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," "expects," "intends," "may," "might," "plans," "potential," "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: our failure to compete successfully in the markets in which we do business; our history of net losses and our ability to sustain profitability; the adequacy of our capital resources and need for additional financing; continued lengthy and delayed sales cycles; the development of our strategic relationships and third party distribution channels; our ability to innovate and respond to rapid technological change and competitive challenges; legal and regulatory uncertainties and other risks related to protection of our intellectual property assets; the operational integrity and maintenance of our systems; the uncertainty of demand for our products; the anticipated customer benefits from our products; the actual mix in new business between hosting and license business when compared with management's projections; the anticipated revenue to us from the Cisco OEM agreement; the ability to increase revenue as a result of the increased investment in sales and marketing; our ability to manage our expenditures and estimate future expense, revenue, and operational requirements; our ability to manage our business plans, strategies and outlooks and any business-related forecasts or projections; risks from our substantial international operations; currency fluctuations 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, 2009. 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 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 unless required by law.

All references to "eGain", the "Company", "our", "we" or "us" mean eGain Communications Corporation and its subsidiaries, except where it is clear from the context that such terms mean only this parent company and excludes subsidiaries.

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. We were incorporated in Delaware in September 1997.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, valuation allowance and accrued liabilities, long-lived assets and stock-based compensation. 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.

There have been no material changes to these estimates for the periods presented in this Quarterly Report on Form 10-Q. For a detailed explanation of the judgments made in these areas, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" within our Annual Report on Form 10-K for the year ended June 30, 2009, which we filed with the Securities and Exchange Commission on September 28, 2009.

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 September 30,
                                                 2009            2008
           Revenue:

           License                                   24 %            20 %
           Recurring services                        50 %            50 %
           Professional services                     26 %            30 %

           Total revenue                            100 %           100 %
           Cost of license                            1 %             0 %
           Cost of recurring services                15 %            14 %
           Cost of professional services             16 %            21 %

           Gross profit                              68 %            65 %

           Operating costs and expenses:
           Research and development                  15 %            19 %
           Sales and marketing                       30 %            34 %
           General and administrative                10 %            13 %

           Total operating costs and expenses        55 %            66 %

           Income / (loss) from operations           13 %            (1 )%

Revenue

Total revenue decreased 2% to $8.0 million in the quarter ended September 30, 2009 from $8.1 million in the quarter ended September 30, 2008. During the three months ended September 30, 2009, there was one customer that accounted for 18% of total revenue and there was one customer that accounted for 11% of total revenue in the comparable year-ago quarter. The impact of the foreign exchange fluctuation between the U.S. dollar and European currencies resulted in decreases of approximately $632,000 in total revenue for the three months ended September 30, 2009, as compared to the comparable year-ago quarter.

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 business 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 business fluctuates from quarter to quarter. The value of new hosting transactions, as a percentage of combined new hosting and license business excluding the Cisco OEM agreement was 63% for the quarter ended September 30, 2009, compared to 50% for the comparable year-ago quarter. 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 Revenue



                                                      Three Months
                                                   Ended September 30,
           (in thousands)                 2009         2008         Change    %
           Revenue:
           License                       $ 1,954      $ 1,599      $    355   22 %
           Percentage of total revenue        24 %         20 %

License revenue increased 22% to $2.0 million in the quarter ended September 30, 2009 from $1.6 million in the comparable year-ago quarter. License revenue in the quarter ended September 30, 2009 was negatively impacted by approximately $175,000 due to the strengthening of the U.S. dollar against the European currencies in which certain licenses were denominated. In the quarter ended September 30, 2009, we signed an amendment to our OEM agreement with Cisco Systems, with an effective date of July 27, 2009. Based upon certain changes, including pricing for support, we will begin to record royalties earned under the Cisco OEM agreement as license revenue from the effective date of the amendment. In prior periods, royalties earned from the Cisco OEM agreement were recorded as professional services revenue.

Given the general unpredictability of the length of current sales cycles, the mix between hosting and license business, 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 but we anticipate total license revenue to increase in fiscal year 2010.

