<PAGE>   1
                                                                  EXHIBIT 10.1




                              EMPLOYMENT AGREEMENT



eLoyalty Corporation, a Delaware corporation ("eLoyalty"), and Jay Istvan
("Employee") enter into this Employment Agreement (this "Agreement") effective
as of January 29, 2001 (the "Effective Date").

         In consideration of the agreements and covenants contained in this
Agreement, eLoyalty and Employee agree as follows:

         1. EMPLOYMENT DUTIES: eLoyalty shall employ Employee as a Senior Vice
President, responsible for strategic marketing and business development.
Employee shall report to eLoyalty's chief executive officer and shall have the
normal responsibilities, duties and authorities inherent in his position.
Employee's principal place of employment shall be at eLoyalty's corporate
headquarters. Employee shall perform faithfully the duties assigned to Employee
to the best of Employee's ability and shall devote Employee's full and undivided
business time and attention to the transaction of eLoyalty's business.

         2. TERM OF EMPLOYMENT: The term of employment ("Term of Employment")
covered by this Agreement shall commence as of the Effective Date and continue
until terminated in accordance with the terms hereof.

         3. TERMINATION: This Agreement may be terminated as follows:

         (a) Involuntary Termination. eLoyalty may terminate Employee's
employment for any reason by giving Employee written notice of termination,
which termination shall be effective as of such date within the 90 day period
beginning on the date of such notice as is specified therein ("Termination
Date"). Until such Termination Date, Employee shall make a good faith effort to
satisfy those professional obligations requested to be performed by eLoyalty,
which may include transferring duties and assisting in the orderly transition of
client responsibilities, including meeting with clients and returning all
eLoyalty and client confidential material. If Employee's employment with
eLoyalty is terminated by eLoyalty for any reason other than Serious Misconduct,
Employee shall receive:

                  (i)a lump sum payment within seven days of the Termination
         Date equal to the sum of Employee's annual base salary as in effect on
         the Termination Date, plus an amount equal to the average annual bonus
         earned during the two years immediately preceding the Termination Date
         (for any year prior to 2001, the bonus earned shall be deemed to be
         equal to Employee's base salary on the Effective Date); and


<PAGE>   2

                  (ii) with respect to any stock options outstanding on the
         Termination Date, continued vesting of such stock options through the
         first anniversary of the Termination Date, as provided in the
         respective applicable stock option agreements.

         (b) Serious Misconduct. eLoyalty may terminate Employee's employment
immediately upon written notice and with no continuation of salary, benefits or
option vesting if Employee engages in "Serious Misconduct." For purposes of this
Agreement, "Serious Misconduct" means embezzlement or misappropriation of
corporate funds, conviction of a felony, material breach of this Agreement or
willful and continued failure to substantially perform his duties or
responsibilities. Prior to any termination for Serious Misconduct, eLoyalty
shall provide the Employee with fifteen days' notice and an opportunity to be
heard at a meeting of the Board of Directors and, in the case of a willful
failure to perform his duties and responsibilities, an opportunity to cure.

         (c) Constructive Discharge. A Constructive Discharge by eLoyalty shall
be treated for all purposes of this Agreement as a termination by eLoyalty for a
reason other than Serious Misconduct and shall entitle Employee to the benefits
set forth in paragraph 3(a) above. If (x) Employee provides written notice to
eLoyalty of the occurrence of Good Reason (as defined below) within a reasonable
time after Employee has knowledge of the circumstances constituting Good Reason,
which notice shall specifically identify the circumstances which Employee
believes constitute Good Reason; (y) eLoyalty fails to correct the circumstances
within 15 days after such notice; and (z) the Employee resigns within ninety
days after the date of delivery of the notice referred to in clause (x) above,
then Employee shall be considered to have been subject to a Constructive
Discharge by eLoyalty. For purposes of this Agreement, "Good Reason" shall mean
the occurrence of any of the following events without Employee's consent:

                  (i) a reduction by eLoyalty in Employee's base salary or a
         reduction in his target bonus to less than 100% of base salary;

                  (ii) diminutions in the Employee's duties or responsibilities
         which are material in the aggregate;

                  (iii) a change in Employee's reporting relationship such that
         Employee no longer reports directly to the chief executive officer of
         eLoyalty or, if eLoyalty is acquired by any other entity, the chief
         executive officer of the ultimate parent of eLoyalty;

                  (iv) a relocation of eLoyalty's corporate offices or
         Employee's principal place of employment to a location outside of Lake,
         Cook and DuPage counties;

                  (v) the failure of eLoyalty to obtain a satisfactory agreement
         from any successor to all or substantially all of the assets or
         business of eLoyalty to assume and agree to perform this Agreement
         within 15 days after a merger, consolidation, sale or similar
         transaction; or


                                        2


<PAGE>   3


                  (vi) a material breach of this Agreement by eLoyalty.

