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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K





(Mark One)





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




| |  | For the Fiscal Year Ended June 30, 2002
| |  | ---------------------------------------




or





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




| |  | For the transition period from                    
to                     .
| |  | ---------------------------------------------------------------------------




Commission File Number: 0-30260





eGain Communications Corporation


(Exact name of registrant as specified in its charter)





Delaware 77-0466366

77-0466366(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification
No.)624 E. Evelyn, Sunnyvale, California 94086

(408) 212-3400(Address of principal executive offices, including zip code)

(Registrants telephone number, including area code)





Securities registered pursuant to Section 12(b) of the
Act:  None





Securities registered pursuant to Section 12(g) of the Act:





Common Stock, par value $0.001 per share





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





Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ̈





The aggregate market value of the Common Stock held by non-affiliates (based on the closing sale price on the Nasdaq National
Market on September 20, 2002), was approximately $1,501,697. For purposes of the foregoing calculation only, the registrant has included in the shares owned by affiliates the beneficial ownership of Common Stock of officers and directors, and
affiliated entities, of the registrant and members of their families. Such inclusion shall not be construed as an admission that any such person is an affiliate for any other purpose.





As of September 20, 2002, there were 36,657,313 shares of Common Stock, $0.001 par value, outstanding.





DOCUMENTS INCORPORATED BY REFERENCE





Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by reference information from the registrants proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of
proxies for the registrants 2002 Annual Meeting of Stockholders to be held on November 1, 2002.





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eGAIN COMMUNICATIONS CORPORATION





TABLE OF CONTENTS





2002 FORM 10-K





ItemNo.



PagePART I1.

Business

12.

Properties

113.

Legal Proceedings

114.

Submission of Matters to a Vote of Security Holders

11PART II5.

Market for the Registrants Common Stock and Related Stockholder Matters

126.

Selected Consolidated Financial Data

137.

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

147A.

Quantitative and Qualitative Disclosures About Market Risk

368.

Financial Statements and Supplementary Data

379.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

63PART III10.

Directors and Executive Officers of the Registrant

6311.

Executive Compensation

6412.

Security Ownership of Certain Beneficial Owners and Management

6413.

Certain Relationships and Related Transactions

64PART IV14.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

65





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PART I





ITEM 1.    
BUSINESS





This report on Form 10-K and the documents incorporated herein by reference
contain forward-looking statements that involve risks and uncertainties. These statements may be identified by the use of the words such as anticipates, believes, continue, could, would,
estimates, forecasts, expects, intends, may, might, plans, potential, predicts, should, or will and similar
expressions or the negative of those terms. The forward-looking statements include, but are not limited to, the expansion of eGains eService platform, the continued expansion of global distribution capabilities, the development of eGains
strategic relationships, the factors influencing competition in eGains market, eGains limited operating history, expected net losses, the adequacy of capital resources, the continued need for eService solutions, 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 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 Internet-based eService software that enables Global 2000 companies to transform traditional customer call centers into multi-channel contact centers. eGain software solutions are designed to
measurably improve operational efficiency and customer retention. eGain eService Enterprise, the Companys integrated software suite, includes applications for knowledge management, self-service, email management and Web collaboration that
enable online customers to communicate through each of the three primary eService channelsemail, real-time and self-service. Built using a 100% Web-native architecture, eGains comprehensive 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 call center infrastructure and business systems, enabling customers to leverage investments
in existing systems and providing an enterprise-wide solution.





eGain offers both licensed and hosted eService
solutions for email management, interactive real-time Web and voice collaboration, intelligent self-help agents, knowledge management and proactive online marketing. This comprehensive suite of applications helps address the needs of customers
across the full customer lifecycle.





Since eGains applications are built upon a common knowledge base,
information such as a customers account history and prior interactions, regardless of origination, can be accessed and shared across different products and across the enterprise. eGain believes this results in a more comprehensive, efficient
and personalized customer experience.





Recent Developments





On May 20, 2002, eGain received a letter from Nasdaq indicating that our common stock had failed to maintain a minimum bid price of $1.00 per share for 30 consecutive
business days, and that we need to comply with the requirements for continued listing within 90 calendar days from such notification or face the possibility of being delisted from the Nasdaq National Market. On August 20, 2002, eGain received
another letter from Nasdaq indicating that eGains common stock had failed to achieve compliance with the $1.00 per share minimum bid price and that the common stock was therefore subject to delisting. On August 26, 2002, eGain issued a press
release announcing receipt of this letter from Nasdaq and eGains intention to appeal the delisting




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determination of the Nasdaq staff. eGain currently has a hearing date scheduled for October 2002 before a Listing Qualifications Hearing Panel. At the hearing, eGain intends to present its plan
for achieving compliance with the Nasdaq listing requirements, but eGains common stock may be delisted from the Nasdaq National Market. See further discussion of this matter under Additional Factors that May Affect Future Results.





August 30, 2002, was the last day of employment by eGain of its former Chief Financial Officer, Harpreet Grewal.
Mr. Grewal resigned to accept employment with another company. eGains Board of Directors has appointed Eric Smit to succeed Mr. Grewal as Chief Financial Officer. Mr. Smit, who has been with eGain for over four years, had previously served as
eGains Vice President, Finance and Administration and Vice President, Operations.





Industry Background





The Internet has fundamentally changed the manner in which businesses and customers interact. Customers demand instant access
to customer service and expect immediate responses to questions and issues. Accordingly, successful companies are implementing multi-channel online interaction solutionssolutions that are increasingly known as eService software.





In a traditional commercial setting, companies typically addressed customer service needs by establishing telephone call
centers, enabling customers to speak with customer service representatives by phone. With the arrival of the Internet and the rapid growth of online communication, companies are discovering that it is increasingly necessary to supplement or
transform their traditional call centers into multi-channel contact centers capable of handling high volumes of customer interactions across multiple channels of communication.





This transformation is being driven both by the lower cost of providing online assistance as compared with telephonic assistance, and by the apparent customer demand for
such assistance. A recent study conducted by Purdue University Research indicates that the number of customer contacts is expected to double to approximately 30 billion by 2005, and that approximately 45% of these contacts will take place online, an
increase from approximately 5% currently.





The ability to address eService requirements has become a necessity in
todays competitive business environment. Integrated eService capabilities have become a significant part of any customer service strategy seeking to deliver a quality customer experience. Failure to address the communication needs of customers
can result in diminished customer loyalty, increased difficulty in acquiring new customers, and a deterioration of competitive position and brand reputation, all potentially resulting in a loss of current and future revenue.





Over the past few years, numerous software vendors have developed and marketed point solutions, or software packages designed to handle
online customer communications through a specific channel such as email, real-time Web collaboration or self-service. However, point solutions do not meet the demands of customers who want flexibility in how they communicate with companies based on
the nature of their inquiry. Point solutions also are difficult to integrate with other programs, making it difficult for customer service agents to easily reference a customers past communications that originated from multiple channels. Nor
can they integrate easily with a companys existing legacy systems. This lack of integration makes these applications expensive to implement and maintain, especially for companies with significant existing call center operations.





For these reasons, eGain believes that providing customers with a full range of intergrated eService product offerings has
become a strategic imperative, and that the demand for an integrated multi-channel interaction platform will continue to grow accordingly.





The eGain Solution





eGain provides software products that enable online customers and
businesses to interact through each of the three primary channels for online customer interactionemail, real-time and self-service. These applications




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operate on a shared platform that provides for common archiving, reporting and knowledge management capabilities across these different channels. In addition, eGains platform is designed to
integrate with leading call center systems, as well as third party customer communications, database and ecommerce software applications, to provide comprehensive information about each customer, thereby permitting companies to leverage existing
investments and installed systems.





eGains applications and platform are built with a 100% Web-native
architecture that allows companies to leverage the unique advantages of the Internet. All of eGains software products can be deployed either as a licensed application installed on servers at the customer location or a hosted application
service maintained and operated by eGains hosted operations.





The eGain solution provides companies with the
following benefits:





| |  |  | Develop, Maintain and Enhance Profitable Long Term Customer Relationships.    Whether a customer is asking a question, seeking a
resolution to an issue or making a purchase, eGains eService platform allows companies to greatly enhance the interaction experience for customers. Companies can respond rapidly and effectively to large volumes of email, communicate over the
Web in real-time with their customers, track the history of individual customer interactions and allow customers to handle their own service needs at any time. In addition to strengthening existing customer relationships, eGains products may
also increase the likelihood that a first-time Web site visitor will become a customer. Online visitors can interact immediately and directly with a customer service representative to inquire about a specific product or issue, thereby increasing the
likelihood that a Web site visitor will complete a purchase.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Reduce Operating Costs.    eGains products assist customers and companies in communicating more effectively while reducing
operating costs and yielding rapid and demonstrable return on investment. eGains intelligent email routing and suggested response capabilities, tracking, workload and reporting features, and knowledge management system is designed to
measurably enhance the productivity of a companys customer service representatives. From an online customer perspective, eGains robust self-service tools, logical integrated escalation paths and sophisticated artificial intelligence
engine empower online customers to resolve business issues without assistance, thereby reducing the demands on the customer service organization.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Reduce Technology Costs.    eGains products are designed to integrate, not only with each other, but with data and processes
residing in legacy systems and other enterprises data sources. By integrating with existing corporate systems, eGains platform allows companies to leverage prior information technology investments, extend the useful lives of such systems and
reduce the need for additional expenditures for enterprise applications, while transforming traditional operations into multi-channel contact centers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Provide Flexible Deployment Options.    eGains products are designed to allow companies to deploy eGain applications either
in-house at their own facility as installed software or in a hosted environment operated and maintained by eGain. Customers using eGains hosted operations can take advantage of eGains systems expertise, thereby reducing the demands on
their own information technology resources while receiving the full benefit of secure and reliable access to eGains applications.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The eGain Strategy





eGains objective is to further enhance its position as a
leading provider of eService software. The key elements of eGains strategy include:





Enhance and Expand
the Leading Integrated, Multi-Channel eService Platform.    eGain believes it is one of the few companies that provide software to enable communication across the three primary channels of online interactionemail,
real-time and self-service. eGain has a strong track record of extending its platform through internal development and acquisitions and continues to invest substantial resources in research and development




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efforts. eGain believes it was the first company to expand channels of communication by integrating the email and real-time channels. eGain believes it was also the first company to offer
self-service and knowledge management applications integrated into a complete customer service platform. In addition, eGains solution is designed to integrate with leading CRM, ERP and call center systems, enabling customers to leverage
investments in existing systems and providing an enterprise-wide solution.





Provide Demonstrable Return on
Investment to Customers.    Especially in these challenging economic times, when many companies are dramatically scaling back their investments in information technology, eGain believes that customers will only buy enterprise
class software if they are convinced that they will experience real return on investment (ROI), in both the short and long run. A central element of eGains strategy is the ability to provide companies with demonstrable ROI from the
purchase of eGains software applications. Among the factors that can provide this ROI are: increased revenues from enhanced customer loyalty; the relatively lower cost of customer retention (as opposed to customer acquisition) initiatives;
decreased headcount and associated costs in the call center and customer support areas; providing customers with access to lower cost service alternatives than traditional telephone support; and preserving and leveraging existing information
technology investments by using eGains easily-integrated products. By focusing on these and other factors, eGain works with existing and prospective customers to establish that investing in eGain products will prove a wise investment.





Technology Leadership.    With its flagship product, eGain Mail, eGain was the first
company to introduce a 100% Web-native solution to address the need for online customer interaction management. Since inception, eGain has designed its products with the specific characteristics of the Web in mind and intends to maintain its
technology leadership by building all of its products on a 100% Web-native architecture. eGain believes that its Web-native architecture provides true global access, improved scalability, easier integration with existing enterprise applications and
systems, and lower deployment costs.





Flexible Delivery Options.    eGain
believes that offering its solution on a hosted or licensed basis provides customers with a meaningful choice of deployment options. Customers can choose to license applications for deployment at their facilities, or employ eGains hosted
operations. Customers choosing to receive hosted access to eGains solutions can focus on other aspects of their business while benefiting from the rapid deployment, 24x7 reliability and support, scalability on demand, and lower up-front
investment that the hosting option offers.





Expand Global Distribution
Capabilities.    eGain intends to attempt to expand its global distribution capabilities through eGains direct sales efforts as well as strategic relationships. eGain maintains a sales presence in 18 countries including
the United Kingdom, Australia and Japan. With the introduction of multi-lingual versions of its products (Asian and Western European language capabilities), eGain may attempt to further penetrate international markets. In addition to its direct
sales and marketing efforts, eGain is engaged in a number of formal and informal strategic relationships with system integrators, consulting firms, technology partners and solutions providers.





Products and Services





eGain eService
Enterprise and Suite of Applications





eGain provides multi-channel, eService solutions to the Global 2000.
eGains solutions are built on a scalable, Web-native architecture based on industry standards and are designed to meet the growth of online communications. eGains products are available on multiple platforms, and deployment is available
either as a hosted application service or as locally installed software. Although each product may be purchased separately, eGains products are designed to work closely with each other and to integrate with customers existing databases
and applications.





The core of eGains product offering is a suite of integrated, multi-channel, globalized
applications built on a common platform and sold under the name eGain eService Enterprise. This integrated solution consists of multiple application components that are designed to enable companies to deliver superior service across all




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channels of communication, including the telephone, email, real-time Web collaboration and Web self-service. This product suite is designed to seamlessly integrate with existing systems through a
variety of bridges and gateways that connect with other corporate databases and systems. All customer interaction data is centrally managed and accessible across the enterprise, ensuring that responses are accurate, up-to-date and consistent across
all channels.





eGains individual applications, categorized by channel, are described below:





Call Center:    eGains call center solutions are focused on improving communications and
establishing customer service consistency within the existing call center environment.





| |  |  | eGain Knowledge is a comprehensive knowledge management solution that lies at the heart of eGain eService Enterprise. Leveraged across all channels, it
helps agents quickly find answers for customers. Novice agents and trainees are guided to the right answer in an automated fashion using case-based reasoning, which reduces the need to escalate customers to more expensive subject matter experts.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | eGain Call Center Bridge is a computer-telephony integration (CTI) solution that is designed to link eGain eService Enterprise to a companys
existing call center infrastructure so that all customer communications, whether they be Internet contacts or phone calls, can be centrally queued, routed, logged, monitored, and managed. This integration simplifies multi-channel administration and
management by leveraging previous call center investments.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Email:    eGain offers applications to manage inbound and outbound email transmissions.





| |  |  | eGain Mail provides companies with an email management system designed to cost-effectively process high volumes of customer emails and Web-form
submissions. Sophisticated workflow and flexible routing rules ensure that the right agent receives the inquiry, even in complex, distributed environments. It provides tools to track issues, create personalized responses, and increase agent
productivity. eGain Mail is designed to scale to meet the growing customer communication needs of Global 2000 companies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | eGain Campaign is a high volume, outbound email management solution used for targeted service and retention marketing campaigns. eGain Campaign enables
businesses to engage in one-to-one email-based customer interactions, leading to profitable, long-term relationships.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Self Service:    eGain provides a comprehensive set of tools that allows online customers to quickly and conveniently obtain answers to their questions 24 hours a day, thereby reducing support
organization staffing needs.





| |  |  | eGain Knowledgecontains an optional self-service module that empowers customers to quickly resolve their problems at the instant they need help by
walking them through targeted questions to pinpoint the best solution. This application provides natural language support and escalation to agent-assisted channels when customers need additional help.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | eGain Assistant offers a life-like, conversational self-service agent that is available at any time to address customer inquiries and reduce support
costs. eGain Assistant encourages the use of self-service by providing a comfortable and engaging way for users to interact with a companys Web site. Customers who cannot find what they are looking for can be immediately escalated to another
channel of communication.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | eGain Inform is a customizable customer service portal with easy to use templates intended to provide customers with access to a history of their
previous communications with a company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Real-Time:     Gains
applications provide online customers a flexible way to communicate with customer service representatives in real-time, offering customers immediate, in-depth help when they need it.





| |  |  | eGain Live enables customer service representatives to answer online requests by providing immediate, personalized assistance through interactive text
messaging, cobrowsing of Web sites, and callbacks. One-to-one collaboration technologies allow agents to help customers in filling out web forms and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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completing purchases and complex transactions on the Internet without the customer ever having to leave the Web site.





| |  |  | eGain Interact enables sales and support representatives to connect browsers with their customers and jointly view online product
demonstrations, fill out complex Web forms and walk through online transactions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Other eGain
application components include:





| |  |  | eGain Commerce Bridge is a database and application-linking solution that is designed to provide easy integration with standard relational databases,
ecommerce platforms, and call center systems as well as any accessible information on the Internet.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




eGains Hosted Operations





eGains hosted customers receive access to the full
functionality of eGains applications through a standard Web browser and Internet connection. Through a network of eGain service centers and hosting partners linked by high-speed Internet connections, eGain provides its customers with multiple
redundant paths to access their hosted customer service applications. eGain remotely manages these applications which reside on server machines housed at leading co-location facilities. eGain also offers value-added services to its hosted customers,
including application management, database maintenance, mail hosting and anti-virus protection. eGain has also developed proprietary Web-based hosted service management systems, enabling eGain service professionals to efficiently administer and
manage large numbers of hosted customer applications.





