This report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties. These statements may be identified by the use of the words such as "anticipates," "believes," "continue," "could," "would," "estimates," "forecasts," "expects," "intends," "may," "might," "plans," "potential," "predicts," "should," or "will" and similar expressions or the negative of those terms. The forward-looking statements include, but are not limited to, risks stemming from: the uncertainty of demand for eGain products including our guidance regarding bookings and revenue; the anticipated customer benefits from eGain products; the actual mix in new business between hosting and license bookings when compared with management's projections; the anticipated revenue to eGain from the Cisco OEM agreement; the ability to increase revenues as a result of the increased investment in sales and marketing; eGain's ability to continue to innovate; eGain's ability to manage its expenditures; eGain's business plans or outlook and any related forecasts or projections relating to any aspect of eGain's business, anticipated financial or operating results; and currency fluctuations. Our actual results could differ materially from those discussed in statements relating to our future plans, product releases, objectives, expectations and intentions, and other assumptions underlying or relating to any of these statements. These forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied by the forward-looking statements, such as, without limitation, factors affecting our quarterly results, the volatility in the market, our ability to successfully forecast our sales cycles, our ability to develop a market for our product and services and generate revenue, our ability to successfully forecast our revenues, our ability to control and forecast costs and expenses, our ability to control and forecast our capital needs and cash flow, our customer relationships, our ability to adequately forecast demand for our products, our ability to compete successfully, the impact of our legal proceedings, and other risks discussed in "Risk Factors" in this report and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008. These forward-looking statements represent our estimates and assumptions and speak only as of the date hereof. We expressly disclaim any obligation or understanding to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

We are a pioneer in, and a leading provider of, customer service and contact center software that enables companies to build customer interaction hubs. These hubs provide an innovative approach to customer service by reducing customer service costs while enhancing customer experience within and across interaction channels by centralizing interaction history, knowledge management, business rules, analytics, and workflow and application management in one platform. Trusted by prominent enterprises and growing mid-sized companies worldwide, eGain's award winning software has been helping organizations achieve and sustain customer service excellence for more than a decade. The company was incorporated in Delaware in September 1997.

Critical Accounting Policies and Estimates

Our critical accounting policies are those that both (1) are most important to the portrayal of the financial condition and results of operations and
(2) require management's most difficult, subjective, or complex judgments, often requiring estimates about matters that are inherently uncertain. Except for income taxes and the calculation of anticipated profit margin for Cisco OEM agreement, there have been no material changes from the methodology applied by management for critical accounting estimates previously disclosed in our most recent Annual Report on Form 10-K. The methodology applied to management's estimate for income taxes has changed due to the implementation of a new accounting pronouncement FIN 48.

Results of Operations

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



                                        Three Months Ended          Nine Months Ended
                                             March 31,                  March 31,
                                        2009           2008        2009          2008
 Revenue:
 License                                     7 %           25 %        23 %          25 %
 Support and Services                       93 %           75 %        77 %          75 %

 Total revenue                             100 %          100 %       100 %         100 %
 Cost of license                             0 %            0 %         0 %           0 %
 Cost of support and services               37 %           35 %        32 %          37 %

 Gross profit                               63 %           65 %        68 %          63 %
 Operating costs and expenses:
 Research and development                   21 %           15 %        18 %          16 %
 Sales and marketing                        32 %           31 %        32 %          38 %
 General and administrative                  9 %           11 %        10 %          14 %

 Total operating costs and expenses         62 %           57 %        60 %          68 %

 Income / (loss) from operations             1 %            8 %         8 %          (5 )%

Revenues

Total revenue decreased 25% to $6.6 million in the quarter ended March 31, 2009 from $8.8 million in the quarter ended March 31, 2008. During the three months ended March 31, 2009, there was one customer that accounted for 21% of total revenue and there was one customer that accounted for 19% of total revenue in the comparable year-ago quarter. Total revenue for the nine months ended March 31, 2009 increased 4% to $24.3 million, compared to $23.4 million in the same period last year. During the nine months ended March 31, 2009, there were two customers that accounted for 13% and 12% of total revenue respectively and there was one customer that accounted 11% of total revenue in the same period last year. The impact of the foreign exchange fluctuation between the U.S. dollar and European currencies resulted in decreases of approximately $899,000 and $3.0 million in total revenue for the three and nine months ended March 31, 2009, respectively, as compared to the same periods last year.

