The aggregate market value of the Common Stockvoting and non-voting common equity held by non-affiliates, (based on the closing sale priceOTC Bulletin Board on the Nasdaq National Market on September 20, 2002)December 31, 2003 (the last business day of registrants second quarter of fiscal 2004), was approximately $1,501,697.$1,346,422. For purposes of the foregoing calculation only, the registrant has included in the shares owned by affiliates the beneficial ownership of Common Stockvoting and non-voting common equity 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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes¨    Nox

As of September 20, 2002,22, 2004, there were 36,657,3133,695,739 shares of Common Stock, $0.001 par value, outstanding.

Items 10 (as to directors), 11, 12, 13 and 1314 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 20022004 Annual Meeting of Stockholders to be held on November 1, 2002.

We are a leading provider of Internet-based eServicecustomer service and contact center software, that enables Global 2000 companies to transform traditional customer call centers into multi-channel contact centers.used by global enterprises for over a decade. eGain software solutions are designed to measurably improve operational efficiency and customer retention. eGain eService Enterprise, the Company’s integratedService 6^™, our software suite, available through licensed or hosted models, includes integrated, best-in-class applications for customer email management, live web collaboration, virtual agent customer service, knowledge management, self-service, emailand web self-service. These robust applications are built on the eGain Service Management Platform (eGain SMP^™), a scalable next-generation framework that includes end-to-end service process management, multi-channel, multi-site contact center management, a flexible integration approach, and 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 integratecertified out-of-the-box integrations with leading call center infrastructure and business systems, enabling customers to leverage investments in existing systems and providing an enterprise-wide solution.

On May 20, 2002, eGainMarch 31, 2004, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P. (the “lenders”) pursuant to which the lenders loaned to us $2.5 million evidenced by secured promissory notes and received a letter from Nasdaq indicating thatwarrants to purchase shares of our common stock had failedin connection with such loan. The secured promissory notes have a term of five years and bear interest at an effective annual rate of 12% due and payable upon the maturity of such notes. We have the option to maintain a minimum bidprepay the notes at any time subject to the prepayment penalties set forth in such notes. The warrants allow the lenders to purchase up to 312,500 shares at an exercise price of $1.00$2.00 per share for 30 consecutive business days,share. The warrants become exercisable as to fifty percent (50%) of the warrant shares nine months after issuance of the warrants and as to one hundred percent (100%) of the warrant shares on the first anniversary of the issuance of the warrants. We recorded $2.28 million in related party notes payable and $223,000 of discount on the notes related to the relative value of the warrants issued in the transaction that we needwill

be amortized to complyinterest expense over the five year life of the notes. The fair value of these warrants was determined using the Black-Scholes valuation method with the requirements for continued listing within 90 calendar days from such notification or face the possibilityfollowing assumptions: an expected life of being3 years, an expected stock price volatility of 75%, a risk free interest rate of 1.93%, and a dividend yield of 0%.

In February 2004, we were delisted from the Nasdaq National Market. On August 20, 2002, eGain received another letterSmallCap Market due to noncompliance with Marketplace Rule 4310(c)(2)(B), which requires companies listed to have a minimum of $2,500,000 in stockholders’ equity or $35,000,000 market value of listed securities or $500,000 of net income from Nasdaq indicating that eGain’scontinuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. Our common stock had failed to achieve compliance withnow trades in the $1.00 per share minimum bid price andover-the-counter market on the OTC Bulletin Board owned by The Nasdaq Stock Market, Inc., which was established for securities that do not meet the 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

The Internet has fundamentally changed the manner in which businesses and customers interact. CustomersToday’s 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.

The ability to address eService requirementsdeliver consistent customer service in a multi-channel contact center 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 communicationmulti-channel service needs of customers can result in diminished customer loyalty increased difficulty in acquiring new customers, and a deterioration ofdeteriorating 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 customerscompanies who want flexibility in how they communicate with companiescustomers based on the nature of their inquiry. Point solutions also are difficult to integrate with other programs,create interaction silos, making it difficult for customer service agents to easily reference a customer’s past communications that originated from multiple channels. Nor cando they use a common knowledge base to deliver consistent accurate responses. Moreover, many of these solutions do not integrate easily with a company’s existing legacy systems. This lack of integration makes these applications expensivesystem, making it difficult to implement and maintain especially for companies with significant existing call center operations.