Professional Services





eGains worldwide professional services organization provides consulting, hosting, technical support and education services designed to ensure customer success
and build customer loyalty.





| |  |  | Consulting Services.    eGains consulting services offers rapid implementation services, custom solution development and
systems integration services. Consultants work with customers to understand their specific requirements, analyze their business needs and implement integrated solutions. eGain provides these services independently or in partnership with systems
integrators who have developed consulting expertise on eGains platform.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Hosted Services.    eGains hosted services group provides 24x7 application management, monitoring and response services. eGain
also provides database services to maintain and enhance the performance, availability and reliability of production systems as well as network security services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Support Services.    eGain offers a comprehensive collection of support services designed to respond to inquiries rapidly.
eGains technical support services are available to customers worldwide under maintenance agreements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Education Services.    eGains educational services group provides a comprehensive set of basic and customized training programs
to eGain customers and partners. Training programs are offered either online, or in person at the customer site or at one of eGains worldwide training centers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




As of June 30, 2002, eGain had approximately 122 professionals providing worldwide services for systems installation, solutions development, application management,
education and support.





Sales and Marketing





Sales Strategy





eGains
sales strategy is to pursue targeted accounts through a combination of its direct sales force and strategic alliances. eGain targets its sales efforts at Global 2000 companies.




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eGains North American direct sales personnel are based at eGains
corporate headquarters in Sunnyvale, California, with field sales offices located throughout the United States and Canada. Internationally, eGain has direct sales personnel located in Australia, France, Germany, Ireland, Italy, Japan, the
Netherlands and the United Kingdom.





The direct sales force is organized into teams that include both sales
representatives and systems engineers. eGains direct sales force is complemented by telemarketing representatives based at headquarters in Sunnyvale, California.





eGain further complements its direct sales force with a series of reseller and sales alliances. Through these alliances, eGain is able to leverage additional sales,
marketing and deployment capabilities.





As of June 30, 2002, there were approximately 71 employees engaged in
worldwide sales activities.





Marketing Strategy





eGains marketing strategy is to build brand awareness as a leading provider of eService software that enable Global 2000 companies to transform traditional call
centers into multi-channel contact centers.





eGain employs a wide range of marketing avenues to deliver its
message, including print and Internet advertising, targeted direct mailing, email newsletters and a variety of trade shows, seminars and interest groups.





eGains marketing group also provides the sales team with lists of prospects and qualified leads for further follow up. This group also produces sales tools, including product collateral, customer
case studies, demonstrations, presentations and competitive analyses. In addition, eGains marketing group performs market analyses and conducts focus group and customer reviews to identify and develop key partnership opportunities and product
requirements.





As of June 30, 2002, there were approximately 15 employees engaged in worldwide marketing
activities.





Strategic Relationships





eGain believes that its strategic relationships help extend the breadth and depth of its product offerings, drive market penetration, and augment its professional service capabilities. eGain believes
these relationships are important to delivering successful, integrated products and services to its customers.





eGain has five main types of strategic relationships: consulting alliances, technology alliances, solution provider alliances, outsourcing alliances and global distribution alliances.





| |  |  | Consulting Alliances.    eGain works with consulting firms and systems integrators with proven implementation expertise and training
in eGains technology platform. Firms such as PriceWaterhouse Coopers, Cap Gemini Ernst and Young and eLoyalty assist eGain customers in addressing their online business needs with strategy, design, implementation and integration services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Technology Alliances.    eGain has a number of technology partnerships with companies that are leaders and innovators in the areas of
content management, sales force automation, call center technology, analytics, and information technology hardware. These companies provide scalable platforms on which eGain products are built, as well as solutions that interoperate with and add
value to eGains proprietary solutions. eGains current technology partners include Actuate Corp., Aspect Communications, BEA Systems, Inc., Business Objects, Microsoft, Nortel Networks, Oracle, SUN Microsystems, Vignette and Witness
Systems.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Solution Provider Alliances.    eGain solution provider partners include leading application service providers (ASPs) and value-added
resellers (VARs). These partners resell and implement eGain products, and provide front-line support to their customers. Solution alliances include partnerships with LSSI, MCLS and eProfile.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Outsourcing Alliances.    eGain outsourcing partners are premier call center providers and service bureaus, providing the human
capital required for a complete ecommerce service solution. Outsourcing alliances utilize the eGain platform to provide services such as customer care, Web collaboration, technical support, fulfillment services and direct marketing services to
customers. Outsourcing alliances include relationships with companies such as Harte-Hanks, Inc., Software Spectrum, Aegis Communications, Decision One and Sykes Enterprises.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Global Distribution Alliances.    eGain has agreements with a number of global distribution partners that are authorized to integrate
eGains products into their solutions. Global distributors include NTT Communications Corp. and Marubeni Corp. in Japan, and TecInno in Europe.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Customers





eGain serves a worldwide customer base across a
wide variety of industry sectors. No customer accounted for 10% or more of total revenue in the fiscal year just ended. The following is a representative list of companies that have entered into license agreements for one or more eGain products:





Telecommunications AT&T Deutsche Telekom Lucent NTT Orange Verizon Virgin Mobile Vodafone Group  Outsourced Services Aegis Communications Experian Harte-Hanks Software Spectrum Spherion  Media Lucas Arts MP3.com News Interactive

Retail Carrefour Crate and Barrel Gymboree HMV LL Bean Staples Timberland 
Financial Services ABN AMRO Bank ANZ Banking Group Bank of America Bank of Hawaii Barclays Charles Schwab Freddie Mac GE Capital HSBC Bank Janus Lloyds TSB

Technology Epson Hewlett-Packard IBM McAfee Microsoft  Manufacturing BMW North America Daimler Chrysler Georgia Pacific Otis Olympus Pioneer Rubbermaid




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Competition





The market for eService software remains relatively new and intensely competitive. Other than product development, 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 eService software applications. eGain also competes directly with companies that provide
licensed eService software, including AskJeeves, Inc., Avaya, Inc., E.piphany, Inc., Firepond, Inc., Genesys Telecommunications (a wholly-owned subsidiary of Alcatel), Kana Software, Inc., Primus Knowledge Solutions, Inc., RightNow Technologies,
Inc., Serviceware, and Talisma Corp. eGain also faces actual or potential competition from larger, front office software companies such as Amdocs Limited (which recently acquired the Clarify, Inc. business from Nortel Networks), Onyx Software
Corporation, PeopleSoft, Inc., Pivotal Corp., and Siebel Systems, Inc. Furthermore, established enterprise software companies, including IBM, Microsoft Corporation, Oracle Corporation, SAP, Inc., and similar companies, may seek to leverage their
existing relationships and capabilities to offer eService solutions.





eGain believes that the principal
competitive factors influencing its market include technology, product features, product quality and performance (including scalability, reliability, functionality and security), ability to integrate with legacy and third party systems, price,
quality of service and support, speed of implementation/deployment and brand reputation. eGain believes that its products compete favorably with respect to these factors.





Some of eGains current competitors have, and future competitors may have, longer operating histories, larger customer bases, stronger brand recognition and
significantly greater financial, sales, marketing, technical and other resources. Some of eGains current and future competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing
policies or devote substantially greater resources to product development. It is possible that new competitors, or alliances among existing competitors, may emerge and rapidly acquire significant market share. eGain also believes that competition
will continue to intensify as a result of ongoing industry consolidation.





Product Development





The market for eGains products changes rapidly and is characterized by evolving industry standards, swift changes in customer
requirements and frequent new product introductions and enhancements. eGain believes that strong product development capabilities are essential to its strategy of maintaining technology leadership. This includes enhancing current technology,
providing excellent quality, performance, and functionality, as well as developing additional applications and maintaining the competitiveness of eGains product and service offerings. eGain has invested significant time and resources to create
a structured process for undertaking all product development. This process involves several functional groups at all levels within eGains organization and is designed to provide a framework for defining and addressing the activities required
in bringing product concepts and development projects to market successfully.





In addition, eGain continuously
analyzes market and customer requirements and evaluates technology that eGain believes will enhance platform acceptance in the market. eGain selectively chooses partners with superior technology to enhance features and functionality of its product
offerings.





As of June 30, 2002, there were approximately 143 employees engaged in worldwide product development
activities. Of this amount, approximately 91 were located at eGains office in Pune, India.





Intellectual Property





eGain regards its copyrights, service marks, trademarks and similar intellectual property as critical to its
success. eGain relies on patent, trademark, copyright, trade secret and other laws, as well as confidentiality procedures and licensing arrangements, to protect the proprietary aspects of its technology and business. eGain




9




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##### Table of Contents

owns four patents in the field of case based reasoning, and has a number of patents pending on various aspects of its technology. eGain also has several United States and international trademark
applications pending.





eGain is continually assessing the propriety of seeking patent and other intellectual
property protections for those aspects of eGains technology that it believes constitute innovations providing significant competitive advantages. Pending and future applications may or may not receive the issuance of valid patents and
trademarks.





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. 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, 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.





Third parties may infringe or misappropriate eGains copyrights, trademarks and similar proprietary rights. In addition, other parties may assert infringement claims
against eGain. eGains products may infringe issued patents that may relate to its products. In addition, because 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.





Employees





As of June 30, 2002, eGain had 405 full-time employees, of which 143 were in product development, 122 in
services and support, 86 in sales and marketing, and 54 in finance and administration. Of the total number of full-time employees, 144 were located at eGains office in Pune, India, 91 of whom are in product development, 35 in services and
support, six in sales and marketing, and 12 in finance and administration.





None of eGains employees is
covered by collective bargaining agreements. While eGain believes its relations with its employees are good, eGains future performance depends in large part upon the continued service of its key technical, sales and marketing, and senior
management personnel, none of which are bound by employment agreements requiring service for a defined period of time. The loss of services of one or more of eGains key employees could have a material adverse effect on its business.





eGain may not be successful in attracting, training and retaining qualified personnel, and the failure to do so,
particularly in key functional areas such as product development and sales, could materially and adversely affect eGains business, results of operations and financial condition. eGains future success will likely depend in large part on
its ability to attract and retain experienced sales, technical, marketing and management personnel.




10




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##### Table of Contents




ITEM 2.    
PROPERTIES





eGain leases all facilities used in its business. The following table
summarizes eGains principal properties.





Location

Principal Use

Approximate Square Footage

Lease Expiration DateSunnyvale, California

Corporate Headquarters

34,000

2005Pune, India

Corporate Offices

21,000

2003Slough, England

European Headquarters

15,000

2003





eGain believes its facilities are suitable for its uses and are
generally adequate to support the current level of operations for the next 12 months.





ITEM 3.    
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, 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. The Company 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.





In March 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.





With the exception of these matters, eGain is not a party to any other material pending legal
proceedings, nor is its property the subject of any material pending legal proceeding, except routine legal proceedings arising in the ordinary course of its business and incidental to its business, none of which are expected to have a material
adverse impact upon its business, financial position or results of operations.





ITEM 4.    
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.




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##### Table of Contents

PART II





ITEM 5.    
MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS





(a)  Common Stock Price Range





eGains Common Stock
is quoted on The Nasdaq National Market under the symbol EGAN. The following table sets forth, for the periods indicated, high and low sale prices for eGains Common Stock as reported by The Nasdaq National Market.





High

LowYear Ended June 30, 2002First Quarter

$
2.76

$
1.01Second Quarter


1.94


0.90Third Quarter


2.15


0.66Fourth Quarter


1.19


0.24Year Ended June 30, 2001First Quarter

$
15.38

$
6.94Second Quarter


8.25


2.06Third Quarter


5.75


2.31Fourth Quarter


3.91


1.69





(b)  Holders





As of September 20, 2002, there were approximately 350 stockholders of record. This number does not include stockholders whose
shares are held in trust by other entities. eGain estimates that there were approximately 12,000 beneficial stockholders of its common stock as of September 20, 2002.





(c)  Dividends





eGain has never declared or paid any cash dividends on its common stock. eGain currently anticipates that it will retain all available funds for use in the operation of its business and does not intend to pay any cash
dividends in the foreseeable future.





(d)  Securities Authorized for Issuance
Under Equity Compensation Plans





Equity Compensation Plan Information





Number of securities to be issued upon exercise of outstanding options, warrants and rights


Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities
reflected in column a)Plan Category

Column a


Column b

Column cEquity compensation plans approved by security holders

4,801,428
(1)

$2.56

2,504,716Equity compensation plans not approved by security holders

1,245,284
(2)

$6.19

757,108Total

6,046,712


$3.07

3,261,824


---

|(1) |  | Includes the aggregate number of securities to be issued upon exercise of outstanding options assumed in connection with eGains acquisition of several
companys which are 197,870 with a weighted average exercise price of $5.82. There are no remaining options available for future issuance under these plans.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







|(2) |  | Includes the aggregate number of securities to be issued upon exercise of outstanding options assumed in connection with eGains acquisition of several
companys which are 2,392 with a weighted average exercise price of $4.08. There are no remaining options available for future issuance under this plan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




(e)  Recent Sales of Unregistered Securities, Use of Proceeds from Registered Securities





None.




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##### Table of Contents

ITEM 6.     
SELECTED CONSOLIDATED FINANCIAL DATA





The selected consolidated financial data set forth
on the following page should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements of the Company and Notes thereto, and other
financial information included elsewhere in this Form 10-K. Historical results are not necessarily indicative of results that may be expected for future periods.





