EGAIN COMMUNICATIONS CORP, 10-K405, 2000-09-28

EGAIN COMMUNICATIONS CORP
10-K405, 2000-09-28
PREPACKAGED SOFTWARE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended June 30, 2000
or

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-30260

eGain Communications Corporation
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Delaware 77-0466366
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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<TABLE>
<S> <C>
455 W. Maude Avenue, Sunnyvale, California 94086 (408) 212-3400
(Address of principal executive offices) (Registrant's telephone number,
including area code)
</TABLE>

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

None

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

Common Stock, par value $0.001 per share

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

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

The aggregate market value of the Common Stock held by non-affiliates
(based on the closing sale price on the Nasdaq National Market on September
25, 2000), was approximately $192,143. For purposes of the foregoing
calculation only, the registrant has included in the shares owned by
affiliates the beneficial ownership of Common Stock of officers and directors
of the registrant and members of their families. Such inclusion shall not be
construed as an admission that any such person is an affiliate for any other
purpose.

As of September 25, 2000, there were 35,702,900 shares of Common Stock,
$0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by
reference information from the registrant's proxy statement to be filed with
the Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 2000 Annual Meeting of Stockholders to be held on
November 20, 2000.

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eGAIN COMMUNICATIONS CORPORATION

TABLE OF CONTENTS

FORM 10-K

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Item
No. Page
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PART I

1. Business.......................................................... 1

2. Properties........................................................ 12

3. Legal Proceedings................................................. 12

4. Submission of Matters to a Vote of Security Holders............... 12

PART II

5. Market for the Registrant's Common Stock and Related Stockholder
Matters........................................................... 13

6. Selected Consolidated Financial Data.............................. 14

7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 15

7A. Quantitative and Qualitative Disclosures About Market Risk........ 32

8. Financial Statements and Supplementary Data....................... 32

9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................. 55

PART III

10. Directors and Executive Officers of eGain......................... 55

11. Executive Compensation............................................ 57

12. Security Ownership of Certain Beneficial Owners and Management.... 57

13. Certain Relationships and Related Transactions.................... 57

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 58
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PART I

ITEM 1. BUSINESS

This report on Form 10-K and the documents incorporated herein by reference
contain forward-looking statements that involve risks and uncertainties. These
statements may be identified by the use of the words such as "anticipates,"
"believes," "continue," "could," "would," "estimates," "forecasts," "expects,"
"intends," "may," "might," "plans," "potential," "predicts," "should," or
"will" and similar expressions or the negative of those terms. The forward-
looking statements include, but are not limited to, the expansion of our
global market penetration and distribution capabilities, the integration of
our software products with databases, the development of our strategic
relationships, the factors influencing competition in our market, our limited
operating history, expected net losses, the adequacy of capital resources, the
continued need for online customer communications, the continued acceptance of
the hosted applications model, competitive threats and the overall volatility
of Internet-related technology companies. These statements related to our
future plans, product releases, objectives, expectations and intentions, and
the assumptions underlying or relating to any of these statements. Our actual
results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include those discussed in
these statements. Factors that could contribute to such differences include
those discussed in "Factors that May Affect Future Results" and elsewhere in
this document. These forward-looking statements speak only as of the date
hereof. eGain expressly disclaims any obligation or understanding to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in eGain's expectations with regard thereto or
any change in events, conditions or circumstances on which any such statement
is based.

Overview

eGain provides a multi-channel, online customer communications platform
designed to help companies meet the growing demands of Internet-based
communications. eGain markets software products that enable online customers
to communicate through each of the three main channels for online customer
communications--email, real-time and self service. These applications operate
on a platform that provides for shared work flow, routing, archiving,
reporting and knowledge management capabilities across these different
channels. In addition, eGain's platform integrates with leading call center
systems, as well as other customer communications, database and ecommerce
software applications, to provide comprehensive information about each
customer while permitting companies to leverage existing investments in
installed systems.

eGain's customer communications platform offers hosted and licensed
software applications for email management, interactive real-time Web and
voice collaboration, intelligent self-help agents and support services, and
proactive online marketing. This comprehensive set of applications helps
address the needs of customers across the full customer lifecycle. Self-help
agents can guide customers through their online experience.

Since eGain's applications are built upon a common knowledge base,
information such as a customer's account history and prior interactions can be
accessed and shared across the different products. The result is a more
personal experience where customers can be directed to their interests and
their questions can be addressed. eGain can help businesses improve their
customers' satisfaction and retain lasting relationships.

eGain's software solutions are built using a 100% Web-native architecture,
thereby providing scalability, global access, diverse integration
capabilities, and rapid deployment. eGain offers a complete line of
consulting, support and training services from offices located in 18 countries
throughout the world. Our customers include traditional companies engaged in
ecommerce, including 3Com, DaimlerChrysler, Fidelity Investments and Home
Depot, and dedicated Internet companies, such as AOL, CNBC.com, MP3.com and
Monster.com.

Recent Developments

On June 29, 2000, eGain completed its acquisition of Inference Corporation.
Under the terms of the agreement, eGain acquired all of the outstanding common
stock of Inference in exchange for eGain common

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stock. Inference shareholders received approximately 5.9 million shares of
eGain common stock. In addition, options to purchase shares of Inference were
converted into options to purchase approximately 1.6 million shares of eGain
common stock. The transaction has been accounted for under the purchase method
of accounting. With the addition of Inference, eGain acquired approximately
250 new customers increased the number of quota carrying sales people, and
extended its international presence. Inference's products enhance eGain's
existing offerings by providing robust knowledge management tools, best of
breed self-service capability and unique personalization tools.

On August 8, 2000, eGain announced that it had entered into definitive
agreements with new and existing investors for the private placement of $88.5
million of convertible preferred stock and warrants. The convertible preferred
stock liquidation value accretes at 6.75% per annum. Investors also received
warrants to purchase approximately 3.8 million shares of common stock at $9.25
per share. eGain intends to use the net proceeds from this private placement
for general corporate purposes.

Industry Background

The Internet has evolved from primarily an information source to a new,
strategic platform for commerce. This growth has fueled competitive pressures
in online markets. Businesses engaged in ecommerce are finding that providing
a quality customer experience has become a key competitive differentiator. The
ability to communicate effectively with customers has become even more
essential to achieving business success.

In a traditional commercial setting, companies typically addressed customer
service needs by establishing telephone call centers, enabling customers to
speak with company representatives by phone. With the arrival and rapid growth
of ecommerce, companies are increasingly eager to supplement these "phone-
centric" call centers so that existing facilities and customer service
organizations can handle Web-based customer communications as well. This move
to "Web-first" customer communications is being driven both by the cost
advantage of providing online assistance as compared with telephonic
assistance, and by growing customer demand for such assistance.

Companies that fail to address these customer needs may lose sales to
competitors located just a mouse-click away. Companies can convert more Web
site visitors into actual customers and develop lasting relationships by
improving responsiveness to email, providing real-time customer communication
and giving customers self service options that can enhance their online
experience. Organizations that recognize the economic value of retaining a
lifetime customer will invest in personalized sales, service and support to
increase revenues and to improve customer loyalty, customer retention, and
increase current and future revenues.

Despite the migration toward a Web-first model of customer communications,
the current state of ecommerce customer communications is inadequate.
Traditional client-server software applications in telephone call centers were
not designed to address online communications. Although some companies have
developed in-house solutions to address online communications, these tools do
not adequately meet the increasingly demanding needs of Web-based
communications. Expensive and hard to maintain, these systems typically have
difficulty scaling to keep pace with the rapid expansion of ecommerce. The
failure to provide adequate customer conversation results in frustrated
customers, lost sales opportunities and diminished brand reputation.

Recently numerous software vendors have developed and marketed point
solutions, or software packages designed to handle online customer
communications through a single channel such as email, real-time or self
service. However, these point solutions often do not work well with other
programs or integrate easily with a company's existing legacy systems. This
lack of integration makes these applications expensive to implement and
maintain, especially for companies with significant, existing call center
operations.

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For these reasons, eGain believes that providing customers with a full
range of online communications options has become a strategic imperative, and
that the demand for an integrated multi-channel platform has grown
accordingly.

The eGain Solution

eGain provides a multi-channel, online customer communications platform
designed to help companies meet the growing demands of Internet-based
communication. eGain markets software products that enable online customers to
communicate through each of the three main channels for online customer
communications--email, real-time and self service. These applications operate
on a platform that provides for shared workflow, routing, archiving, reporting
and knowledge management capabilities across these different channels. In
addition, eGain's platform integrates with leading call center systems, as
well as other customer communications, database and ecommerce software
applications, to provide comprehensive information about each customer while
permitting companies to leverage existing investments in installed systems.

eGain's applications and platform are designed with a 100% Web-native
architecture that allows companies to leverage the unique characteristics of
the Internet. eGain's software products can be deployed either as a hosted
applications through the eGain Hosted Network, or as a licensed applications
installed on servers at the customer location.

The benefits of the eGain solution include:

. Develop and Maintain Customer Relationships. eGain's customer
communications platform allows ecommerce companies to enhance the online
experience of their customers. Companies can respond rapidly and
effectively to large volumes of email, communicate over the Web in real-
time with their customers, track the history of individual customer
interactions and allow customers to handle their own service needs. By
personalizing the customer experience, eGain's products improve customer
satisfaction and help build lasting customer relationships.

. Enhance Productivity and Reduce Costs. eGain's intelligent email routing
and suggested response capabilities, tracking and workload reporting
features, and self-service tools all reduce demands on customer service
organizations and empower online customers to communicate more
effectively. In addition, by integrating with existing corporate
systems, eGain's platform allows companies to leverage prior investments
in information technology, extending the useful lives of such systems
and reducing the need for additional expenditures.

. Convert Web Site Visitors to Buyers. eGain's products can also increase
the likelihood that a first-time Web site visitor will become a
customer. eGain's real-time and self service applications facilitate
online customers communications. Online visitors can choose to interact
directly with a customer service representative, via live Web
collaboration, or employ self service tools to conduct an inquiry,
increasing the likelihood that a Web site visitor will complete a
purchase.

. Flexible Deployment Options. eGain's platform is designed to allow
companies to deploy eGain applications either in a hosted environment
through the eGain Hosted Network or in-house at their own facility as
installed software. Customers using the eGain Hosted Network can take
advantage of eGain's systems management expertise, thereby reducing the
drain on their own information technology resources while receiving the
benefit of secure and reliable access to eGain's applications.

The eGain Strategy

eGain's objective is to become the leading provider of customer
communications solutions for businesses engaged in ecommerce. The key elements
of eGain's strategy include:

Continue to Develop Integrated, Multi-Channel Customer Communications
Platform. eGain is one of the few companies that provide software products to
enable customer communications across the three primary

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channels of online customer interaction--email, real-time and self-service.
eGain applications operate on eGain Commerce, an integrated, multi-channel
platform upon which each application is built. The eGain Commerce platform
contains the underlying knowledge base, artificial intelligence, routing and
workflow rules--all connected to a centralized database--with which the
applications integrate. This platform provides an integrated solution that
enables customers to manage all of their online customer communications from
different channels, rather than a patchwork of independent point solutions. In
addition, eGain's solution integrates with leading CRM, ERP and call center
systems, enabling customers to leverage investments in existing systems and
providing an enterprise wide solution.

Flexible Delivery Options. eGain believes that offering its solution on a
hosted or licensed basis provides customers with a meaningful choice of
deployment options. Customers can choose to license applications for
deployment at their facilities, or employ the eGain Hosted Network. Customers
choosing to employ the eGain Hosted Network can focus on other aspects of
their business while benefiting from the rapid deployment, 24x7 reliability
and support, scalability on demand, and lower up-front investment that the
hosting option offers. With over 220 of its more than 600 customers choosing
the hosted solution, eGain believes it operates the largest network for hosted
customer communications for ecommerce companies.

Maintain Commitment to 100% Web-Native Product Architecture. With its
flagship product, eGain Mail, eGain was the first company to introduce a 100%
Web-native solution to address the need for online customer communications
management. Since inception eGain has designed its products with the specific
characteristics of the Web in mind and remains committed to building all
products on a 100% Web-native architecture. Web-native architecture differs
from the traditional client-server software applications, or even those with
Web interfaces, in that applications built on Web-native architecture allow
users to access the software, and use its full functionality, from anywhere in
the world through an Internet browser. eGain believes Web-native architecture
provides improved scalability, easier integration with existing customer
communications and database software, and lower deployment costs.

Continue to Expand Global Distribution Capabilities. eGain intends to
continue its expansion of global distribution capabilities through direct
sales efforts as well as strategic relationships. eGain has expanded its
domestic and international direct sales force. eGain has marketing, sales and
services organizations in 18 countries including the United Kingdom, Australia
and Japan and plans to establish a presence in additional regions in the
future. In addition to these sales and marketing efforts, eGain is engaged in
approximately 50 formal and informal strategic relationships with system
integrators, consulting firms, technology partners and solutions providers.
Approximately 25% of new customers in the fourth quarter of fiscal 2000 were
derived from these strategic relationships.

Products and Services

eGain Platform and Suite of Applications

eGain provides multi-channel, Web native customer communications solutions
for companies engaged in ecommerce activities. eGain's solutions are built on
a scalable, Web-native architecture designed to meet the growth of Internet-
based communications. eGain's products are built on technologies that are
based on industry standards and designed to integrate with a customer's
existing databases and applications. eGain's products are available to its
customers 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 another and to integrate with
customers' existing software.

eGain's product offerings are comprised of a software platform and a suite
of software applications that enable customer communications across the three
primary channels--email, real-time and self service. eGain Commerce is an
integrated platform for online customer communications, built on a Web-
component architecture offering reliability, scalability, flexibility and
performance. This platform contains the underlying knowledge base, artificial
intelligence, and routing and workflow rules, all of which are connected to a
centralized database with which eGain's current and future applications are
intended to integrate.

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eGain's current suite of product offerings fall primarily under three
primary channels for online communications: email, real-time, and self
service.

Email: eGain offers applications to manage a wide variety of inbound and
outbound email transmissions.

. eGain Mail enables companies to intelligently route, track and
personalize responses to high volumes of customer emails and Web-form
submissions. eGain Mail provides functionality for each aspect of online
service, sales and marketing operations, from workflow and routing to
agent productivity and management and administration. eGain Mail is
designed to scale to the customer communication needs of any company
engaging in ecommerce.

. eGain Campaign is a scalable, outbound email marketing solution that
offers comprehensive tools based on proven one-to-one marketing
techniques for planning, targeting and executing high-volume direct
marketing programs. eGain Campaign supports a broad range of marketing
programs, from basic newsletters and personalized emails to customers,
to the most demanding multi-step promotional and cross-selling
campaigns.

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

. eGain Live enables customer service representatives to answer online
requests by providing immediate, personalized assistance through
interactive text messaging and Voice-over-Internet, or VoIP, while
delivering information to customers through their browsers. One-to-one
collaboration technologies are used to help customers complete purchases
and other multi-step transactions without ever having to leave the web
site.

Self Service: eGain provides a comprehensive set of tools that allows
online customers to quickly and conveniently obtain answers to their questions
24 hours a day. Companies benefit from this solution by reducing staffing
needs support organization.

. eGain Assistant is an interactive online self service solution that
enables companies to offer their Web visitors a personalized method to
navigate through and obtain information from their Web sites. eGain
Assistant provides a conversational virtual customer service
representative with whom customers interact in "plain English" via their
keyboard or speech recognition applications.

. eGain Inform provides online self service to enable a company's
customers to obtain information from the Web site quickly and easily at
any time. For general inquiries, eGain Inform allows a customer to
browse a custom knowledge base of product, service and/or technical
information. For specific questions, customers can use searching tools
to quickly obtain answers. The Inform knowledge base of FAQ's
(frequently asked questions) is common with other eGain solutions so
answers developed for email, live or other interactions can be easily
reused for self service.

. eGain Knowledge is a personalized e-service and support solution that
guides customers through an easy exchange of questions and answers to
find solutions for their questions. This product offers personalized
interaction by accessing information in existing databases and call
center solutions. eGain Knowledge acts as a hub for corporate
information, enabling companies to get up and running quickly by using
knowledge gateways that leverage their investment in existing corporate
documents, databases and call log environments.