To meet the demands of the modern customer, businesses need a comprehensive, functionally rich, yet deeply integrated customer service suite to serve customers across the phone, web, and email. eGain believes that providing customers with a full rangehas designed its suite of intergrated eService product offerings has become a strategic imperative, and that the demand for an integrated multi-channel interaction platform will continuesoftware applications to grow accordingly.

Our application suite, eGain provides software products that enable online customersService 6^™, is available licensed or hosted, and businesses to interact through each of the three primary channelsincludes integrated, best-in-class applications for online customer interaction—email real-timemanagement, live web collaboration, virtual agent customer service, knowledge management, and web self-service. These robust applications

Our applications and platform are built withbased on a 100% Web-nativeInternet architecture that allows companiesand open standards such as J2EE, XML, HTTP, JDBC and Java and are designed 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 maintainedeasily integrated and operated by eGain’s hosted operations.

We provide companies with the following benefits:

Our objective is to further enhance itsour position as a leading provider of eServicecustomer service and contact center software. The key elements of eGain’sour strategy include:

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 individual applications categorized by channel,in the suite are described below:

Our hosted customers receive access to the full functionality of eGain’sour applications through a standard Webweb browser and Internet connection. Through a network of eGainour service centers and hosting partners linked by high-speed Internet connections, eGain provides itswe provide our customers with multiple redundant paths to access their hosted customer service applications. eGainWe remotely managesmanage these applications which reside on server machines housed at leading co-location facilities. eGainWe also offersoffer value-added services to itsour hosted customers, including application management, database maintenance, mail hosting and anti-virus protection. eGain hasWe have also developed proprietary Web-basedweb-based hosted service management systems, enabling eGainour service professionals to efficiently administer and manage large numbers of hosted customer applications.

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

As of fiscal year ended June 30, 2002, eGain2004, we had approximately 12278 professionals providing worldwide services for systems installation, solutions development, application management, and education and support.

Our sales strategy is to pursue targeted accounts through a combination of itsour direct sales force and strategic alliances. eGain targets itsWe target our sales efforts at Global 2000 companies.

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

We further complements itscomplement our direct sales force with a series of reseller and sales alliances. Through these alliances, eGain iswe are able to leverage additional sales, marketing and deployment capabilities.

Our marketing strategy is to build brandmarket awareness as a leading provider of eServicecustomer service and contact center software that enableenables Global 2000 companies to transform traditional call centers into multi-channel contact centers.

We employ a wide range of marketing avenues to deliver itsour message, including print and Internet advertising, targeted directelectronic and postal mailing, email newsletters and a variety of trade shows, seminars and interest groups.

Our 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’sour marketing group performs market analyses and conducts focus group and customer reviews to identify and develop key partnership opportunities and product requirements.

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

As of strategic relationships: consulting alliances, technology alliances, solution provider alliances, outsourcing alliancesfiscal year ended June 30, 2004, there were approximately 44 employees engaged in worldwide sales and global distribution alliances.

We serve 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 eGainof our products:

The market for eServicecustomer service and contact center software remains relatively new andis intensely competitive. Other than product development,innovation and existing customer relationships, there are no substantial barriers to entry in this market, and established or new entities may enter this market in the near future. eGain competes with companies that develop and maintain internallyWhile home-grown software developed eService software applications. eGainby enterprises represents indirect competition, we also competescompete directly with companies that provide licensed eServicepackaged application software vendors in the customer service arena, 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 facesIn addition, we face actual or potential competition from larger front office software companies such as Amdocs Limited (which recently acquired the Clarify,Siebel Systems, 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 that may seekattempt to leveragesell customer service software to their existing relationshipsinstalled base.

We believe competition will continue to be fierce and capabilities to offer eService solutions.

greater financial, sales, marketing technical and other resources. Some of eGain’s currentWith more established and futurebetter-financed competitors, these companies may be able to devote greater resources toundertake more extensive marketing and promotional campaigns, adopt more aggressive pricing policies, and make more attractive offers to businesses to induce them to use their products or devote substantially greater resourcesservices.

Further, any delays in the general market acceptance of our applications would likely harm our competitive position by allowing our competitors additional time to improve their product development. It is possible thatand service offerings, and also provide time for new competitors or alliances among existing competitors, may emergeto develop applications and rapidly acquire significantsolicit prospective customers within our target markets. Increased competition could result in pricing pressures, reduced operating margins and loss of market share. eGain also believes that competition will continue to intensify as a result of ongoing industry consolidation.

