reductions in workforce and salary levels may reduce employee morale and may create concern among existing employees about job security, which may lead to attrition beyond eGains planned workforce reductions and reduce
eGains ability to meet the needs of its current and future customers.





In addition, many of the employees who were
terminated possessed specific knowledge or expertise that may prove to have been important to eGains operations. In that case, their absence may create significant difficulties. This personnel reduction may also subject eGain to the risk of
litigation, which may adversely impact eGains ability to conduct its operations and may cause eGain to incur significant expense.





eGain must
recruit and retain its key employees to expand its business





eGains success will depend on the skills, experience and
performance of eGains senior management, engineering, sales, marketing and other key personnel, many of whom have worked together for only a short period of time. The loss of the services of any of eGains senior management or other key
personnel, including eGains Chief Executive Officer and co-founder, Ashutosh Roy, and eGains President and co-founder, Gunjan Sinha, could harm its business. eGain does not have employment agreements with, or life insurance policies on,
most of its key employees. Most of these employees may terminate their employment with eGain at any time. eGains success also will depend on its ability to recruit, retain and motivate other highly skilled engineering, sales, marketing and
other personnel. If eGain fails to retain and recruit necessary engineering, sales and marketing, customer support or other personnel, eGains business and its ability to develop new products and services and to provide acceptable levels of
customer service could suffer. In addition, companies in the software industry whose employees accept positions with competitors frequently claim that competitors have engaged in unfair hiring practices. eGain could incur substantial costs in
defending itself against any of these claims, regardless of the merits of such claims.





If eGain fails to expand its sales activities, it may
be unable to expand its business





If eGain does not successfully expand its sales activities, eGain may not be able to
expand its business, and eGains common stock price could decline. The complexity of eGains ecommerce customer communications platform and related products and services requires it to have highly trained sales personnel to educate
prospective customers regarding the use and benefits of eGains products and services, and provide effective customer support. With eGains relatively brief operating history and its plans for future growth, eGain has considerable need to
recruit, train, and retain qualified sales staff. Any delays or difficulties eGain encounters in these staffing efforts




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could impair its ability to attract new customers and enhance its relationships with existing customers. This in turn
would adversely affect the timing and extent of eGains revenue. Because many of eGains current sales personnel have recently joined eGain and have limited experience working together, eGains sales organization may not be able to
compete successfully against bigger and more experienced organizations of its competitors.





eGains failure to expand third-party distribution
channels would impede its revenue growth





To increase its revenue, eGain must increase the number of its marketing and
distribution partners, including software and hardware vendors and resellers. eGains existing or future marketing and distribution partners may choose to devote greater resources to marketing and supporting the products of competitors which
could also harm eGain. eGains failure to expand third-party distribution channels would impede its revenue growth.





Similarly, to increase its revenue and implementation capabilities, eGain must develop and expand relationships with systems integrators. eGain relies on systems integrators to recommend eGains products to their customers and to
install and support eGains products for their customers. Systems integrators may develop, market or recommend software applications that compete with eGains products. Moreover, if these firms fail to implement eGains products
successfully for their customers, eGain may not have the resources to implement its products on the schedule required by their customers.





Due to the
lengthy sales cycles of some of eGains products, the timing of its sales is difficult to predict and may cause eGain to miss its revenue expectations





The long sales cycle for eGains products may cause license revenue and operating results to vary significantly from period to period. eGains sales cycle for its products can be six months or more, and
varies substantially from customer to customer. While eGains potential customers are evaluating eGains products before executing definitive agreements, eGain may incur substantial expenses and spend significant management effort in
connection with the potential customer. eGains multi-product offering and the increasingly complex needs of its customers contribute to a longer and unpredictable sales cycle. Consequently, eGain faces difficulty predicting the quarter in
which expected sales will actually occur. This contributes to the uncertainty and fluctuations in eGains future operating results. In addition, the recent economic slowdown in North America may cause potential customers to delay or cancel
major information technology purchasing decisions. If this slowdown continues, eGains average sales cycle could increase and, in some cases, prevent deals from closing that eGain has been forecasting as likely to close. Consequently, eGain may
not meet its revenue forecast and may incur significant expenses that are not offset by corresponding revenue.