Years Ended June 30,


Period from Inception (September 10,1997) toJune 30, 19982002


2001


2000


1999(in thousands, except per share information)Revenue:Hosting

$
5,624


$
10,549


$
3,534


$
137


$
License


10,015



24,285



5,053



473



Services


14,790



18,603



4,775



409



2Total revenue


30,429



53,437



13,362



1,019



2Cost of revenuedirect


16,861



29,402



14,550



1,772



52Cost of revenueacquisition related


1,448



1,448



103







Gross profit (loss)


12,120



22,587



(1,291
)


(753
)


(50
)Operating costs and expenses:Research and development


11,395



22,877



11,752



2,096



314Sales and marketing


25,147



46,995



27,893



4,182



246General and administrative


8,940



16,389



7,211



1,235



214Impairment of long-lived assets


36,779















Amortization of goodwill and other intangible assets


35,064



36,816



10,945



1,217



Amortization of deferred compensation


961



3,291



10,553



1,817



58Restructuring


8,964



1,443



71







Total operating costs and expenses


127,250



127,811



68,425



10,547



832Loss from operations


(115,130
)


(105,224
)


(69,716
)


(11,300
)


(882
)Interest income


601



3,417



2,047



111



2Interest and other expenses


(1,291
)


(845
)


(762
)


(116
)


(58
)Net loss


(115,820
)


(102,652
)


(68,431
)


(11,305
)


(938
)Dividends on convertible preferred stock


(6,447
)


(5,433
)










Beneficial conversion feature on convertible preferred stock


(43,834
)


(19,335
)










Net loss applicable to common stockholders

$
(166,101
)

$
(127,420
)

$
(68,431
)

$
(11,305
)

$
(938
)Per share information:Basic and diluted net loss per common share

$
(4.58
)

$
(3.62
)

$
(2.92
)

$
(2.14
)

$
(17.78
)Shares used in computing basic and diluted net lossper common share


36,229



35,164



23,440



5,295



53June 30,2002


2001


2000


1999


1998(in thousands)Consolidated Balance Sheet Data:Cash, cash equivalents and short-term investments

$
9,892


$
42,613


$
30,192


$
1,265


$
3,831Working capital


2,281



37,758



11,909



(756
)


3,691Total assets


35,544



158,151



175,900



23,965



3,990Long-term debt


831



1,720



1,072



221








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##### Table of Contents

|ITEM  7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|-------- | -------------------------------------------------------------------------------------




This report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties. These statements may be identified by the use of the words such as
anticipates, believes, continue, could, would, estimates, forecasts, expects, intends, may, might, plans,
potential, predicts, should, or will and similar expressions or the negative of those terms. The forward-looking statements include, but are not limited to, the expansion of eGains eService
platform, the continued expansion of global distribution capabilities, the development of eGains strategic relationships, the factors influencing competition in eGains market, eGains limited operating history, expected net losses,
the adequacy of capital resources, the continued need for eService solutions, 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 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 eService software for Global 2000 companies. eGains solutions enable companies to
transform traditional customer call centers into multi-channel contact centers. The companys solutions have a proven track record of helping businesses deliver a superior customer experience and establishing profitable, long-term customer
relationships, while reducing operating and technology costs. eGain offers an integrated platform that enables companies to offer both assisted (email management, web collaboration, knowledge management, and call center integration tools) and
unassisted (integrated set of self-service solutions) online customer service. Built using a Java-based, 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 CRM, ERP and call center systems, enabling customers to leverage investments in existing systems and providing an enterprise wide
solution.





Impact of Economic Downturn





Due to the severe economic downturn experienced during the period of July 1, 2001 to June 30, 2002, we experienced a reduction in total revenues for each of the quarters during fiscal 2002 when
compared to fiscal 2001. Total revenues were $8.0 million for the three months ended September 30, 2001 compared to $12.1 million for the three months ended September 30, 2000, $10.2 million for the three months ended December 31, 2001 compared
to $13.8 million for the three months ended December 31, 2000, $5.9 million for the three months ended March 31, 2002 compared to $13.4 million for the three months ended March 31, 2001 and $6.3 million for the three months ended June 30, 2002
compared to $14.1 million for the three months ended June 30, 2001. The impact of the economic slowdown in fiscal 2002 was evidenced by existing and prospective customers postponing purchases or making smaller purchases than in fiscal 2001.





In response to the revenue decline, we took several actions to reduce our operating expenses during fiscal 2002.
Specifically, we reduced our headcount by 190 employees (from 595 employees at June 30, 2001 to 405 employees at June 30, 2002), decreased spending on outside professional services, migrated development resources to eGain India, consolidated
excess facilities in North America and reduced overall operating expenses.




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##### Table of Contents




We review long-lived assets, including goodwill and intangible assets, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its fair value. In the fourth quarter of 2002, we determined that impairment indicators were present and therefore evaluated the carrying
value of goodwill and other intangible assets. The evaluation was based on a cash flow forecast for five years ending June 30, 2007, and discounted at the rate of 34%, which represented our estimated weighted average cost of capital. As a
result of the evaluation, we concluded that the book value of long-lived assets exceeded fair value by $36.8 million and accordingly, this amount was charged to operations as impairment of long-lived assets in the fourth quarter of 2002.





eGain was founded in September 1997. From inception to September 1998, eGains operating activities related
primarily to planning and developing its proprietary technological solutions, recruiting personnel, raising capital and purchasing operating assets. In September 1998, eGain commenced commercial shipment of eGain Mail and established eGains
hosted operations. To date, eGain has developed and released several versions of its product suite. eGain markets and sells its products worldwide through its direct sales force and third-party distribution partners.





On April 30, 1999, eGain acquired Sitebridge Corporation and added its real-time Web collaboration product to eGains product suite.
This product, eGain Live, is an application that allows 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 that 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 and added its customer profiling, contact center support and knowledge management
capabilities to the eGain product suite. It also significantly expanded eGains European business and added new product and technology components to the eGain platform. The merger was accounted for under the purchase method of accounting.





In April 2001, eGain obtained final regulatory approval from the government of India to complete the acquisition
of eGain Communications Private Limited (eGain India), formerly Nitman Software Private Limited, a software development company located in Pune, India. Effective April 23, 2001, eGain acquired all of the outstanding capital stock of
eGain India for cash. The acquisition has been at the cornerstone of eGains strategy of developing a global operating model that allows the company to maintain its commitment to the eService market and innovation while remaining fiscally
prudent. The transaction was accounted for under the purchase method of accounting.





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 $299.1 million as of June 30, 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.





Critical Accounting Policies and Estimates





Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally




15




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##### Table of Contents

accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, valuation allowances and accrued liabilities, long-lived assets and restructuring. Management bases its estimates and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.





Revenue Recognition





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





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





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





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





We use a signed software license and services
agreement and order form as evidence of an arrangement for sales of software, hosting, maintenance and support. We use a signed engagement letter to evidence an arrangement for system implementation consulting and training.





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





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




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##### Table of Contents




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





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





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





Valuation of Long-Lived Assets





We periodically review
long-lived assets, certain identifiable intangibles and goodwill related to these assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Assumptions
and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Significant assumptions and estimates include the projected cash flows based upon
estimated revenue and expense growth rates and the discount rate applied to expected cash flows. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.





Restructuring





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





Allowance for Doubtful Accounts





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




17




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##### Table of Contents




Results of Operations





The following table sets forth certain items reflected in eGains consolidated statements of operations expressed as a percent of total revenues for the periods
indicated.





Fiscal Year2002


2001


2000Revenue:Hosting

18
%

20
%

26
%License

33
%

45
%

38
%Services

49
%

35
%

36
%Total revenue

100
%

100
%

100
%Cost of revenuedirect

55
%

55
%

109
%Cost of revenueacquisition related

5
%

3
%

Gross profit (loss)

40
%

42
%

(10
)%Research and development

37
%

43
%

88
%Sales and marketing

83
%

88
%

208
%General and administrative

29
%

30
%

54
%Impairment of long-lived assets

121
%




Amortization of goodwill and other intangible assets

115
%

69
%

82
%Amortization of deferred compensation

3
%

6
%

79
%Restructuring

30
%

3
%

1
%Total operating costs and expenses

418
%

239
%

512
%Loss from operations

(378
)%

(197
)%

(522
)%





Revenue





During fiscal 2002, overall revenue decreased 43%, or $23.0 million compared to fiscal 2001, primarily due to the weakening economic environment and its adverse impact on
sales of enterprise software. The weakness was particularly pronounced in the North American market as both existing and prospective customers postponed purchases or made smaller purchases than in previous years. Revenues from North America declined
from $38.6 million in fiscal 2001 to $17.4 million in fiscal 2002. During fiscal year 2001, total revenue increased 300%, or $40.1 million as compared to fiscal 2000. The increase during this period was primarily attributable to increases in
eGains customer base, the average size of new customer orders and follow-on orders from existing customers. Factors that contributed to these increases primarily include expanded direct sales and marketing efforts, the introduction of new
products and increased market acceptance of eGains products. In addition, a significant portion of the revenue increase in fiscal 2001 was due to the acquisition of Inference Corporation on June 29, 2000 and the inclusion of its revenue from
the effective date of the merger.





Hosting revenue decreased 47%, or $4.9 million in fiscal 2002 compared to
fiscal 2001. The decrease in fiscal year 2002 was primarily due to the slowing global economy which resulted in a decline in new hosted customer contracts, coupled with the termination of existing hosted customer contracts. Hosted revenue increased
199%, or $7.0 million in fiscal 2001 compared to fiscal 2000. This increase was primarily attributable to the growth in number of eGains hosted customers during fiscal 2001.





License revenue decreased 59%, or $14.3 million in fiscal 2002 compared to fiscal 2001. The decrease in fiscal 2002 was primarily due to the slowing global economy which
resulted in a large decline in customer orders as well as lengthened sales cycles worldwide. License revenue increased 381%, or $19.2 million in fiscal 2001 compared to fiscal 2000. This increase was attributable to the increases in unit sales
volumes and the average size of new customer orders.




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Services revenue decreased 21%, or $3.8 million in fiscal 2002 compared to fiscal
2001. The decrease in fiscal 2002 was primarily due to the slowing global economy which resulted in 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 a reduction in IT spending by our customers. Services revenue increased 290%, or $13.8 million in fiscal 2001 compared to fiscal 2000. The increase in fiscal 2001 was primarily
attributable to an increase in software license sales, resulting in increased revenue from customer implementations, system integration projects and maintenance contracts.





In fiscal 2002, 2001 and 2000, no single customer accounted for more than 10% of total revenue.





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, cost of third-party software royalties and lease costs paid
to remote co-location centers. Cost of revenuedirect was $16.9 million, $29.4 million and $14.6 million in fiscal years 2002, 2001 and 2000, respectively. The significant decrease in fiscal 2002 was primarily due to the reduction in worldwide
workforce, as well as a decline in outside contractor services and co-location lease costs. Additionally, there was a reduction in facilities-related expenses resulting from the consolidation of eGains excess facilities in North America in the
first and fourth quarters of fiscal 2002. The increase in fiscal 2001 compared to fiscal 2000 was primarily attributable to the rapid expansion of the hosting, services and support organizations in addition to the significant increases in royalties
paid to third-party vendors for technology embedded in eGains product offerings. Due to certain third-party software royalty obligations under renegotiation, eGain may experience a substantial increase in absolute dollars in cost of revenue in
fiscal 2003.





Cost of RevenueAcquisition Related





Cost of revenueacquisition related costs is a fixed amount of $1.4 million in both fiscal years 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 for eGains engineering, product management and
quality assurance personnel and, to a lesser extent, occupancy costs and related overhead. Research and development expense was $11.4 million, $22.9 million and $11.8 million in fiscal years 2002, 2001 and 2000, respectively. The decrease in fiscal
2002 was primarily due to the significant headcount reduction, a decline in outside contractor services and the migration of development resources to eGain India. Additionally, there was a reduction in facilities-related expenses resulting from the
consolidation of eGains excess facilities in North America in the first and fourth quarters of fiscal 2002. eGain anticipates that the research and development expenses will decrease in absolute dollars in fiscal 2003. The increase in fiscal
2001 compared to fiscal 2000 was primarily attributable to significant growth in the research and development organization associated with the enhancement of existing products and the development of new products.





Sales and Marketing





Sales and marketing expenses primarily consist of compensation and benefits for 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 decreased 47% or $21.9 million in fiscal 2002. The decrease in fiscal 2002 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 resulting from the consolidation of eGains excess facilities in North America in the first and




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##### Table of Contents

fourth quarters of fiscal 2002. eGain anticipates that the sales and marketing expenses will decrease in absolute dollars in fiscal 2003. In fiscal 2001, sales and marketing expenses increased
69%, or $19.1 million compared to fiscal 2000. The increase was primarily due to increases in spending on marketing programs and the sales commission resulting from an increase in sales.





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, provision for doubtful accounts and, to a lesser
extent, occupancy costs and related overhead. General and administrative expense decreased 46%, or $7.5 million in fiscal 2002. The decrease in fiscal 2002 was primarily due to a decline in headcount through planned workforce reductions, a decline
in outside professional services and a significant decrease in bad debt expense compared to fiscal 2001. Additionally, there was a reduction in facilities-related expenses resulting from the consolidation of eGains excess facilities in North
America in the first and fourth quarters of fiscal 2002. eGain anticipates that the general and administrative expenses will decrease in absolute dollars in fiscal 2003. In fiscal 2001, general and administrative expense increased 127%, or $9.2
million compared to fiscal 2000. This increase was primarily attributable to increased personnel to manage and support the growth of eGains business, in addition to an increase in legal and other outside professional services fees.





Impairment of Long-Lived Assets





The Company reviews long-lived assets, including goodwill and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its
fair value. In the fourth quarter of 2002, the Company observed indicators that our acquired intangible assets and goodwill were possibly impaired. In addition to observing a continued deterioration of industry and market conditions, the Company was
not able to meet operating plans for several quarters resulting in a revision of the Companys cash flow forecast. These events were considered to be indicators of potential impairment and the Company evaluated the carrying value of its
long-lived assets. The Companys forecast of future cash flows indicated that the long-lived assets were impaired. The Company estimated the fair value of long-lived assets by discounting the cash flow forecast using a discount rate of 34%,
which represented the Companys estimated weighted average cost of capital. As a result of the evaluation, the Company concluded the book value of long-lived assets exceeded fair value by $36.8 million. The Company wrote off $36.8 million
of unamortized goodwill which was charged to operations as impairment of long-lived assets in the fourth quarter of 2002.





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 $35.1 million, $36.8 million, $10.9 million in fiscal years 2002, 2001 and 2000, respectively. Amortization of intangible assets principally relates to goodwill acquired in connection
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,




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##### Table of Contents

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 $1.0 million, $3.3 million and $10.6 million in fiscal 2002, 2001 and 2000, respectively.





Restructuring





During fiscal year 2002, eGain recorded restructuring charges totaling $8,964,000 pursuant to a plan approved
by the required level of management. These charges were primarily related to the consolidation of eGains facilities in North America. In the first quarter of fiscal 2002, eGain initiated the plan of consolidation of facilities in North America
resulting in a charge of $4,336,000. This amount included 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 the third quarter of fiscal 2002, eGain incurred 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.





In the fourth quarter of fiscal 2002, eGain decided to extend the plan of facilities consolidation which resulted in an additional charge of $2,763,000 related to exited facilities and leasehold
improvement write-offs of $575,000.





During fiscal 2002, eGain recorded a total severance charge of $1,222,000,
which was primarily due to the reduction in worldwide workforce by 190 employees across all departments.





During
fiscal 2001, eGain recorded restructuring charges totaling $1,443,000. These charges primarily related to a reduction in eGains worldwide workforce by 141 employees across all departments and office closures in North America pursuant to the
adoption of eGains expense management strategy. The total charges were primarily comprised of $917,000 related to severance costs, $263,000 related to office closure costs and $263,000 related to legal and professional costs associated with
the employee terminations. Of the total charges, $132,000, which was primarily related to legal and professional costs, remained unpaid as of June 30, 2002.





Details of the cumulative restructuring charges during the fiscal year ended June 30, 2002 are as follows (in thousands):





Cash/Non-cash

FY01 Remaining Balance

FY02 Charges

Amount Paid/Used


Balance at 06/30/02Excess facilities

Cash

$


$
6,412

$
(1,449
)

$
4,963Leasehold improvement write-offs

Non-cash





1,315


(1,315
)


Employee severance

Cash





1,222


(1,222
)


Professional services

Cash


220


15


(103
)


132Total restructuring charges



$
220

$
8,964

$
(4,089
)

$
5,095





During fiscal 2000, eGain incurred $71,000 of restructuring charges
related to the acquisition of Inference, all of which was paid as of June 30, 2002. eGain abandoned plans to occupy new office space in the United Kingdom and expensed professional services fees incurred in the design phase of the office space.