There is general unpredictability of the length of our current sales cycles, the timing of revenue recognition on more complex license transactions and seasonal buying patterns. This unpredictability has increased in recent months due to the global economic slowdown and the increased volatility of the value of the U.K. pound and Euro in relation to the U.S. dollar. Also, because we offer a hybrid delivery model, the mix of new hosting and license bookings in a quarter could also have an impact on our revenue in a particular quarter. We are continuing to see the mix of license and hosting bookings fluctuate from quarter to quarter. The value of new hosting transactions, as a percentage of combined new hosting and license bookings was 55% for the quarter ended March 31, 2009 compared to 42% for the comparable year-ago quarter. The value of new hosting transactions, as a percentage of combined new hosting and license bookings was 30% for the nine months ended March 31, 2009 compared to 41% for the comparable year-ago period. For license transactions, the license revenue amount is generally recognized in the quarter which delivery and acceptance of our software takes place whereas, for hosting transactions, hosting revenue is recognized ratably over the term of the hosting contract, which is typically one to two years. As a result, our total revenue may increase or decrease in future quarters as a result of the timing and mix of license and hosting transactions.

License



                                                  Three Months Ended                          Nine Months Ended
                                                      March 31,                                   March 31,
(in thousands)                          2009       2008        Change       %        2009        2008       Change      %
Revenue:
License                                 $ 463     $ 2,234     $ (1,771 )   (79 )%   $ 5,591     $ 5,849     $  (258 )   (4 )%
Percentage of total revenue                 7 %        25 %                              23 %        25 %

License revenue decreased 79% to $463,000 in the quarter ended March 31, 2009 from $2.2 million in the quarter ended March 31, 2008. License revenue in the quarter was negatively impacted by $40,000 due to the strengthening of the U.S. dollar against the European currencies in which certain licenses were denominated. The license revenue for the quarter included three transactions totaling approximately $436,000 compared to a total of $1.5 million from two transactions recognized from deferred revenue in the comparable year-ago quarter. License revenue represented 7% and 25% of total revenue for the quarters ended March 31, 2009 and 2008, respectively.

License revenue decreased 4% to $5.6 million for the nine months ended March 31, 2009 from $5.8 million in the same period last year. License revenue for the nine months ended March 31, 2009 was negatively impacted by $1.4 million due to the strengthening of the U.S. dollar against the European currencies in which certain licenses were denominated. License revenue represented 23% and 25% of total revenue for the nine months ended March 31, 2009 and 2008, respectively.

Given the general unpredictability of the length of current sales cycles, the mix between hosting and license bookings, the uncertainty in the global economy and the recent volatility of the value of the U.K. pound and Euro in relation to the U.S. dollar, license revenue may increase or decrease in future periods.

Support and Services



                                                Three Months Ended                            Nine Months Ended
                                                     March 31,                                    March 31,
(in thousands)                         2009        2008       Change       %         2009         2008       Change      %
Revenue:
Hosting services                      $ 1,570     $ 1,619     $   (49 )    (3 )%   $  4,806     $  4,295     $   511     12 %
Maintenance. and support services       2,138       2,632        (494 )   (19 )%      6,650        7,140        (490 )   (7 )%
Professional services                   2,410       2,334          76       3 %       7,262        6,131       1,131     18 %

Total support and services            $ 6,118     $ 6,585     $  (467 )    (7 )%   $ 18,718     $ 17,566     $ 1,152      7 %
Percentage of total revenue                93 %        75 %                              77 %         75 %

Support and services revenue includes hosting, software maintenance and support and professional services. Software maintenance and support services consist of technical support and software upgrades and enhancements. Professional services primarily consist of consulting and implementation services and training. Support and services revenue decreased 7% to $6.1 million in the quarter ended March 31, 2009 from $6.6 million in the quarter ended March 31, 2008. Support and services revenue represented 93% and 75% of total revenue for the quarters ended March 31, 2009 and 2008, respectively.