Other eGain offerings include:

. eGain Commerce Bridge is a database and application linking solution
that provides fast, easy, no-programming integration with standard
relational databases, ecommerce platforms, and call center systems as
well as any accessible information on the Internet. It enables companies
to leverage existing investments by providing the ability to integrate
various information sources regardless of where they are stored, whether
at the company or on the Internet. The eGain Commerce Bridge provides
customer

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service representatives with a 360-degree view of the customer,
including history, sales activity, credit and order status, and other
activities.

. eGain Call Center Bridge provides computer-telephony integration (CTI)
that links eGain's communications solutions to a company's existing call
center infrastructure so Internet contacts and phone calls can be
centrally queued, routed, logged, monitored, and managed. This blending
simplifies multi-channel administration and management by leveraging
previous call center investments.

. eGain Voice is a communication solution that transcends assisted text
based web communication and offers customers the option to talk directly
to a customer service representative over the Internet through VoIP.
Customers and customer service representatives can talk while browsing
the Web site or holding collaborative work sessions. An enhancement to
eGain Live, it is designed to integrate with a company's existing call
center infrastructure, thereby allowing companies to use a single system
to administer, manage and log all email, live Web collaboration and
telephone interactions with customers.

. eGain Interact enables sales and support representatives to "connect
browsers" with their customers and jointly view online product
demonstrations, fill out complex Web forms and walk through online
transactions. Users can co-navigate without downloads or plug-ins and
get instant connectivity.

. eGain AI (Artificial Intelligence) helps ecommerce companies reduce the
cost of operations and improves the quality of customer communications.
eGain AI enables ecommerce companies to more accurately categorize and
route customer requests, as well as significantly improve agent
productivity through more accurate auto-suggestions and auto-responses.

eGain Hosted Advantage

The eGain Hosted Network allows hosted customers to access the full
functionality of eGain's applications through a standard Web browser and
Internet connection. Through a network of eGain service centers and hosting
partners linked by high-speed Internet connections, eGain provides its
customers with multiple redundant paths to access their hosted customer
service applications in a mission critical environment. eGain remotely manages
these applications which reside on server machines co-located at the global
facilities of AboveNet Communications, GlobalCenter and Exodus Communications.
The eGain Hosted Advantage offers value-added services to subscribers of eGain
Hosted Network. Such value-added services include application management,
database maintenance, mail hosting and anti-virus protection. eGain has also
developed proprietary Web-based hosted service management systems, enabling
eGain service professionals to efficiently administer and manage large numbers
of hosted customer applications.

eGain believes customers using the eGain Hosted Advantage can benefit by:

. Eliminating significant upfront investment in infrastructure;

. Reducing costs and administrative burdens;

. Deploying solutions quickly;

. Scaling to meet growing ecommerce demands; and

. Ensuring reliability, performance and security.

Professional Services

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

. Implementation Services. eGain's implementation services group offers
rapid implementation services designed to deploy eGain's applications
quickly. The installation teams are involved in needs

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assessment, software and hardware configuration, training and
activation. Using well-defined templates and installation tools, eGain
can deploy systems solutions efficiently.

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

. Business Solutions. eGain's business solutions group broadens eGain's
solutions offerings by effectively integrating eGain's products with
third party applications. eGain works closely with third parties to
expand the eGain solution so businesses have a 360 degree view of the
customer. Such third parties include providers of traditional CRM
software such as Clarify, Inc., a subsidiary of Nortel Networks, Seibel
Systems, Inc., and Vantive Corp., providers of back office and ERP
systems including Oracle Corp. and SAP AG, providers of content
management software including Broadvision, Inc. and Vignette Corp., and
providers of other workforce management solutions such as Blue Pumpkin
Software.

. Customer Advocacy. eGain's customer advocacy group is dedicated to
increasing customer satisfaction. Senior consultants work closely with
customers on an ongoing basis to address their product and service needs
throughout the relationship.

. Hosted Business Solutions. eGain's hosted business solutions group
provides 24x7 application management, monitoring and response services.
eGain also provides database services to maintain and enhance the
performance, availability and reliability of production systems as well
as network security services.

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

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

As of June 30, 2000, eGain had approximately 189 professionals providing
services for application management, solutions development, system
installation, customer advocacy, education and support.

Sales and Marketing

Sales Strategy

eGain sells its customer communications solutions either as a subscription-
based hosted service or as a licensed software product for in-house
installation. eGain's sales strategy is to pursue targeted accounts through a
combination of its direct sales force and strategic alliances. To date, eGain
has targeted its sales efforts at the ecommerce divisions of traditional and
Global 2000 companies as well as dedicated ecommerce companies.

eGain's North American direct sales personnel are based at our corporate
headquarters in Sunnyvale, California while field sales offices are located in
Connecticut, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan,
Minnesota, New Hampshire, New Jersey, New York, Pennsylvania, Texas, Virginia,
Washington and Canada. Internationally, eGain has direct sales personnel
located in the Netherlands, United Kingdom and Australia. Sales managers
currently based in the United States manage sales to customers located in
other international regions.

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

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eGain further complements its direct sales force with a series of reseller
and sales alliances. Through these alliances, eGain is able to leverage
additional sales, marketing and deployment capabilities. In the future, eGain
intends to expand its distribution capabilities by increasing the size of its
direct sales force, establishing additional sales offices both domestically
and internationally and broadening its alliance activities.

As of June 30, 2000, there were approximately 118 employees engaged in
worldwide sales activities.

Marketing Strategy

eGain's marketing strategy is to build brand awareness as a leading
provider of intelligent customer communication solutions for organizations
engaged in ecommerce. eGain's marketing efforts focus on Global 2000 companies
and dedicated Internet companies.

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

eGain's marketing group also provides the sales team with tools, including
product collateral, customer case studies, demos, presentations and
competitive analysis. In addition, eGain's marketing group performs market
analysis and conducts focus group and customer reviews to identify and develop
key partnership opportunities and product requirements.

As of June 30, 2000, there were approximately 40 employees engaged in
worldwide marketing activities.

Strategic Relationships

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

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

. Consulting Alliances: eGain works with consulting firms and systems
integrators with proven implementation expertise and training in eGain's
technology platform. Firms such as eLoyalty assist eGain customers in
addressing their online business needs with strategy, design,
implementation and integration services.

. Technology Alliances: eGain has a number of technology partnerships with
companies that are leaders and innovators in the areas of content
management, sales force automation, call center technology, analytics,
and information technology hardware. These companies provide scalable
platforms on which eGain products are built, as well as solutions that
interoperate with and add value to eGain's proprietary solutions.
eGain's current technology partners include Actuate Corp., Blue Martini
Software, Remedy Corp. and Seibel Systems, Inc.

. Solution Provider Alliances: eGain solution provider partners include
leading applications service providers (ASPs) and value-added resellers
(VARs). These partners resell and implement eGain products, and provide
front-line support to their customers. Solution alliances include
partnerships with Aspect Communications Corp. and Ineto, Inc.

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

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

Customers

eGain has over 600 customers worldwide which include both Global 2000
companies and dedicated Internet companies. No customer accounted for 10% or
more of total revenues in the fiscal year just ended. The following is a
representative list of companies that have entered into license agreements for
one or more eGain products:

<TABLE>
<S> <C> <C>
Technology and Networking Internet Services Media
------------------------- ----------------- -----
3Com Cooking.com AOL
Congee Communications Earthlink Associated Press
Dell eTown BBC
Electronic Arts FairMarket CNBC.com
Epson KBKids.com CNN
Fujitsu LookSmart Lucas Arts
Gateway McAfee.com Sony
Hewlett-Packard Monster.com Televisa
Motorola ONElist
Peoplesoft Petsmart.com Retail
------
Real Networks PlanetRx Gymboree
Seagate Tucows HMV
Sun Microsystems WebTV Home Depot
L.L. Bean
Financial Services Manufacturing Marks & Spencer
------------------ -------------
ABN-AMRO Bass Brewers RCA.com
Bank of America BMW Service Merchandise
Barclays Bank Boeing Stop & Shop
Consumer Financial Network DaimlerChrysler Timberland
Discover Financial Services Mazda USA Walgreens
Freddie Mac Otis Elevator
i-Escrow Phillips Petroleum Telecommunications
------------------
Lloyds TSB Pitney Bowes Aspect Communications
MasterCard Rubbermaid British Telecom
Nova Information Systems Safeco Cable & Wireless
Quick & Reilly Shell Carrefour
Statefarm Siemens Deutsche Telekom
Suretrade.com Volkswagen Ericsson
Xerox Lucent Technologies
Motorola
Nextel Communications
Qwest/US West
Verizon Communications
</TABLE>

Competition

The market for online customer communications software is rapidly evolving
and intensely competitive. eGain currently competes with a number of companies
offering one or more products, some of which compete directly with its
products, and expects the level of competition to intensify in the future.
Competitors providing single point solutions that compete with eGain's
products include Ask Jeeves, Inc., Brightware, Inc., Kana Communications,
Inc., Primus Knowledge Solutions, Inc., Quintus Corp., and WebLine
Communications Corp., a subsidiary of Cisco Systems. Some of these companies
also provide hosting capabilities for their products.

9
<PAGE>

eGain also faces potential competition from larger, front office software
providers such as Clarify, Inc., a subsidiary of Nortel Networks, Peoplesoft,
Inc., and Siebel Systems, Inc. In the future eGain may also encounter
competition from established software companies such as Hewlett-Packard
Company, IBM, Microsoft Corporation and others that may seek to enter the
market for online customer communications solutions.

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

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

Product Development

eGain believes the market for its products changes rapidly and is
characterized by evolving industry standards, swift changes in customer
requirements and frequent new product introductions and enhancements. eGain's
product development efforts seek to enhance current technology, provide
quality, performance, and functionality, as well as develop additional
applications and maintain the competitiveness of its product and service
offerings. eGain has invested significant time and resources in creating a
structured process for undertaking all product development. This process
involves several functional groups at all levels within our organization and
is designed to provide a framework for defining and addressing the activities
required in bringing product concepts and development projects to market
successfully.

In addition, eGain analyzes market and customer requirements and evaluates
technology that it believes will further market acceptance of its products.
eGain seeks partners with technology that will enhance product features and
functionality.

In May 2000, eGain reached an agreement in principal to acquire Nitman
Software Pvt. Ltd., an ecommerce software development company located in Pune,
India. eGain expects to receive final approval for the acquisition from the
Indian government in the second quarter of fiscal year 2001.

As of June 30, 2000, there were approximately 202 employees engaged in
product development activities, including 43 developers of Nitman Software
located in India and 35 consultants located in Sunnyvale, California.

Technology

eGain software products are built on a standards-based, scalable
architecture that is 100% Web-native and designed to address the evolving
needs of companies engaged in ecommerce. Specifically, eGain's Commerce
platform is based on proprietary Web Component Architecture (WCA) an open,
scalable framework for software design that builds upon three industry trends:

. widespread availability of reliable Internet connectivity to businesses
which is enabling the delivery and management of hosted applications
over the Internet;

. investment in Internet technologies, which is driving development of new
Web-native applications; and

. the success of component-based software development models which provide
the tools for developing distributed software applications.

10
<PAGE>

eGain believes that its software architecture is a more scalable approach
to application design than traditional client-server or three-tier
architectures. For example, in contrast to client-server or three-tier
architectures that require the download and maintenance of dedicated client-
side software, eGain's technology does not require the download of any client
software. Consequently, users can access the application from any location
through a standard Web browser.

Our component-based software model is more fault-resilient and flexible
than traditional architectures. Each component can be diagnosed and monitored
independently, and the overall system does not stop if there is a problem with
an individual component. Moreover, each independent software component can be
modified or augmented to meet the specific needs of customers.

Intellectual Property

eGain regards its patents, copyrights, service marks, trademarks and
similar intellectual property as critical to eGain's success. We rely on
patent, trademark, copyright, trade secret and other laws, as well as
confidentiality procedures and licensing arrangements, to protect the
proprietary aspects of our technology and business. eGain has numerous
registered trademarks and trademark applications pending in the United States
and internationally, as well as common law trademark rights. In addition,
eGain owns several patents in the area of case-based reasoning, and has
patents pending relating to various other technologies. eGain will seek
additional trademark and patent protection in the future. eGain does not know
if its trademark and patent applications will be granted, or whether they will
provide the protection eGain desires, or whether they will subsequently be
challenged or invalidated.

eGain routinely requires its employees, customers, and potential business
partners to enter into confidentiality and nondisclosure agreements before
eGain will disclose any sensitive aspects of its products, technology, or
business plans. In addition, eGain requires employees to agree to surrender to
eGain any proprietary information, inventions or other intellectual property
they generate or come to possess while employed by eGain. Despite eGain's
efforts to protect its proprietary rights through confidentiality and license
agreements, unauthorized parties may attempt to copy or otherwise obtain and
use its products or technology. These precautions may not prevent
misappropriation or infringement of eGain's intellectual property. In
addition, some of eGain's license agreements with certain customers and
partners require it to place the source code for its products into escrow.
These agreements typically provide that some party will have a limited, non-
exclusive right to access and use this code as authorized by the license
agreement if there is a bankruptcy proceeding instituted by or against eGain,
or if eGain materially breaches a contractual commitment to provide support
and maintenance to the party.

Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties may assert infringement
claims against eGain. eGain's products may infringe issued patents that may
relate to its products. In addition, because patent applications in the United
States are not publicly disclosed until the patent is issued, applications may
have been filed which relate to eGain's software products. eGain may be
subject to legal proceedings and claims from time to time in the ordinary
course of our 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 our business. This litigation
could also require eGain to develop non-infringing technology or enter into
royalty or license agreements. These royalty or license agreements, if
required, may not be available on acceptable terms, if at all, in the event of
a successful claim of infringement. eGain's failure or inability to develop
non-infringing technology or license the proprietary rights on a timely basis
would harm its business.

Employees

As of June 30, 2000, eGain had 630 full-time employees (including 43
employees from Nitman with whom eGain has signed a definitive acquisition
agreement), of which 189 were in services and support, 167 in product

11
<PAGE>

development, 158 in sales and marketing and 116 in finance and administration.
None of eGain's employees is covered by collective bargaining agreements.
While eGain believes its relations with its employees are good, eGain's future
performance depends in large part upon the continued service of its key
technical, sales and marketing, and senior management personnel, none of which
are bound by employment agreements requiring service for a defined period of
time. The loss of services of one or more of eGain's key employees could have
a material adverse effect on its business.

eGain may not be successful in attracting, training and retaining qualified
personnel, and the failure to do so, particularly in key functional areas such
as product development and sales, could materially and adversely affect
eGain's business, results of operations and financial condition. Competition
for such personnel in the computer software industry is intense, and in the
past eGain has experienced difficulty in recruiting qualified personnel,
especially developers and sales personnel. The demand for qualified personnel
is particularly acute in the San Francisco Bay area due to the large number of
software companies and the low level of unemployment in the region. eGain's
future success will likely depend in large part on its ability to attract and
retain experienced sales, technical, marketing and management personnel. eGain
expects competition for qualified personnel to remain intense, and it may not
succeed in attracting or retaining such personnel.

ITEM 2. PROPERTIES

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

<TABLE>
<CAPTION>
Approximate Lease
Location Principal Use Square Footage Expiration Date
-------- ---------------------- -------------- ---------------
<S> <C> <C> <C>
Sunnyvale,
California........... Corporate Offices 84,000 2005
Sunnyvale,
California........... Corporate Headquarters 46,000 2001
Novato, California.... Corporate Offices 29,000 2005
Slough, England....... European Headquarters 14,500 2002
</TABLE>

eGain believes its facilities are suitable for its uses and are generally
adequate to support the current level of operations for the next 12 months.
eGain may not be able to obtain lease extensions or replacement space for all
of its leased facilities upon the expiration of the current lease terms, at
rates not materially higher than those currently in effect. The demand for
real estate is particularly competitive in the San Francisco Bay area due to
the large number of companies in the region. eGain's inability to obtain
acceptable facilities to support its current and planned level of operations
could harm its business.

ITEM 3. LEGAL PROCEEDINGS

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

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

None.

12
<PAGE>

PART II

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

(a) Common Stock Price Range

Our Common Stock is quoted on The Nasdaq National Market under the symbol
"EGAN." The following table sets forth, for the periods indicated, high and
low sales prices for our Common Stock as reported by The Nasdaq National
Market.