Interest Income





Interest income consists of interest earned on cash, cash equivalents, and short-term investments. Interest income decreased 81%, or $2.8 million in fiscal 2002 compared to fiscal 2001. The significant decrease in fiscal
2002 was primarily due to a decline in eGains average cash balance associated with lower interest rates. In fiscal




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##### Table of Contents

2001, interest income increased 67%, or $1.4 million compared to fiscal 2000. This increase resulted from eGains private placement of convertible preferred stock on August 8, 2000, which
generated net proceeds of $82.6 million.





Interest and Other Expenses





Interest and other expenses increased 59%, or $495,000 in fiscal 2002 compared to fiscal 2001. The increase in fiscal 2002 was principally due to a rise in interest expense
resulting from increased bank borrowings and losses on the disposal of property and equipment. A $526,000 loss on disposal of property and equipment in fiscal 2002 was associated with the headcount reduction. In addition, eGain experienced an
increase in state taxes and foreign currency transaction losses.





Interest and other expenses increased 11%, or
$83,000 in fiscal 2001 compared to fiscal 2000. The increase in fiscal 2001 was principally due to a rise in interest expense resulting from increased bank borrowings and losses on the disposal of property and equipment. The increase was partially
offset by a decrease in foreign exchange losses.





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 our fiscal year beginning July 1, 2002. 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. We will adopt SFAS No. 142 in our first quarter of fiscal 2003. Upon adoption, we will stop the amortization of goodwill and
intangible assets deemed to have indefinite lives with a net carrying value of approximately $8.2 million as of June 30, 2002. As a result of the discontinuance of the amortization of goodwill existing as of June 30, 2002 and excluding the impact of
potential impairment charges, the application of SFAS No. 142 is expected to result in an increase in our results of operations of approximately $4.9 million during fiscal 2003. During the first six months of fiscal 2003, we will perform the first
of the required impairment tests of goodwill and intangible assets deemed to have indefinite lives as of July 1, 2002, using the two-step process required under SFAS 142. We have not yet determined what effect these tests will have on our earnings
and financial position.





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 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 our fiscal year beginning after July 1, 2002. Adoption of this statement is not expected to have a material impact on eGains financial position or results of operations.





On January 1, 2002, we adopted the consensus of Emerging Issues Task Force Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred. Prior to the adoption of EITF No. 01-14, reimbursable out-of-pocket expenses were reflected as a reduction to Cost of
RevenueDirect. EITF 01-14 requires that reimbursements received for out-of-pocket expenses be reflected as revenues and reclassification of prior period financial statements to conform to the current period presentation. eGain has not
reclassified these reductions to cost of revenue to revenue for prior years as the adoption of EITF 01-14 did not have a material impact on our financial statements in fiscal 2002 or prior periods.





The FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which establishes financial
accounting and reporting for costs associated with exit or disposal activities. This statement is effective for disposal activities initiated after December 31, 2002. Management has evaluated the impact of this statement and has determined that
there is no material effect on eGains financial position or results of operations.




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Liquidity and Capital Resources





Since inception eGain experienced substantial expenditures as it grew operations and personnel. Although over the last fiscal year eGain has repeatedly taken actions to
reduce its expense rates, it expects to incur additional operating losses, at least through the second quarter of fiscal 2003 if not longer. eGains working capital requirements in the foreseeable future will depend on a variety of factors and
assumptions, in particular that revenue growth rates remain stable and that customers continue to pay on a timely basis, and is subject to numerous risks. If eGain does not significantly reduce its net cash outflow in the near term, as compared to
fiscal 2002, eGain will require additional credit facilities, additional equity and/or debt financings and/or will need to pursue strategic alternatives in fiscal year 2003. eGain is currently focused on reducing its expenses and pursuing such
alternatives in the near term, and/or will need to pursue strategic alternatives. If additional funds are raised through the issuance of equity securities, eGain stockholders may experience significant dilution. Furthermore, there can be no
assurance that additional financing will be available when needed or at all, or that if available, such financing will be on terms favorable to us or our stockholders. If such financing is not available when required or is not available on
acceptable terms, eGain may be unable to meet operating obligations. These conditions raise substantial doubt about the Companys ability to continue as a going concern.





Prior to eGains initial public offering, eGain financed operations primarily 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 the 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 has been using the net proceeds from this private placement for general corporate purposes.





At June
30, 2002, eGain had cash and cash equivalents of $9.9 million, a decrease of $32.7 million since June 30, 2001. Working capital at June 30, 2002 was $2.3 million, a decrease of $35.5 million since June 30, 2001. In fiscal 2002, eGain regularly
invested excess funds in short-term money market funds and commercial paper.





In March 2002, eGain terminated its
loan agreement dated August 7, 1998, as amended, and repaid its existing bank borrowings under that agreement. On March 27, 2002, eGain entered into a new credit agreement with Silicon Valley Bank (SVB). Under the credit agreement, SVB
provided eGain a term loan, an equipment loan and a revolving line of credit (the SVB Credit Facilities). The term loan in the amount of $1,962,717 and the equipment loan in the amount of $304,431, are both secured by the assets of the
Company and mature on February 29, 2004. The revolving line of credit is secured by the Companys accounts receivable balance and matures on March 25, 2003. The aggregate maximum proceeds available under the revolving line of credit are $5.0
million, of which $1,432,876 was outstanding on March 27, 2002. The SVB Credit Facilities are subject to certain financial covenants and restrictions with respect to, among other matters, eGains quick ratio, liquidity, and profitability.





The proceeds of the SVB Credit Facilities were used to repay all outstanding obligations under the prior credit
facility with Comerica Bank. On March 28, 2002 the credit agreement with Comerica Bank was terminated.





On May 16,
2002, eGain and SVB entered into a waiver and loan modification agreement, whereby SVB waived the event of default arising out of eGains failure to comply with the profitability covenant set forth in the credit agreement for the quarter ended
March 31, 2002.




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##### Table of Contents




On June 25, 2002, eGain and SVB entered into the second waiver and loan
modification agreement, whereby SVB waived the event of default arising out of eGains failure to comply with the adjusted quick ratio covenant set forth in the credit agreement for the month ended April 30, 2002. As part of this agreement, the
original covenant requirements were eliminated and replaced with a liquidity covenant which required eGain to maintain a ratio of its cash balance to principal and accrued interest on its outstanding credit facilities of 2.0 to 1.0. Additionally,
eGain was required to establish and maintain a 7-day unrestricted, renewable certificate of deposit in the amount of $3.5 million with SVB. As of June 30, 2002 eGain was in compliance with its covenant requirements, as amended.





On August 30, 2002, eGain and SVB entered into the third waiver and loan modification agreement, whereby SVB waived the event
of default arising out of eGains failure to comply with the liquidity covenant set forth in the credit agreement for the month ended August 31, 2002. As part of this agreement, the term loan and equipment loan were combined into one term loan
facility in the amount of $1.7 million. In addition, eGain was required to secure all outstanding obligations under the SVB Credit Facilities (including the revolving line of credit), by establishing a restricted certificate of deposit in the amount
of $2.6 million with SVB. The amount of the restricted certificate of deposit will be reduced as scheduled amortization payments on the term loan are made.





On September 23, 2002, eGain entered into an accounts receivable purchase agreement (the AR Facility) with SVB, which replaced the existing revolving line of credit. The AR Facility
provides for the sale of up to $5.0 million in certain qualified receivables, bears interest at a rate of prime plus 5.0% per annum and carries a 0.50% monthly administrative fee.





Net cash used in operating activities was $27.5 million, $70.7 million and $38.6 million for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Cash used in
operating activities was primarily the result of net loss, partially offset by non-cash charges.





Net cash used in
investing activities was $2.0 million, $2.5 million and $4.4 million for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Cash used in investing activities in fiscal 2002 was primarily due to the purchases of property and
equipment, while net cash used in fiscal 2001 consisted of property and equipment purchases, partially offset by proceeds from the sales of short-term securities.





Net cash used in financing activities was $3.4 million in fiscal 2002 consisting primarily of payments on borrowings and capital leases, partially offset by proceeds from
borrowings and the issuance of common stock. Net cash provided by financing activities was $88.6 million and $68.9 million in the years ended June 30, 2001 and 2000, respectively. Net cash provided by financing in fiscal years 2001 and 2000 was
primarily due to the issuance of preferred stock and common stock, including net proceeds of $82.6 million generated by the private placement on August 8, 2000 and $63.0 million from the initial public offering on September 29, 1999.





The following table summarizes our contractual obligations as of June 30, 2002 and the effect such obligations are expected to
have on our liquidity and cash flow in future periods (in thousands):





Year Ended June 30,2003

2004

2005

2006

TotalCapital leases

$
431

$
47

$
10

$


$
488Operating leases


4,671


3,113


2,058


31


9,873Bank borrowings and notes payable


2,155


779








2,934$
7,257

$
3,939

$
2,068

$
31

$
13,295




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##### Table of Contents




Quarterly Results of Operations





The following tables set forth certain unaudited consolidated statement of operations data for the eight quarters ended June 30, 2002. This data has been derived from
unaudited consolidated financial statements that, in the opinion of management, include all adjustments consisting only of normal recurring adjustments, necessary for a fair presentation of such information when read in conjunction with the
Consolidated Financial Statements and Notes thereto.





The unaudited quarterly information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein on this Form 10-K. eGain believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.





Quarters EndedSept. 30, 2000


Dec. 31, 2000


Mar. 31, 2001


June 30, 2001


Sept. 30, 2001


Dec. 31, 2001


Mar. 31, 2002


June 30, 2002(in thousands)Consolidated Statements of Operations Data:Revenue:Hosting

$
2,295


$
3,222


$
2,539


$
2,493


$
2,041


$
1,531


$
931


$
1,121License


4,604



6,275



5,930



7,476



2,060



4,437



1,242



2,276Services


5,159



4,340



4,951



4,153



3,939



4,199



3,737



2,915Total revenue


12,058



13,837



13,420



14,122



8,040



10,167



5,910



6,312Cost of revenuedirect


8,724



7,783



7,580



5,315



5,068



3,784



3,592



4,417Cost of revenueacquisition related


362



362



362



362



362



362



362



362Gross profit (loss)


2,972



5,692



5,478



8,445



2,610



6,021



1,956



1,533Operating costs and expenses:Research and development


6,079



5,866



5,615



5,317



4,574



2,032



2,452



2,337Sales and marketing


12,461



13,001



11,599



9,934



8,602



5,493



6,003



5,049General and administrative


4,228



4,290



4,221



3,650



3,805



1,127



2,401



1,607Impairment of long-lived assets






























36,779Amortization of goodwill and other intangible assets


9,200



9,200



9,200



9,216



9,194



9,194



9,194



7,482Amortization of deferred compensation


1,098



877



750



566



302



258



233



168Restructuring










388



1,055



4,785



466



327



3,386Total operating costs and expenses


33,066



33,234



31,773



29,738



31,262



18,570



20,610



56,808Loss from operations


(30,094
)


(27,542
)


(26,295
)


(21,293
)


(28,652
)


(12,549
)


(18,654
)


(55,275
)Non-operating income (expense), net


231



1,368



745



228



233



(27
)


(352
)


(544
)Net loss


(29,863
)


(26,174
)


(25,550
)


(21,065
)


(28,419
)


(12,576
)


(19,006
)


(55,819
)Dividends on preferred stock


(884
)


(1,506
)


(1,513
)


(1,530
)


(1,598
)


(1,598
)


(1,617
)


(1,634
)Beneficial conversion feature on preferred stock


(767
)


(18,568
)










(43,834
)










Net loss applicable to common stockholders

$
(31,514
)

$
(46,248
)

$
(27,063
)

$
(22,595
)

$
(73,851
)

$
(14,174
)

$
(20,623
)

$
(57,453
)Per share information:Basic and diluted net loss per commonshare

$
(0.91
)

$
(1.32
)

$
(0.77
)

$
(0.63
)

$
(2.06
)

$
(0.39
)

$
(0.57
)

$
(1.57
)Shares used in computing basic and diluted net loss per common share


34,474



35,129



35,353



35,699



35,916



36,176



36,318



36,506




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##### Table of Contents

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 $115.8 million for the year ended June 30, 2002. As of June 30, 2002, eGain had
an accumulated deficit of approximately $299.1 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. Even 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 eService 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s 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 macroeconomic environment and the corresponding growth rate of ecommerce;
| | - |  | -----------------------------------------------------------------------------




| |  |  | demand for eService software solutions;
| | - |  | ---------------------------------------




| |  |  | competitive pressure from new and existing market participants;
| | - |  | ---------------------------------------------------------------




| |  |  | 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;
| | - |  | --------------------------------------------------------------------------------------------------------




| |  |  | 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 and revenue recognition of large customer contracts;
| | - |  | -----------------------------------------------------------




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



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




| |  |  | failure to increase eGains North American and 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 spending for enterprise software has weakened considerably over the past eighteen months. At this time, it is difficult to predict if and when the market for eGain products and services will
show a meaningful and sustained recovery. In addition, the threat of additional terrorist attacks and the related possibility for international hostilities create additional uncertainty that it could materially affect eGains business and
results of operations.





eGain must compete successfully in its market segment





The market for eService software remains relatively new and intensely competitive. Other than product development, 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 eService software applications. eGain also competes
directly with companies that provide licensed eService software, including AskJeeves, Inc., Avaya, Inc., E.piphany, Inc., Firepond, Inc., Genesys Telecommunications (a wholly-owned subsidiary of Alcatel), Kana Software, Inc., Primus Knowledge
Solutions, Inc., RightNow Technologies, Inc., Serviceware, and Talisma Corp. eGain also faces actual or potential competition from larger, front office software companies such as Amdocs Limited (which recently acquired the Clarify, Inc. business
from Nortel Networks), Onyx Software Corporation, PeopleSoft, Inc., Pivotal Corp., and Siebel Systems, Inc. Furthermore, established enterprise software companies, including IBM, Microsoft Corporation, Oracle Corporation, SAP, Inc., and similar
companies, may seek to leverage their existing relationships and capabilities to offer eService 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
| | - |  | -------------------------------------------




| |  |  | 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 eService applications would likely harm its competitive position. Any
delay would allow eGains competitors additional time to improve their eService




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product offerings, and also provide time for new competitors to develop eService 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 be difficult or impossible and will likely dilute existing stockholders





Since
inception eGain experienced substantial expenditures as it grew operations and personnel. Although over the last fiscal year eGain has repeatedly taken actions to reduce its expense rates, it expects to incur additional operating losses, at least
through the second quarter of fiscal 2003 if not longer. eGains working capital requirements in the foreseeable future will depend on a variety of factors and assumptions, in particular that revenue growth rates remain stable and that
customers continue to pay on a timely basis, and is subject to numerous risks. If eGain does not significantly reduce its net cash outflow in the near term, as compared to fiscal 2002, eGain will require additional credit facilities, additional
equity and/or debt financings and/or will need to pursue strategic alternatives in fiscal year 2003. eGain is currently focused on reducing its expenses and pursuing such alternatives in the near term. If additional funds are raised through the
issuance of equity securities, eGain stockholders may experience significant dilution. Furthermore, there can be no assurance that additional financing will be available when needed or at all, or that if available, such financing will be on terms
favorable to us or our stockholders. If such financing is not available when required or is not available on acceptable terms, eGain may be unable to meet operating obligations.





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 June 30, 2002, eGain had borrowed approximately $2.8 million under the loan agreement. As of June 30, 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.