         (d) Resignation. Employee may terminate his employment upon giving
eLoyalty 90 days written notice. eLoyalty may make the termination effective at
any time within the 90 day notice period. During this period Employee shall make
a good faith effort to satisfy those professional obligations requested to be
performed by eLoyalty, which may include transferring duties and assisting in
the transition of client responsibilities, including meeting with clients.

         (e) Disability. eLoyalty or Employee may terminate Employee's
employment at any time by reason of Employee's Disability. A termination of
Employee's employment by reason of Disability shall be treated for all purposes
of this Agreement as a termination by eLoyalty for a reason other than Serious
Misconduct and shall entitle Employee to the benefits set forth in paragraph
3(a)(i) above. For purposes of this Agreement, "Disability" means Employee's
inability, due to physical or mental incapacity, to substantially perform his
duties and responsibilities contemplated by this Agreement for a period of not
less than 180 days. In the event of a dispute as to whether Employee is
disabled, the determination shall be made by a licensed medical doctor selected
by the eLoyalty and agreed to by Employee. If the parties cannot agree on a
medical doctor, each party shall select a medical doctor and the two doctors
shall select a third who shall be the approved medical doctor for this purpose.
Employee agrees to submit to such tests and examinations as such medical doctor
shall deem appropriate.

         (f) Death. A termination of Employee's employment by reason of death
shall be treated for all purposes of this Agreement as a termination by eLoyalty
for a reason other than Serious Misconduct and shall entitle Employee's estate
to the benefits set forth in paragraph 3(a)(i) above.

         4. SALARY: As compensation for Employee's services, eLoyalty shall pay
Employee a base salary at the annual rate listed on Exhibit A to this Agreement.
Employee's base salary shall be subject to annual review and may, by mutual
agreement of eLoyalty and Employee, be adjusted from that listed in Exhibit A
according to Employee's responsibilities, capabilities and performance during
the preceding year.

         5. BONUSES: (a) Employee shall be eligible to receive a sign-on bonus
in the amount set forth on Exhibit A to this Agreement in the form of a loan
evidenced by, and subject to the terms and conditions of, a promissory note (the
"Promissory Note"). The loan will be made as of the Effective Date, or as soon
thereafter as is practicable after eLoyalty has received Employee's signed
Promissory Note. The loan will be fully forgiven on the earliest to occur of (i)
24 months after the date the loan was made, assuming Employee's employment
continues through such date; (ii) any termination of employment by eLoyalty for
reasons other than Serious Misconduct; (iii) any termination of employment by
Employee pursuant to a Constructive Discharge; (iv) any termination of
employment by eLoyalty or Employee for Employee's Disability; or (v) Employee's
death. Employee will be obligated to repay his loan with accrued interest
thereon in accordance with the terms of the Promissory Note only if his
employment terminates on account of his resignation other than pursuant to a
Constructive Discharge or eLoyalty's termination of his employment for Serious

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<PAGE>   4
Misconduct before the expiration of such 24-month period.

         (b) In addition, Employee shall be eligible to receive a performance
bonus under this paragraph (b) based upon the attainment of objectives
determined in accordance with and subject to the terms and conditions of
eLoyalty's then applicable discretionary bonus program. Employee's target bonus
for the 2001 calendar year shall equal 100% of the base salary listed in Exhibit
A to this Agreement, with 75% of this 2001 target bonus amount guaranteed
(subject to Employee's continued employment with eLoyalty) and 25% thereof
required to be earned based upon the attainment of mutually agreed objectives,
and shall otherwise be subject to the terms and conditions of eLoyalty's then
current bonus program. For calendar years after 2001, Employee's target bonus
for any year shall not be less than 100% of his base salary for such year and,
subject to approval of the Compensation Committee of eLoyalty's Board of
Directors, shall be based upon objectives mutually agreed upon by Employee and
eLoyalty's chief executive office.