Support and services revenue for the nine months ended March 31, 2009 increased 7% to $18.7 million, compared to $17.6 million in the same period last year. The increase was primarily driven by the increase in professional services. Support and services revenue represented 77% and 75% of total revenue for the nine months ended March 31, 2009 and 2008, respectively.

Hosting revenue decreased 3% to $1.6 million in the quarter ended March 31, 2009 from the quarter ended March 31, 2008. Without the $214,000 impact of the U.S. dollar strengthening compared to the European currencies, hosting revenue would have increased by approximately $165,000 or approximately 10% for the quarter ended March 31, 2009. Hosting revenue for the nine months ended March 31, 2009 increased 12% to $4.8 million, compared to $4.3 million in the same period last year. Without the $416,000 impact of the U.S. dollar strengthening compared to the European currencies, hosting revenue would have increased by approximately $927,000 or approximately 22% for the nine months ended March 31, 2009. Excluding the impact from any further foreign currency fluctuations, we expect hosting revenue to remain relatively constant in future periods based upon current renewal rates for major existing hosted customers, and the global economic slowdown.

Maintenance and support revenue decreased 19% to $2.1 million in the quarter ended March 31, 2009 from $2.6 million in the quarter ended March 31, 2008. Without the $388,000 impact of the U.S. dollar strengthening compared to the European currencies, maintenance and support revenue would have decreased by approximately $106,000 or approximately 4% for the quarter ended March 31, 2009. Maintenance and support revenue for the nine months ended March 31, 2009 decreased 7% to $6.7 million, compared to $7.1 million in the same period last year. Without the $744,000 impact of the U.S. dollar strengthening compared to the European currencies, maintenance and support revenue would have increased by approximately $253,000 or approximately 4% for the nine months ended March 31, 2009. The increase for the nine months excluding the impact of currency fluctuations was primarily due to the new license sales in recent quarters. Excluding the impact from any future foreign currency fluctuations, we expect maintenance and support revenue to remain relatively constant in future periods based upon the current renewal rates for existing maintenance and support customers and the projected levels of new license sales.

Professional services revenue increased 3% to $2.4 million in the quarter ended March 31, 2009 from $2.3 million in the quarter ended March 31, 2008. Without the $256,000 impact of the U.S. dollar strengthening compared to the European currencies, professional services revenue would have increased by approximately $332,000 or approximately 14% for the quarter ended March 31, 2009. Professional services revenue for the nine months ended March 31, 2009 increased 18% to $7.3 million, from $6.1 million in the same period last year. Without the $503,000 impact of the U.S. dollar strengthening compared to the European currencies, professional services revenue would have increased by approximately $1.6 million or approximately 26% for the nine months ended March 31, 2009. The increase for the three months and nine months ended March 31, 2009 was primarily due to an increase in revenue from the OEM agreement we entered into with Cisco Systems in fiscal year 2006. The OEM agreement included multiple elements, including significant product customizations that were subject to Cisco's acceptance. We have determined that this arrangement should be accounted for under the contract accounting method per paragraph 74 of SOP 97-2. In addition, we have determined that no loss will be incurred in the arrangement; however, initially the lowest probable level of profit could not be determined and therefore, no profit had been recognized on this contract prior to the quarter ended September 30, 2008. In the quarter ended September 30, 2008, we established a minimum margin of 25% that was used in calculating revenue for this agreement, resulting in a change in accounting estimate. The minimum margin increased to 35% and 40% in the quarters ended December 31, 2008 and March 31, 2009, respectively. The change resulted from increased royalties received from Cisco and an update to the estimate of costs remaining to complete the final milestones per the agreement. The change in accounting estimate resulted in a revenue increase of $644,000 and $1.8 million for the three and nine months ended March 31, 2009, respectively, and a decrease to our net loss by $0.02 per share for the quarter ended March 31, 2009 and an increase to our net income by $0.07 per share for the nine months ended March 31, 2009. Revenue from this arrangement as a percentage of total revenue was approximately 21% and 3% for the three months ended March 31, 2009 and 2008, respectively, and is all related to professional services revenue. Revenue from this arrangement as a percentage of total revenue was approximately 13% and 2% for the nine months ended March 31, 2009 and 2008, respectively. We do not expect the impact of this change in accounting estimate to have a material impact on future periods.