Recurring Services Revenue



                                                        Three Months
                                                     Ended September 30,
       (in thousands)                      2009         2008        Change       %
       Revenue:
       Hosting services                   $ 1,679      $ 1,620      $    59       4 %
       Maintenance and support services   $ 2,305      $ 2,490      $  (185 )    (7 )%

       Total recurring services           $ 3,984      $ 4,110      $  (126 )    (3 )%
       Percentage of total revenue             50 %         50 %

Recurring services revenue includes hosting and software maintenance and support services. Software maintenance and support services consist of technical support and software upgrades and enhancements. Recurring services revenue decreased 3% to $4.0 million in the quarter ended September 30, 2009 from $4.1 million for the comparable year-ago quarter. Recurring services revenue represented 50% of total revenue for the quarters ended September 30, 2009 and 2008.

Hosting revenue increased 4% to $1.7 million in the quarter ended September 30, 2009 from the comparable year-ago quarter. Without the $120,000 impact of the U.S. dollar strengthening compared to the European currencies, hosting revenue would have increased by approximately $179,000 or approximately 11% for the quarter ended September 30, 2009. The increase was primarily due to the increased size of new hosting contracts with larger enterprises. Excluding the impact from any further foreign currency fluctuations, we expect hosting revenue to increase in future periods based upon current renewal rates for existing hosted customers, the new hosting agreements entered into in recent quarters that we expect to start generating hosting revenue in future quarters and the increased interest we are seeing for our hosting or on demand services from our target customers.

Maintenance and support services revenue decreased 7% to $2.3 million in the quarter ended September 30, 2009 from $2.5 million in the comparable year-ago quarter. Without the $203,000 impact of the U.S. dollar strengthening compared to the European currencies, maintenance and support revenue would have increased by approximately $18,000 or approximately 1% for the quarter ended September 30, 2009. Excluding the impact from any future foreign currency fluctuations, we expect maintenance and support revenue to increase 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



                                                      Three Months
                                                  Ended September 30,
         (in thousands)                 2009         2008        Change        %
         Revenue:
         Professional services         $ 2,037      $ 2,430      $  (393 )    (16 )%
         Percentage of total revenue        26 %         30 %

Professional services revenue decreased 16% to $2.0 million in the quarter ended September 30, 2009 from $2.4 million in the comparable year-ago quarter. Without the $134,000 impact of the U.S. dollar strengthening compared to the European currencies, professional services revenue would have decreased by approximately $259,000 or approximately 11% for the quarter ended September 30, 2009. The decrease for the three months ended September 30, 2009 was primarily due to a decrease in revenue from the Cisco OEM agreement. In the quarter ended September 30, 2009, we signed an amendment to the Cisco OEM agreement, with an effective date of July 27, 2009. Based upon certain changes, including pricing for support, we will no longer estimate the minimum profit and record the associated revenue as professional services for the Cisco OEM agreement from the effective date of the amendment. Instead, we will begin to record royalties earned under the Cisco OEM agreement as license revenue. In the quarter ended September 30, 2009, but prior to the effective date of the amendment we increased the minimum margin to 48% from 40% in the second half of fiscal 2009 and 25% in the quarter ended September 30, 2008. The changes in minimum margin were a result of increased royalties received from Cisco and an update to the estimate of costs remaining to complete the final milestones per the Cisco OEM agreement. The change in accounting estimate resulted in a revenue increase of $420,000 and an increase to our net income by $0.02 per share for the three months ended September 30, 2009 compared to a revenue increase of $700,000 and a corresponding positive impact to our net loss ($0.05 loss per share) for the comparable year-ago quarter. Excluding the impact from any future foreign currency fluctuations, we expect professional services revenue to decrease in future periods.