<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended June 30, 2000
First Quarter............................................... $23.00 $18.25
Second Quarter.............................................. 57.75 19.38
Third Quarter............................................... 68.50 26.75
Fourth Quarter.............................................. 32.50 10.50
</TABLE>

(b) Holders

As of September 25, 2000, there were approximately 397 stockholders of
record and approximately 16,000 beneficial stockholders of our Common Stock.

We have never declared or paid any cash dividends on our Common Stock. We
currently anticipate that we will retain all available funds for use in the
operation of our business, including possible acquisitions, and do not intend
to pay any cash dividends in the foreseeable future.

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

None.

13
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

<TABLE>
<CAPTION>
Period from
inception
(September 10,
Year Ended June 30, 1997) to
-------------------- June 30,
2000 1999 1998
--------- --------- --------------
(In thousands,
except per share information)
<S> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenue:
Hosting ................................ $ 3,534 $ 137 $ --
License................................. 5,053 473 --
Services................................ 4,775 409 2
--------- --------- -------
Total revenue......................... 13,362 1,019 2
Cost of revenue--direct................. 14,550 1,772 52
Cost of revenue--acquisition related.... 103 -- --
--------- --------- -------
Gross profit (loss)................... (1,291) (753) (50)
Operating costs and expenses:
Research and development................ 11,752 2,096 314
Sales and marketing..................... 27,893 4,182 246
General and administrative.............. 7,211 1,235 214
Amortization of goodwill and other
intangible assets...................... 10,945 1,217 --
Amortization of deferred compensation... 10,553 1,817 58
Restructuring........................... 71 -- --
--------- --------- -------
Total operating costs and expenses.... 68,425 10,547 832
--------- --------- -------
Loss from operations...................... (69,716) (11,300) (882)
Interest income........................... 2,047 111 2
Interest and other expenses............... (762) (116) (58)
--------- --------- -------
Net loss.................................. $ (68,431) $ (11,305) $ (938)
========= ========= =======
Per share information:
Basic and diluted net loss per share...... $ (2.92) $ (2.14) $(17.78)
========= ========= =======
Shares used in computing basic and
diluted:
Net loss per share...................... 23,440 5,295 53
========= ========= =======
</TABLE>

<TABLE>
<CAPTION>
June 30,
------------------------
2000 1999 1998
-------- ------- ------
(In thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments..... $ 30,192 $ 1,265 $3,831
Working capital....................................... 11,909 (756) 3,691
Total assets.......................................... 175,900 23,965 3,990
Long-term debt........................................ 1,072 221 --
</TABLE>

14
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This report on Form 10-K and the documents incorporated herein by reference
contain forward-looking statements that involve risks and uncertainties. These
statements may be identified by the use of the words such as "anticipates,"
"believes," "continue," "could," "would," "estimates," "forecasts," "expects,"
"intends," "may," "might," "plans," "potential," "predicts," "should," or
"will" and similar expressions or the negative of those terms. The forward-
looking statements include, but are not limited to, the expansion of our
global market penetration and distribution capabilities, the integration of
our software products with databases, the development of our strategic
relationships, the factors influencing competition in our market, our limited
operating history, expected net losses, the adequacy of capital resources, the
continued need for online customer communications, the continued acceptance of
the hosted applications model, competitive threats and the overall volatility
of Internet-related technology companies. These statements related to our
future plans, product releases, objectives, expectations and intentions, and
the assumptions underlying or relating to any of these statements. Our actual
results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include those discussed in
"Factors That May Affect Future Results" and elsewhere in this document. These
forward-looking statements speak only as of the date hereof. eGain expressly
disclaims any obligation or understanding to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in eGain's expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.

Overview

eGain provides a multi-channel, online customer communications platform
designed to help companies meet the growing demands of Internet-based
communications. eGain markets software products that enable online customers
to communicate through each of the three main channels for online customer
communications--email, real-time and self service. These applications operate
on a shared platform that provides for common archiving, reporting and
knowledge management capabilities across these different channels. In
addition, eGain's platform integrates with leading call center switches, as
well as customer communications, database and ecommerce software applications,
to provide comprehensive information about each customer while permitting
companies to leverage existing investments and installed systems. Our
customers include traditional companies engaged in ecommerce, including 3Com,
DaimlerChysler, Fidelity Investments and Home Depot, and dedicated Internet
companies, such as AOL, CNBC.com, MP3.com amd Monster.com.

eGain was incorporated in September 1997. From inception to September 1998,
eGain's operating activities related primarily to planning and developing its
proprietary technological solutions, recruiting personnel, raising capital and
purchasing operating assets. In September 1998, eGain commenced commercial
shipment of eGain Mail, and established the eGain Hosted Network.

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

On September 28, 1999, eGain completed its initial public offering of
common stock, in which it sold 5.8 million shares of common stock (including
exercise of an over-allotment option in October 1999), at a price of $12.00
per share, which generated net proceeds of approximately $63.0 million.

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

15
<PAGE>

On May 15, 2000, eGain signed a letter of intent to acquire Nitman Software
Pvt. Ltd., an ecommerce software development company located in Pune, India.
In August 2000, eGain and Nitman executed definitive agreements in connection
with the acquisition, and we expect that the transaction, which is awaiting
final approval by the Indian government, will close in the second quarter of
fiscal 2001. eGain's acquisition of Nitman will enhance eGain's product
development capabilities.

On June 29, 2000, eGain acquired Inference Corporation in exchange for its
common stock and assumption of outstanding options to purchase Inference
common stock. The acquisition brings together eGain's strength in Web-native,
multi-channel customer communications with Inference's customer profiling and
contact center support capabilities. The acquisition also significantly
expands eGain's European business and adds new product and technology
components to the eGain Commerce platform. The acquisition was accounted for
as a purchase transaction.

eGain intends to make significant investments in product development and
technology to enhance its current products and services, develop new products
and services and further advance its solution offerings. In addition, an
important part of eGain's strategy is to expand its operations and employee
base and build sales, marketing, customer support, technical and operational
resources. eGain also intends to expand its strategic distribution, hosting
and solution relationships to add capabilities to its current product
offerings and to help market products to new customers. eGain has incurred
significant losses since its inception, and as of June 30, 2000, had an
accumulated deficit of approximately $80.7 million. eGain has not achieved
profitability on a quarterly or annual basis. eGain expects to continue to
incur substantial operating losses for the foreseeable future. In view of the
rapidly evolving nature of its business and limited operating history, eGain
believes that period to period comparisons of its revenue and operating
results are not meaningful and should not be relied upon as indications of
future performance.

Results of Operations

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

<TABLE>
<CAPTION>
Fiscal
Year Period from inception
------------ (September 10, 1997)
2000 1999 to June 30, 1998
---- ----- ---------------------
<S> <C> <C> <C>
Revenue:
Hosting................................. 26 % 14 % --
License................................. 38 % 46 % --
Services................................ 36 % 40 % 100 %
---- ----- ------
Total revenue......................... 100 % 100 % 100 %
Cost of revenue--direct................. 109 % 174 % 2600 %
Cost of revenue--acquisition related.... 1 % -- --
---- ----- ------
Gross profit (loss)................... (10)% (74)% (2500)%
Operating costs and expenses:
Research and development................ 88 % 206 % 15700 %
Sales and marketing..................... 208 % 410 % 12300 %
General and administrative.............. 54 % 121 % 10700 %
Amortization of goodwill and other
intangible assets...................... 82 % 120 % --
Amortization of deferred compensation... 79 % 178 % 2900 %
Restructuring........................... 1 % -- --
---- ----- ------
Total operating costs and expenses.... 512 % 1035 % 41600 %
---- ----- ------
Loss from operations...................... (522)% (1109)% (44100)%
==== ===== ======
</TABLE>

16
<PAGE>

Revenue

eGain recognizes revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), as amended. Revenue from hosting
services is recognized ratably over the period of the agreement as services
are provided. Hosting agreements are typically for a period of one year and
automatically renew unless either party cancels the agreement.

Under SOP 97-2, revenue from license fees is recognized when persuasive
evidence of an agreement exists, delivery of the product has occurred, no
significant eGain obligations remain, the fee is fixed or determinable and
collectibility is probable. License fee revenue in multiple element contracts
is recognized using the residual method when there is vendor specific
objective evidence of the fair value of all undelivered elements in an
arrangement but vendor specific objective evidence of fair value does not
exist for one or more of the delivered elements in an arrangement. Under the
residual method, the total fair value of the undelivered elements, as
indicated by vendor specific objective evidence, is deferred and the
difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered
elements, regardless of any separate prices stated within the contract for
each element. If sufficient vendor-specific objective evidence does not exist
for undelivered elements in an arrangement, all revenue from the arrangement
is deferred until the earlier of the point at which (a) such sufficient vendor
specific objective evidence does exist or (b) all elements of the arrangement
have been delivered.

Service revenue is primarily comprised from consulting fees, maintenance
agreements, and training. Service revenue from consulting and training, billed
on a time and materials basis, is recognized as performed. Service revenue on
fixed price service arrangements is recognized upon completion of specific
contractual milestone events, or based on an estimated percentage of
completion as work progresses. Maintenance agreements include the right to
software updates on an if-and-when-available basis. Maintenance revenue is
deferred and recognized on a straight-line basis as service revenue over the
life of the related agreement, which is typically one year.

In all cases, eGain assesses whether the service element of the arrangement
is essential to the functionality of the other elements of the arrangement. In
this determination, eGain focuses on whether the services include significant
alterations to the features and functionality of the software, whether the
services involve the building of complex interfaces, the timing of payments
and the existence of milestones. In making this determination, eGain considers
the following: (1) the relative fair value of the services compared to the
software, (2) the amount of time and effort subsequent to delivery of the
software until the interfaces or other modifications are completed, (3) the
degree of technical difficulty in building the interfaces or other
modifications, and (4) any contractual cancellation, acceptance, or
termination provisions for failure to complete the interfaces. In those
instances where eGain determines that the service elements are essential to
the other elements of the arrangement, eGain accounts for the entire
arrangement in accordance with Accounting Research Bulletin (ARB) No. 45,
"Long-Term Construction-Type Contracts," using the relevant guidance from SOP
97-2 and SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts."

Total revenue increased to $13.4 million in fiscal 2000 from $1.0 million
in fiscal 1999 and $2,000 in the period from inception (September 10, 1997) to
June 30, 1998. The increase in fiscal 2000 and 1999 was primarily due to an
increase in eGain's customer base. Factors that contributed to the increase
primarily include expanded direct sales and marketing efforts, expanded
channel partnerships and the introduction of new products. In fiscal 2000, no
single customer accounted for more than 10% of total revenue, while in fiscal
1999, two customers accounted for approximately 26% of total revenue. Although
total revenue has increased from prior periods, eGain cannot be certain that
it will continue to grow in future periods or that it will grow at similar
rates in the past.

Revenue from application hosting increased to $3.5 million in fiscal 2000
from $137,000 in fiscal 1999. The increase was primarily attributable to an
increase in the number of eGain's hosted customers. Hosting revenue
represented 26% and 14% of total revenue for fiscal 2000 and 1999,
respectively. There were no revenues from application hosting for the period
from inception (September 10, 1997) to June 30, 1998.

17
<PAGE>

Revenue from software license fees increased to $5.1 million in fiscal 2000
from $473,000 in fiscal 1999. The increase was primarily due to higher unit
sales volumes and higher average sales price per customer. License revenue
represented 38% and 46% of total revenue for fiscal 2000 and 1999,
respectively. There were no revenues from software license fees for the period
from inception (September 10, 1997) to June 30, 1998.

Revenue from consulting and support services increased to $4.8 million in
fiscal 2000 from $409,000 in fiscal 1999 and $2,000 in the period from
inception (September 10, 1997) to June 30, 1998. The increase was primarily
attributable to the increase in eGain's customer base. Services revenue
represented 36% and 40% for fiscal 2000 and 1999, respectively, and 100% for
the period from inception (September 10, 1997) to June 30, 1998.

Cost of Revenue

Cost of revenue includes personnel costs for eGain's hosting services,
consulting services and customer support. It also includes depreciation of
capital equipment used in eGain's hosted network, cost of third-party products
and lease costs paid to remote co-location centers. Cost of revenue increased
to $14.7 million in fiscal 2000 from $1.8 million in fiscal 1999 and $52,000
in the period from inception (September 10, 1997) to June 30, 1998. The
increase in fiscal 2000 and 1999 was primarily due to a significant increase
in headcount and the expansion of the eGain Hosted Network. In addition, eGain
recorded cost of revenue-acquisition related expenses of $103,000 in fiscal
2000, which related to amortization of developed technology resulting from our
business combinations in fiscal 2000. eGain expects cost of revenue to
increase in future periods as it continues to expand its business operations,
but at a slower rate than in previous periods.

Research and Development

Research and development expenses primarily consist of compensation and
benefits of engineering and quality assurance personnel and, to a lesser
extent, occupancy costs and related overhead. Research and development
expenses increased to $11.8 million in fiscal 2000 from $2.1 million in fiscal
1999 and $314,000 in the period from inception (September 10, 1997) to June
30, 1998. The increase in fiscal 2000 and 1999 was primarily attributable to
significant growth in the research and development organization associated
with development of new products. eGain expects research and development
expenses to increase in future periods as eGain continue to expand its product
line, but at a slower rate than in previous periods.

Sales and Marketing

Sales and marketing expenses primarily consist of compensation and benefits
of eGain's sales, marketing and business development personnel, advertising,
trade show and other promotional costs and, to a lesser extent, occupancy
costs and related overhead. Sales and marketing increased to $27.9 million in
fiscal 2000 from $4.2 million in fiscal 1999 and $246,000 in the period from
inception (September 10, 1997) to June 30, 1998. The increase in fiscal 2000
and 1999 was primarily due to a significant increase in headcount. In
addition, during fiscal 2000, there was increased spending on marketing
programs, increased growth in the European sales and marketing operations and
the launch of operations in Australia. eGain expects sales and marketing
expenses to increase in future periods as eGain continues to expand its
business operations, but at a slower rate than in previous periods.

General and Administrative

General and administrative expenses primarily consist of compensation and
benefits for eGain's finance, human resources, administrative and legal
services personnel, fees for outside professional services and, to a lesser
extent, occupancy costs and related overhead. General and administrative
expenses increased to $7.2 million in fiscal 2000 from $1.2 million in fiscal
1999 and $214,000 in the period from inception (September 10, 1997) to June
30, 1998. The increase in fiscal 2000 and 1999 was primarily due to an
increase in headcount. In addition, eGain incurred significant fees for
outside professional services in fiscal 2000. eGain expects general and
administrative expenses to increase in future periods as eGain continues to
expand its business operations, but at a slower rate than in previous periods.

18
<PAGE>

Amortization of Goodwill and Other Intangible Assets

Goodwill and other intangible assets represent the excess of the purchase
price over the estimated fair market value of tangible and intangible net
assets acquired in various business combinations. eGain recorded amortization
of goodwill and other intangible assets of $10.9 million in fiscal 2000. This
was based upon intangible assets totaling $131.9 million recorded in
connection with the acquisitions of Sitebridge Corporation on April 30, 1999,
Big Science Company on March 7, 2000 and Inference Corporation on June 29,
2000. eGain recorded amortization of goodwill and other intangible assets of
$1.2 million in fiscal 1999, which was based upon goodwill and other
intangible assets of $21.0 million recorded in connection with the acquisition
of Sitebridge.

Amortization of Deferred Compensation

In connection with the granting of stock options to employees and
consultants, eGain recorded deferred compensation totaling approximately $7.1
million in fiscal 2000, $10.6 million in fiscal 1999 and $234,000 in fiscal
1998. Deferred compensation is amortized on a graded vesting method over the
vesting period of the individual option grants. Deferred compensation in
connection with stock options granted to consultants has been determined in
accordance with Statement of Financial Accounting Standards No. 123. Stock
options granted to consultants are periodically revalued during their
respective vesting periods. eGain recorded amortization of deferred
compensation of $10.6 million and $1.8 million in fiscal 2000 and 1999,
respectively, and $58,000 in the period from inception (September 10, 1997) to
June 30, 1998.

Restructuring

For fiscal 2000, eGain incurred $71,000 of restructuring charges related to
the acquisition of Inference Corporation. eGain abandoned plans to occupy new
office space in the United Kingdom and expensed professional services fees
incurred in the design phase of the office space. As of June 30, 2000, the
liability remains unpaid.