The market for eGain’sour products changes rapidly and is characterized by evolving industry standards, swift changes in customer requirements and frequent new product introductions and enhancements. eGain believesWe believe that strong product development capabilities are essential to itsour 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’sour product and service offerings. eGain hasWe have 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’sour 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, eGainwe continuously analyzesanalyze market and customer requirements and evaluatesevaluate technology that eGain believeswe believe will enhance platform acceptance in the market. eGainWe selectively chooseschoose partners with superior technology to enhance features and functionality of itsour product offerings.

As of fiscal year ended June 30, 2002,2004, there were approximately 14366 employees engaged in worldwide product development activities. Of this amount, approximately 91 were located at eGain’s office in Pune, India.

We regard our copyrights, service marks, trademarks and similar intellectual property as critical to itsour success. eGain reliesWe rely on patent, trademark, copyright, trade secret and other laws, as well as confidentiality procedures and licensing arrangements, to protect the proprietary aspects of itsour technology and business. eGain

We are continually assessing the propriety of seeking patent and other intellectual property protectionsprotection for those aspects of eGain’sour technology that it believeswe believe constitute innovations providing significant competitive advantages. Pending and future applications may or may not receive the issuance of valid patents and trademarks.

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

Third parties may infringe or misappropriate eGain’sour copyrights, trademarks and similar proprietary rights. In addition, other parties may assert infringement claims against eGain. eGain’sus. Our products may infringe issued patents that may relate to itsour 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’sour software products. eGainWe may be subject to legal proceedings and claims from time to time in the ordinary course of itsour 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’sour business. This litigation could also require eGainus 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’sOur failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis would harm itsour business.

As of fiscal year ended June 30, 2002, eGain2004, we had 405223 full-time employees, of which 14366 were in product development, 12281 in services and support, 8644 in sales and marketing, and 5432 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’sour employees isare covered by collective bargaining agreements. While eGain believes itswe believe our relations with its employees are good, eGain’sour future performance depends in large partlargely upon the continued service of itsour key technical, sales and marketing, and senior management personnel, none of whichwhom are bound by employment agreements requiring service for a defined period of time. The loss of services of one or more of eGain’sour key employees could have a material adverse effect on itsour business.

We 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’sour business, results of operations and financial condition. eGain’sOur future success will likely depend in large partlargely on itsour ability to attract and retain experienced sales, technical, marketing and management personnel.

We lease all facilities used in itsour business. The following table summarizes eGain’sour principal properties.

We believe our facilities are suitable for itsour uses and are generally adequate to support the current level of operations for the next 12 months.

In Fiscal Year 2003, our common stock began trading on the Nasdaq SmallCap Market giving effect to a one-for-ten reverse stock split on August 20, 2003. In February 2004 eGain’s Common Stock is quotedbegan trading on The Nasdaq National Marketthe OTC Bulletin Board under the symbol “EGAN.”“EGAN.OB”. The following table sets forth, for the periods indicated, high and low sale prices for eGain’s Common Stock as reported by the Nasdaq SmallCap Market or the OTC Bulletin Board. The Nasdaq National Market.

As of September 20, 2002,22, 2004, there were approximately 350380 stockholders of record. This number does not include stockholders whose shares are held in trust by other entities. eGain estimatesWe estimate that there were approximately 12,0009,100 beneficial stockholders of itsour common stock as of September 20, 2002.

We have never declared or paid any cash dividends on itsour common stock. eGainWe currently anticipatesanticipate that itwe will retain all available funds for use in the operation of itsour business and doesdo not intend to pay any cash dividends in the foreseeable future.

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,” theour 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.

We are a leading provider of eServicecustomer service and contact center software, used by global enterprises for Global 2000 companies. eGain’s solutions enable companies to transform traditionalover a decade. eGain Service 6^™, our software suite, available through licensed or hosted models, includes integrated, best-in-class applications for 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 (emailemail management, live web collaboration, virtual agent customer service, knowledge management, and web self-service. These robust applications are built on the eGain Service Management Platform (eGain SMP^™), a scalable next-generation framework that includes end-to-end service process management, multi-channel, multi-site contact center management, a flexible integration approach, and certified out-of-the-box integrations with leading call center 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 capabilitiesbusiness systems. We market 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.

We were founded in September 1997. Since inception, we have incurred substantial costs developing our proprietary technological solutions, recruiting 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,compensating personnel, and purchasing operating assets. As a result of these efforts, and the transaction was accounted for underdecline in technology spending by our customers in recent years we have incurred significant losses and had an accumulated deficit of $315.5 million as of June 30, 2004, which includes approximately $80.3 million related to goodwill charges.