Difficulties in implementing
eGains products could harm our revenues and margins





eGain generally recognizes 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 eGain, 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 eGains 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 eGain experiences difficulties with implementation or do not meet project milestones in a timely manner, eGain could be
obligated to devote more customer support, engineering and other resources to a particular project. Some customers may also require eGain to develop customized features or capabilities. If new or existing customers have difficulty deploying
eGains products or require significant amounts of eGain professional services support or customized features, revenue recognition could be further delayed or canceled and eGains costs could increase, causing increased variability in
eGains operating results.





eGains business is premised on a novel business model that is largely untested





eGains business is premised on novel business assumptions that are largely untested. Customer communications historically have been conducted
primarily in person or over the telephone. eGains business model




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assumes that companies engaged in ecommerce will continue to elect to communicate with customers mainly through the
Internet rather than by telephone. eGains business model also assumes that many companies recognize the benefits of a hosted delivery model and will seek to have their customer communications applications hosted by eGain. If any of these
assumptions is incorrect, eGains business will be seriously harmed.





eGain depends on broad market acceptance of online customer communications
applications





eGain depends on the widespread acceptance and use of online customer communications applications as an
effective solution for businesses seeking to manage high volumes of customer communication over the Internet. eGain cannot estimate the size or growth rate of the potential market for its product and service offerings, and does not know whether its
products and services will achieve broad market acceptance. The market for online customer communications is 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 online customer communications applications fails to grow or grows more slowly than eGain currently anticipates, its business will be seriously
harmed.





If eGain does not successfully address the risks inherent in the expansion of its international operations, its business could suffer





eGain intends to continue to expand into international markets and to spend significant financial and managerial resources
to do so. For example, eGain has established subsidiaries in Europe, Asia Pacific and India. If eGains revenue from international operations does not exceed the expense associated with establishing and maintaining these operations,
eGains business and operating results will suffer. eGain has limited experience in international operations and may not be able to compete effectively in international markets. eGain faces various risks inherent in conducting business
internationally, such as the following:





| |  |  | unexpected changes in international regulatory requirements;
| | - |  | ------------------------------------------------------------




| |  |  | difficulties and costs of staffing and managing international operations;
| | - |  | -------------------------------------------------------------------------




| |  |  | differing technology standards;
| | - |  | -------------------------------




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




| |  |  | political and economic instability;
| | - |  | -----------------------------------




| |  |  | fluctuations in currency exchange rates;
| | - |  | ----------------------------------------




| |  |  | imposition of currency exchange controls;
| | - |  | -----------------------------------------




| |  |  | potentially adverse tax consequences;
| | - |  | -------------------------------------




| |  |  | reduced protection for intellectual property rights in foreign countries; and
| | - |  | -----------------------------------------------------------------------------




| |  |  | general business conditions.
| | - |  | ----------------------------




eGain may not be able to
upgrade its systems and the eGain Hosted Network to accommodate growth in ecommerce





eGain faces risks related to the
ability of the eGain Hosted Network to operate with higher activity levels while maintaining expected performance. As the volume and complexity of ecommerce customer communications increase, eGain will need to expand its systems and hosted network
infrastructure. The expansion and adaptation of eGains network infrastructure will require substantial financial, operational and management resources. Customer demand for eGains products and services could be greatly reduced if eGain
fails to maintain high capacity data transmission. In addition, as eGain upgrades its network, eGain is likely to encounter equipment or software




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incompatibility. eGain may not be able to expand or adapt the eGain Hosted Network to meet additional demand or
eGains customers changing requirements in a timely manner or at all.





Unplanned system interruptions and capacity constraints could reduce
eGains ability to provide hosting services and could harm its business and reputation





eGains customers have in
the past experienced some interruptions with the eGain Hosted Network. eGain believes that these interruptions will continue to occur from time to time. These interruptions could be due to hardware and operating system failures. eGain expects a
substantial portion of its revenue to be derived from customers who use the eGain Hosted Network. As a result, eGains business will suffer if it experiences frequent or long system interruptions that result in the unavailability or reduced
performance of the eGain Hosted Network or reduce eGains ability to provide remote management services. eGain expects to experience occasional temporary capacity constraints due to sharply increased traffic, 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, eGains business and reputation could be seriously harmed.





eGains success largely depends on the efficient and uninterrupted operation of its computer and communications hardware and network systems. Most
of eGains computer and communications systems are located in Sunnyvale, California. eGains systems and operations are vulnerable to damage or interruption from fire, earthquake, power loss, telecommunications failure and similar events.





eGain has entered into service agreements with some of its customers that require minimum performance standards, including
standards regarding the availability and response time of eGains remote management services. If eGain fails to meet these standards, eGains customers could terminate their relationships with eGain, and eGain could be subject to
contractual monetary penalties. Any unplanned interruption of services may harm eGains ability to attract and retain customers.