Interest Income

Interest income consists of interest earned on cash, cash equivalents, and
short-term investments. Interest income increased to $2.0 million in fiscal
2000 from $111,000 in fiscal 1999 and $2,000 in the period from inception
(September 10, 1997) to June 30, 1998. The increase in fiscal 2000 was
primarily attributable to a significant increase in cash, cash equivalents and
short-term investments as a result of eGain's initial public offering in
September 1999, which generated net proceeds of approximately $63.0 million.

Interest and Other Expenses

Interest and other expenses increased to $762,000 in fiscal 2000 from
$116,000 in fiscal 1999 and $58,000 in the period from inception (September
10, 1997) to June 30, 1998. The increase in fiscal 2000 was primarily due to
an increase in interest expense resulting from the acquisition of capital
leases and an increase in borrowings. In addition, eGain experienced an
increase in state taxes and foreign currency transaction losses.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting
for Derivative Instruments and Hedging Activities, which will be effective for
the year ending June 30, 2001. This statement establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met.
eGain believes the adoption of SFAS 133 will not have a material effect on the
financial statements, since it currently does not invest in derivative
instruments and engage in hedging activities.

19
<PAGE>

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101. SAB 101 summarizes certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101 is required to be adopted by December 31, 2000. eGain is
currently evaluating the impact of SAB 101. Based on currently available
guidance, it does not anticipate the adoption of SAB 101 will have a material
impact on revenue recognition policies.

In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25." This interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events
that occur after either December 15, 1998 or January 12, 2000. To the extent
that this Interpretation covers events occurring during the period after
December 15, 1998 or January 12, 2000, but before the effective date of July
1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. eGain anticipates that the adoption of
FIN 44 will not have a material impact on its financial statements.

Liquidity and Capital Resources

Prior to eGain's initial public offering, it financed operations primarily
through the private placement of convertible preferred stock, a bank line of
credit, and financing for capital purchases. On September 28, 1999, eGain
completed its initial public offering of common stock, in which 5.8 million
shares of common stock were sold (including exercise of an over-allotment
option in October 1999), at a price of $12.00 per share. Proceeds to eGain
from the offering, before offering expenses, were approximately $69.0 million.

In August 2000, eGain raised $88.5 million through the issuance of
convertible preferred stock and warrants to purchase approximately 3.8 million
shares of common stock at $9.25 per share. The convertible preferred stock
liquidation value accretes at 6.75% per annum. eGain intends to use the net
proceeds from this private placement for general corporate purposes.

At June 30, 2000, cash and cash equivalents were $27.2 million an increase
of $25.9 million since June 30, 1999. Working capital at June 30, 2000 was
$11.9 million, an increase of $12.7 million since June 30, 1999. In fiscal
2000, eGain began to regularly invest excess funds in short-term money market
funds, commercial paper, and short-term notes. At June 30, 2000, short-term
investments held as available for sale totaled $2.3 million.

Net cash used in operating activities was $38.6 million and $7.8 million in
fiscal 2000 and 1999, respectively, and $676,000 in the period from inception
(September 10, 1997) to June 30, 1998. Cash used in operating activities in
each period was primarily the result of net losses, increases in accounts
receivable and other current and non-current assets, partially offset by
increases, in accounts payable, accrued compensation, other current and non-
current liabilities, deferred revenues, and non-cash charges.

Net cash used in investing activities was $4.4 million and $1.2 million in
fiscal 2000 and 1999, respectively, and $117,000 in the period from inception
(September 10, 1997) to June 30, 1998. Cash used in investing activities in
each period was primarily due to the purchases of property and equipment. In
addition, cash used in investing activities in fiscal 2000 was due to net
purchases of short-term, available-for-sale securities, offset by cash assumed
in the Inference acquisition.

Net cash provided by financing activities was $68.9 million and $6.4
million in fiscal 2000 and 1999, respectively, and $4.6 million in the period
from inception (September 10, 1997) to June 30, 1998. Cash provided by
financing activities in each of the periods was primarily due to the issuance
of preferred stock and common stock, including net proceeds of $63.0 million
from the initial public offering.

20
<PAGE>

eGain expects to devote substantial capital resources to expand the eGain
Hosted Network, to hire and expand the research and development organization,
to hire and expand the sales and marketing and general and administrative
organizations, to expand marketing programs, to establish additional
facilities worldwide and for other general corporate activities. eGain
believes that existing cash balances, in addition to the financing obtained in
August 2000, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months.

Quarterly Results of Operations

The following tables set forth certain unaudited consolidated statement of
operations data for the eight quarters ended June 30, 2000. This data has been
derived from unaudited consolidated financial statements that, in the opinion
of management, include all adjustments consisting only of normal recurring
adjustments, necessary for a fair presentation of such information when read
in conjunction with the Consolidated Financial Statements and Notes thereto.

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

<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue:
Hosting..................... $ -- $ 3 $ 18 $ 116 $ 276 $ 666 $ 988 $ 1,604
License..................... -- 79 201 193 571 648 1,268 2,566
Services.................... -- 65 34 310 541 1,069 1,047 2,118
------- ------- ------- ------- -------- -------- -------- --------
Total revenue............. -- 147 253 619 1,388 2,383 3,303 6,288
Cost of revenue--direct..... 143 296 460 873 2,202 3,107 4,138 5,103
Cost of revenue--
acquisition related........ -- -- -- -- -- -- -- 103
------- ------- ------- ------- -------- -------- -------- --------
Gross profit (loss)....... (143) (149) (207) (254) (814) (724) (835) 1,082
Operating costs and expenses:
Research and development.... 214 355 584 943 1,979 2,067 3,005 4,701
Sales and marketing......... 508 929 1,078 1,667 3,723 5,261 7,013 11,896
General and
administrative............. 225 205 296 509 1,261 1,745 1,779 2,426
Amortization of goodwill
and other
intangible assets.......... -- -- -- 1,217 1,826 1,826 2,614 4,679
Amortization of deferred
compensation............... 89 190 387 1,151 3,008 2,899 2,944 1,702
Restructuring............... -- -- -- -- -- -- -- 71
------- ------- ------- ------- -------- -------- -------- --------
Total operating costs and
expenses................. 1,036 1,679 2,345 5,487 11,797 13,798 17,355 25,475
------- ------- ------- ------- -------- -------- -------- --------
Loss from operations......... (1,179) (1,828) (2,552) (5,741) (12,611) (14,522) (18,190) (24,393)
Non-operating income
(expense), net.............. 24 2 (18) (13) (76) 704 461 196
------- ------- ------- ------- -------- -------- -------- --------
Net loss..................... $(1,155) $(1,826) $(2,570) $(5,754) $(12,687) $(13,818) $(17,729) $(24,197)
======= ======= ======= ======= ======== ======== ======== ========
Per share information:
Basic and diluted net loss
per share.................. $ (0.31) $ (0.38) $ (0.40) $ (0.98) $ (1.22) $ (0.51) $ (0.63) $ (0.85)
======= ======= ======= ======= ======== ======== ======== ========
Shares used in computing
basic and diluted net loss
per share.................. 3,781 4,819 6,445 5,878 10,389 26,974 27,986 28,409
======= ======= ======= ======= ======== ======== ======== ========
</TABLE>

21
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

eGain incurred net losses of approximately $68.4 million for the fiscal
year ended June 30, 2000. As of June 30, 2000, eGain had an accumulated
deficit of approximately $80.7 million. eGain expects to continue to incur net
losses for the foreseeable future. If eGain continues to incur net losses, it
may not be able to increase its number of employees or its investment in
capital equipment, sales, marketing, customer support and research and
development programs in accordance with its present plans. eGain does not know
when or if it will become profitable. If eGain does not become profitable
within the timeframe expected by financial analysts or investors, the market
price of eGain common stock will likely decline. If eGain does achieve
profitability, it may not sustain or increase profitability in the future.

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

eGain has spent heavily on technology and infrastructure development. eGain
expects to continue to spend substantial financial and other resources on
developing and introducing product and service offerings, and expanding its
sales, marketing and customer support organizations and operating
infrastructure. eGain expects that its operating expenses will continue to
increase in absolute dollars and may increase as a percentage of revenue. If
eGain's revenue does not correspondingly increase, its business and operating
results could suffer.

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

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

. the growth rate of ecommerce;

. demand for ecommerce customer communications applications;

. eGain's ability to attract and retain customers and maintain customer
satisfaction;

. eGain's ability to upgrade, develop and maintain its systems and
infrastructure;

. eGain's ability to develop new products and services;

. the amount and timing of operating costs and capital expenditures
relating to expansion of eGain's business and infrastructure;

. technical difficulties or system outages;

. eGain's ability to attract and retain qualified personnel with software
and Internet industry expertise, particularly sales and marketing
personnel;

. the announcement or introduction of new or enhanced products and
services by eGain's competitors;

. changes in eGain's pricing policies and those of its competitors;

. litigation relating to proprietary rights;

. seasonal trends in technology purchases;

. timing of large contracts;

22
<PAGE>

. integration of newly acquired businesses and technologies as planned,
including eGain's purchase of Inference;

. changes in market conditions limiting eGain's ability to raise capital;

. general business conditions in the industry;

. failure to increase eGain's international sales; and

. governmental regulation regarding the Internet and ecommerce in
particular.

eGain bases its expense levels in part on its expectations regarding future
revenue levels. If eGain's revenue for a particular quarter is lower than it
expects, it may be unable to proportionately reduce its operating expenses for
that quarter. For example, eGain's hosting agreements are typically for a
period of one year and automatically renew unless terminated by either party
with 30 days' prior notice. In addition, some of eGain's hosting agreements
give the customer the right to terminate the contract at any time. Period-to-
period comparisons of eGain's operating results are not a good indication of
its future performance.

eGain must compete successfully in the ecommerce customer communications
market

The ecommerce customer communications market is relatively new, growing
rapidly, and intensely competitive. There are no substantial barriers to entry
in this market, and established or new entities may enter this market in the
near future. eGain competes with companies that develop and maintain
internally developed customer communications software applications. eGain also
competes directly with companies that provide licensed software products to
assist in handling customer communications, including AskJeeves, Inc.,
Brightware, Inc., Broadbase Software, Inc., E.Piphany, Inc., Kana
Communications, Inc., Primus Knowledge Solutions, Inc., Quintus Corp., and
WebLine Communications Corp., a subsidary of Cisco Systems, Inc. In addition,
some of eGain's competitors who currently offer licensed software products are
now beginning to offer hosted approaches. eGain also faces actual or potential
competition from larger, front office software companies such as Clarify,
Inc., a subsidiary of Nortel Networks Corp., PeopleSoft, Inc. and Seibel
System, Inc. Furthermore, established enterprise software companies, including
Hewlett-Packard Company, IBM, Microsoft Corporation and similar companies, may
seek to leverage their existing relationships and capabilities to offer
ecommerce customer communications applications.

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

eGain's business is premised on novel business assumptions that are largely
untested. Customer communications historically have been conducted primarily
in person or over the telephone. eGain's business model assumes that companies
engaged in ecommerce will continue to elect to communicate with customers
mainly through the Internet rather than by telephone. eGain's business model
also assumes that many companies recognize the benefits of a hosted delivery
model and will seek to have their customer communications applications hosted
by eGain. If any of these assumptions is incorrect, eGain's business will be
seriously harmed.

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

eGain may review acquisition or investment prospects that might complement
its current business or enhance its technological capabilities. Integrating
any newly acquired businesses or their technologies or products may be
expensive and time-consuming. For example, eGain acquired Inference
Corporation in June 2000. There can be no assurance that eGain can effectively
integrate Inference's products, including k-Commerce Support Enterprise and k-
Commerce Sales, successfully with the eGain platform. To finance any
acquisitions, it may be necessary for eGain to raise additional funds through
public or private financings. Additional funds may not be available on terms
that are favorable to eGain, if at all, and, in the case of equity financings,
may result in dilution to eGain's existing stockholders. eGain may not be able
to operate acquired businesses profitably or

23
<PAGE>

otherwise implement its growth strategy successfully. If eGain is unable to
integrate newly acquired entities or technologies effectively, eGain's
operating results could suffer. Future acquisitions by eGain could also result
in large and immediate write-offs, incurrence of debt and contingent
liabilities, or amortization of expenses related to goodwill and other
intangibles, any of which could harm eGain's operating results.

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

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

If eGain fails to expand its sales, marketing and customer support activities,
it may be unable to expand its business

If eGain does not successfully expand its sales, marketing and customer
support activities, eGain may not be able to expand its business, and eGain's
common stock price could decline. The complexity of eGain's ecommerce customer
communications platform and related products and services requires it to have
highly trained sales, marketing and customer support personnel, to educate
prospective customers regarding the use and benefits of eGain's services, and
provide effective customer support. With eGain's relatively brief operating
history and its plans for expansion, eGain has considerable need to recruit,
train, and retain qualified staff. Any delays or difficulties eGain encounters
in these staffing efforts could impair its ability to attract new customers
and to enhance its relationships with existing customers. This in turn would
adversely affect the timing and extent of eGain's revenue. Because many of
eGain's current sales, marketing and customer support personnel have recently
joined eGain and have limited experience working together, eGain's sales,
marketing and customer support organization may not be able to compete
successfully against bigger and more experienced organizations of its
competitors.

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

eGain's success will depend on the skills, experience and performance of
eGain's senior management, engineering, sales, marketing and other key
personnel, many of whom have worked together for only a short period of time.
Recently, eGain has hired a number of senior executives. The loss of the
services of any of eGain's senior management or other key personnel, including
eGain's Chief Executive Officer and co-founder, Ashutosh Roy, and eGain's
President and co-founder, Gunjan Sinha, could harm its business. Additionally,
the services of Charles Jepson, former Inference President and Chief Executive
Officer, will be needed during the integration of Inference's operations.
eGain does not have employment agreements with, or life insurance policies on,
most of its key employees. Most of these employees may terminate their
employment with eGain at any time. eGain's success also will depend on its
ability to recruit, retain and motivate other highly skilled engineering,
sales, marketing and other personnel. Competition for these personnel is
intense, especially in the San Francisco Bay Area, and eGain has had
difficulty hiring employees in its desired timeframes. In particular, eGain
may be unable to hire a sufficient number of qualified software engineers and
information technology professionals. If eGain fails to retain and recruit
necessary engineering, sales and marketing, customer support or other
personnel, eGain's business and its ability to develop new products and
services and to provide acceptable levels of customer service could suffer. In
addition, companies in the software industry whose employees accept positions
with competitors frequently claim that competitors have engaged in unfair
hiring practices. eGain could incur substantial costs in defending itself
against any of these claims, regardless of the merits of such claims.

24
<PAGE>

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

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

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

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

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

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

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

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

A fundamental requirement for online communications and transactions is the
secure transmission of confidential information over public networks. Third
parties may attempt to breach eGain's security or that of eGain's customers.
eGain may be liable to its customers for any breach in its security and any
breach could harm its business and reputation. Although eGain has implemented
network security measures, eGain's servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays or loss of data. eGain may be required to expend
significant capital and other resources to license encryption technology and
additional technologies to protect against security breaches or to alleviate
problems caused by any breach.

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

eGain's sales cycle for its ecommerce customer communications applications
can be six months or more, and varies substantially from customer to customer.
While eGain's potential customers are evaluating eGain's products before
placing orders, eGain may incur substantial sales and marketing expenses and
spend significant management effort. Consequently, if revenue forecasted from
a specific customer for a particular quarter is not realized in that quarter,
eGain may incur significant expenses that are not offset by corresponding
revenue.

25
<PAGE>

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

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

. unexpected changes in international regulatory requirements;

. difficulties and costs of staffing and managing international
operations;

. differing technology standards;

. difficulties in collecting accounts receivable and longer collection
periods;

. political and economic instability;

. fluctuations in currency exchange rates;

. imposition of currency exchange controls;

. potentially adverse tax consequences;

. reduced protection for intellectual property rights in foreign
countries; and

. general business conditions.

eGain's recent growth has placed a strain on its resources and if eGain fails
to manage its future growth, its business could suffer

eGain recently began to expand its operations rapidly and intends to
continue this expansion. The completed acquisitions of Inference and Big
Science are two examples of this expansion. This rapid expansion has placed,
and is expected to continue to place, a significant strain on eGain's
managerial, operational and financial resources. To manage further growth,
eGain will need to improve or replace its existing operational, customer
support and financial systems, procedures and controls. Any failure by eGain
to properly manage these system and procedural transitions could impair its
ability to attract and service customers, and could cause it to incur higher
operating costs and delays in the execution of its business plan. eGain will
also need to continue the expansion of its operations and employee base.
eGain's management may not be able to hire, train, retain, motivate and manage
required personnel. In addition, eGain's management may not be able to
successfully identify, manage and exploit existing and potential market
opportunities.