         6. STOCK OPTION: As of the Effective Date, Employee shall be granted a
nonqualified stock option (the "Option") to purchase the number of shares of
common stock of eLoyalty set forth on Exhibit A to this Agreement. The Option
shall be granted under and in accordance with the provisions of the eLoyalty
1999 Stock Incentive Plan (the "Incentive Plan"), and will be subject, in all
respects, to the terms and conditions of the Incentive Plan. In addition, the
Option will be evidenced by, and subject to the terms and conditions of, a Stock
Option Agreement in the form attached hereto (the "Option Agreement") reflecting
the vesting schedule set forth on Exhibit A hereto, as well as the other
customary terms and conditions applicable to options granted under the Incentive
Plan. Each option granted to Employee after the Effective Date shall provide for
accelerated vesting upon a change in control of eLoyalty or death or Disability
on a basis no less favorable than the terms of the Option.

         7. EMPLOYEE BENEFITS: During the Term of Employment, Employee shall be
entitled to participate in such employee benefit plans, including eLoyalty's
401(k) plan and deferred compensation plan and its group life and health
insurance and other medical benefits, and shall receive all other fringe
benefits, including 22 paid vacation days, as eLoyalty may make available
generally to its Senior Vice Presidents.

         8. BUSINESS EXPENSES: eLoyalty shall reimburse Employee for all
reasonable and necessary business expenses incurred by Employee in performing
Employee's duties including wireless service and business use of an automobile
in accordance with eLoyalty's expense reimbursement policies. Employee shall
provide eLoyalty with supporting documentation sufficient to satisfy reporting
requirements of the Internal Revenue Service and eLoyalty. eLoyalty's
determination as to reasonableness and necessity shall be final.

         9. NONCOMPETITION AND NONDISCLOSURE: Employee acknowledges that the
successful development and marketing of eLoyalty's professional services and
products require substantial time and expense. Such efforts generate for
eLoyalty valuable and proprietary information ("Confidential Information") which

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<PAGE>   5
gives eLoyalty a business advantage over others who do not have such
information. Confidential Information of eLoyalty and its clients and prospects
includes, but is not limited to, the following: business strategies and plans;
proposals; deliverables; prospects and customer lists; methodologies; training
materials; computer software; and other Trade Secrets (as defined in paragraph
11) of eLoyalty, its customers and its vendors. Employee acknowledges that
during the Term of Employment, Employee will obtain knowledge of such
Confidential Information. Accordingly, Employee agrees to undertake the
following obligations which Employee acknowledges to be reasonably designed to
protect eLoyalty's legitimate business interests without unnecessarily or
unreasonably restricting Employee's post-employment opportunities:

         (a) Upon termination of the Term of Employment for any reason, Employee
shall return all eLoyalty property, including but not limited to computer
programs, files, notes, records, charts, or other documents or things containing
in whole or in part any of eLoyalty's Confidential Information.

         (b) During the Term of Employment and subsequent to termination,
Employee agrees to treat all such Confidential Information as confidential and
to take all necessary precautions against disclosure of such information to
third parties during and after Employee's employment with eLoyalty. Employee
shall refrain from using or disclosing to any person, without the prior written
approval of eLoyalty's Chief Executive Officer, any Confidential Information
unless at that time the information has become generally and lawfully known to
eLoyalty's competitors.

         (c) Without limiting the obligations of paragraph 9(b), Employee shall
not, for a period of one year following Employee's termination of employment for
any reason, for Employee's self or as an agent, partner or employee of any
person, firm or corporation, engage in the practice of consulting or related
services for any client of eLoyalty for whom Employee performed services, or
prospective eLoyalty client to whom Employee submitted, or assisted in the
submission of, a proposal during the one year period preceding Employee's
termination of employment; provided, however, that the foregoing shall not
preclude Employee from providing consulting or related services which are not
competitive with consulting or related services then provided by eLoyalty to its
customers or with consulting or related services which senior management of
eLoyalty is actively planning for eLoyalty to provide to its customers.

         (d) During a one year period immediately following Employee's
termination of employment for any reason, Employee shall not induce or assist in
the inducement of any eLoyalty employee away from eLoyalty's employ or from the
faithful discharge of such employee's contractual and fiduciary obligations to
serve eLoyalty's interests with undivided loyalty.

         10. REMEDIES: Employee recognizes and agrees that a breach of any or
all of the provisions of paragraph 9 will constitute immediate and irreparable
harm to eLoyalty's business advantage, including but not limited to eLoyalty's
valuable business relations, for which damages cannot be readily calculated and
for which damages are an inadequate remedy. Accordingly, Employee acknowledges



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<PAGE>   6
that eLoyalty shall therefore be entitled to an order enjoining any further
breaches by the Employee.

         11. AGREEMENTS REGARDING PRIOR EMPLOYMENT.

         (a) As used in this Agreement, the following terms have the following
meanings.