Cost of Revenues



                                                  Three Months Ended                           Nine Months Ended
                                                       March 31,                                   March 31,
(in thousands)                           2009        2008       Change       %        2009        2008       Change      %
Cost of Revenues                        $ 2,456     $ 3,107     $  (651 )   (21 )%   $ 7,914     $ 8,742     $  (828 )   (9 )%
Percentage of total revenue                  37 %        35 %                             32 %        37 %

Total cost of revenue decreased 21% to $2.5 million in the quarter ended March 31, 2009 from $3.1 million in the quarter ended March 31, 2008. Total cost of revenue represented 37% and 35% of total revenues in the quarter ended March 31, 2009 and 2008, respectively. The decrease was primarily due to (i) a decrease in international subsidiaries' expenses of approximately $403,000 from the strengthening of the U.S. dollar against the European and Indian currencies,
(ii) a decrease of $171,000 for the services performed by research and development personnel in connection with the Cisco OEM agreement, (iii) a decrease in personnel and personnel-related expenses of $34,000, (iv) a decrease in outside consulting expense of $22,000, and was partially offset by an increase in hosting related costs of $34,000. Gross margin for the quarter ended March 31, 2009 was 63% compared to 65% in the comparable year-ago quarter. The decrease in gross margin was primarily due to the decrease in the total revenue partially offset by the decrease in the cost of support and services.

Total cost of revenue for the nine months ended March 31, 2009 decreased 9% to $7.9 million, compared to $8.7 million in the same period last year. Total cost of revenue represented 32% and 37% of total revenues for the nine months ended March 31, 2009 and 2008, respectively. The decrease was primarily due to (i) a decrease in international subsidiaries' expenses of approximately $807,000 from the strengthening of the U.S. dollar against the European and Indian currencies,
(ii) a decrease of $275,000 for the services performed by research and development personnel in connection with the Cisco OEM agreement, and (iii) a decrease of $57,000 in outside consulting services. The decrease was partially offset by an increase in personnel and personnel-related expenses of $253,000 from additional headcount and increased hosting related costs of approximately $85,000. Gross margin for the nine months ended March 31, 2009 was 68% as compared to 63% for the same period last year. The increase in gross margin was primarily due to the increase in our support and services revenue. In order to better understand the changes within our cost of revenues and resulting gross margins, we have provided the following discussion of the individual components of our cost of revenues.

Cost of License



                                                    Three Months Ended                        Nine Months Ended
                                                         March 31,                                March 31,
(in thousands)                              2009      2008      Change       %       2009      2008      Change       %
Cost of License                             $  16     $  20     $    (4 )   (20 )%   $  54     $  60     $    (6 )   (10 )%
Percentage of license revenue                   3 %       1 %                            1 %       1 %
Gross Margin                                   97 %      99 %                           99 %      99 %

Cost of license is the cost for third-party software imbedded in our products. Total cost of license decreased slightly by $4,000 in the quarter ended March 31, 2009 from the quarter ended March 31, 2008. Total cost of license as a percentage of total license revenues increased to 3% (a gross margin of 97%) for the quarter ended March 31, 2009 as compared to 1% (a gross margin of 99%) for the comparable year-ago quarter.

Total cost of license for the nine months ended March 31, 2009 decreased slightly by $6,000 as compared to the same period last year. Total cost of license remained unchanged as a percentage of total license revenues at 1% (a gross margin of 99%) for the nine months ended March 31, 2009 as compared to the same period last year. We anticipate cost of license will increase slightly in future periods based upon our anticipated renewal of third-party royalty agreement with certain vendors.