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

eGain faces risks related to the ability of the eGain Hosted Network to
operate with higher activity levels while maintaining expected performance. As
the volume and complexity of ecommerce customer communications increase, eGain
will need to expand its systems and hosted network infrastructure. The
expansion and adaptation of eGain's network infrastructure will require
substantial financial, operational and management resources. Customer demand
for eGain's products and services could be greatly reduced if eGain fails to
maintain high capacity data transmission. In addition, as eGain upgrades its
network, eGain is likely to encounter equipment or software incompatibility.
eGain may not be able to expand or adapt the eGain Hosted Network to meet
additional demand or eGain's customers' changing requirements in a timely
manner or at all.

26
<PAGE>

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

eGain's customers have in the past experienced some interruptions with the
eGain Hosted Network. eGain believes that these interruptions will continue to
occur from time to time. These interruptions could be due to hardware and
operating system failures. eGain expects a substantial portion of its revenue
to be derived from customers who use the eGain Hosted Network. As a result,
eGain's business will suffer if it experiences frequent or long system
interruptions that result in the unavailability or reduced performance of the
eGain Hosted Network or reduce eGain's ability to provide remote management
services. eGain expects to experience occasional temporary capacity
constraints due to sharply increased traffic, which may cause unanticipated
system disruptions, slower response times, impaired quality and degradation in
levels of customer service. If this were to continue to happen, eGain's
business and reputation could be seriously harmed.

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

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

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

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

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

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

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

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

27
<PAGE>

be granted, or whether they will provide the protection eGain desires, or
whether they will subsequently be challenged or invalidated. It is difficult
to monitor unauthorized use of technology, particularly in foreign countries,
where the laws may not protect eGain's proprietary rights as fully as in the
United States. Furthermore, eGain's competitors may independently develop
technology similar to eGain's technology.

Despite eGain's efforts to protect its proprietary rights through
confidentiality and license agreements, unauthorized parties may attempt to
copy or otherwise obtain and use eGain's products or technology. These
precautions may not prevent misappropriation or infringement of eGain's
intellectual property. In addition, eGain routinely requires its employees,
customers, and potential business partners to enter into confidentiality and
nondisclosure agreements before eGain will disclose any sensitive aspects of
its products, technology, or business plans. In addition, eGain requires
employees to agree to surrender to eGain any proprietary information,
inventions or other intellectual property they generate or come to possess
while employed by eGain. Despite eGain's efforts to protect its proprietary
rights through confidentiality and license agreements, unauthorized parties
may attempt to copy or otherwise obtain and use its products or technology.
These precautions may not prevent misappropriation or infringement of its
intellectual property. In addition, some of eGain's license agreements with
certain customers and partners require eGain to place the source code for its
products into escrow. These agreements typically provide that some party will
have a limited, non-exclusive right to access and use this code as authorized
by the license agreement if there is a bankruptcy proceeding instituted by or
against eGain, or if eGain materially breaches a contractual commitment to
provide support and maintenance to the party.

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

Third parties may infringe or misappropriate eGain's copyrights, trademarks
and similar proprietary rights. In addition, other parties may assert
infringement claims against eGain. Although eGain has received no notice of
any alleged infringement, eGain's products may infringe issued patents that
may relate to its products. In addition, because the contents of patent
applications in the United States are not publicly disclosed until the patent
is issued, applications may have been filed which relate to eGain's software
products. eGain may be subject to legal proceedings and claims from time to
time in the ordinary course of its business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties. Intellectual property litigation is expensive and time-consuming and
could divert management's attention away from running eGain's business. This
litigation could also require eGain to develop non-infringing technology or
enter into royalty or license agreements. These royalty or license agreements,
if required, may not be available on acceptable terms, if at all, in the event
of a successful claim of infringement. eGain's failure or inability to develop
non-infringing technology or license the proprietary rights on a timely basis
would harm its business.

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

To the extent eGain needs to license third-party technologies, it may be
unable to do so on commercially reasonable terms or at all. In addition, eGain
may fail to successfully integrate any licensed technology into its products
or services. Third-party licenses may expose eGain to increased risks,
including risks associated with the integration of new technology, the
diversion of resources from the development of eGain's own proprietary
technology, and eGain's inability to generate revenue from new technology
sufficient to offset associated acquisition and maintenance costs. eGain's
inability to obtain any of these licenses could delay product and service
development until equivalent technology can be identified, licensed and
integrated. This in turn would harm eGain's business and operating results.

The conversion of our preferred shares and the exercise of the related
warrants could result in substantial numbers of additional shares being issued
if our market price declines.

On August 8, 2000, eGain issued 35.11 shares of series A cumulative
convertible preferred stock and 849.89 shares of series B cumulative
convertible preferred stock, and warrants to purchase approximately

28
<PAGE>

3.8 million shares of eGain common stock with a current warrant exercise price
of $9.2517 per share. The series A shares are convertible into common stock
and, subject to stockholder approval, the series B shares are convertible into
series A shares. The series A shares are convertible into common stock at a
conversion price of $9.2517 per share. However, if the average market price of
eGain common stock for the 20 trading days preceding August 8, 2001 is less
than $9.2517, the conversion price will be adjusted to a price equal to 122%
of such average trading price; provided that in no event shall the conversion
price be adjusted to less than $5.6875 per share. Accordingly, a decrease in
the price of eGain common stock in August 2001 will increase the number of
shares of common stock issuable upon conversion of the preferred stock.

To the extent the preferred shares are converted or dividends on the
preferred shares are paid in shares of common stock rather than cash, a
significant number of shares of common stock may be sold into the market, such
sales could decrease the price of our common stock and encourage short sales
by selling securityholders (subject to the price floor described above) or
others. Any such short sales could place further downward pressure on the
price of eGain common stock, requiring the issuance of a greater number of
shares of eGain common stock upon future conversions of the preferred shares.

eGain's stock price may be volatile

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

. actual or anticipated fluctuations in eGain's operating results;

. changes in or failure to meet securities analysts' expectations;

. announcements of technological innovations;

. introduction of new services by eGain or its competitors;

. developments with respect to intellectual property rights;

. conditions and trends in the Internet and other technology industries;
and

. general market conditions.

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

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

eGain may need additional capital, and raising additional capital may dilute
existing stockholders

eGain believes that its existing capital resources will enable it to
maintain its current and planned operations for the next 12 months. However,
eGain may choose to, or be required to, raise additional funds due to
unforeseen circumstances. If eGain's capital requirements vary materially from
those currently planned, it may require additional financing sooner than
anticipated. This financing may not be available in sufficient amounts or on
terms acceptable to eGain and may be dilutive to existing stockholders.

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

. longer operating histories;

29
<PAGE>

. larger customer bases;

. greater brand recognition;

. more diversified lines of products and services; and

. significantly greater financial, marketing and other resources.

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

. undertake more extensive marketing campaigns;

. adopt more aggressive pricing policies; and

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

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

eGain depends on broad market acceptance of Web-based ecommerce customer
communications applications

eGain depends on the widespread acceptance and use of Web-based customer
communications applications as an effective solution for businesses seeking to
manage high volumes of customer communication over the Internet. eGain cannot
estimate the size or growth rate of the potential market for its product and
service offerings, and does not know whether its products and services will
achieve broad market acceptance. The market for Web-based ecommerce customer
communications is new and rapidly evolving, and concerns over the security and
reliability of online transactions, the privacy of users and quality of
service or other issues may inhibit the growth of the Internet and commercial
online services. If the market for ecommerce customer communications
applications fails to grow or grows more slowly than eGain currently
anticipates, its business will be seriously harmed.

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

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

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

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

. the Internet infrastructure may be unable to support the demands placed
on it;

. the performance and reliability of the Internet may decline as usage
grows;

30
<PAGE>

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

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

Because eGain provides its customer communications applications to companies
conducting business over the Internet, eGain's business could suffer if
efficient transmission of data over the Internet is interrupted

The recent growth in the use of the Internet has caused frequent
interruptions and delays in accessing the Internet and transmitting data over
the Internet. Because eGain provides Internet-based ecommerce customer
communications applications, interruptions or delays in Internet transmissions
will harm eGain customers' ability to receive and respond to email messages.
Therefore, eGain's market depends on improvements being made to the entire
Internet infrastructure to alleviate overloading and congestion.

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

Governmental regulation may impair the growth of the Internet or commercial
online services. This could decrease the demand for eGain's products and
services, increase its cost of doing business or otherwise harm its business
and operating results. Although there are currently few laws and regulations
directly applicable to the Internet and the use of the Internet as a
commercial medium, a number of laws have been proposed involving the Internet.
These proposed laws include laws addressing user privacy, pricing, content,
copyrights, distribution, antitrust, and characteristics and quality of
products and services. Further, the growth and development of the market for
commercial online transactions may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies engaged
in ecommerce. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve.

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

As a provider of ecommerce customer communications applications, eGain
faces potential liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the actions of eGain
customers or others using the eGain Hosted Network. This liability could
result from the nature and content of the communications transmitted by eGain
customers through the eGain Hosted Network. eGain does not and cannot screen
all of the communications generated by its customers, and eGain could be
exposed to liability with respect to this content. Furthermore, some foreign
governments have enforced laws and regulations related to content distributed
over the Internet that are more strict than those currently in place in the
United States.

31
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

eGain develops products in the United States and India and sells these
products internationally. Generally, sales are made in local currency. As a
result, eGain's financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. To date, the effect of changes in foreign currency exchange rates on
revenues and operating expenses has not been material. eGain does not
currently use derivative instruments to hedge against foreign exchange risk.

eGain's exposure to market rate risk for changes in interest rates relates
primarily to its investment portfolio. eGain's investments consist primarily
of commercial paper and money market funds, which have an average fixed rate
of 5.5% to 6.0%, and have maturities of six months or less. eGain does not
consider its cash equivalents to be subject to interest rate risk due to their
short maturities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

32
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2000 and 1999

33
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Report............................................ 35

Consolidated Financial Statements:

Consolidated Balance Sheets, June 30, 2000 and 1999 .................. 36

Consolidated Statements of Operations for the periods ended June 30,
2000, 1999 and 1998 ................................................. 37

Consolidated Statements of Stockholders' Equity for the periods ended
June 30, 2000, 1999 and 1998 ........................................ 38

Consolidated Statements of Cash Flows for the periods ended June 30,
2000, 1999 and 1998 ................................................. 40

Notes to Consolidated Financial Statements............................ 41
</TABLE>

34
<PAGE>

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of
eGain Communications Corporation

We have audited the accompanying consolidated balance sheets of eGain
Communications Corporation as of June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended June 30, 2000, and from the
period from inception (September 10, 1997) through June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of eGain
Communications Corporation at June 30, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended June 30, 2000, and for the period from inception (September 10,
1997) to June 30, 1998, in conformity with accounting principles generally
accepted in the United States.

/s/ Ernst & Young LLP

Palo Alto, California
July 28, 2000, except for Note 9
as to which the date is August 28, 2000

35
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
June 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................ $ 27,201 $ 1,265
Short-term investments, held as available for sale....... 2,991 --
Accounts receivable, less allowances for doubtful
accounts of $714 and $32 at June 30, 2000 and 1999,
respectively............................................ 8,589 705
Prepaid and other current assets......................... 4,456 513
-------- --------
Total current assets................................... 43,237 2,483
Property and equipment, net................................ 11,690 1,133
Goodwill and other intangible assets, net.................. 119,629 20,195
Other assets............................................... 1,344 154
-------- --------
$175,900 $ 23,965
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Bank borrowings--line of credit.......................... $ 1,000 $ 1,000
Accounts payable......................................... 5,305 684
Accrued compensation..................................... 8,509 343
Accrued liabilities...................................... 4,434 475
Accrued acquisition-related costs........................ 3,496 --
Deferred revenue......................................... 7,286 302
Current portion of capital lease obligations............. 1,116 --
Current portion of notes payable......................... 182 435
-------- --------
Total current liabilities.............................. 31,328 3,239
Capital lease obligations, net of current portion.......... 729 --
Notes payable, net of current portion...................... 343 221
Other long-term liabilities................................ 129 22
-------- --------
Total liabilities...................................... 32,529 3,482

Commitments

Stockholders' equity:
Convertible preferred stock, $0.001 par value, none and
10,036 shares authorized at June 30, 2000 and 1999, none
and 9,566 shares issued and outstanding at June 30, 2000
and 1999................................................ -- 10
Preferred stock: $0.001 par value; 5,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, $0.001 par value, 50,000 shares authorized,
35,841 and 10,947 shares issued and outstanding at June
30, 2000 and 1999....................................... 36 11
Additional paid-in capital............................... 231,475 41,804
Notes receivable from stockholders....................... (475) (144)
Deferred stock compensation.............................. (6,798) (8,956)
Accumulated other comprehensive income (loss)............ (193) 1
Accumulated deficit...................................... (80,674) (12,243)
-------- --------
Total stockholders' equity............................. 143,371 20,483
-------- --------
$175,900 $ 23,965
======== ========
</TABLE>

See accompanying notes.

36
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)

<TABLE>
<CAPTION>
Period from
Year Ended June inception
30, (September 10,
------------------ 1997) to
2000 1999 June 30, 1998
-------- -------- --------------
<S> <C> <C> <C>
Revenue:
Hosting................................... $ 3,534 $ 137 $ --
License................................... 5,053 473 --
Services.................................. 4,775 409 2
-------- -------- -------
Total revenue........................... 13,362 1,019 2
Cost of revenue--direct................... 14,550 1,772 52
Cost of revenue--acquisition related...... 103 -- --
-------- -------- -------
Gross profit (loss)..................... (1,291) (753) (50)
Operating costs and expenses:
Research and development.................. 11,752 2,096 314
Sales and marketing....................... 27,893 4,182 246
General and administrative................ 7,211 1,235 214
Amortization of goodwill and other
intangible assets........................ 10,945 1,217 --
Amortization of deferred compensation..... 10,553 1,817 58
Restructuring............................. 71 -- --
-------- -------- -------
Total operating costs and expenses...... 68,425 10,547 832
-------- -------- -------
Loss from operations........................ (69,716) (11,300) (882)
Interest income............................. 2,047 111 2
Interest and other expenses................. (762) (116) (58)
-------- -------- -------
Net loss.................................... $(68,431) $(11,305) $ (938)
======== ======== =======
Per share information:
Basic and diluted net loss per share...... $ (2.92) $ (2.14) $(17.78)
======== ======== =======
Shares used in computing basic and diluted
net loss per share....................... 23,440 5,295 53
======== ======== =======
</TABLE>

See accompanying notes.