Failure to comply with
Nasdaqs listing standards could result in eGains common stock being delisted from the Nasdaq National Market and adversely affect the market for stock





On May 20, 2002, eGain received a letter from Nasdaq indicating that our common stock had failed to maintain a minimum bid price of $1.00 per share for 30 consecutive
business days, and that we need to comply with the requirements for continued listing within 90 calendar days from such notification or face the possibility of being delisted from the Nasdaq National Market.





On August 20, 2002, eGain received another letter from Nasdaq indicating that eGains common stock had failed to achieve compliance
with the $1.00 per share minimum bid price and that the common stock was therefore subject to delisting. On August 26, 2002, eGain issued a press release announcing receipt of this letter from Nasdaq and eGains intention to appeal the
delisting determination of the Nasdaq staff. eGain currently has a hearing date set before a Listing Qualifications Hearing Panel. At the hearing, scheduled for October 2002, eGain intends to present its plan for achieving compliance with the Nasdaq
listing requirements.





If eGains common stock is delisted from the Nasdaq National Market, it would
adversely affect the liquidity and trading price of its common stock. In addition, eGains ability to raise capital through the issuance of debt or equity securities would be impaired. Likewise, measures eGain may decide to pursue in order to
avoid being delisted could cause the value of its common stock to decrease.




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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, resulting in 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. 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 recently underwent a transition at the Chief Financial Officer position, and while eGain believes that it has an effective transition plan in place, the loss of such a significant member of its management
team presents significant challenges and risks. In addition, 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 eService 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 as well as
provide effective customer support. With eGains relatively brief operating history and its plans for future growth, eGain has considerable need to train and retain qualified sales staff. Any delays or difficulties eGain encounters in these
staffing efforts 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 competing organizations.





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.




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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 targets





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 does 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 an emerging business model that is not fully tested





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





eGain depends on broad market acceptance of
eService applications





eGain depends on the widespread acceptance and use of eService applications as an
effective solution for businesses seeking to manage high volumes of customer communication over the Internet while providing




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improved customer service. 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 eService software 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 eService applications fails to grow or grows more slowly than eGain currently anticipates, its business will be seriously harmed.





eGain may not be able to upgrade its systems and hosted operations to accommodate growth





eGain faces risks related to the ability of its hosted operations to accommodate higher activity levels while maintaining expected performance. As the volume and complexity of online 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 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 incompatibility. eGain may not be
able to expand or adapt its hosted operations 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 operations. 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 significant portion of its revenue to be derived from customers who use the hosted operations. 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 its hosted operations 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 may be liable for activities of its customers or others using eGains hosted operations





As a provider of eService 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 eGain solutions. This liability could result from the nature and content of the communications transmitted by eGain customers through the hosted
operations. 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.




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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.





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





To be competitive in the eService market, eGain must continually improve the performance, features and reliability of eGain products and
services, including eGains existing eService product suite, 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.




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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.





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.




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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 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 17.7 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:





| |  |  | the prospect of a potential delisting order from the Nasdaq National Market;
| | - |  | ----------------------------------------------------------------------------




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




| |  |  | ability to meet announced or anticipated profitability goals;
| | - |  | -------------------------------------------------------------




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




| |  |  | concerns related to liquidity or cash balances;
| | - |  | -----------------------------------------------




| |  |  | 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. To finance any acquisitions, it may be necessary for eGain to




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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, the conversion of the Companys preferred notes into common stock, 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.





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 eService 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 eService 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




35




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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 7A.    
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 1.0% 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.




36




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##### Table of Contents

|ITEM | 8.    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|---- | --------------------------------------------------







eGain Communications Corporation





Consolidated Financial Statements





June 30, 2002 and 2001







37




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##### Table of Contents

eGain Communications Corporation





Index to Consolidated Financial Statements





Page NumberReport of Ernst & Young LLP, Independent Auditors

39Consolidated Financial Statements:Consolidated Balance Sheets, June 30, 2002 and 2001

40Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000

41Consolidated Statements of Stockholders Equity for the years ended June 30, 2002, 2001 and 2000


42Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000

44Notes to Consolidated Financial Statements

45




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##### Table of Contents

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS





The
Board of Directors and Stockholders of


eGain Communications Corporations





We have audited the accompanying consolidated balance sheets of eGain Communications Corporation as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders equity, and cash flows for each
of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.





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





In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of eGain Communications Corporation at June 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally
accepted in the United States.





The accompanying financial statements have been prepared assuming that eGain Communications Corporation
will continue as a going concern. As more fully described in Note 1, the Company has incurred significant operating losses and negative cash flows since inception. The Company has not achieved profitability and may not be able to realize sufficient
revenues to achieve or sustain profitability in the future. These conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.





/s/    Ernst & Young LLP





Palo Alto, California


August 7, 2002




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##### Table of Contents

eGAIN COMMUNICATIONS CORPORATION





CONSOLIDATED BALANCE SHEETS


(in thousands, except per share amounts)





June 30,2002


2001ASSETSCurrent assets:Cash and cash equivalents

$
9,892


$
42,613Accounts receivable, less allowance for doubtful accounts of $560 and $1,398 at June 30, 2002 and 2001,
respectively


4,968



13,803Prepaid and other current assets


4,472



7,365Total current assets


19,332



63,781Property and equipment, net


5,736



11,677Goodwill, net


4,130



74,616Intangible assets, net


4,087



6,890Other assets


2,259



1,187$
35,544


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

$
3,176


$
5,397Accrued compensation


2,494



6,309Accrued liabilities


5,278



3,395Accrued acquisition-related costs






65Deferred revenue


3,555



5,438Current portion of bank borrowings


1,999



4,268Current portion of notes payable


156



199Current portion of capital lease obligations


393



952Total current liabilities


17,051



26,023Bank borrowings, net of current portion


779



1,167Notes payable, net of current portion






161Capital lease obligations, net of current portion


52



392Other long term liabilities


2,193



597Total liabilities


20,075



28,340Commitments and contingenciesStockholders equity:Series A Cumulative Convertible Preferred stock: $0.001 par value; 0.890 shares authorized, 0.885 issued and outstanding
at June 30, 2002 and 2001; aggregate liquidation preference of $100,379 at June 30, 2002


94,481



88,034Common stock, $0.001 par value, 100,000 shares authorized, 36,655 and 36,439 shares issued and outstanding at June
30, 2002 and 2001


37



36Additional paid-in capital


220,398



227,375Notes receivable from stockholders


(103
)


(380
)Deferred stock compensation


(257
)


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


59



(84
)Accumulated deficit


(299,146
)


(183,326
)Total shareholders equity


15,469



129,811$
35,544


$
158,151





See accompanying notes.




40




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##### Table of Contents

eGAIN COMMUNICATIONS CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share information)





Years Ended June 30,2002


2001


2000Revenue:Hosting

$
5,624


$
10,549


$
3,534License


10,015



24,285



5,053Services


14,790



18,603



4,775Total revenue


30,429



53,437



13,362Cost of revenuedirect


16,861



29,402



14,550Cost of revenueacquisition related


1,448



1,448



103Gross profit (loss)


12,120



22,587



(1,291
)Operating costs and expenses:Research and development


11,395



22,877



11,752Sales and marketing


25,147



46,995



27,893General and administrative


8,940



16,389



7,211Impairment of long-lived assets


36,779







Amortization of goodwill and other intangible assets


35,064



36,816



10,945Amortization of deferred compensation


961



3,291



10,553Restructuring


8,964



1,443



71Total operating costs and expenses


127,250



127,811



68,425Loss from operations


(115,130
)


(105,224
)


(69,716
)Interest income


650



3,417



2,047Interest and other expenses


(1,340
)


(845
)


(762
)Net loss


(115,820
)


(102,652
)


(68,431
)Dividends on convertible preferred stock


(6,447
)


(5,433
)


Beneficial conversion feature on convertible preferred stock


(43,834
)


(19,335
)


Net loss applicable to common stockholders

$
(166,101
)

$
(127,420
)

$
(68,431
)Per share information:Basic and diluted net loss per common share

$
(4.58
)

$
(3.62
)

$
(2.92
)Shares used in computing basic and diluted net loss per common share


36,229



35,164



23,440





See accompanying notes.




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##### Table of Contents

eGAIN COMMUNICATIONS CORPORATION





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(in thousands)





Convertible Preferred Stock


Common Stock

Additional Paid-in Capital


Notes Receivable From Stock- holders


Deferred Stock Compen- sation


Accumulated Other Compre-hensive Income (Loss)


Accum- ulated
Deficit


Total Stock- holders Equity


Compre-hensive LossShares


Amount


Shares

AmountBALANCES AT JUNE 30, 1999

9,566


$
10


10,947

$
11

$
41,804


$
(144
)

$
(8,956
)

$
1


$
(12,243
)

$
20,483Issuance of Series D preferred stock for cash

652












5,152



















5,152Issuance of preferred stock upon exercise of warrants

289












108



















108Conversion of preferred stock to common stock under initial public offering

(10,507
)


(10
)

10,507


10






















Issuance of common stock under the initial public offering, net of issuance costs of $5.983 million








5,750


6


63,011



















63,017Issuance of common stock upon exercise of stock options, net of repurchases








1,746


2


489



(331
)














160Issuance of common stock under employee stock purchase plan








75





766



















766Issuance of common stock upon exercise of warrants








175





141



















141Issuance of common stock in connection with Big Science Company acquisition








740


1


32,258



















32,259Issuance of common stock in connection with Inference Corporation acquisition








5,901


6


79,351



















79,357Deferred stock compensation














7,194







(7,194
)










Amortization of deferred stock compensation .














1,201







9,352











10,553Comprehensive loss:Net loss






























(68,431
)


(68,431
)

$
(68,431
)Unrealized loss on debt and equity securities


























(163
)






(163
)


(163
)Foreign currency translation adjustments


























(31
)






(31
)


(31
)Comprehensive loss





































$
(68,625
)BALANCES AT JUNE 30, 2000




$



35,841

$
36

$
231,475


$
(475
)

$
(6,798
)

$
(193
)

$
(80,674
)

$
143,371Issuance of convertible preferred stock, net of issuance costs

1



82,601




























82,601Dividends on convertible preferred stock





5,433








(5,433
)


















Issuance of common stock upon exercise of stock options, net of repurchases








210





1,410



95















1,505Issuance of common stock under employee stock purchase plan








388





1,544



















1,544Deferred stock compensation














(1,745
)






1,745











Amortization of deferred stock compensation














124







3,209











3,333Comprehensive loss:Net loss






























(102,652
)


(102,652
)

$
(102,652
)Unrealized gain on debt and equity securities


























163







163



163Foreign currency translation adjustments


























(54
)






(54
)


(54
)Comprehensive loss





































$
(102,543
)BALANCES AT JUNE 30, 2001

1


$
88,034


36,439

$
36

$
227,375


$
(380
)

$
(1,844
)

$
(84
)

$
(183,326
)

$
129,811




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##### Table of Contents




eGAIN COMMUNICATIONS CORPORATION





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY(Continued)


(in thousands)





Convertible Preferred
Stock

Common Stock

Additional Paid-in
Capital


Notes Receivable From Stockholders


Deferred Stock Compensation


Accumulated Other Comprehensive Income(Loss)


Accum- ulated
Deficit


Total Stock-
holders Equity


Compre- hensive
LossShares

Amount

Shares


AmountBALANCES AT JUNE 30, 2001



$
88,034

36,439


$
36

$
227,375


$
(380
)

$
(1,844
)

$
(84
)

$
(183,326
)

$
129,811Issuance of convertible preferred stock, net of issuance costs

































Dividends on convertible preferred stock




6,447








(6,447
)


















Issuance of common stock upon exercise of stock options, net of repurchases






(71
)





(127
)


277















150Issuance of common stock under employee stock purchase plan






287



1


223



















224Deferred stock compensation













(703
)






703











Amortization of deferred stock compensation













77







884











961Comprehensive loss:Net loss





























(115,820
)


(115,820
)

$
(115,820
)Unrealized gain on debt and equity securities





































Foreign currency translation adjustments

























143







143



143Comprehensive loss




































$
(115,677
)BALANCES AT JUNE 30, 2002

1

$
94,481

36,655


$
37

$
220,398


$
(103
)

$
(257
)

$
59


$
(299,146
)

$
15,469








See accompanying notes.




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##### Table of Contents

eGAIN COMMUNICATIONS CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


Years Ended June 30,2002


2001


2000Cash flows from operating activities:Net loss

$
(115,820
)

$
(102,652
)

$
(68,431
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


6,852



6,007



1,887Loss on disposal of fixed assets


1,846



138



Impairment of long-lived assets


36,779







Amortization of goodwill and other intangible assets


36,510



38,264



11,048Amortization of deferred compensation.


961



3,333



10,553Purchased in-process research and development.










345Interest expense associated with warrants










22Changes in operating assets and liabilities, net of effects from acquisition of eGain Communications Pvt.
Ltd.:Accounts receivable


8,835



(5,214
)


(3,102
)Prepaid and other current assets


(543
)


(2,819
)


(2,660
)Other assets


1,603



157



(761
)Accounts payable


(2,221
)


51



3,700Accrued compensation


(3,815
)


(2,200
)


4,588Other accrued liabilities


1,818



(4,388
)


2,012Deferred revenue


(1,883
)


(1,848
)


2,145Other liabilities


1,596



468



102Net cash used in operating activities


(27,483
)


(70,703
)


(38,552
)Cash flows from investing activities:Purchases of property and equipment


(1,966
)


(4,885
)


(8,652
)Net cash assumed in (paid for) acquisitions






(806
)


7,391Purchases of short-term securities










(26,546
)Proceeds from sale of property and equipment


12



74



Proceeds from sale of short-term securities






3,154



23,392Net cash used in investing activities


(1,954
)


(2,463
)


(4,415
)Cash flows from financing activities:Payments on borrowings


(7,013
)


(307
)


(555
)Payments on capital lease obligations


(940
)


(1,288
)


(263
)Proceeds from borrowings


4,152



4,577



408Net proceeds from issuance of preferred stock






82,601



5,152Net proceeds from issuance of common stock


374



3,049



64,192Net cash (used in) provided by financing activities


(3,427
)


88,632



68,934Effect of exchange rate differences on cash


142



(54
)


(31
)Net increase (decrease) in cash and cash equivalents


(32,721
)


15,412



25,936Cash and cash equivalents at beginning of year


42,613



27,201



1,265Cash and cash equivalents at end of year

$
9,892


$
42,613


$
27,201Supplemental cash flow disclosures:Cash paid for interest

$
422


$
377


$
278Cash paid for income taxes










279Equipment acquired under capital leases


41



787



2,108Deferred compensation on stock options


(703
)


(1,745
)


7,194Net unrealized gain (loss) on debt and equity securities






163



(163
)Conversion of line of credit to term loan






1,000









See accompanying notes.




44




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##### Table of Contents

eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1.    SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Organization, Nature of Business and Basis of Presentation





eGain is a leading provider of enterprise interaction management/eService software that enables companies to transform traditional
customer call centers into multi-channel eService networks. 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 CRM, ERP and call center
systems, enabling customers to leverage investments in existing systems and providing an enterprise wide solution.





The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has incurred significant operating losses and negative cash flows since inception. The Company has
not achieved profitability and may not be able to realize sufficient revenues to achieve or sustain profitability in the future. Since inception eGain experienced substantial expenditures as it grew operations and personnel. Although over the last
fiscal year eGain has repeatedly taken actions to reduce its expense rates, it expects to incur additional operating losses, at least through the second quarter of fiscal 2003 if not longer. eGains working capital requirements in the
foreseeable future will depend on a variety of factors and assumptions, in particular that revenue growth rates remain stable and that customers continue to pay on a timely basis, and is subject to numerous risks. If eGain does not significantly
reduce its net cash outflow in the near term, as compared to fiscal 2002, eGain will require additional credit facilities, additional equity and/or debt financings and/or will need to pursue strategic alternatives in fiscal year 2003. eGain is
currently focused on reducing its expenses and pursuing such alternatives in the near term. These conditions raise substantial doubt about the Companys ability to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.