In response to our revenues declining over the purchase methodlast three years we have repeatedly taken actions to reduce expense rates. As a result of accounting.

product development and technology to enhance our current products and services, develop new products and services and further advance our solution offerings. We have not achieved profitability on a quarterly or annual basis. In view of the purchase methodrapidly evolving nature of accounting.

In April 2001, eGainwe 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, eGainwe acquired all of the outstanding capital stock of eGain India for cash. The acquisition has been at the cornerstone of eGain’sour strategy of developing a global operating model that allows the company to maintain its commitment to the eServicecustomer service and contact center market and innovation while remaining fiscally prudent. The transaction was accounted for under the purchase method of accounting.

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

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

We use a signed software license and services agreementagreements and order formforms as evidence of an arrangement for sales of software, hosting, maintenance and support. We use a signed engagement letterletters 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 collectibilitycollectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If we determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.

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

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

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

In connection with the transitional goodwill impairment evaluation provisions of SFAS 142, we performed a goodwill impairment review as of July 1, 2002 and found no impairment. We also performed our annual goodwill impairment review as of April 1, 2004 and found no impairment.

As of July 1, 2002, in accordance with the provisions of Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), we review long-lived assets, certain identifiable intangiblesincluding property and goodwill related to theseequipment and intangible assets, for possible impairment whenever events or changes in business circumstances indicate that the carrying amountamounts of a long-lived assetthe assets may not be fully recoverable. AssumptionsUnder

SFAS 144, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and estimatesits eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. Significant management judgment is required in the forecasting of future operating results which are used in the evaluationpreparation 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 discounted cash flows based upon estimated revenue and, expense growth rates and the discount rate applied to expected cash flows.should different conditions prevail or judgments be made, material write-downs of net intangible assets and/or goodwill could occur. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.

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.

We maintain an allowance for doubtful accounts to reserve for potential uncollectibleuncollectable trade receivables. We review our trade receivables by aging category to identify specific customers with known disputes or collectibilitycollectability 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.

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

Overall revenue, which consists of license revenue and support and services revenue, was $19.6 million, $22.1 million and $30.4 million in fiscal years 2004, 2003 and 2002, respectively. In fiscal year 2004, overall revenue decreased 43%11%, or $23.0$2.5 million compared to fiscal 2001,year 2003. Overall revenue was relatively flat quarter over quarter throughout fiscal year 2004 so the relative decrease was attributable to the steep revenue decline in the first quarter of fiscal year 2004 where overall revenue decreased by 15% compared to the last quarter of fiscal year 2003. For fiscal year 2003, overall revenue decreased 27%, or $8.3 million compared to fiscal year 2002. The reduction in overall revenue over the last two fiscal years was primarily due to the weakeningcontinuing weak economic environment, and in particular spending in technology, and its adverse impact on sales of enterprise software. The weakness was particularly pronounced in the North American market in fiscal 2003 as both existing and prospective customers postponed purchases or made smaller purchases than in previous years. Revenuesyears, but stabilized in fiscal 2004. Revenue from North America declined from $38.6$1.0 million or 9% in fiscal year 2004 compared to fiscal year 2003 and declined $6.2 million, or 36% in fiscal year 2003 compared to fiscal year 2002.

License revenue was $4.1 million, $6.1 million and $10.0 million in fiscal 2001 to $17.4years 2004, 2003 and 2002, respectively. This represents a decreased 33%, or $2.0 million in fiscal 2002. During fiscal year 2001, total revenue increased 300%, or $40.1 million as2004 compared to fiscal 2000. The increase during this period was primarily attributable to increases in eGain’s customer base, the average sizeyear 2003 and a decrease 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.

Support and Services revenue increased 381%, or $19.2was $15.5 million, $16.0 million and $20.4 million in fiscal 2001years 2004, 2003 and 2002, respectively. This represents a decrease of 3%, or $444,000 in fiscal year 2004 compared to fiscal 2000. This increase was attributable to the increases in unit sales volumesyear 2003 and the average sizea decrease of new customer orders.

In fiscal 2002, 20012004, 2003 and 2000,2002, no single customer accounted for more than 10% of total revenue.