37
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

<TABLE>
<CAPTION>
Convertible Notes Accumulated
Preferred Stock Common Stock Additional Receivable Deferred Other Total
--------------- ------------- Paid-in From Stock Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Income (Loss) Deficit Equity
-------- ------ ------ ------ ---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders......... -- $ -- 8,000 $ 8 $ 287 $ -- $ -- $ -- $ -- $ 295
Issuance of
Series A
convertible
preferred stock
for cash and
conversion of
notes, net of
issuance costs of
$26.............. 5,406 5 -- -- 4,324 -- -- -- -- 4,329
Interest expense
from outstanding
warrants......... -- -- -- -- 57 -- -- -- -- 57
Deferred stock
compensation..... -- -- -- -- 234 -- (234) -- -- --
Amortization of
deferred stock
compensation..... -- -- -- -- -- -- 58 -- -- 58
Net loss......... -- -- -- -- -- -- -- -- (938) (938)
-------- ---- ------ ---- ------- ----- -------- ---- -------- --------
BALANCES AT JUNE
30, 1998......... 5,406 5 8,000 8 4,902 -- (176) -- (938) 3,801
Issuance of
Series B
convertible
preferred stock
for cash, net of
issuance costs of
$25.............. 2,550 3 -- -- 5,073 -- -- -- -- 5,076
Issuance of
common stock upon
exercise of
employee stock
options and other
issuances under
the 1998 Stock
Plan, net of
repurchases...... -- -- 1,491 2 166 (144) -- -- -- 24
Issuance of
Series C
preferred and
common stock in
connection with
Sitebridge
Corporation
acquisition...... 1,610 2 1,456 1 21,008 -- -- -- -- 21,011
Interest expense
from outstanding
warrants......... -- -- -- -- 36 -- -- -- -- 36
Deferred stock
compensation..... -- -- -- -- 10,619 -- (10,619) -- -- --
Amortization of
deferred stock
compensation..... -- -- -- -- -- -- 1,839 -- -- 1,839
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- (11,305) (11,305)
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- 1 -- 1
Comprehensive
loss............. -- -- -- -- -- -- -- -- -- --
-------- ---- ------ ---- ------- ----- -------- ---- -------- --------
BALANCES AT JUNE
30, 1999......... 9,566 $ 10 10,947 $ 11 $41,804 $(144) $ (8,956) $ 1 $(12,243) $ 20,483
<CAPTION>
Comprehensive
Loss
-------------
<S> <C>
Issuance of
common stock to
founders.........
Issuance of
Series A
convertible
preferred stock
for cash and
conversion of
notes, net of
issuance costs of
$26..............
Interest expense
from outstanding
warrants.........
Deferred stock
compensation.....
Amortization of
deferred stock
compensation.....
Net loss.........
BALANCES AT JUNE
30, 1998.........
Issuance of
Series B
convertible
preferred stock
for cash, net of
issuance costs of
$25..............
Issuance of
common stock upon
exercise of
employee stock
options and other
issuances under
the 1998 Stock
Plan, net of
repurchases......
Issuance of
Series C
preferred and
common stock in
connection with
Sitebridge
Corporation
acquisition......
Interest expense
from outstanding
warrants.........
Deferred stock
compensation.....
Amortization of
deferred stock
compensation.....
Comprehensive
loss:
Net loss........ $(11,305)
Foreign currency
translation
adjustments..... 1
Comprehensive
loss............. $(11,304)
=============
BALANCES AT JUNE
30, 1999.........
</TABLE>

See accompanying notes.

38
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
(in thousands)

<TABLE>
<CAPTION>
Convertible
Preferred Notes Accumulated
Stock Common Stock Additional Receivable Deferred Other Total
--------------- ------------- Paid-in From Stock Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Income (Loss) Deficit Equity
------- ------ ------ ------ ---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE
30, 1999......... 9,566 $ 10 10,947 $11 $ 41,804 $(144) $(8,956) $ 1 $(12,243) $ 20,483
Issuance of
Series D
preferred stock
for cash......... 652 -- -- -- 5,152 -- -- -- -- 5,152
Issuance of
preferred stock
upon exercise of
warrants......... 289 -- -- -- 108 -- -- -- -- 108
Conversion of
preferred stock
to common stock
under initial
public offering.. (10,507) (10) 10,507 10 -- -- -- -- -- --
Issuance of
common stock
under the initial
public offering,
net of issuance
costs of $5,983
................. -- -- 5,750 6 63,011 -- -- -- -- 63,017
Issuance of
common stock upon
exercise of
employee stock
options and other
issuances under
the 1998 Stock
Plan, net of
repurchases...... -- -- 1,746 2 489 (331) -- -- -- 160
Issuance of
common stock
under employee
stock purchase
plan............. -- -- 75 -- 766 -- -- -- -- 766
Issuance of
common stock upon
exercise of
warrants......... -- -- 175 -- 141 -- -- -- -- 141
Issuance of
common stock in
connection with
Big Science
Company
acquisition...... -- -- 740 1 32,258 -- -- -- -- 32,259
Issuance of
common stock in
connection with
Inference
Corporation
acquisition...... -- -- 5,901 6 79,351 -- -- -- -- 79,357
Deferred stock
compensation..... -- -- -- -- 7,194 -- (7,194) -- -- --
Amortization of
deferred stock
compensation..... -- -- -- -- 1,201 -- 9,352 -- -- 10,553
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- (68,431) (68,431)
Unrealized loss
on debt and
equity
securities...... -- -- -- -- -- -- -- (163) -- (163)
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- (31) -- (31)
Comprehensive
loss............. -- -- -- -- -- -- -- -- -- --
------- ---- ------ --- -------- ----- ------- ----- -------- --------
BALANCES AT JUNE
30, 2000......... -- $ -- 35,841 $36 $231,475 $(475) $(6,798) $(193) $(80,674) $143,371
======= ==== ====== === ======== ===== ======= ===== ======== ========
<CAPTION>
Comprehensive
Loss
-------------
<S> <C>
BALANCES AT JUNE
30, 1999.........
Issuance of
Series D
preferred stock
for cash.........
Issuance of
preferred stock
upon exercise of
warrants.........
Conversion of
preferred stock
to common stock
under initial
public offering..
Issuance of
common stock
under the initial
public offering,
net of issuance
costs of $5,983
.................
Issuance of
common stock upon
exercise of
employee stock
options and other
issuances under
the 1998 Stock
Plan, net of
repurchases......
Issuance of
common stock
under employee
stock purchase
plan.............
Issuance of
common stock upon
exercise of
warrants.........
Issuance of
common stock in
connection with
Big Science
Company
acquisition......
Issuance of
common stock in
connection with
Inference
Corporation
acquisition......
Deferred stock
compensation.....
Amortization of
deferred stock
compensation.....
Comprehensive
loss:
Net loss........ $(68,431)
Unrealized loss
on debt and
equity
securities...... (163)
Foreign currency
translation
adjustments..... (31)
-------------
Comprehensive
loss............. $(68,625)
=============
BALANCES AT JUNE
30, 2000.........
</TABLE>

See accompanying notes.

39
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Period from
Year Ended inception
June 30, (September 10,
------------------ 1997) to June 30,
2000 1999 1998
-------- -------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(68,431) $(11,305) $ (938)
Adjustments to reconcile net loss to
net cash used in
operating activities:
Depreciation......................... 1,887 279 7
Amortization of goodwill and other
intangible assets................... 11,048 1,217 --
Amortization of deferred
compensation........................ 10,553 1,817 58
Purchased in-process research and
development......................... 345 -- --
Interest expense associated with
warrants............................ 22 36 57
Changes in operating assets and
liabilities, net of effects from
acquisitions of Inference and Big
Science:
Accounts receivable................ (3,102) (654) --
Prepaid and other current assets... (2,660) (456) (49)
Other assets....................... (761) (137) --
Accounts payable................... 3,700 418 188
Accrued compensation............... 4,588 268 1
Other accrued liabilities.......... 2,012 410 --
Deferred revenue................... 2,145 302 --
Other liabilities.................. 102 22 --
-------- -------- ------
Net cash used in operating activities... (38,552) (7,783) (676)
Cash flows from investing activities:
Purchases of property and equipment... (8,652) (1,259) (117)
Net cash assumed in Inference
acquisition.......................... 7,391 -- --
Net cash assumed in Sitebridge
acquisition.......................... -- 78 --
Purchases of short-term securities.... (26,546) -- --
Proceeds from sale of short-term
securities........................... 23,392 -- --
-------- -------- ------
Net cash used in investing activities... (4,415) (1,181) (117)
Cash flows from financing activities:
Payments on borrowings................ (555) (44) --
Payments on capital lease
obligations.......................... (263) -- --
Proceeds from borrowings.............. 408 1,342 --
Net proceeds from issuance of
preferred stock...................... 5,152 5,075 4,329
Net proceeds from issuance of common
stock................................ 64,192 24 295
-------- -------- ------
Net cash provided by financing
activities............................. 68,934 6,397 4,624
Effect of exchange rate differences on
cash................................... (31) 1 --
-------- -------- ------
Net increase (decrease) in cash and cash
equivalents............................ 25,936 (2,566) 3,831
Cash and cash equivalents at beginning
of year................................ 1,265 3,831 --
-------- -------- ------
Cash and cash equivalents at end of
year................................... $ 27,201 $ 1,265 $3,831
======== ======== ======
Supplemental cash flow disclosures:
Cash paid for interest................ $ 278 $ 111 $ --
Cash paid for income taxes............ 279 -- --
Equipment acquired under capital
leases............................... 2,108 -- --
Deferred compensation on stock
options.............................. 7,194 10,619 234
Net unrealized loss on debt and equity
securities........................... 163 -- --
Conversion of promissory notes to
preferred stock...................... -- -- 800
</TABLE>

See accompanying notes.

40
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

eGain is a leading provider of intelligent customer communications
solutions for companies engaged in ecommerce. eGain's products and services
help businesses deliver a superior customer experience by providing a powerful
suite of service, support, and marketing applications that effectively manage
customer interactions throughout the customer lifecycle and establish
stronger, lasting customer relationships. These applications also enhance
operational efficiencies as they improve workflow management and reduce volume
to call and support centers. Accordingly, eGain enables businesses to increase
revenues and reduce costs.

Principles of Consolidation

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

Use of Estimates

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

Cash equivalents

eGain considers investments that are highly liquid, readily convertible to
cash and that mature within three months from the date of purchase to be cash
equivalents. eGain's cash equivalents consisted of the following (in
thousands):

<TABLE>
<CAPTION>
June 30,
--------------
2000 1999
------- ------
<S> <C> <C>
Cash........................................................ $ 945 $ 33
Money market funds.......................................... 8,932 1,232
Commercial paper............................................ 17,324 --
------- ------
$27,201 $1,265
======= ======
</TABLE>

Short-term Investments

Short-term investments are securities with maturities of more than 90 days
but less than one year. Management determines the appropriate classification
of debt and equity securities at the time of purchase and evaluates such
designation as of each balance sheet date. To date, all debt and securities
have been classified as available-for-sale and are carried at fair value with
unrealized gains and losses recorded as a component of accumulated other
comprehensive income/loss. Realized gains and losses and interest and
dividends on all securities are included in interest income. As of June 30,
2000, eGain had an investment in a single debt security with a contractual
maturity of approximately 10 months that had a fair value of $2,991,000 and an
amortized cost basis of $3,154,000.

Fair Value of Financial Instruments

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

41
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Concentration of Credit Risk

Financial instruments that subject eGain to concentrations of credit risk
consist principally of cash and cash equivalents, short-term investments and
trade accounts receivable. eGain invests excess cash primarily in money market
funds and commercial paper, which are highly liquid securities that bear
minimal risk. In addition, eGain has investment policies and procedures that
are reviewed periodically to minimize credit risk.

eGain's customer base extends across many different industries and
geographic regions. eGain performs ongoing credit evaluations and generally do
not require collateral. In addition, eGain routinely assess the financial
strength of its customers and, as a consequence, believe that its accounts
receivable credit risk exposure is limited.

To date, eGain's bad debt write-offs have not been significant. eGain added
approximately $723,000 in fiscal 2000 and $25,000 in fiscal 1999 to its
allowance for doubtful accounts. Total write-offs of uncollectible amounts
were $34,000 in fiscal 2000 and $0 in fiscal 1999.

For the year ended June 30, 2000, no single customer accounted for more
than 10% of revenue. For the year ended June 30, 1999, two customers accounted
for 26% of revenue. One customer represented all of the revenue for the period
from inception (September 10, 1997) to June 30, 1998.

Property and Equipment

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

eGain capitalizes costs for development of internal use software in
accordance with Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" which requires that all costs
related to the development or acquisition of internal use software incurred
during the application development stage be capitalized. During fiscal 2000,
we capitalized $1,314,000.

Goodwill and Purchased Intangible Assets

Goodwill represents the excess of the purchase price over the estimated
fair market value of tangible and intangible net assets acquired in a business
combination. Under Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of ("SFAS No. 121"), the carrying values of long-term assets
and intangibles other than developed technology ("other intangibles") are
regularly reviewed to determine if the carrying value of the assets is
impaired. The reviews look for the existence of facts or circumstances, either
internal or external, which indicate the carrying value of the asset cannot be
recovered. Such indicators would include a lack of successful further
development and integration of the acquired company's technology into eGain's
operations, lack of the market acceptance of the products and lower than
expected cash flows from operations. No impairment has been indicated to date.
If there is an indication of impairment in the future, and undiscounted
expected future cash flows are less than the carrying amount of the assets,
eGain will measure the amount of the loss based on discounted expected future
cash flows from the impaired assets. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections
at the time.

In addition, eGain assesses the impairment of goodwill not included in the
scope of SFAS 121 under Accounting Principles Board Opinion No. 17, Intangible
Assets, ("APB 17"). Write-offs and write-downs to net

42
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

realizable value of goodwill not included in the scope of SFAS 121 will
typically be made only if eGain has effectively abandoned and stopped selling
virtually all of the products acquired in an acquisition. No impairment has
been indicated to date.

Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life or the ratio of current
revenues to the total of current and anticipated future revenues. The
recoverability of the carrying value of purchased developed technology and
associated goodwill is reviewed periodically. The carrying value of developed
technology is compared to the estimated future gross revenues from that
product reduced by the estimated future costs of completing and disposing of
that product, including the costs of performing maintenance and customer
support (net undiscounted cash flows). To the extent that the carrying value
exceeds the undiscounted cash flows the difference will be written off. No
write-off has been recorded to date.

Goodwill and purchased intangible assets consisted of the following at June
30, 2000 (in thousands):

<TABLE>
<CAPTION>
Total
--------
<S> <C>
Goodwill......................................................... $119,594
Customer base.................................................... 4,951
Developed technology............................................. 4,375
Workforce........................................................ 2,925
Trademark........................................................ 50
--------
Gross intangible assets........................................ 131,895
Accumulated amortization......................................... (12,266)
--------
Intangible assets, net......................................... $119,629
========
</TABLE>

Revenue Recognition

Revenue from hosting services is recognized ratably over the period of the
agreement as services are provided. Hosting agreements are typically for a
period of one year and automatically renew unless either party cancels the
agreement.

eGain recognizes revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), as amended. Under SOP 97-2, revenue
from license fees is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant eGain obligations
remain, the fee is fixed or determinable, and collectibility is probable.
License fee revenue in multiple element contracts is recognized using the
residual method when there is vendor specific objective evidence of the fair
value of all undelivered elements in an arrangement but vendor specific
objective evidence of fair value does not exist for one or more of the
delivered elements in an arrangement. Under the residual method, the total
fair value of the undelivered elements, as indicated by vendor specific
objective evidence, is deferred and the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements, regardless of any
separate prices stated within the contract for each element. If sufficient
vendor-specific objective evidence does not exist for undelivered elements in
an arrangement, all revenue from the arrangement is deferred until the earlier
of the point at which (a) such sufficient vendor-specific objective evidence
does exist or (b) all elements of the arrangement have been delivered.

Service revenue is primarily comprised from consulting fees, maintenance
agreements, and training. Service revenue from consulting and training billed
on a time and materials basis is recognized as performed. Service revenue on
fixed price service arrangements is recognized upon completion of specific
contractual milestone

43
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

events, or based on an estimated percentage of completion as work progresses.
Maintenance agreements include the right to software updates on an if-and-
when-available basis. Maintenance revenue is deferred and recognized on a
straight-line basis as service revenue over the life of the related agreement,
which is typically one year.

In all cases, eGain assesses whether the service element of the arrangement
is essential to the functionality of the other elements of the arrangement. In
this determination, eGain focuses on whether the services include significant
alterations to the features and functionality of the software, whether the
services involve the building of complex interfaces, the timing of payments
and the existence of milestones. In making this determination, eGain considers
the following: (1) the relative fair value of the services compared to the
software, (2) the amount of time and effort subsequent to delivery of the
software until the interfaces or other modifications are completed, (3) the
degree of technical difficulty in building the interfaces or other
modifications, and (4) any contractual cancellation, acceptance, or
termination provisions for failure to complete the interfaces. In those
instances where eGain determines that the service elements are essential to
the other elements of the arrangement, eGain accounts for the entire
arrangement in accordance with Accounting Research Bulletin (ARB) No. 45,
"Long-Term Construction--Type Contracts," using the relevant guidance from SOP
97-2 and SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts."

Advertising Costs

Advertising costs are accounted for as expenses in the period in which they
are incurred. Advertising expenses for the years ended June 30, 2000 and 1999
were $4,291,000 and $210,000 respectively, and zero for the period from
inception (September 10, 1997) to June 30, 1998.

Software Development Costs

Software development costs are included in research and development and are
expensed as incurred until the technological feasibility of the product is
achieved. To date, the period between achieving technological feasibility and
general availability of software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, we have
not capitalized any software development costs.