Principles of Consolidation





The consolidated financial statements include the accounts of eGain and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.





Use of Estimates





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





Foreign Currency Translation





The functional currency of each of eGains international subsidiaries is the local currency of the country in which it operates. Assets and liabilities of eGains foreign subsidiaries are
translated at month-end exchange rates, and revenues and expenses are translated at the average monthly exchange rates. The resulting cumulative translation adjustments are recorded as a component of accumulated other comprehensive income. Gains and
losses resulting from foreign currency transactions are included in the consolidated statements of operations and, to date, have not been significant.




45




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##### Table of Contents



eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Cash equivalents





eGain considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. eGains cash equivalents consisted of the
following (in thousands):





June 30,2002

2001Cash

$
2,623

$
5,154Money market funds


4


1,425Certificates of deposit


3,500


250Commercial paper


3,765


35,784$
9,892

$
42,613





Fair Value of Financial Instruments





eGains financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt. eGain does not
have any derivative financial instruments. eGain believes the reported carrying amounts of its financial instruments approximate fair value, based upon their short-term nature and comparable market information available at the respective balance
sheet dates.





Concentration of Credit Risk





Financial instruments that subject eGain to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. eGain is exposed to credit risk in the event of
default by these institutions to the extent of the amount recorded on the balance sheet. eGain invests excess cash primarily in commercial paper and money market funds, which are highly liquid securities that bear minimal risk. In addition, eGain
has investment policies and procedures that are reviewed periodically to minimize credit risk.





eGains
customer base extends across many different industries and geographic regions. eGain performs ongoing credit evaluations and generally does not require collateral. In addition, eGain establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of customers, historical trends and other information. In the years ended June 30, 2002, 2001 and 2000, no single customer accounted for more than 10% of total revenue.





Property and Equipment





Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the respective assets (3 years). Leasehold
improvements are amortized over the lesser of their corresponding lease term or the estimated useful lives of the improvements (5 years).





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. See Note
3 regarding a substantial impairment in the year ended June 30, 2002.




46




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##### Table of Contents



eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Impairment of Long-Lived Assets





eGain periodically evaluates long-lived assets, including goodwill, to determine if the carrying value of the assets is impaired. The reviews look for the existence of
facts or circumstances, either internal or external, which indicate that the carrying value of the asset cannot be recovered. Such indicators would include a lack of successful further development and integration of the acquired companys
technology into eGains operations, lack of market acceptance of the products and lower than expected cash flows from operations. If there is an indication of impairment and undiscounted expected future cash flows are less than the carrying
amount of the assets, eGain measures the amount of the loss based on discounted expected future cash flows from the impaired assets. The cash flow calculations are based on managements best estimates, using appropriate assumptions and
projections at the time. See Note 3 regarding a substantial impairment in the year ended June 30, 2002.





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 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.





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.





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




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Construction-Type Contracts, using the relevant guidance from SOP 97-2 and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.





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





Software Development Costs





Software development costs are included in research and development and are expensed as incurred until technological feasibility of the product is achieved. To date, software development costs incurred in the period between achieving
technological feasibility and general availability of software have not been material and have been charged to operations as incurred.





Advertising Costs





eGain expenses advertising costs as incurred. Total advertising expenses
for the years ended June 30, 2002, 2001 and 2000 were $269,000, $2,629,000, $4,291,000, respectively.





Stock-Based Compensation





eGain accounts for its stock-based compensation arrangements with employees using the intrinsic value method
as allowed under Accounting Principles Board No. 25 (APB 25), Accounting for Stock Issued to Employees. Under APB 25, deferred stock-based compensation is recorded on the date of grant when the deemed fair value of the underlying common
stock exceeds the exercise price for stock options. Pursuant to Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), eGain is required to disclose the pro forma effects on operating
results as if eGain had elected to use the fair value approach to account for all of its stock-based employee compensation plans.





In accordance with SFAS 123, stock options and warrants issued to non-employees are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably
measured.





Income Taxes





Income taxes are accounted for using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Under this method,
deferred tax liabilities and assets are recognized for the expected future tax consequences of differences between the carrying amounts and the tax bases of assets and liabilities.





Comprehensive Loss





eGain reports comprehensive loss and
its components in accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). Under SFAS 130, comprehensive income includes all changes in equity during a period except those resulting
from investments by or distributions to owners. Total comprehensive loss for each of the three years ended June 30, 2002 is shown in the statement of stockholders equity. Accumulated other comprehensive loss presented in the accompanying
consolidated balance sheets at June 30, 2002 consists solely of accumulated foreign currency translation adjustments.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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 represents the calculation of basic and diluted net loss per common share (in thousands, except per share data):





Year ended June 30,2002


2001


2000Net loss applicable to common stockholders

$
(166,101
)

$
(127,420
)

$
(68,431
)Basic and diluted:Weighted-average common shares outstanding


36,501



36,107



24,940Less weighted-average common shares subject to repurchase


(272
)


(943
)


(1,500
)Weighted-average common shares used in computing basic and diluted net loss per common share


36,229



35,164



23,440Basic and diluted net loss per common share

$
(4.58
)

$
(3.62
)

$
(2.92
)





Outstanding options and warrants to purchase 6,208,000, 5,878,000
and 5,819,000 shares of common stock at June 30, 2002, 2001 and 2000, respectively, and convertible preferred stock convertible into 17,649,000 shares of common stock at June 30, 2002, were not included in the computation of diluted net loss per
common share for the periods presented as a result of their anti-dilutive effect. Such securities could have a dilutive effect in future periods.





Segment Information





Operating segments are identified as components of an enterprise for
which discrete financial information is available and regularly reviewed by the company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-makers, as defined under SFAS No. 131, is its executive management team. 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. Accordingly, eGain operates in one segment, the development, license, implementation and support of its customer service infrastructure
software solutions.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Information relating to eGains geographic areas for the years
ended June 30, 2002, 2001 and 2000 is as follows (in thousands):





Total Revenues

Operating Loss


Identifiable AssetsYear ended June 30, 2002:North America

$
17,393

$
(111,791
)

$
22,466Europe


11,354


(186
)


3,635India





(2,119
)


627Asia Pacific


1,682


(1,034
)


599$
30,429

$
(115,130
)

$
27,327Year ended June 30, 2001:North America

$
38,555

$
(98,919
)

$
69,446Europe


12,417


(3,261
)


6,052India





(398
)


750Asia Pacific


2,465


(2,646
)


397$
53,437

$
(105,224
)

$
76,645Year ended June 30, 2000:North America

$
12,208

$
(68,355
)

$
50,530Europe


1,134


(784
)


5,696India









Asia Pacific


20


(577
)


45$
13,362

$
(69,716
)

$
56,271





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 our fiscal year beginning July 1, 2002. 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. We will adopt SFAS No. 142 in our first quarter of fiscal 2003. Upon adoption, we will stop the amortization of goodwill and intangible assets deemed to have
indefinite lives with a net carrying value of approximately $5.6 million as of June 30, 2002. As a result of the discontinuance of the amortization of goodwill existing as of June 30, 2002 and excluding the impact of potential impairment charges,
the application of SFAS No. 142 is expected to result in an increase in our results of operations of approximately $4.9 million during fiscal 2003. During the first six months of fiscal 2003, we will perform the first of the required impairment
tests of goodwill and intangible assets deemed to have indefinite lives as of July 1, 2002, using the two-step process required under SFAS 142. We have not yet determined what effect these tests will have on our earnings and financial position.





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 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 our fiscal year beginning July 1, 2002. 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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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)










On January 1, 2002, we
adopted the consensus of Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred. Prior to the adoption of EITF No. 01-14,
reimbursable out-of-pocket expenses were reflected as a reduction to Cost of RevenueDirect. EITF 01-14 requires that reimbursements received for out-of-pocket expenses be reflected as revenues and reclassification of prior period
financial statements to conform to the current period presentation. eGain has not reclassified these reductions to cost of revenue to revenue for prior years as the adoption of EITF 01-14 did not have a material impact on our financial statements in
fiscal 2002 or prior periods.





The FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, which establishes financial accounting and reporting for costs associated with exit or disposal activities. This statement is effective for disposal activities initiated after December 31, 2002. Management has evaluated the
impact of this statement and has determined that there is no material effect on eGains financial position or results of operations.





2.    BUSINESS COMBINATIONS





In April 2001, eGain obtained final
regulatory approval from the government of India to complete the acquisition of eGain Communications Private Limited (eGain India), formerly Nitman Software Private Limited, an ecommerce software development company located in Pune,
India. Effective April 23, 2001, eGain acquired all of the outstanding capital stock of eGain India in exchange for a $921,000 cash payment and transaction costs totaling $65,000. The acquisition has been accounted for using the purchase method of
accounting and the results of eGain Indias operations have been combined with those of eGain since the date of acquisition. This purchase resulted in $301,000 of goodwill which is being amortized, net of impairment charges, on a straight-line
basis over a period of four years. See Note 3 regarding a substantial impairment in the year ended June 30, 2002.





On June 29, 2000, eGain acquired all of the outstanding common stock of Inference Corporation (Inference), a developer of one-to-one sales, service and support solutions over the Web, for $80,100,000. eGain issued
5,900,000 shares of its common stock in the acquisition and assumed options that can be exercised for 1,600,000 shares of its common stock. The acquisition was accounted for under the purchase method of accounting and the results of Inferences
operations have been combined with those of eGain since the date of acquisition. This purchase resulted in $76,060,000 of goodwill and other intangible assets that are being amortized, net of impairment charges, over estimated useful lives ranging
from three to four years. See Note 3 regarding a substantial impairment in the year ended June 30, 2002.





On March
7, 2000, eGain acquired all of the assets and liabilities of Big Science Company (Big Science), a developer of self-service software products for $34,200,000. eGain issued 740,000 shares of its common stock in the acquisition and assumed
options that can be exercised for 50,000 shares of its common stock. The acquisition was accounted for under the purchase method of accounting and the results of Big Sciences operations have been combined with those of eGain since the date of
acquisition. This purchase resulted in $34,423,000 of goodwill and other intangible assets that are being amortized over an estimated useful life of three years. See Note 3 regarding a substantial impairment in the year ended June 30, 2002.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







3.    PURCHASED INTANGIBLE ASSETS INCLUDING GOODWILL





Purchased intangible assets, including goodwill consisted of the following (in thousands):





June 30,2002


2001Goodwill

$
121,188


$
121,188Customer base


4,901



4,901Assembled workforce


2,255



2,255Developed technology


3,694



3,694Total intangible assets including goodwill

$
132,038


$
132,038Less accumulated amortization


(87,042
)


(50,532
)Less impairment charge


(36,779
)


Intangible assets including goodwill, net

$
8,217


$
81,506





Upon adoption of SFAS 142 in fiscal 2003, the Company will
reclassify assembled workforce to goodwill and will no longer amortize goodwill.





The Company reviews long-lived
assets, including goodwill and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its fair value. In the fourth quarter of 2002, the Company observed indicators that
our acquired intangible assets and goodwill were possibly impaired. In addition to observing a continued deterioration of industry and market conditions, the Company was not able to meet operating plans for several quarters resulting in a revision
of the Companys cash flow forecast. These events were considered to be indicators of potential impairment and the Company evaluated the carrying value of its long-lived assets. The Companys forecast of future cash flows indicated that
the long-lived assets were impaired. The Company estimated the fair value of long-lived assets by discounting the cash flow forecast using a discount rate of 34%, which represented the Companys weighted average cost of capital. As a result of
the evaluation, the Company concluded the book value of long-lived assets exceeded fair value by $36.8 million. The Company wrote off $36.8 million of unamortized goodwill which was charged to operations as impairment of long-lived assets in
the fourth quarter of 2002.





4.    PROPERTY AND EQUIPMENT





Property and equipment consists of the following:





June 30,2002


2001Computers and equipment

$
16,143


$
15,028Furniture and fixtures


2,028



2,780Leasehold improvements


368



1,837Total


18,539



19,645Accumulated depreciation and amortization


(12,803
)


(7,968
)Property and equipment, net

$
5,736


$
11,677





Depreciation expense was $6,852,000, $6,007,000 and $1,887,000 for
the years ended June 30, 2002, 2001 and 2000, respectively. Included in computers and equipment at June 30, 2002, 2001 and 2000 are computer




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




hardware and software under capital leases with cost totaling $2,250,000, $2,340,000 and $2,108,000, respectively. The accumulated depreciation related to the leased property was $1,960,000,
$1,160,000 and $263,000 at June 30, 2002, 2001, and 2000, respectively.





5.    BANK BORROWINGS AND NOTES PAYABLE





On March 27, 2002, eGain entered into a credit agreement with Silicon Valley Bank (SVB). Under
the credit agreement, SVB provided eGain a term loan, an equipment loan and a revolving line of credit (the SVB Credit Facilities). The term loan in the amount of $1,962,717 and the equipment loan in the amount of $304,431, are both
secured by the assets of the Company and mature on February 29, 2004. The revolving line of credit is secured by the Companys accounts receivable balance and matures on March 25, 2003. The aggregate maximum proceeds available under the
revolving line of credit are $5.0 million, of which $1,432,876 was outstanding on March 27, 2002. The SVB Credit Facilities are subject to certain financial covenants and restrictions with respect to, among others, the quick ratio, liquidity, and
profitability.





The proceeds of the SVB Credit Facilities were used to repay all outstanding obligations under the
prior credit facility with Comerica Bank. On March 28, 2002 the credit agreement with Comerica Bank was terminated.





On May 16, 2002, eGain and SVB entered into a waiver and loan modification agreement, whereby SVB waived the event of default arising out of eGains failure to comply with the profitability covenant set forth in the credit
agreement for the quarter ended March 31, 2002.





On June 25, 2002, eGain and SVB entered into the second waiver
and loan modification agreement, whereby SVB waived the event of default arising out of eGains failure to comply with the adjusted quick ratio covenant set forth in the credit agreement for the month ended April 30, 2002. As part of this
agreement, the original covenant requirements were eliminated and replaced with a liquidity covenant which required eGain to maintain a ratio of its cash balance to principal and accrued interest on its outstanding credit facilities of 2.0 to 1.0.
Additionally, eGain was required to establish and maintain a 7-day unrestricted, renewable certificate of deposit in the amount of $3.5 million with SVB. As of June 30, 2002 eGain was in compliance with its covenant requirements, as amended.





Total borrowings under the SVB Credit Facilities were $2,778,000 at June 30, 2002, which consisted of the
following (in thousands):





Amount

Maturity Date

Interest RateRevolving line of credit

$   881

March 25, 2003

Prime + 0.25%Term loan

1,642

February 29, 2004

Prime + 0.50%Equipment loan

255

February 29, 2004

Prime + 0.50%$2,778





In October 1998, eGain obtained a $1.5 million credit facility with
a leasing company for equipment purchases. Borrowings under the credit facility are collateralized by certain fixed assets and bear an imputed interest rate of 13.68%. At June 30, 2002 and 2001, $156,000 and $360,000, respectively, were outstanding
under the credit facility. In conjunction with the credit facility, eGain issued warrants to purchase 75,000 shares of its Series A preferred stock, which was converted into a right to purchase eGains common stock upon eGains initial
public offering, at $0.8055 per share.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Principal debt repayments are due as follows (in thousands):





Fiscal Year2003

$2,1552004

779$2,934





6.    INCOME TAXES





Due to operating losses and the inability to recognize the benefits therefrom, there is no provision for income taxes for the years ended
June 30, 2002, 2001 or 2000.