Cost of revenue—directlicense primarily includes the amortization of prepaid third-party software royalties and delivery costs for shipments to customers. Cost of license decreased 7%, or $126,000 in fiscal year 2004 compared to fiscal year 2003. Cost of license increased 107%, or $914,000 in fiscal year 2003 compared to fiscal year 2002. The decrease in fiscal year 2004 was primarily due to the extension of one royalty agreement with a third-party vendor that resulted in a reduction of $172,000 in the amortization of prepaid royalties. We expect cost of license to continue to decline in future periods with the expiration or renewal of other third party royalty agreements.

Cost of Support and Services

Cost of support and services includes personnel costs for eGain’sour hosting services, consulting services and

customer support. It also includes depreciation of capital equipment used in eGain’sour hosted network, cost of support for the third-party software royalties and lease costs paid to remote co-location centers. Cost of revenue—directsupport and services was $16.9

$6.5 million, $29.4$8.7 million and $14.6$16.0 million in fiscal years 2002, 20012004, 2003 and 2000,2002, respectively. The significant decrease in fiscal 2002years 2003 and 2004 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 fromcosts as well as the migration of resources to eGain India. Our occupancy costs and related overhead were also reduced due to the consolidation of eGain’s excess facilities, in North America in the firstasset write-offs related to the reduction of work force and fourth quartersthe closure of fiscal 2002. The increaseoffices in fiscal 2001 compared toyear 2002 and fiscal 2000 was primarily attributable to the rapid expansion of the hosting, services and support organizations in addition to theyear 2003. We do not anticipate a 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 dollarsor decrease in cost of revenuesupport and services in fiscal 2003.

Cost of revenue—acquisition related costs is a fixed amount ofwas $0, $827,000 and $1.4 million in both fiscal yearsyear 2004, 2003 and 2002, and 2001.respectively. The decrease was primarily due to a discontinuance of the amortization of acquired workforce intangibles that was reclassified to goodwill as of July 1, 2002 in accordance with SFAS 142. These amounts consisted of amortization of developed technology resulting from eGain’sour business combinations in fiscal year 2000.

Research and development expenses primarily consist of compensation and benefits for eGain’sour engineering, product management and quality assurance personnel and, to a lesser extent, occupancy costs and related overhead. Research and development expense was $11.4$2.9 million, $22.9$5.9 million and $11.8$11.4 million in fiscal years 2002, 20012004, 2003 and 2000,2002, respectively. The decreasedecreases in fiscal 2002 wasyear 2003 and 2004 were 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 fromOur occupancy costs and related overhead were also reduced due to the consolidation of eGain’s excess facilities, the asset write-offs related to the reduction of work force and the closure of offices in North Americafiscal year 2002 and fiscal year 2003. We do not anticipate a significant increase or decrease 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 expenses primarily consist of compensation and benefits for eGain’sour 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 $21.9expense was $8.3 million, $9.6 million and $25.1 million in fiscal 2002.year 2004, 2003 and 2002, respectively. The decreasedecreases in fiscal 2002 wasyear 2003 and 2004 were primarily due to a decline in headcount through planned workforce reductions to reflect a tough market and internal reorganization and a decrease in spending on advertising and marketing programs. Additionally, there was a reductionThe reduced sales-related expenses in facilities-related expenses resulting fromfiscal year 2003 and 2004 included personnel costs, commission and travel expenses. Our occupancy costs and related overhead were also reduced due to the consolidation of eGain’s excess facilitiesfacilities. We do not anticipate a significant increase or decrease in North America in the first and

General and administrative expenses primarily consist of compensation and benefits for eGain’sour 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 $7.5was $3.4 million, $4.8 million and $8.9 million in fiscal 2002.year 2004, 2003 and 2002, respectively. The decreasedecreases in fiscal 2002 was2003 and 2004 were primarily due to a decline in headcount through planned workforce reductions, a declineincreased efficiencies, migration of certain accounting and human resource functions to India, the reduction in outside professional services fees related to the change in accounting firm, reduced depreciation expense due to assets being fully depreciated, the discontinuance of certain software maintenance contracts and a significant decrease in bad debt expense. The bad debt expense comparedwas $21,000, $(103,000) and $1.8 million in fiscal 2004, 2003 and 2002, respectively. The decrease was due to fiscal 2001. Additionally, there was athe improvement in our collection efforts, the quality of customer base and an overall reduction in facilities-related expenses resulting fromaccounts receivables. Our occupancy costs and related overhead were also reduced due to the consolidation of eGain’s excess facilitiesfacilities. We do not anticipate a significant increase or decrease 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. 2005.