Stock-Based Compensation

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

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

Income Taxes

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

44
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of
shares of common stock outstanding. Diluted net loss per share is computed
using the weighted-average number of shares of common stock outstanding and,
when dilutive, common equivalent shares from convertible preferred stock,
outstanding stock options and warrants using the treasury stock method.

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

<TABLE>
<CAPTION>
Period from
inception
Year ended June (September 10,
30, 1997)
------------------ to June 30,
2000 1999 1998
-------- -------- --------------
<S> <C> <C> <C>
Net loss.................................... $(68,431) $(11,305) $ (938)
======== ======== =======
Basic and diluted:
Weighted-average shares outstanding....... 24,940 8,757 154
Less weighted-average shares subject to
repurchase............................... (1,500) (3,462) (101)
-------- -------- -------
Weighted-average shares used in computing
basic and diluted net loss per share..... 23,440 5,295 53
======== ======== =======
Basic and diluted net loss per share........ $ (2.92) $ (2.14) $(17.78)
======== ======== =======
</TABLE>

Outstanding options and warrants to purchase 5,819,000, 2,834,000 and
700,000 shares of common stock at June 30, 2000 and 1999, and 1998,
respectively, were not included in the computation of diluted net loss per
share for the periods presented as a result of their anti-dilutive effect.
Such options and warrants could have a dilutive effect in future periods.

Foreign Currency Translation

Assets and liabilities of our foreign subsidiaries are translated at
period-end exchange rates, and revenues and expenses are translated at average
monthly exchange rates. The resulting cumulative translation adjustments are
recorded as a component of accumulated other comprehensive income. Gains and
losses resulting from foreign currency transactions are included in the
consolidated statements of operations and, to date, have not been significant.

Comprehensive Loss

eGain reports comprehensive loss and its components in accordance with
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). Under SFAS 130, comprehensive income includes all changes
in equity during a period except those resulting from investments by or
distributions to owners. Total comprehensive loss for each of the three years
ended June 30, 2000 is shown in the statement of stockholders' equity.

45
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Segment Information

eGain operates in one segment, the development and marketing of customer
service infrastructure solutions. eGain markets and sells its products
throughout North America, principally the U.S., and Europe and Asia Pacific,
which comprise international activities. Information relating to eGain's
geographic areas for the year ended June 30, 2000 is as follows (in
thousands):

<TABLE>
<CAPTION>
Total Operating Identifiable
Revenues Loss Assets
-------- --------- ------------
<S> <C> <C> <C>
North America................................ $12,208 $(68,355) $50,530
International................................ 1,154 (1,361) 5,741
------- -------- -------
$13,362 $(69,716) $56,271
======= ======== =======
</TABLE>

Total revenues and operating losses generated by eGain's foreign operations
and their corresponding identifiable assets were not material in the year
ended June 30, 1999 and for the period from inception (September 10, 1997) to
June 30, 1998. In addition, eGain's export revenue has not been material in
any period presented.

Reclassification

Certain reclassifications have been made to prior years' amounts in order
to conform to the current year's presentation.

New Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging
Activities, which will be effective for the year ending June 30, 2001. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. eGain believes the adoption of SFAS 133 will not
have a material effect on the financial statements, since eGain currently does
not invest in derivative instruments and engage in hedging activities.

In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements. The SAB states that all registrants are expected to
apply the accounting and disclosures described in it. The SEC staff, however,
will not object if registrants that have not applied this accounting do not
restate prior financial statements provided they report a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes, by
cumulative catch-up adjustment no later than the quarter ended December 31,
2000. eGain is currently evaluating the impact, if any, of SAB 101 on its
revenue recognition policy and its consolidated financial statements.

46
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Interpretation covers events occurring during the period after December 15,
1998 or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. eGain does not anticipate the adoption of FIN 44 will have
a material impact on its financial statements.

2. BUSINESS ACQUISITIONS

On March 7, 2000, eGain acquired all of the assets and liabilities of Big
Science Company ("Big Science"), a developer of self service software products
for approximately $34,200,000. eGain issued approximately 740,000 shares of
its common stock in the acquisition and assumed options that can be exercised
for approximately 50,000 shares of its common stock. The results of Big
Science's operations have been combined with those of eGain since the date of
acquisition.

On June 29, 2000, eGain acquired all of the outstanding common stock of
Inference Corporation ("Inference"), a developer of one-to-one sales, service
and support solutions over the Web, for approximately $80,100,000. eGain
issued approximately 5,900,000 shares of its common stock in the acquisition
and assumed options that can be exercised for approximately 1,600,000 shares
of its common stock. The results of Inference's operations have been combined
with those of eGain since the date of acquisition.

The Big Science and Inference acquisitions have been accounted for using
the purchase method of accounting. Consideration for these transactions
consisted of the following (in thousands):

<TABLE>
<CAPTION>
Big Science Inference
----------- ---------
<S> <C> <C>
eGain common stock................................... $30,496 $66,392
Options assumed by eGain............................. 1,790 13,008
Cash................................................. 681 --
Transaction costs.................................... 1,194 663
------- -------
$34,161 $80,063
======= =======
</TABLE>

The following is a summary of the preliminary purchase price allocation (in
thousands):

<TABLE>
<CAPTION>
Big Science Inference
----------- ---------
<S> <C> <C>
Tangible assets..................................... $ 90 $ 16,819
Goodwill............................................ 32,933 66,699
Customer Base....................................... 220 4,681
Developed technology................................ 900 2,425
Workforce........................................... 320 2,255
Trademark........................................... 50 --
In-process research and development................. -- 345
Liabilities assumed................................. (352) (13,161)
------- --------
$34,161 $ 80,063
======= ========
</TABLE>

The total amount allocated to goodwill and other intangible assets related
to the Big Science acquisition is being amortized on a straight-line basis
over a period of three years. In connection with the Inference acquisition,
goodwill and customer base is being amortized on a straight-line basis over a
period of four years, while developed technology and workforce is being
amortized on a straight-line basis over a period of three years. In-process
research and development was directly expensed as of the date of the
acquisition.

47
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Inference purchase price is preliminary and is dependent on eGain's
final analysis.

Unaudited pro forma combined results of operations for the years ended June
30, 2000 and 1999 have been prepared as if the acquisitions occurred at the
beginning of each period (in thousands).

<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Total revenues..................................... $ 35,945 $ 30,216
========= ========
Net loss........................................... $(110,826) $(54,184)
========= ========
Basic and diluted net loss per share............... $ (3.43) $ (7.47)
========= ========
</TABLE>

On April 30, 1999, we acquired Sitebridge Corporation. In connection with
the acquisition, we issued preferred stock and common stock and assumed
options and warrants to acquire shares of common stock and preferred stock.
The fair market value of the securities issued in the acquisition was
approximately $20,148,000. The acquisition was accounted for under the
purchase method of accounting.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
June 30,
---------------
2000 1999
------- ------
<S> <C> <C>
Computers and equipment........................................ $10,294 $1,215
Furniture and fixtures......................................... 2,248 189
Leasehold improvements......................................... 1,321 15
------- ------
Total........................................................ 13,863 1,419
Accumulated depreciation and amortization...................... (2,173) (286)
------- ------
Property and Equipment, net.................................... $11,690 $1,133
======= ======
</TABLE>

Depreciation expense was approximately $1,887,000 and $279,000 for the
years ended June 30, 2000 and 1999, and $7,000 for the period from inception
(September 10, 1997) to June 30, 1998. Included in computers and equipment at
June 30, 2000 are computer hardware and software under capital leases with
cost and accumulated depreciation totaling approximately $2,108,000 and
$263,000, respectively.

4. NOTES PAYABLE

In August 1998, eGain obtained a $1,000,000 line of credit from a bank for
equipment purchases and working capital financing. Borrowings under the line
of credit are collateralized by all of eGain's assets and bear interest at the
bank's prime rate plus 0.25% (9.75% at June 30, 2000). At June 30, 2000 and
1999, $1,000,000 was outstanding under this agreement. The entire balance
originally came due in February 2000 and was extended to September 2000.

In October 1998, eGain obtained a $1,500,000 credit facility with a leasing
company for equipment purchases. Borrowings under the credit facility are
collateralized by certain fixed assets and bear an imputed interest rate of
13.68%. At June 30, 2000 and 1999, $525,000 and $298,000, respectively, was
outstanding under the credit facility. In conjunction with the line of credit
and equipment credit facilities, eGain issued warrants to purchase 75,000
shares of its Series A preferred stock at $0.8055 per share.

48
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In connection with the acquisition of Sitebridge on April 30, 1999, eGain
assumed two promissory notes for a total amount of $380,000. These notes were
fully repaid in January 2000.

Long-term debt repayments are due as follows (in thousands):

<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2001................................................................. $182
2002................................................................. 243
2003................................................................. 100
----
$525
====
</TABLE>

5. INCOME TAXES

Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the years ended June 30,
2000 or June 30, 1999.

As of June 30, 2000, eGain had a federal net operating loss carryforward of
approximately $90,700,000. eGain also had federal research and development
credit carryforwards of approximately $1,400,000. The net operating loss and
credit carryforwards will expire at various dates beginning in 2001 through
2020, if not utilized.

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

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

<TABLE>
<CAPTION>
Period from
inception
June 30, (September 10,
----------------- 1997) to
2000 1999 June 30, 1998
-------- ------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....... $ 34,000 $ 4,300 $ 300
Research credits....................... 1,600 100 --
Deferred revenue....................... 1,600 -- --
Accruals not currently deductible for
tax................................... 1,100 -- --
Accrued compensation not currently
deductible for tax.................... 400 -- --
Depreciation........................... 200 -- --
Other individual immaterial items...... 700 100 --
-------- ------- -----
Total deferred tax assets............ 39,600 4,500 300
Valuation allowance for deferred tax
assets.................................. (31,100) (4,000) (300)
-------- ------- -----
Net deferred tax assets.................. $ 8,500 $ 500 $ --
Deferred tax liabilities:
Other intangibles...................... (8,500) (500) --
-------- ------- -----
$ -- $ -- $ --
======== ======= =====
</TABLE>

49
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

The net valuation allowance increased by $3,700,000 during the year ended
June 30, 1999.

6. COMMITMENTS

eGain leases its facilities under noncancelable operating leases that
expire at various dates through the year 2005. Rent expense for facilities
under operating leases was approximately $1,553,000 and $362,000,
respectively, for the years ended June 30, 2000 and 1999, and $80,000 for the
period from inception (September 10, 1997) to June 30, 1998. eGain leases
certain computer hardware and software under capital leases that expire at
various dates through year 2003. A summary of future minimum lease payments is
as follows (in thousands):

<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- ------- ---------
<S> <C> <C>
2001...................................................... $ 1,290 $ 5,218
2002...................................................... 651 4,456
2003...................................................... 128 4,054
2004...................................................... 19 4,184
2005...................................................... -- 3,080
------- -------
Total minimum lease payments.......................... $ 2,088 $20,992
=======

Less amount representing imputed interest................. (243)
-------
Present value of net minimum capital lease payments....... 1,845
Less current portion...................................... (1,116)
-------
Capital leases, excluding current portion................. $ 729
=======
</TABLE>

7. STOCKHOLDERS' EQUITY

On September 28, 1999, eGain completed an initial public offering in which
it sold 5,000,000 shares of Common Stock at $12.00 per share for net proceeds
of $54,700,000. Upon the closing of the offering, all its Preferred Stock
converted to Common Stock. After the offering, its authorized capital
consisted of 50,000,000 shares of Common Stock and 5,000,000 shares of
preferred stock. In October 1999, the underwriters exercised an over-allotment
option of 750,000 shares resulting in net proceeds of $8,300,000.

50
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Common Stock

eGain has issued shares of common stock to founders that are subject to its
right to repurchase upon termination of employment. The repurchase rights
lapse ratably over a period of two years from the date of issuance. There were
zero and 2,666,666 shares subject to repurchase at June 30, 2000 and 1999,
respectively.

Certain option holders have exercised options to purchase shares of
restricted common stock in exchange for five-year, full recourse promissory
notes. The notes bear interest ranging from 4.5% to 5.5% and expire at various
dates through June 2004. eGain has the right to repurchase all unvested shares
at the original exercise price upon employee termination. The number of shares
subject to this repurchase right decreases as the shares vest under the
original option terms, generally four years. There were 1,460,000 and
1,150,000 shares subject to repurchase at June 30, 2000 and 1999,
respectively.

Common Stock Warrants

Warrants to purchase 219,000 shares of Series A preferred stock for a price
of $0.8055 per share were issued in connection with the issuance of
convertible promissory notes in fiscal year 1998. The convertible promissory
notes were subsequently converted into Series A preferred stock. The fair
value was appraised at the date of issuance and additional interest expense of
approximately $57,000 was recorded. The warrants were exercised prior to the
closing of eGain's initial public offering.

Warrants to purchase 75,000 shares of Series A preferred stock for a price
of $0.8055 per share were issued in connection with the line of credit and
equipment credit facilities entered into during fiscal year 1999. The warrants
were appraised at the date of issuance and additional interest expense of
$36,000 was recorded. The warrants were exercised during fiscal 2000.

A warrant to purchase 175,000 shares of common stock at a price of $0.8055
per share was issued to FW Ventures I, L.P. in connection with financial
advisory services rendered in connection with the acquisition of Sitebridge
Corporation ("Sitebridge") on April 30, 1999. Mark Wolfson, a director of
eGain, is a limited partner of FW Ventures I, L.P. The warrant was exercised
prior to the closing of eGain's initial public offering.

Warrants to purchase 121,000 shares of Series C preferred stock for a price
of $0.9916 per share and 30,000 shares of common stock for a price of $0.2754
per share were assumed by eGain in connection with its acquisition of
Sitebridge. The warrants expire at various dates through May 2003.

1999 Employee Stock Purchase Plan

The 1999 Employee Stock Purchase Plan (the "ESPP") was adopted by the Board
of Directors and approved by the stockholders in July 1999 and was effective
upon the completion of the initial public offering of eGain's common stock in
September 1999. eGain has reserved a total of 750,000 shares of common stock
for issuance under the ESPP. Pursuant to the ESPP, eligible employees may
purchase common stock at 85% of the lesser of the fair market value of our
common stock on the first and last days of the applicable six-month offering
period. During the year ended June 30, 2000, there were 75,000 shares issued
under the ESPP at a weighted-average price of $10.21. At June 30, 2000, a
total of 675,000 shares remained available for future issuance under the ESPP.

51
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1998 Stock Plan

In June 1998, the board of directors adopted the 1998 Stock Plan (the
"Plan"), which provides for issuance to purchase options of common stock to
eligible participants. Options granted under the Plan may be either incentive
stock options or nonstatutory stock options. Incentive stock options may be
granted to employees with exercise prices of no less than the fair value and
nonstatutory options may be granted to eligible participants at exercise
prices of no less than 85% of the fair value of the common stock on the grant
date as determined by the board of directors. Options generally vest ratably
over a period of four years. Options may be granted with different vesting
terms at the discretion of the board of directors. Options are generally
exercisable for a term of ten years after the date of grant. Options are
generally exercisable upon grant, subject to repurchase rights by eGain until
vested.

<TABLE>
<CAPTION>
Shares Available Options Weighted
for Grant Outstanding Average Price
---------------- ----------- -------------
<S> <C> <C> <C>
Shares authorized for
issuance..................... 2,000,000
Options granted............. (511,000) 511,000 $ 0.05
---------- ----------
Balance at June 30, 1998...... 1,489,000 511,000 $ 0.05
Additional authorization.... 1,500,000 --
Options granted............. (2,666,000) 2,666,000 $ 0.24
Options exercised........... -- (1,447,000) $ 0.12
Options canceled............ 249,000 (249,000) $ 0.08
Repurchases................. 75,000 --
---------- ----------
Balance at June 30, 1999...... 647,000 1,481,000 $ 0.24
Additional authorization.... 3,000,000
Options granted............. (4,179,000) 4,179,000 $19.25
Options exercised........... -- (1,154,000) $ 0.47
Options canceled............ 638,000 (638,000) $ 0.05
Repurchases................. 153,000 --
---------- ----------
Balance at June 30, 2000...... 259,000 3,868,000 $20.74
========== ==========
</TABLE>

In connection with the acquisition of Sitebridge, eGain assumed options to
purchase 1,114,000 shares of common stock, of which 139,000 were outstanding
as of June 30, 2000. In connection with the acquisitions of Big Science and
Inference, eGain assumed options to purchase 50,000 and 1,611,000 shares of
common stock, respectively, all of which were outstanding as of June 30, 2000.