As of June 30, 2002, eGain had a federal net operating loss carryforward of
approximately $172,200,000. eGain also had federal research and development credit carryforwards of approximately $1,700,000. The net operating loss and credit carryforwards will expire at various dates beginning in 2003 through 2022, if not
utilized.





Utilization of the net operating losses and credits may be subject to a substantial limitation due to
the change in ownership provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Deferred tax assets and liabilities reflect the net tax effects of
net operating loss and credit carryforwards and of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of eGains deferred tax
assets and liabilities for federal and state income taxes are as follows (in thousands):





June 30,2002


2001Deferred tax assets:Net operating loss carryforwards

$
62,400


$
52,200Research credits


2,800



1,900Capitalized research and development


1,900



1,400Other individual immaterial items


5,800



5,300Total deferred tax assets


72,900



60,800Valuation allowance for deferred tax assets


(71,300
)


(55,200
)Net deferred tax assets


1,600



5,600Deferred tax liabilities:Other intangibles


(1,600
)


(5,600
)$



$






FASB No. 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. Based upon the weight of available evidence, which includes eGains historical operating performance and the reported cumulative net losses in all prior years, eGain has provided a full
valuation allowance against its net deferred tax assets.





The net valuation allowance increased by $16.1 million
and $24.1 million during the years ended 2002 and 2001, respectively.





7.    COMMITMENTS





eGain leases its facilities under noncancelable operating leases that expire at various dates through fiscal year 2006. Rent
expense for facilities under operating leases was $5,142,000, $5,364,000 and $1,553,000 for the years ended June 30, 2002, 2001 and 2000, respectively. In addition, eGain generated sublease rental income of $839,000 for the year ended June 30, 2002.
eGain also leases certain computer hardware and software under capital leases that expire at various dates through fiscal year 2005. A summary of future minimum lease payments is as follows (in thousands):





Fiscal Year

Capital Leases


Operating Leases2003

$
431


$
4,6712004


47



3,1132005


10



2,0582006






312007


Total minimum lease payments


488


$
9,873Less amount representing imputed interest


(43
)Present value of net minimum capital lease payments


445Less current portion


(393
)Capital leases, excluding current portion

$
52




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Total future minimum rentals to be received under noncancelable
subleases were $1,800,000 as of June 30, 2002.





8.    EMPLOYEE BENEFIT PLANS





eGain sponsors an employee savings and retirement plan (the 401(k) Plan) as allowed under Section 401(k) of the Internal
Revenue Code. The 401(k) Plan is available to all domestic employees who meet minimum age and service requirements, and provides employees with tax deferred salary deductions and alternative investment options. Employees may contribute up to 20% of
their salary, subject to certain limitations. eGain, at the discretion of its Board of Directors, may make contributions to the 401(k) Plan. eGain has not contributed to the 401(k) Plan since its inception.





9.    STOCKHOLDERS EQUITY





Convertible 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 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
approximately 3,826,000 shares of eGains common stock (the Warrants). The total proceeds of the offering were $88,500,000. 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 aggregate liquidation preference was $100,379,000 at June 30, 2002. In the event of a liquidation, dissolution or winding up of eGain, before any
distribution or payment to holders of common stock, Series A stockholders shall be entitled to be paid the greater of (i) the liquidation value, or (ii) an amount equal to the amount that Series A stock holders would be entitled to receive if they
had converted their shares to common stock immediately prior to the record date in connection with such liquidation, dissolution or winding up. A consolidation, merger or other business combination resulting in the holders of the issued and
outstanding voting securities immediately prior to such transaction owning or controlling a majority of the voting securities of the continuing or surviving entity immediately following such transaction shall not be deemed to be a liquidation,
dissolution or winding up (unless in connection therewith, the liquidation of eGain is specifically approved). The Series A stockholders are entitled to cash dividends only when and if declared by the board of directors. The Series A shares are
convertible at the option of the holder into common stock at any time.





Pursuant to the terms and conditions of
the Series A agreement, on August 8, 2001, the conversion price of the Series A shares underwent a reset from the original conversion price of $9.2517 per share to $5.6875 per share. As a result of this adjustment of the conversion price, the
currently outstanding Series A shares were convertible into approximately 16,635,000 shares of common stock as of August 8, 2001. In addition, on August 8, 2001, pursuant to the terms and conditions of the Warrant agreement, the exercise price
of the Warrants underwent an adjustment from the original exercise price of $9.2517 per share to $5.6875 per share. This adjustment to the exercise price of the Warrants will not result in the issuance of additional warrants or shares of common
stock upon the exercise of the Warrants.





The net cash proceeds of the offering, after expenses, were $82,601,000.
In order to determine whether a beneficial conversion feature existed in connection with the offering, the proceeds were discounted by $25,300,000, representing the valuation of the 3,826,000 warrants issued in connection with the sale of Series A
and B shares. After reducing the proceeds by the value of the warrants, the remaining proceeds were used to




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




compute a discounted conversion price, which was compared to the fair market value of eGains common stock at the date of issuance to determine whether a beneficial conversion feature
existed. 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, the 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. In the year ended June 30, 2002, $43,834,000 was allocated to the beneficial conversion feature and was included in net loss applicable to common stockholders.





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 per
share). 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.





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. In the year ended June 30, 2002, accrued
dividends were $6,447,000.





Common Stock





On September 28, 1999, eGain completed an initial public offering in which it sold 5,000,000 shares of common stock at $12.00 per share for net proceeds of $54,700,000. In October 1999, the
underwriters exercised an over-allotment option of 750,000 shares resulting in net proceeds of $8,300,000.





Certain option holders have exercised options to purchase shares of restricted common stock in exchange for five-year, full recourse promissory notes. The notes bear interest ranging from 5.0% to 6.0% and expire at various dates
through June 2004. eGain has the right to repurchase all unvested shares at the original exercise price upon employee termination. The number of shares subject to this repurchase right decreases as the shares vest under the original option terms,
generally four years. There were 75,940 and 485,000 shares subject to repurchase at June 30, 2002 and 2001, respectively.





Common
Stock Warrants





In connection with the acquisition of Sitebridge on April 30, 1999, eGain assumed warrants to
purchase 121,000 shares of common stock at a price of $0.9916 per share, which expire in May 2003. In addition, eGain assumed warrants to purchase 30,000 shares of common stock at a price of $0.2754 per share, which expired in October 2001 and were
never exercised.





1999 Employee Stock Purchase Plan





The 1999 Employee Stock Purchase Plan (the ESPP) allows eligible employees to purchase common stock through payroll deductions of up to 15% of an
employees compensation, subject to certain limitations. The ESPP has a one-year offering period that begins in May or November of each year, depending on which date the participant elects to enter the ESPP. The purchase price of the common
stock will be equal to 85% of the lower of (1) the fair market value per share on the participants entry date into the offering period or (2) the fair market




57




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




value per share on each semi-annual purchase date during the offering period. A total of 1,500,000 shares of common stock have been reserved for issuance under the ESPP, of which 750,000 shares
had been issued as of June 30, 2002. During the years ended June 30, 2002 and 2001 there were 287,000 and 388,000 shares issued under the ESPP, respectively.





Tender Offer





In May 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, eGain employees were given the opportunity, if they chose, to cancel certain outstanding stock options previously granted to them with an exercise price equal to or greater than $4.00 in exchange for an
equal number of replacement options to be granted at a future date, at least six months and one day from the cancellation date, which was August 10, 2001. Those employees electing to participate in the exchange program were required to exchange all
options granted to such employees during the six-month period prior to the cancellation date. Under the exchange program, options for 1,014,000 shares of the Companys common stock were tendered and cancelled and 878,000 shares were issued as
replacement grants on February 11, 2002 at a price of $1.43. There were 14,000 untendered options associated with the exchange program that are subject to variable accounting. There was no compensation expense associated with these options recorded
during fiscal 2002.





2000 Stock Plan





In July 2000, the board of directors adopted the 2000 Non-Management Stock Option Plan (the 2000 Plan), which provides for the grant of nonstatutory stock options to employees, advisors and
consultants of eGain. Options under the 2000 Plan shall be granted at a price not less than 85% of the fair market value of the common stock on the date of grant. eGains board of directors determines the fair market value (as defined in the
2000 Plan) of the common stock, date of grant and vesting schedules of the options granted. The options generally vest ratably over 4 years and expire no later than 10 years from the date of grant.





The following table represents the activity under the 2000 Plan:





Shares Available for Grant


Options Outstanding


Weighted Average PriceShares authorized for issuance

2,000,000Options granted

(2,300,000
)

2,300,000


$
9.32Options canceled

886,000


(886,000
)

$
9.48Balance at June 30, 2001

586,000


1,414,000



$9.23Options granted

(578,000
)

578,000


$
1.27Options canceled

749,000


(749,000
)

$
9.19Balance at June 30, 2002

757,000


1,243,000



$5.55





1998 Stock Plan





In June 1998, the board of directors adopted the 1998 Stock Plan (the 1998 Plan), which provides for grant of stock options to eligible participants. Options
granted under the 1998 Plan are either incentive stock options or nonstatutory stock options. Incentive stock options may be granted to employees with exercise prices of no less than the fair value of the common stock and nonstatutory options may be
granted to eligible participants at exercise prices of no less than 85% of the fair value of the common stock on the date of grant. eGains board of directors determines the fair market value (as defined in the 1998 Plan) of the common stock,
date of grant and vesting schedules of the options granted. The options generally vest ratably over a period of four years and expire no later than 10 years from the date of grant. Options are generally exercisable upon grant, subject to repurchase
rights by eGain until vested.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following table represents the activity under the 1998 Plan:





Shares Available for Grant


Options Outstanding


Weighted Average PriceBalance at June 30, 1999

647,000


1,481,000


$
0.32Additional authorization

3,000,000Options granted

(4,179,000
)

4,179,000


$
19.25Options exercised




(1,154,000
)

$
0.47Options canceled

638,000


(638,000
)

$
19.39Repurchases

153,000


Balance at June 30, 2000

259,000


3,868,000


$
17.58Additional authorization

2,000,000Options granted

(2,271,000
)

2,271,000


$
5.49Options exercised




(136,000
)

$
0.79Options canceled

2,584,000


(2,584,000
)

$
17.75Repurchases

265,000


Balance at June 30, 2001

2,837,000


3,419,000


$
10.09Options granted

(4,020,000
)

4,020,000


$
1.33Options exercised




(61,000
)

$
1.10Options canceled

2,774,000


(2,774,000
)

$
9.68Repurchases

163,000


Balance at June 30, 2002

1,754,000


4,604,000


$
2.81





In connection with the acquisition of Sitebridge, eGain assumed
options to purchase 1,114,000 shares of common stock. During fiscal 2002, 31,000 options were exercised and 11,000 options were canceled at weighted average exercise prices of $0.14 and $0.14, respectively. As of June 30, 2002, 6,000 options were
outstanding. In connection with the acquisitions of Big Science and Inference, eGain assumed options to purchase 50,000 and 1,611,000 shares of common stock, respectively, of which none and 194,000, respectively, were outstanding as of June 30,
2002.





The following table summarizes information about stock options outstanding and exercisable as of June 30,
2002:





Options Outstanding

Options ExercisableRange of Exercise Prices

Number

Weighted Average Remaining Contractual Life

Weighted Average Exercise
Price

Number

Weighted Average Exercise
Price$0.10$0.56

703,000

9.57

$  0.49

238,000

$  0.47$0.89$1.00

641,000

8.50

$  0.98

304,000

$  0.98$1.02$1.42

675,000

9.58

$  1.12

314,000

$  1.04$1.43$1.43

763,000

9.63

$  1.43

319,000

$  1.43$1.58$1.58

766,000

9.19

$    .58

629,000

$  1.58$1.60$2.07

557,000

9.32

$  2.04

66,000

$  2.05$2.22$4.75

656,000

8.34

$  3.07

319,000

$  3.36$5.35$8.66

293,000

7.55

$  7.03

218,000

$  7.04$8.68$8.69

573,000

8.14

$  8.68

225,000

$  8.68$8.81$47.63

420,000

7.92

$16.20

77,000

$18.41$0.10$47.63

6,047,000

8.91

$  3.47

2,709,000

$  3.07




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Stock-Based Compensation





Pro forma information regarding net loss and net loss per share is required by SFAS 123 as if eGain had accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of eGains stock-based awards to employees was estimated using the Black-Scholes multiple option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. eGains stock-based awards
to employees have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Therefore, in managements opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees.





The fair value of eGains stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:





Options


ESPP2002


2001


2000


2002


2001


2000Expected life (years)

3.28


3.50


2.97


0.50


0.50


0.50Expected stock price volatility

1.00


1.00


1.00


1.00


1.00


1.00Risk-free interest rate

3.92
%

6.00
%

5.79
%

2.70
%

5.65
%

5.79
%





The weighted-average fair value of options granted in the years
ended June 30, 2002, 2001 and 2000 was $0.70, $4.52 and $12.81, respectively.





For purposes of pro forma
disclosures, the estimated fair value of an option is amortized to expense over the vesting period of the option. eGains pro forma information, which includes the stock option plans and the ESPP, for the fiscal years ended June 30, 2002, 2001
and 2000 is as follows (in thousands except for basic and diluted net loss per common share information):





2002


2001


2000Net loss applicable to common stockholdersactual

$
(166,101
)

$
(127,420
)

$
(68,431
)Net loss applicable to common stockholderspro forma


(168,478
)


(134,618
)


(80,271
)Net loss per common share:Basic and diluted actual

$
(4.58
)

$
(3.62
)

$
(2.92
)Basic and diluted pro forma


(4.65
)


(3.83
)


(2.96
)





10.    RESTRUCTURING COSTS





During fiscal year 2002, eGain recorded restructuring charges totaling $8,964,000 pursuant to a plan approved by the required level of
management necessary to execute its components. These charges were primarily related to the consolidation of eGains facilities in North America. In the first quarter of fiscal 2002, eGain initiated the plan of consolidation of facilities in
North America resulting in a charge of $4,336,000. This amount included 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 the third quarter of fiscal 2002, eGain incurred 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.




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eGAIN COMMUNICATIONS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







In the fourth quarter of fiscal 2002, eGain decided to extend the
plan of facilities consolidation which resulted in an additional charge of $2,763,000 related to exited facilities and leasehold improvement write-offs of $575,000.





During fiscal 2002 year, eGain recorded a total severance charge of $1,222,000, which was primarily due to the reduction in worldwide workforce by 190 employees across all
departments.





During fiscal 2001, eGain recorded restructuring charges totaling $1,443,000. These charges
primarily related to a reduction in eGains worldwide workforce by 141 employees across all departments and office closures in North America pursuant to the adoption of eGains expense management strategy. The total charges were primarily
comprised of $917,000 related to severance costs, $263,000 related to office closure costs and $263,000 related to legal and professional costs associated with the employee terminations. Of the total charges, $132,000, which was primarily related to
legal and professional costs, remained unpaid as of June 30, 2002.





Details of the cumulative restructuring
charges during the fiscal year ended June 30, 2002 are as follows (in thousands):





Cash/Non-cash

FY01 Remaining Balance

FY02 Charges

Amount Paid/Used


Balance at 06/30/02Excess facilities

Cash

$


$
6,412

$
(1,449
)

$
4,963Leasehold improvement write-offs

Non-cash





1,315


(1,315
)


Employee severance

Cash





1,222


(1,222
)


Professional services

Cash


220


15


(103
)


132Total restructuring charges



$
220

$
8,964

$
(4,089
)

$
5,095





During fiscal 2000, eGain incurred $71,000 of restructuring charges
related to the acquisition of Inference, all of which was paid as of June 30, 2002. eGain abandoned plans to occupy new office space in the United Kingdom and expensed professional services fees incurred in the design phase of the office space.