Goodwill and Other Intangible Assets

In fiscalJune 2001, generalthe FASB issued SFAS 141 “Business Combinations” and administrative expense increased 127%, or $9.2 million comparedSFAS 142 “Goodwill and Other Intangible Assets.” SFAS 141 requires business combinations initiated after June 30, 2001 to fiscal 2000. This increase was primarily attributable to increased personnel to managebe accounted for using the purchase method of accounting. SFAS 141 also included guidance on the initial recognition and support the growthmeasurement of eGain’s business, in addition to an increase in legalgoodwill and other outside professional services fees.

In the fourth quarter of fiscal year 2002, the Company observedin accordance with SFAS No. 121, we determined that impairment indicators that our acquired intangible assetswere present 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 Companytherefore evaluated the carrying value of its long-livedour goodwill and other intangible 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 theevaluation was based on a cash flow forecast using a discountfor five years ending June 30, 2007, and discounted at the rate of 34%, which represented the Company’sour estimated weighted average cost of capital. As a result of the evaluation, the Companywe concluded that the book value of long-lived assets exceeded fair value by $36.8 million. The Company wrote off $36.8 million of unamortized goodwill whichand accordingly, this amount was charged to operations as impairment of long-lived assets in the fourth quarter of 2002.

Stock-based 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. DeferredStock-based compensation is amortized on a graded vesting method over the vesting period of the individual grants. In addition, eGain recordswe record 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,

Beginning in fiscal 2001 and continuing through the first quarter of fiscal 2004, economic conditions in North America and many of the other countries in which we operate either deteriorated or stabilized at depressed levels. This continuing weak economic environment, and in particular spending in technology, has had an adverse impact on sales of enterprise software. As a result, we have seen a decline in our revenues over the last three fiscal years. In response to this decline, we initiated a series of steps to streamline operations and better align operating costs and expenses with revenue trends. Specifically this included establishing restructuring plans in fiscal years 2001, 2002, eGain initiated2003 and 2004.

Fiscal 2004 plan

In fiscal year 2004, the plantotal restructuring charge relating to the Fiscal 2004 Plan was $80,000. This charge related to workforce reductions in Europe and was completed and paid in full in fiscal 2004.

In addition, during fiscal 2004 we made provisional adjustments to both Fiscal 2003 and Fiscal 2002 Plans as follows:

The total payments in fiscal year 2004 of $1.2 million consisted of $80,000, $336,000, $725,000 and $92,000 of expenses accrued in Fiscal 2004, 2003, 2002 and 2001 Plans, respectively.

Fiscal 2003 Plan

In fiscal year 2003, the total restructuring charge relating to the Fiscal 2003 Plan was $2.3 million. The $2.3 million expense included $772,000 related to the closure of local offices in Holland, France, Germany, Australia and Singapore, $225,000 for additional consolidation of excess facilities in North America, resulting$1.2 million in employee severance payments and $61,000 in professional services and miscellaneous charges related to the restructuring. Both the employee severance and professional charges have been paid in full in fiscal year 2003. We expect to pay the remaining balance of restructuring accrual related to excess facilities by the end of fiscal year 2006.

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

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

Fiscal 2002 Plan

In fiscal year 2002, the total restructuring charge relating to the Fiscal 2002 Plan was $9.0 million. These charges included $6.4 million for the consolidation of $4,336,000. This amount included estimated future net rental payments on exitedour facilities of $3,511,000, as well as $810,000in North America, $1.3 million in write-offs of leasehold improvementsimprovement and $15,000 in professional services and miscellaneous charges associated with the exited facilities.

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

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

Fiscal 2001 Plan

In fiscal year 2001, the total restructuring charges totaling $1,443,000.charge relating to the Fiscal 2001 Plan was $1.4 million. These charges primarily related to a reduction in eGain’sour worldwide workforce byof 141 employees across all departments and office closures in North America pursuant to the adoption of eGain’sour 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 legalprofessional services and professional costsmiscellaneous charges associated with the employee terminations. Of the total charges, $132,000, whichTotal payments of $1.2 million were made in fiscal year 2001. This plan was primarily related to legalcompleted and professional costs, remained unpaidpaid in full as of June 30, 2002.

The following table sets forth an analysis of the cumulative restructuring charges duringaccrual activity for the fiscal yearyears ended June 30, 2004, 2003, 2002 are as followsand 2001 (in thousands):