<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------------------- ------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Options Life (years) Price Options Price
-------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.02-$0.50 471,000 8.48 $ 0.30 379,000 $ 0.34
$1.00-$4.08 798,000 8.58 $ 1.69 629,000 $ 1.16
$4.16-$6.11 678,000 7.09 $ 5.63 558,000 $ 5.64
$6.20-$9.51 1,271,000 8.18 $ 7.56 680,000 $ 7.77
$9.85-$13.25 471,000 9.84 $12.33 38,000 $10.19
$14.63-$18.00 657,000 9.80 $16.34 6,000 $14.94
$22.56-$29.63 453,000 9.48 $27.18 -- --
$32.50-$41.38 447,000 9.59 $38.06 -- --
$42.00-$47.63 422,000 9.60 $45.27 -- --
------------- --------- ---- ------ --------- ------
$0.02-$47.63 5,668,000 8.77 $13.94 2,290,000 $ 4.26
</TABLE>

52
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock-Based Compensation

Pro forma information regarding net loss and net loss per share is required
by SFAS 123 for awards granted after January 31, 1995 as if eGain had
accounted for its stock-based awards to employees under the fair value method
of SFAS 123. The fair value of eGain's stock-based awards to employees was
estimated using the Black-Scholes multiple option pricing model. The Black-
Scholes option valuation model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of
highly subjective assumptions including the expected stock price volatility.
Because eGain's stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of eGain's stock-based
awards to employees.

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

<TABLE>
<CAPTION>
Options ESPP
---------------- ----------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years).................. 3.50 3.50 3.50 0.50 0.50 0.50
Expected stock price volatility........ 1.00 1.00 1.00 1.00 1.00 1.00
Risk-free interest rate................ 5.79% 5.72% 5.65% 5.79% 5.72% 5.65%
</TABLE>

The weighted-average fair value of options granted in the years ended June
30, 2000 and 1999 was $15.62 and $0.06, respectively, and $0.01 for the period
from inception (September 10, 1997) to June 30, 1998.

For purposes of pro forma disclosures, the estimated fair value of an
option is amortized to expense over the vesting period of the option. eGain's
pro forma information, which includes the stock option plans and the Employee
Stock Purchase Plan, for the fiscal year ended June 30, 2000 is as follows (in
thousands except for basic net loss per share information):

<TABLE>
<CAPTION>
2000
--------
<S> <C>
Net income (loss)............................................... $(68,431)
Net loss--pro forma............................................. (80,271)
Net loss per share:
Basic and diluted actual...................................... $ (2.92)
Basic and diluted pro forma................................... (3.42)
</TABLE>

The effect of applying SFAS 123 to eGain's stock options granted prior to
fiscal 2000 did not result in pro forma net loss amounts that are materially
different from the reported historical amounts. Therefore, such pro forma
information is not separately presented herein.

8. EMPLOYEE BENEFIT PLANS

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

53
<PAGE>

eGAIN COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. RESTRUCTURING COSTS

10. SUBSEQUENT EVENTS

In August 2000, eGain raised $88.5 million through a private placement of
convertible preferred stock and warrants with new and existing investors. The
investors include Oak Hill Capital Partners and its affiliates, eGain's co-
founder and President, Gunjan Sinha, and new investors Deutsche Bank, Societe
Generale, Elliott Associates, L.P., and the Palladin Group, L.P. The
convertible preferred stock liquidation value accretes at 6.75% per annum.
Investors received warrants to purchase approximately 3,800,000 shares of
common stock at $9.25 per share. eGain intends to use the net proceeds from
this private placement for general corporate purposes.

54
<PAGE>

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF eGAIN

The information required by this item (with respect to directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in eGain's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 2000 Annual Meeting of Stockholders to be held on
November 20, 2000 (the "Proxy Statement").

The executives of eGain as of September 10, 2000 are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ashutosh Roy............... 34 Chief Executive Officer and Chairman

Gunjan Sinha............... 33 President and Director

Harpreet Grewal............ 34 Chief Financial Officer

Laeeq Ahmed................ 41 Vice President of Professional Services

Ian Duffield............... 43 Chief Information Officer

Charles Jepson............. 54 Senior Vice President of Business Development

Senior Vice President of International
Ram Kedlaya................ 40 Operations

Promod Narang.............. 42 Vice President of Products and Engineering

Veronica O'Shea............ 39 Vice President of North American Sales

Ryan Rosenberg............. 39 Vice President of Marketing

Eric Smit.................. 38 Vice President of Finance and Administration

Ernest Valentine........... 59 Vice President of Human Resources
</TABLE>

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

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

Harpreet Grewal has served as Chief Financial Officer of eGain since July
1999. From November 1998 to July 1999, Mr. Grewal served as Chief Financial
Officer of Pepsi-Cola's North American Fountain Beverage Division. From April
1996 to October 1998, Mr. Grewal held various positions in PepsiCo's Corporate
Strategy

55
<PAGE>

and Development Group. From August 1995 to March 1996, Mr. Grewal worked for
International Equity Partners, a private equity firm. Previously, Mr. Grewal
worked for Wasserstein, Perella & Co. Mr. Grewal holds a Masters degree in
International Studies from the Johns Hopkins School of International Studies
and a B.A. in Economics from the University of California, Berkeley.

Laeeq Ahmed has served as Vice President of Professional Services of eGain
since January 2000. From October 1999 to December 1999, Mr. Ahmed served as
Vice President of Professional Services for IPNet Solutions. From August 1997
to September 1999, Mr. Ahmed served as Senior Practice Director for Oracle
Corporation. From April 1996 to August 1997, Mr. Ahmed served as Senior
Manager for Ernst & Young LLP. From August 1995 to April 1996, Mr. Ahmed
served as a Managing Associate for Coopers & Lybrand, LLP. From November 1993
to July 1995, Mr. Ahmed served as Practice Manager for Oracle Corporation. Mr.
Ahmed holds an M.B.A. in Finance and Investments from George Washington
University and a B.A. in Economics from the University of Maryland.

Ian Duffield has served as Chief Information Officer of eGain since
December 1999. From October 1998 to December 1999, Mr. Duffield served as
Chief Information Officer of Rational Software, a software tools company. From
December 1995 to October 1998, Mr. Duffield served as Chief Information
Officer at Aspen Technology, an enterprise software supplier to the process
manufacturing industry. Mr. Duffield holds a Bachelors degree in Land
Surveying and Geography from the University of Newcastle Upon Tyne, England.

Charles Jepson joined eGain as Senior Vice President of Business
Development having served as Chief Executive Officer, President and Director
of Inference Corporation since March 1998. Prior to joining Inference, he was
President and Chief Executive of Interlink Computer Sciences, Inc. from
November 1992 to May 1997. Mr. Jepson began his career at Hewlett-Packard
where he spent 16 years as a division general manager as well as holding
numerous marketing and finance positions in their computer systems area. He
has held executive positions at Software Publishing Corporation and Convergent
Technologies, Inc., and was president and chief executive officer of Touch
Communications Incorporated. Mr. Jepson holds a M.B.A. from the University of
California at Berkeley and a B.A. from San Jose State University.

Ram Kedlaya has served as Senior Vice President of International Operations
since February 2000. Mr. Kedlaya has been with eGain since December 1998,
serving as Vice President of Products and Vice President of Professional
Services in that time. From August 1992 to March 1998, Mr. Kedlaya was a co-
founder of NUKO Information Systems, a provider of networking products and
solutions for broadband network service providers. Mr. Kedlaya served in
several positions at NUKO, most recently as a Vice President, Strategic
Planning. Mr. Kedlaya holds an M.S. in Computer Science from the University of
Texas, Austin and a B.S. from the Indian Institute of Technology, Madras,
India.

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

Veronica O'Shea has served as Vice President of North American Sales of
eGain since October 1999. From October 1997 to September 1999, Ms. O'Shea
served as Vice President of Western Region Sales for Vantive Corporation. From
December 1989 to December 1996, Ms. O'Shea served as Regional Sales Vice
President of Oracle Corporation. Ms. O'Shea holds a Bachelors degree in
Economics/Accounting from Boston College.

Ryan Rosenberg has served as Vice President of Marketing of eGain since
June 1998. From June 1996 to June 1998, Mr. Rosenberg served as Director of
Product Marketing for Symantec Corporation, a business and personal software
company. From November 1993 to June 1996, Mr. Rosenberg served as a Product
and Senior Product Manager for Symantec. Mr. Rosenberg holds a B.S. in
Computer Science from Michigan State University, and an M.B.A. in Marketing
from the University of California, Los Angeles.

56
<PAGE>

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

Ernest Valentine has served as Vice President of Human Resources of eGain
since April 2000. From October 1996 to April 2000, Mr. Valentine served as the
Vice President of Human Resources for Aspen Technology, Inc., a manufacturing
and supply-chain management software and services company. From August 1994 to
October 1996, Mr. Valentine served as the Director of Human Resources for
SunSoft, the software development and publishing arm of Sun Microsystems. Mr.
Valentine holds a Bachelors of Science degree in Political Science from
Tennessee State University.

The information contained under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the definitive Proxy Statement for the
Company's 2000 Annual Meeting of Stockholders is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information contained under the heading "Executive Compensation" and
under the captions "Director Compensation," and "Recent Option Grants" in the
definitive Proxy Statement for eGain's 2000 Annual Meeting of Stockholders is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the definitive Proxy Statement for
eGain's 2000 Annual Meeting of Stockholders is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information contained under the caption "Related Party Transactions" in
the definitive Proxy Statement for eGain's 2000 Annual Meeting of Stockholders
is incorporated herein by reference.

57
<PAGE>

PART IV

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

(a) 1. Financial Statements

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

2. Financial Statement Schedule

None.

3. Exhibits

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

(b) Reports on Forms 8-K

1. On May 5, 2000 we filed a Current Report on Form 8-K/A with the
Securities and Exchange Commission to amend Item 7 in the
Registrant's Current Report on Form 8-K/A dated March 7, 2000.

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

<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
------- -----------------------
<C> <S>
2.1(a) Agreement and Plan of Merger, dated as of March 16, 2000, between
Inference Corporation, Intrepid Acquisition Corp. and eGain.

2.2(b) Agreement and Plan of Merger and Reorganization, dated as of February
7, 2000, by and among eGain, Big Science Corporation ("BSC") and
certain shareholders of BSC.

2.3(c) Agreement and Plan of Reorganization among eGain, Sitebridge
Corporation, ECC Acquisition Corporation, Wendell Lansford, Prakash
Mishra and Chelsea M.C. LLC dated as of April 30, 1999.

3.1(c) Amended and Restated Certificate of Incorporation.

3.2(c) Amended and Restated Bylaws.

4.1(c) Amended and Restated Investors' Rights Agreement dated as of April
30, 1999.

4.2(d) Registration Rights Agreement dated as of August 8, 2000.

10.1(c) Form of Indemnification Agreement.

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

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

10.4(c)# 1999 Employee Stock Purchase Plan.

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

10.6(f) Inference Corporation 1998 Non-Management Stock Option Plan (assumed
by eGain in connection with Inference acquisition).

10.7(g)# Inference Corporation 1998 New Hire Stock Option Plan (assumed by
eGain in connection with Inference acquisition).
</TABLE>

58
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
------- -----------------------
<C> <S>
10.8(h)# Inference Corporation Charles W. Jepson Stock Option Plan (assumed
by eGain in connection with Inference acquisition).

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

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

10.11 eGain Communications Corporation 2000 Non-Management Stock Option
Plan.

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

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

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

10.15(c)# Amended to Common Stock Purchase Agreement dated as of June 24, 1998
between Registrant and Ashutosh Roy.

10.16(c)# Amended to Common Stock Purchase Agreement dated as of June 24, 1998
between Registrant and Gunjan Sinha.

21.1 Subsidiaries of eGain Communications Corporation.

23.1 Consent of Ernst & Young LLP.

24.1 Power of Attorney.

27.1 Financial Data Schedule.
</TABLE>
--------
(a) Incorporated into this Annual Report by reference to eGain's Registration
Statement on Form S-4, File No. 333-34848, originally filed with the
Commission on April 14, 2000, as subsequently amended.

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

(c) Incorporated into this Annual Report by reference to eGain's Registration
Statement on Form S-1, File No. 333-83439, originally filed with the
Commission on July 22, 1999, as subsequently amended.

(d) Incorporated into this Annual Report by reference to eGain's Current
Report on Form 8-K filed with the Commission on August 15, 2000.

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

(f) Incorporated by reference to Exhibit 10.6 to Inference Corporation's
Annual Report on Form 10-K/A for the fiscal year ended January 31, 1999.

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

(h) Incorporated by reference to Exhibit 10.12 to Inference Corporation's Form
10-K for the fiscal year ended January 31, 1998.

(i) Incorporated by reference to Exhibit 10.2 to Inference Corporation's
Registration Statement on Form S-1, File No. 333-92386.

# Indicates management contract or compensation plan or arrangement.

59
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on September 28,
2000.

eGAIN COMMUNICATIONS CORPORATION

/s/ Ashutosh Roy
By __________________________________
Ashutosh Roy
Chief Executive Officer

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

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Ashutosh Roy Chief Executive Officer and September 28, 2000
____________________________________ Director (Principal Executive
Ashutosh Roy Officer)

/s/ Gunjan Sinha President and Director September 28, 2000
____________________________________
Gunjan Sinha

/s/ Harpreet Grewal Chief Financial Officer September 28, 2000
____________________________________ (Principal Financial Officer)
Harpreet Grewal

/s/ Eric Smit Vice President--Finance and September 28, 2000
____________________________________ Administration (Principal
Eric Smit Accounting Officer)

/s/ Mark A Wolfson Director September 28, 2000
____________________________________
Mark A. Wolfson

/s/ David Brown Director September 28, 2000
____________________________________
David Brown

Director
____________________________________
Phiroz P. Darukhanavala
</TABLE>

60
<PAGE>

EXHIBIT INDEX

2.2(b) Agreement and Plan of Merger and Reorganization, dated as of
February 7, 2000, by and among eGain, Big Science Corporation
("BSC") and certain shareholders of BSC.

2.3(c) Agreement and Plan of Reorganization among eGain, Sitebridge
Corporation, ECC Acquisition Corporation, Wendell Lansford, Prakash
Mishra and Chelsea M.C. LLC dated as of April 30, 1999.

3.1(c) Amended and Restated Certificate of Incorporation.

3.2(c) Amended and Restated Bylaws.

4.1(c) Amended and Restated Investors' Rights Agreement dated as of April
30, 1999.

4.2(d) Registration Rights Agreement dated as of August 8, 2000.

10.1(c) Form of Indemnification Agreement.

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

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

10.4(c)# 1999 Employee Stock Purchase Plan.

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

10.6(f) Inference Corporation 1998 Non-Management Stock Option Plan (assumed
by eGain in connection with Inference acquisition).

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

10.8(h)# Inference Corporation Charles W. Jepson Stock Option Plan (assumed
by eGain in connection with Inference acquisition).

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

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

10.11 eGain Communications Corporation 2000 Non-Management Stock Option
Plan.

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

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

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

10.15(c)# Amended to Common Stock Purchase Agreement dated as of June 24, 1998
between Registrant and Ashutosh Roy.

10.16(c)# Amended to Common Stock Purchase Agreement dated as of June 24, 1998
between Registrant and Gunjan Sinha.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
------- -----------------------

<C> <S>
21.1 Subsidiaries of eGain Communications Corporation.

23.1 Consent of Ernst & Young LLP.

24.1 Power of Attorney.

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

(d) Incorporated into this Annual Report by reference to eGain's Current
Report on Form 8-K filed with the Commission on August 15, 2000.

(f) Incorporated by reference to Exhibit 10.6 to Inference Corporation's
Annual Report on Form 10-K/A for the fiscal year ended January 31, 1999.

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

(h) Incorporated by reference to Exhibit 10.12 to Inference Corporation's Form
10-K for the fiscal year ended January 31, 1998.

(i) Incorporated by reference to Exhibit 10.2 to Inference Corporation's
Registration Statement on Form S-1, File No. 333-92386.

# Indicates management contract or compensation plan or arrangement.