eGain relies on
relationships with, and the system integrity of, hosting partners for the eGain Hosted Network





The eGain Hosted Network
consists of virtual data centers co-located in the physical data centers of eGains hosting partners. Accordingly, eGain relies on the speed and reliability of the systems and networks of these hosting partners. If eGains hosting partners
experience system interruptions or delays, or if eGain does not maintain or develop relationships with reliable hosting partners, eGains business could suffer.





eGain may be liable for activities of its customers or others using the eGain Hosted Network





As a provider of customer interaction management software for the Internet, eGain faces potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the actions of eGain customers or
others using the eGain Hosted Network. This liability could result from the nature and content of the communications transmitted by eGain customers through the eGain Hosted Network. eGain does not and cannot screen all of the communications
generated by its customers, and eGain could be exposed to liability with respect to this content. Furthermore, some foreign governments 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.





If eGains system security is breached, eGains business and reputation could suffer





A fundamental requirement for online communications and transactions is the secure transmission of confidential information
over public networks. Third parties may attempt to breach eGains security or that of eGains customers. eGain may be liable to its customers for any breach in its security and any breach could harm its business and reputation. Although
eGain has implemented network security measures, eGains servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. eGain 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.




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eGain may be unable to develop or enhance products or services that address the changing needs of the online customer
communications market





To be competitive in the online customer communications market, eGain must continually improve the
performance, features and reliability of eGain products and services, including eGains existing online customer communications applications, and develop new products, services, functionality and technology that address changing industry
standards and customer needs. If eGain cannot bring new or enhanced products to market in a timely and effective way, its business and operating results will suffer. More generally, if eGain cannot adapt or respond in a cost-effective and timely
manner to changing industry standards, market conditions or customer requirements, eGains business and operating results will suffer.





Unknown
software defects could disrupt eGains products and services, which could harm eGains business and reputation





eGains product and service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when new versions are released.
eGain may not discover software defects that affect its new or current services or enhancements until after they are deployed. It is possible that, despite testing by eGain, defects may occur in the software. These defects could result in damage to
eGains reputation, lost sales, product liability claims, delays in or loss of market acceptance of eGains products, product returns and unexpected expenses and diversion of resources to remedy errors.





Problems arising from use of eGains products with other vendors products could cause eGain to incur significant costs, divert attention from eGains product
development efforts and cause customer relations problems





eGains customers generally use eGain products together with
products from other companies. As a result, when problems occur in the network, it may be difficult to identify the source of the problem. Even when eGains products do not cause these problems, these problems may cause eGain to incur
significant warranty and repair costs, divert the attention of eGains engineering personnel from product development efforts and cause significant customer relations problems.





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





To the
extent eGain needs to license third-party technologies, it may be unable to do so on commercially reasonable terms or at all. In addition, eGain may fail to successfully integrate any licensed technology into its products or services. Third-party
licenses may expose eGain to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of eGains own proprietary technology, and eGains inability to generate
revenue from new technology sufficient to offset associated acquisition and maintenance costs. eGains 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 eGains business and operating results.





eGain may be unable to protect its
intellectual property and proprietary rights





eGain regards its patents, copyrights, service marks, trademarks, trade
secrets and similar intellectual property as critical to its success, and relies on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with eGain employees, customers and partners to protect its
proprietary rights. eGain has numerous registered trademarks and trademark applications pending in the United States and internationally, as well as common law trademark rights. In addition, eGain owns several patents in the area of case-based
reasoning, and has patents pending relating to various technologies. eGain will seek additional trademark and patent protection in the future. eGain does not know if its 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 eGains proprietary
rights as fully as in the United States. Furthermore, eGains competitors may independently develop technology similar to eGains technology.




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Despite eGains efforts to protect its proprietary rights through confidentiality and
license agreements, unauthorized parties may attempt to copy or otherwise obtain and use eGains products or technology. These precautions may not prevent misappropriation or infringement of eGains intellectual property. In addition,
eGain routinely requires its employees, customers, and potential business partners to enter into confidentiality and nondisclosure agreements before eGain will disclose any sensitive aspects of its products, technology, or business plans. In
addition, eGain requires employees to agree to surrender to eGain any proprietary information, inventions or other intellectual property they generate or come to possess while employed by eGain. In addition, some of eGains license agreements
with certain customers and partners require eGain to place the source code for its 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 eGain, or if eGain materially breaches a contractual commitment to provide support and maintenance to the party.





eGain may face intellectual property infringement claims that could be costly to defend