11.    LITIGATION





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, 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. The Company 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.




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##### Table of Contents




In March 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.





With
the exception of these matters, eGain is not a party to any other material pending legal proceedings, nor is its property the subject of any material pending legal proceeding, except routine legal proceedings arising in the ordinary course of its
business and incidental to its business, none of which are expected to have a material adverse impact upon its business, financial position or results of operations.





12.    SUBSEQUENT EVENTS(Unaudited)





On August 30, 2002, eGain and SVB entered into the third waiver and loan modification agreement, whereby SVB waived the event of default arising out of eGains failure to comply with the liquidity covenant set forth in the
credit agreement for the month ended August 31, 2002. As part of this agreement, the term loan and equipment loan were combined into one term loan facility in the amount of $1.7 million. In addition, eGain was required to secure all outstanding
obligations under the SVB Credit Facilities (including the revolving line of credit), by establishing a restricted certificate of deposit in the amount of $2.6 million with SVB. The amount of the restricted certificate of deposit will be reduced as
scheduled amortization payments on the term loan are made.





On September 23, 2002, eGain entered into an accounts
receivable purchase agreement (the AR Facility) with SVB, which replaced the existing revolving line of credit. The AR Facility provides for the sale of up to $5.0 million in certain qualified receivables, bears interest at a rate of
prime plus 5.0% per annum and carries a 0.50% monthly administrative fee.





On August 20, 2002, eGain received an
updated letter from Nasdaq indicating that eGains common stock had failed to achieve compliance with the $1.00 per share minimum bid price and that the common stock was therefore subject to delisting. On August 26, 2002, eGain issued a press
release announcing receipt of this letter from Nasdaq and eGains intention to appeal the delisting determination of the Nasdaq staff. eGain currently has a hearing date scheduled for October 2002 before a Listing Qualifications Hearing Panel.




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##### Table of Contents

|ITEM 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------




Not applicable.





PART III





ITEM 10.    
DIRECTORS AND EXECUTIVE OFFICERS OF eGAIN





The information required by this item (with
respect to Directors) is incorporated by reference from the information under the caption Election of Directors contained in eGains Proxy Statement to be filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Companys 2002 Annual Meeting of Stockholders to be held on November 1, 2002 (the Proxy Statement).





The following table sets forth information regarding eGains current executive officers as of September 20, 2002:





Name

Age

PositionAshutosh Roy

36

Chief Executive Officer and ChairmanGunjan Sinha

35

President and DirectorEric Smit

40

Chief Financial OfficerArnold Adriaanse

50

Senior Vice President of Worldwide Sales, Professional Services and MarketingPromod Narang

44

Vice President of Products and EngineeringMilind Kasbekar

47

Vice President of Finance and Administration





Ashutosh Roy co-founded eGain and has served as Chief Executive
Officer and a director of eGain since September 1997. From May 1995 through April 1997, Mr. Roy served as Chairman of WhoWhere? Inc., an Internet-service company co-founded by Mr. Roy. From June 1994 to April 1995, Mr. Roy co-founded Parsec
Technologies, a call center company based in New Delhi, India. From August 1988, to August 1992, Mr. Roy worked as Software Engineer at Digital Equipment Corp. Mr. Roy holds a B.S. in Computer Science from the Indian Institute of Technology, New
Delhi, a Masters degree in Computer Science from Johns Hopkins University and an M.B.A. from Stanford University.





Gunjan Sinha co-founded eGain and has served as a director of eGain since inception in September 1997 and as President of eGain since January 1998. From May 1995 through April 1997, Mr. Sinha served as President of WhoWhere? Inc., an
Internet-services company co-founded by Mr. Sinha. Prior to co-founding WhoWhere? Inc., Mr. Sinha was a developer of hardware for multiprocessor servers at Olivetti Advanced Technology Center. In June 1994, Mr. Sinha co-founded Parsec Technologies.
Mr. Sinha holds a degree in Computer Science from the Indian Institute of Technology, New Delhi, a Masters degree in Computer Science from University of California, Santa Cruz, and a Masters degree in Engineering Management from Stanford University.





Eric Smit has served as Chief Financial Officer since August 2002. From April 2001 to July 2002, Mr. Smit served
as Vice President, Operations of eGain since April 2001. From June 1999 to April 2001, Mr. Smit served as Vice President, Finance and Administration of eGain. From June 1998 to June 1999, Mr. Smit served as Director of Finance of eGain. From
December 1996 to May 1998, Mr. Smit served as Director of Finance for WhoWhere? Inc., an Internet services company. From April 1993 to November 1996, Mr. Smit served as Vice President of Operations and Chief Financial Officer of Velocity
Incorporated, a software game developer and publishing company. Mr. Smit holds a Bachelor of Commerce in Accounting from Rhodes University, South Africa.





Arnold Adriaanse has served as Senior Vice President of Worldwide Sales, Professional Services and Marketing since January 2002. Prior to joining eGain, Mr. Adriaanse served as Vice President of
International




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##### Table of Contents

Sales for Aspect Communications from October 2000 to December 2001. From October 1999 to September 2000, Mr. Adriaanse served as Vice President of Product Management and Enterprise Accounts at
Novell Inc. From 1990 to 1999, Mr. Adriaanse held various positions in Sales and Global Account Management at Oracle Corporation in the US and Europe. Mr. Adriaanse holds a Bachelors degree in Economics from Eerde International College, the
Netherlands.





Promod Narang has served as Vice President of Engineering of eGain since March 2000. Mr. Narang
joined eGain in October 1998, and served as Director of Engineering prior to assuming his current position. Prior to joining eGain, Mr. Narang served as President of VMpro, a system software consulting company from September 1987 to October 1998.
Mr. Narang holds a Bachelors of Science in Computer Science from Wayne State University.





Milind Kasbekar has
served as Vice President of Finance since April 2001. From May 2000 to April 2001 Mr. Kasbekar served as Director of Financial Panning and Analysis at eGain. From November 1998 to April 2000, Mr. Kasbekar served as Shared Services Controller for
Philips Semiconductors North America. From June 1986 through October 1998, Mr. Kasbekar worked for AT&T in various positions as Controller/CFO for various products and services businesses within AT&T. From August 1982 to May 1986 Mr.
Kasbekar served as Assistant Professor of Operations Management at Valparaiso University, Indiana. Mr. Kasbekar holds an M.B.A degree in Finance and M.S. degree in Computer Science from Illinois Institute of Technology, Chicago.





The information contained under the caption Section 16(a) Beneficial Ownership Reporting Compliance in the
definitive Proxy Statement for the Companys 2002 Annual Meeting of Stockholders is incorporated herein by reference.





ITEM
11.    
EXECUTIVE COMPENSATION





The information contained under the heading Executive
Compensation and under the captions Director Compensation, and Recent Option Grants in the definitive Proxy Statement for eGains 2002 Annual Meeting of Stockholders is incorporated herein by reference.





ITEM 12.    
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The information
contained under the heading Security Ownership of Certain Beneficial Owners and Management in the definitive Proxy Statement for eGains 2002 Annual Meeting of Stockholders is incorporated herein by reference.





ITEM 13.    
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





The information contained under the
caption Related Party Transactions in the definitive Proxy Statement for eGains 2002 Annual Meeting of Stockholders is incorporated herein by reference.




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##### Table of Contents

PART IV





ITEM 14.    
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K





|(a) | 1.     Financial Statements
|--- | ---------------------------




See Index to Financial Statements in Item 8 of this Report.





| | 2. | Financial Statement Schedule
| | -- | ----------------------------




Financial statement schedule, which is included at the end of this report:





Schedule IIValuation and Qualifying Accounts





All other schedules have been omitted
since they are either not required, not applicable or the information has been included in the consolidated financial statements or notes thereto.





| | 3. | Exhibits
| | -- | --------




See the exhibits listed under Item 14(c) or filed or incorporated by reference herein. Each management contract or compensation plan or arrangement required to be filed has been identified.





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




None.





|(c) | Exhibits
|--- | --------




The exhibits listed below are filed or incorporated by reference herein.





Exhibit No.

Description of Exhibits2.1(a)

Agreement and Plan of Reorganization among eGain, Sitebridge Corporation, ECC Acquisition Corporation, Wendell Lansford, Prakash Mishra and Chelsea M.C. LLC
dated as of April 30, 1999.2.2(b)

Agreement and Plan of Merger and Reorganization, dated as of February 7, 2000, by and among eGain, Big Science Corporation (BSC) and certain
shareholders of BSC.2.3(c)

Agreement and Plan of Merger, dated as of March 16, 2000, between Inference Corporation, Intrepid Acquisition Corporation, and eGain.3.1

Certificate of Correction of Restated Certificate of Incorporation filed with the Secretary of State of the state of Delaware on February 13,
2001.3.2

Amended and Restated Bylaws filed as Exhibit 3.3 to eGains Registration Statement on Form S-1, File No. 333-83439, originally filed with the
Commission on July 22, 1999, as subsequently amended, and incorporated by reference herein.4.1(a)

Amended and Restated Investors Rights Agreement dated as of April 30, 1999.4.2

Registration Rights Agreement dated as of August 8, 2000, filed as Exhibit 10.2 to eGains Current Report on Form 8-K dated August 15, 2000, and
incorporated by reference herein.4.3

Form of Common Stock Purchase Warrant, filed as Exhibit 4.1 to eGains Current Report on Form 8-K dated August 15, 2000, and incorporated by
reference herein.10.1(a)

Form of Indemnification Agreement.10.2(a)#

Social Science, Inc. 1997 Stock Option Plan (assumed by eGain in connection with Sitebridge acquisition).




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##### Table of Contents

Exhibit No.

Description of Exhibits10.3(a)#

Amended and Restated 1998 Stock Plan and forms of stock option agreements thereunder.10.4(a)#

1999 Employee Stock Purchase Plan.10.5(a)

Golden Gate Commercial Lease Agreement dated as of July 21, 1998 between Registrant and Golden Gate Commercial Company.10.6(a)

Starter Kit Loan and Security Agreement dated as of August 7, 1998 between Registrant and Imperial Bank.10.7(a)

Senior Loan and Security Agreement No. 6194 dated as of October 15, 1998 between Registrant and Phoenix Leasing Incorporated.10.8(a)#

Amendment to Common Stock Purchase Agreement dated as of June 24, 1998 between Registrant and Ashutosh Roy.10.9(a)#

Amendment to Common Stock Purchase Agreement dated as of June 24, 1998 between Registrant and Gunjan Sinha.10.10(d)#

Amended and Restated Inference Corporation 1993 Stock Option Plan assumed by eGain Communications Corporation (assumed by eGain in connection with Inference
acquisition).10.11(e)#

eGain Communications Corporation 2000 Non-management Stock Option Plan.10.12(f)#

Inference Corporation 1998 Non-Management Stock Option Plan.10.13(g)#

Inference Corporation 1998 New Hire Stock Option Plan (assumed by eGain in connection with Inference acquisition).10.14(g)#

Inference Corporation Private Placement Stock Option Plan (assumed by eGain in connection with Inference acquisition).10.15(h)#

Inference Corporation Fourth Amended and Restated Incentive Stock Option Plan and Nonqualified Stock Option Plan (assumed by eGain in connection with
Inference acquisition).10.16

Securities Purchase Agreement, filed as Exhibit 10.1 to eGains Current Report on Form 8-K dated August 15, 2000, and incorporated by reference
herein.10.17

Amended and Restated Starter Kit Loan and Security Agreement between Registrant and Imperial Bank dated as of March 29, 2001, filed as Exhibit 10.1 to
eGains Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, filed with the Commission on May 15, 2001, and incorporated by reference herein.10.18

Loan and Security Agreement between eGain and Silicon Valley Bank, dated March 27, 2002, filed as Exhibit 10.1 to eGains Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002, and incorporated by reference herein.10.19

Waiver and Loan Modification Agreement between eGain and Silicon Valley Bank, dated May 16, 2002.10.20

Second Waiver and Loan Modification Agreement between eGain and Silicon Valley Bank, dated June 25, 2002.10.21

Third Waiver and Loan Modification Agreement between eGain and Silicon Valley Bank, dated August 30, 2002.21.1

Subsidiaries of eGain Communications Corporation.23.1

Consent of Ernst & Young LLP, Independent Auditors.24.1

Power of Attorney (see Signature Page).


---

|(a) |  | Incorporated by reference to eGains Registration Statement on Form S-1, File No. 333-83439, originally filed with the Commission on July 22, 1999, as
subsequently amended.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Incorporated by reference to eGains Current Report on Form 8-K filed with the Commission on March 22, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(c) |  | Incorporated by reference to Appendix A to Proxy Statement Prospectus, dated May 22, 2000, that forms a part of eGains Registration Statement on Form
S-4/A, filed with the Commission on May 15, 2000 (File No. 333-34848).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | Incorporated by reference to Exhibit 10.1 to Inference Corporations Registration Statement on Form S-1, No. 333-92386 and to Exhibit 10.4 to Inference
Corporations Annual Report on Form 10-K/A for the fiscal year ended January 31, 1999.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) |  | Incorporated by reference to eGains Annual Report on Form 10-K for the fiscal year ended June 30, 2000 filed with the Commission on September 28, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) |  | Incorporated by reference to Exhibit 10.6 to Inference Corporations Annual Report on Form 10-K for the fiscal year ended January 31, 1999 filed with the
Commission on April 29, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) |  | Incorporated by reference to Exhibit 10.7 from Inference Corporations Registration Statement on Form S-8, No. 333-86471 filed with the Commission on
September 3, 1999.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) |  | Incorporated by reference to Exhibit 10.2 to Inference Corporations Registration Statement on Form S-1, No. 333-92386.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

|# |  | Indicates management contract or compensation plan or arrangement.
|- |  | ------------------------------------------------------------------



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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September
30, 2002.





eGAIN COMMUNICATIONS CORPORATIONBy:

/S/    ASHUTOSH
ROYAshutosh RoyChief Executive Officer





KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ashutosh Roy, Gunjan Sinha, William McGrath and Milind Kasbekar, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all amendments to this annual report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.





Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.





Name

Title

Date/S/    ASHUTOSH
ROY Ashutosh Roy

Chief Executive Officer and Director (Principal Executive Officer)

September 30, 2002/S/    GUNJAN
SINHA Gunjan Sinha

President and Director

September 30, 2002/S/    ERIC
SMIT Eric Smit

Chief Financial Officer (Principal Financial Officer)

September 30, 2002/S/    MILIND
KASBEKAR Milind Kasbekar

Vice PresidentFinance and Administration (Principal Accounting Officer)

September 30, 2002/S/    MARK A.
WOLFSON Mark A. Wolfson

Director

September 30, 2002/S/    DAVID
BROWN David Brown

Director

September 30, 2002Phiroz P. Darukhanavala

Director

September 30, 2002




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CERTIFICATIONS





I, Ashutosh Roy, Chief Executive Officer, certify that:





| | 1. |  | I have reviewed this annual report on Form 10-K of eGain Communications Corporation;
| | -- |  | ------------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







By:

/S/    ASHUTOSH
ROYAshutosh RoyDate:    September 30, 2002





I, Eric Smit, Chief Financial Officer, certify that:





| | 1. |  | I have reviewed this annual report on Form 10-K of eGain Communications Corporation;
| | -- |  | ------------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







By:

/S/    ERIC
SMITEric SmitDate:    September 30, 2002




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SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS





(in thousands)





Balance at Beginning of Period

Additions Charged to Expense

Amounts Written Off, Net of Recoveries

Balance at End of PeriodAllowance for Doubtful Accounts:Year ended June 30, 2002

$
1,398

$
1,794

$
2,632

$
560Year ended June 30, 2001

$
714

$
2,371

$
1,687

$
1,398Year ended June 30, 2000

$
14

$
734

$
34

$
714




70