Cost of Revenue



                                                      Three Months
                                                    Ended March 31,
         (in thousands)                 2009         2008        Change        %
         Cost of Revenue               $ 2,515      $ 2,860      $  (345 )    (12 )%
         Percentage of total revenue        32 %         35 %
         Gross Margin                       68 %         65 %

Total cost of revenue decreased 12% to $2.5 million in the quarter ended September 30, 2009 from $2.9 million in the comparable year-ago quarter. Total cost of revenue represented 32% and 35% of total revenue in the quarter ended September 30, 2009 and 2008, respectively. The decrease was primarily due to
(i) a decrease in international subsidiaries' expenses of approximately $212,000 from the strengthening of the U.S. dollar against the European and Indian currencies, (ii) a decrease of $143,000 for the services performed by research and development personnel in connection with the Cisco OEM agreement, (iii) a decrease in outside consulting expense of $77,000, and was partially offset by an increase of $75,000 in the third-party software royalties. Gross margin for the quarter ended September 30, 2009 was 68% compared to 65% in the comparable year-ago quarter. The increase in gross margin was primarily due to the increase in our license revenue and the decrease in the cost of revenue.

In order to better understand the changes within our cost of revenue and resulting gross margins, we have provided the following discussion of the individual components of our cost of revenue.

Cost of License



                                                       Three Months
                                                    Ended September 30,
            (in thousands)                  2009       2008       Change     %
            Cost of license                 $  68      $  19      $    49   258 %
            Percentage of license revenue       1 %        0 %
            Gross Margin                       99 %      100 %

Cost of license is the cost for third-party software imbedded in our products. Total cost of license increased by $49,000 in the quarter ended September 30, 2009 from the comparable year-ago quarter. Total cost of license as a percentage of total license revenue was approximately 1% (a gross margin of approximately 99%) in the quarter ended September 30, 2009 as compared to an approximately 0% (a gross margin of approximately 100%) the comparable year-ago quarter.

We anticipate cost of license to remain relatively constant as a percentage of total license revenues in future periods.

Cost of Recurring Services



                                                            Three Months
                                                         Ended September 30,
     (in thousands)                              2009         2008        Change    %
     Cost of recurring services                 $ 1,152      $ 1,128      $    24   2 %
     Percentage of recurring services revenue        29 %         27 %
     Gross Margin                                    71 %         73 %

Cost of recurring services included personnel costs for our hosting services and maintenance and 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. Total cost of recurring services increased 2% to $1.2 million in the quarter ended September 30, 2009 from $1.1 million in the comparable year-ago quarter. The increase primarily consisted of
(i) an increase in support on third-party software of $73,000 (ii) an increase of $66,000 in personnel and personnel-related expenses, (iii) an increase of $27,000 in hosting related costs and was partially offset by a decrease in our international subsidiaries' expenses of approximately $89,000 from the strengthening of the U.S. dollar against the European and Indian currencies.

Excluding the impact from any future foreign currency fluctuations and based upon current revenue expectations, we anticipate cost of recurring services to increase slightly in future periods.

Cost of Professional Services



                                                          Three Months
                                                      Ended September 30,
      (in thousands)                        2009         2008        Change        %
      Cost of professional services        $ 1,295      $ 1,713      $  (418 )    (24 )%
      Percentage of professional revenue        64 %         70 %
      Gross Margin                              36 %         30 %

Cost of professional services includes personnel costs for consulting services. In addition, we recorded costs associated with the Cisco OEM agreement starting the second quarter in fiscal year 2006. In the quarter ended September 30, 2009, we signed an amendment to this agreement, with an effective date of July 27, 2009. Based upon certain changes, we will no longer record the costs associated with the Cisco OEM agreement as cost of professional services from the effective date of the amendment. There was minimal cost associated with the Cisco OEM agreement for the quarter ended September 30, 2009 compared to $183,000 for the comparable year-ago quarter. The services delivered in connection with this agreement for the comparable year-ago quarter were performed by research and development personnel totaling approximately $143,000 with the remainder of $40,000 by services personnel.

Total cost of professional services for the three months ended September 30, 2009 decreased 24% to $1.3 million, compared to $1.7 million in the comparable year-ago quarter. The decrease was primarily due to (i) a decrease of $143,000 for the services performed by research and development personnel in connection with the Cisco OEM agreement, (ii) a decrease in international subsidiaries' expenses of approximately $123,000 from the strengthening of the U.S. dollar against the European and Indian currencies, (iii) a decrease of $77,000 in outside consulting services, and (iv) the decrease in personnel and personnel-related expenses by $58,000.