Third parties may infringe or misappropriate eGains copyrights, trademarks and similar proprietary rights. In addition, other parties may assert infringement claims against eGain. For example, eGain has been
contacted by a company that has suggested that eGain may need to license certain patents held by this company. Although this company has not filed any claims against eGain, eGain cannot be sure that it (or some other party) will not do so in the
future. In addition, 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 eGains software products. eGain may be subject to
legal proceedings and claims from time to time in the ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive
and time-consuming and could divert managements attention away from running eGains business. This litigation could also require eGain 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. eGains failure or inability to develop non-infringing technology or license the proprietary rights on a
timely basis would harm its business.





eGain may face liability associated with its management of sensitive customer information





eGains applications manage sensitive customer information, and eGain may be subject to claims associated with invasion of privacy or
inappropriate disclosure, use or loss of this information. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm eGains reputation and its business and operating
results.





eGain may become involved in securities class action litigation which could divert managements attention and harm its business





The stock market has from time to time experienced significant price and volume fluctuations that have affected the market
prices for the common stocks of technology companies, particularly Internet companies. These broad market fluctuations may cause the market price of eGain common stock to decline. In the past, following periods of volatility in the market price of a
particular companys securities, securities class action litigation has often been brought against that company. eGain may become involved in this type of litigation in the future. Litigation is often expensive and diverts managements
attention and resources, which could harm eGain business and operating results.





The conversion of eGains preferred shares and the exercise of
the related warrants would result in a substantial number of additional shares being issued, which could result in a decline in the market price of eGains common stock





On August 8, 2000, eGain 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, the investors received warrants to purchase 3.8 million shares of




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eGains common stock with a current warrant exercise price of $5.6875 per share. The Series A shares have a
liquidation preference of $100,000 per share which increases on a daily basis at an annual rate of 6.75% from August 8, 2000, compounded on a semi-annual basis. The Series A shares are convertible into common stock (including all amounts accreted
from August 8, 2000) at a conversion price of $5.6875 per share. By way of illustration, at the current conversion price of $5.6875 per share, the Series A shares would be convertible into 17.4 million shares of common stock.





To the extent the preferred shares are converted into common stock (including all amounts accreted from August 8, 2000), a significant number
of shares of common stock may be sold into the market, which could decrease the price of eGains common stock.





eGains stock price may be
volatile





The price at which eGain common stock trades has been and will likely continue to be highly volatile and fluctuate
substantially due to factors such as the following:





| |  |  | actual or anticipated fluctuations in eGains operating results;
| | - |  | ----------------------------------------------------------------




| |  |  | changes in or failure to meet securities analysts expectations;
| | - |  | ----------------------------------------------------------------




| |  |  | announcements of technological innovations;
| | - |  | -------------------------------------------




| |  |  | introduction of new services by eGain or its competitors;
| | - |  | ---------------------------------------------------------




| |  |  | developments with respect to intellectual property rights;
| | - |  | ----------------------------------------------------------




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




| |  |  | general market conditions.
| | - |  | --------------------------




eGain may engage in future
acquisitions or investments that could dilute eGains existing stockholders, cause eGain to incur significant expenses or harm its business





eGain may review acquisition or investment prospects that might complement its current business or enhance its technological capabilities. Integrating any newly acquired businesses or their technologies or products
may be expensive and time-consuming. For example, eGain acquired eGain India, an ecommerce software development company in India, in April 2001. There can be no assurance that eGain can effectively integrate eGain Indias operations with those
of eGains. To finance any acquisitions, it may be necessary for eGain to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to eGain, if at all, and, in the case of
equity financings, may result in dilution to eGains existing stockholders. eGain may not be able to operate acquired businesses profitably or otherwise implement its growth strategy successfully. If eGain is unable to integrate newly acquired
entities or technologies effectively, eGains operating results could suffer. Future acquisitions by eGain could also result in large and immediate write-offs, incurrence of debt and contingent liabilities, or amortization of expenses related
to goodwill and other intangibles, any of which could harm eGains operating results.





eGain could incur additional non-cash charges associated
with stock-based compensation arrangements





eGains operating results may be impacted if it incurs significant non-cash
charges associated with stock-based compensation arrangements with employees and non-employees. eGain has issued options to non-employees which are subject to various vesting schedules of up to 48 months. For deferred compensation purposes,
non-employee options are required to be remeasured at each vesting date, which may require eGain to record additional non-cash accounting expenses. These expenses may result in eGain incurring net losses or increased net losses for a given period,
and this could seriously harm eGains operating results and common stock price.