Cost of Support and Services



                                                      Three Months Ended                           Nine Months Ended
                                                           March 31,                                   March 31,
(in thousands)                               2009        2008       Change       %        2009        2008       Change      %
Cost of support and services                $ 2,440     $ 3,087     $  (647 )   (21 )%   $ 7,860     $ 8,682     $  (822 )   (9 )%
Percentage of support and service revenue        40 %        47 %                             42 %        49 %
Gross Margin                                     60 %        53 %                             58 %        51 %

Cost of support and services includes personnel costs for our hosting services, consulting services and customer support. It also includes depreciation of capital equipment used in our hosted network, cost of support for the third-party software and lease costs paid to remote co-location centers. In addition, as the Cisco OEM agreement is being accounted for under the contract accounting method in accordance with paragraph 74 of SOP 97-2, we recorded costs associated with this agreement starting the second quarter in fiscal year 2006. The cost associated with the Cisco OEM agreement for the quarter ended March 31, 2009 was approximately $160,000 compared to $336,000 for the comparable year-ago quarter. The services delivered in connection with this agreement for the quarter ended March 31, 2009 were performed by research and development personnel totaling approximately $124,000 with the remainder of $37,000 by services personnel. The cost associated with this agreement for the nine months ended March 31, 2009 was approximately $482,000 compared to $833,000 in the same period last year. The services delivered in connection with this agreement for the nine months ended March 31, 2009 were performed by research and development personnel totaling approximately $358,000 with the remainder of $124,000 by services personnel.

Total cost of support and services decreased 21% to $2.4 million in the quarter ended March 31, 2009 from $3.1 million in the quarter ended March 31, 2008. The decrease was primarily due to (i) a decrease in international subsidiaries' expenses of approximately $403,000 from the strengthening of the U.S. dollar against the European and Indian currencies, (ii) a decrease of $171,000 for the services performed by research and development personnel in connection with the Cisco OEM agreement, (iii) a decrease in personnel and personnel-related expenses of $34,000, (iv) a decrease in outside consulting expense of $22,000, and was partially offset by an increase in hosting related costs of $34,000.

Total cost of support and services for the nine months ended March 31, 2009 decreased 9% to $7.9 million, compared to $8.7 million in the same period last year. The decrease was primarily due to (i) a decrease in international subsidiaries' expenses of approximately $807,000 from the strengthening of the U.S. dollar against the European and Indian currencies, (ii) a decrease of $275,000 for the services performed by research and development personnel in connection with the Cisco OEM agreement, and (iii) a decrease of $57,000 in outside consulting services. The decrease was partially offset by an increase in personnel and personnel-related expenses of $253,000 from additional headcount and increased hosting related costs of approximately $85,000.

Excluding the impact from any future foreign currency fluctuations and based upon current revenue expectations we anticipate cost of support and services to remain relatively constant in absolute dollars in future periods. While we continue to account for the Cisco OEM agreement under the contract accounting method in accordance with paragraph 74 of SOP 97-2, the gross margin is subject to fluctuate based upon the amount of Cisco-related services.

Research and Development



                                                   Three Months Ended                        Nine Months Ended
                                                       March 31,                                 March 31,
(in thousands)                             2009        2008        Change    %      2009        2008        Change    %
Research and Development                  $ 1,378     $ 1,266     $    112   9 %   $ 4,303     $ 3,665     $    638   17 %
Percentage of total revenue                    21 %        15 %                         18 %        16 %

Research and development expenses primarily consist of compensation and benefits for our engineering, product management and quality assurance personnel, fees for outside consultants and, to a lesser extent, occupancy costs and related overhead. Research and development costs increased 9% to $1.4 million in the quarter ended March 31, 2009 from $1.3 million in the quarter ended March 31, 2008. The increase was primarily due to (i) a net increase of $201,000 in personnel related costs from the increased headcount in North America, which was partially offset by a reduction in the research and development group in India, and (ii) a decrease of $171,000 for the services performed by research and development personnel in connection with the Cisco OEM agreement charged to cost of support and services, which was partially offset by (i) a decrease in our international subsidiaries' expenses of approximately $137,000 from the strengthening of the U.S. dollar against the European and Indian currencies and . . .