Excluding the impact from any future foreign currency fluctuations and based upon current revenue expectations, we anticipate cost of professional services to remain relatively constant in absolute dollars in future periods.

Research and Development



                                                      Three Months
                                                  Ended September 30,
         (in thousands)                 2009         2008        Change        %
         Research and Development      $ 1,170      $ 1,525      $  (355 )    (23 )%
         Percentage of total revenue        15 %         19 %

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 decreased 23% to $1.2 million in the quarter ended September 30, 2009 from $1.5 million in the comparable year-ago quarter. The decrease was primarily due to (i) a decrease of $242,000 in personnel related costs from the decreased headcount in North America,
(ii) decreased outside consulting services of $194,000, and (iii) a decrease in our international subsidiaries' expenses of approximately $59,000 from the strengthening of the U.S. dollar against the European and Indian currencies and was partially offset by the decrease in allocation of the services in connection with the Cisco OEM agreement to cost of professional services that contributed an increase of $143,000. Total research and development expenses as a percentage of total revenue were 15% in the quarter ended September 30, 2009 and 19% in the comparable year-ago quarter.

Excluding any fluctuation of foreign exchange rates in European and Indian currencies against the U.S. dollar, we anticipate research and development expense to remain relatively constant in absolute dollars in future periods.

Sales and Marketing



                                                      Three Months
                                                  Ended September 30,
         (in thousands)                 2009         2008        Change        %
         Sales                         $ 2,031      $ 2,278      $  (247 )    (11 )%
         Marketing                     $   403      $   504      $  (101 )    (20 )%

         Total Sales and Marketing     $ 2,434      $ 2,782      $  (348 )    (13 )%
         Percentage of total revenue        30 %         34 %

Sales and marketing expenses primarily consist of compensation and benefits for our sales, marketing and business development personnel, lead generation activities, advertising, trade show and other promotional costs and, to a lesser extent, occupancy costs and related overhead. Sales and marketing expense decreased 13% to $2.4 million in the quarter ended September 30, 2009 from $2.8 million in the comparable year-ago quarter. Total sales and marketing expenses as a percentage of total revenues were 30% in the quarter ended September 30, 2009 compared to 34% in the comparable year-ago quarter.

Total sales expenses in the quarter ended September 30, 2009 decreased 11% to $2.0 million from $2.3 million in the quarter ended September 30, 2008. The decrease for the quarter was primarily due to (i) the decrease in our international subsidiaries' expenses of approximately $180,000 from the strengthening of the U.S. dollar against the European and Indian currencies and
(ii) the decrease of $132,000 in personnel and personnel-related expenses related to the reduction in headcount, which was partially offset by an increase of $69,000 in outside consulting expenses.

Total marketing expenses in the quarter ended September 30, 2009 decreased 20% to $403,000 from $504,000 in the comparable year-ago quarter. The decrease for the quarter was primarily due to (i) a decrease of $50,000 in marketing program expense, (ii) the decrease in our international subsidiaries' expenses of approximately $36,000 from the strengthening of the U.S. dollar against the European and Indian currencies and (iii) the decrease of $16,000 in personnel and personnel-related expenses.

We anticipate sales and marketing expenses to increase in future periods based upon current revenue expectations, excluding the fluctuation of foreign exchange rates in European and Indian currencies against the U.S. dollar.

General and Administrative



                                                      Three Months
                                                  Ended September 30,
          (in thousands)                2009        2008        Change        %
          General and Administrative    $ 786      $ 1,047      $  (261 )    (25 )%
          Percentage of total revenue      10 %         13 %

General and administrative expenses primarily consist of compensation and benefits for our finance, human resources, administrative and legal services personnel, fees for outside professional services, provision for doubtful accounts and, to a lesser extent, occupancy costs and related overhead.

Total general and administrative expense in the quarter ended September 30, 2009 decreased 25% to $786,000 from $1.0 million in the comparable year-ago quarter. The decrease was primarily due to (i) a decrease of $78,000 in personnel and personnel-related expense, (ii) a decrease of $68,000 in outside consulting services and other expenses, (iii) a decrease of $39,000 in bad debt expense, . . .