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eGain will only be able to execute its business plan if Internet usage continues to grow





eGains business will be seriously harmed if Internet usage does not continue to grow or grows at significantly lower rates compared to current
trends. The continued growth of the Internet depends on various factors, most of which are outside eGains control. These factors include the following:





| |  |  | the Internet infrastructure may be unable to support the demands placed on it;
| | - |  | ------------------------------------------------------------------------------




| |  |  | the performance and reliability of the Internet may decline as usage grows;
| | - |  | ---------------------------------------------------------------------------




| |  |  | security and authentication concerns with respect to transmission over the Internet of confidential information, such as credit card numbers, and attempts by unauthorized
computer users, so-called hackers, to penetrate online security systems; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | privacy concerns, including those related to the ability of Web sites to gather user information without the users knowledge or consent.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------




Because eGain provides its customer interaction management software to companies conducting business over the Internet, eGains business could suffer if
efficient transmission of data over the Internet is interrupted





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. Because eGain provides Internet-based customer interaction management software, interruptions or delays in Internet transmissions will harm eGain
customers ability to receive and respond to online interactions. Therefore, eGains market depends on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion.





Governmental regulation and legal uncertainties could impair the growth of the Internet and decrease demand for eGains services or increase eGains cost of doing
business





Governmental regulation may impair the growth of the Internet or commercial online services. This could decrease
the demand for eGains products and services, increase its cost of doing business or otherwise harm its business and operating results. Although there are currently few laws and regulations directly applicable to the Internet and the use of the
Internet as a commercial medium, a number of laws have been proposed involving the Internet. These proposed laws include laws addressing user privacy, pricing, content, copyrights, distribution, antitrust, and characteristics and quality of products
and services. 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.





ITEM 3.    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





eGain develops products in the United
States and India and sells these products internationally. Generally, sales are made in local currency. As a result, eGains 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. eGain does not currently use derivative instruments to hedge against foreign exchange risk.





eGains exposure to market rate risk for changes in interest rates relates primarily to its investment portfolio.
eGains investments consist primarily of commercial paper and money market funds, which have an average fixed rate of 2.5% to 3.5%, and have maturities of three months or less. eGain does not consider its cash equivalents to be subject to
interest rate risk due to their short maturities.




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PART II.    
OTHER INFORMATION





Item 1.    
Legal Proceedings





On October 25, 2001, a federal securities class action complaint was filed in the
United States District Court for the Southern District of New York against eGain Communications Corp., certain of its officers, and the lead underwriters for eGains initial public offering. Rennel Trading Corp. v. eGain Communications
Corp., et al., No. 01-CIV-9414 (SAS). The complaint alleges violations of Section 11, 12(a)(2) and Section 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, on behalf
of a alleged class of plaintiffs who purchased eGain common stock between September 23, 1999 and December 6, 2000. Specifically, the complaint alleges that the prospectus eGain filed in connection with the initial public offering was materially
false and misleading because it failed to disclose that the underwriter defendants solicited and received excessive and undisclosed commissions from certain investors in exchange for shares of eGain stock, and that the underwriters entered into
agreements with certain investors in which these investors agreed to purchase additional shares of Company common stock in the aftermarket in exchange for receiving shares of eGain common stock in the initial public offering. The lawsuit is being
prosecuted by the Plaintiffs Executive Committee in In re: Initial Public Offering Securities Litigation, 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. eGain believes it has good and valid defenses to these
allegations, and eGain intends to defend the action vigorously. However, these claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.





On March 5, 2002, eGain was named as defendant in a Wisconsin state court action alleging breach of contract/warranty, fraudulent misrepresentation and related claims arising from a
software license agreement between Metavante Corp. and Inference Corporation (a wholly owned subsidiary of eGain). The suit, which has only recently been filed, seeks unspecified damages. eGain intends to defend this claim vigorously and does not
expect it to have a material impact on our results of operations. However, the ultimate outcome of any litigation is uncertain, and it could have an adverse material impact due to defense costs, diversion of management and other resources and other
factors.





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.





Item 6.    
Exhibits and Reports on Form 8-K





(a)  Exhibits required by Item 601 of Regulation S-K.








Exhibit Number

Exhibit10.1

Loan and Security Agreement dated March 27, 2002





(b)  Reports on Form 8K.





None.




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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.





EGAIN COMMUNICATIONS CORPORATIONDated: May 15, 2002



By:

/s/    HARPREET GREWALHarpreet Grewal Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)




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INDEX TO EXHIBITS





Exhibit Number

Exhibit10.1

Loan and Security Agreement dated March 27, 2002




28