                  "Trade Secret" means the whole or any portion of the property
of a person (the "Owner") consisting of any information, pattern, compilation,
data, list, document, memorandum, process, program, device, method, technique,
formula or improvement, whether patentable or not, relating to the business of
the Owner (i) of which Employee became aware as a consequence of or through his
relationship with the Owner; (ii) which derives independent economic value,
actual or potential, form not being generally known to the public or to other
persons who can obtain economic value from its disclosure or use; and (iii)
which is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy. Assuming these three criteria are met, Trade Secrets shall
include information relating to the financial affairs, customers, employees,
employees' compensation, research, development, inventions, existing and future
products and services, plans and designs, and marketing of the Owner. Trade
Secrets shall not include any data or information that has been voluntarily
disclosed to the public by the Owner or become generally known to the public.

         (b) To induce eLoyalty to enter into this Agreement, Employee
represents to eLoyalty that Employee has not disclosed to eLoyalty, directly or
indirectly, any Trade Secret of any former employer and that Employee does not
believe that the performance of his duties and responsibilities arising from
this Agreement will require his reliance on, use of or disclosure of any Trade
Secret of any former employer.

         (c) Employee and eLoyalty hereby covenant to each other that neither
eLoyalty nor Employee intends to obtain, learn, disclose or use any Trade Secret
of any former employer of Employee. Employee will not disclose to eLoyalty any
Trade Secret of a former employer, and eLoyalty will not request Employee to
make any such disclosure.

         12. INTELLECTUAL PROPERTY: During the Term of Employment, Employee
shall disclose to eLoyalty all ideas, inventions and business plans which
Employee develops during the course of Employee's employment with eLoyalty which
relate directly or indirectly to eLoyalty's business, including but not limited
to any computer programs, processes, products or procedures which may, upon
application, be protected by patent or copyright. Employee agrees that any such
ideas, inventions or business plans shall be the property of eLoyalty and that
Employee shall, at eLoyalty's request and cost (including reimbursement of
Employee's expenses and, if Employee is no longer in the employ of eLoyalty,
reasonable per diem compensation to Employee), provide eLoyalty with such
assurances as is necessary to secure a patent or copyright.




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<PAGE>   7

         13. ASSIGNMENT: Employee acknowledges that the services to be rendered
pursuant to this Agreement are unique and personal. Accordingly, Employee may
not assign any of Employee's rights or delegate any of Employee's duties or
obligations under this Agreement. eLoyalty may assign its rights, duties or
obligations under this Agreement to a subsidiary or affiliate of eLoyalty with
the consent of Employee. This Agreement shall be binding upon and inure to the
benefit of any purchaser or transferee of a majority of eLoyalty's outstanding
capital stock or a purchaser or transferee of all, or substantially all, of the
assets of eLoyalty.

         14. NOTICES: All notices hereunder shall be in writing, except for
notice of termination of employment, which may be oral if confirmed in writing
within 14 days. Notices intended for eLoyalty shall be sent by registered or
certified mail addressed to it at 150 Field Drive, Suite 250, Lake Forest,
Illinois 60045 or its current principal office, and notices intended for
Employee shall be either delivered personally to Employee or sent by registered
or certified mail addressed to Employee's last known address.

         15. ENTIRE AGREEMENT: This Agreement and Exhibit A attached hereto,
together with the other plans, programs and agreements referred to herein,
constitute the entire agreement between eLoyalty and Employee with respect to
the subject matter hereof. Neither Employee nor eLoyalty may modify this
Agreement by oral agreements, promises or representations. The parties may
modify this Agreement only by a written instrument signed by the parties.
eLoyalty shall prepare amendments to Exhibit A from time to time as necessary to
reflect changes to the terms set forth therein.

         16. WAIVER OF BREACH: No waiver by any party hereto of a breach of any
provision of this Agreement by any other party, or of compliance with any
condition or provision of this Agreement to be performed by such other party,
will operate or be construed as a waiver of any subsequent breach by such other
party of any similar or dissimilar provisions and conditions at the same or any
prior or subsequent time. The failure of any party hereto to take any action by
reason of such breach will not deprive such party of the right to take action at
any time while such breach continues.

         17. APPLICABLE LAW: This Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois.

         18. BINDING ARBITRATION: Employee and eLoyalty agree that all claims or
disputes relating to Employee's employment with eLoyalty or the termination of
such employment, and any and all other claims that Employee might have against
eLoyalty, any eLoyalty director, officer, employee, agent, or representative,
and any and all claims or disputes that eLoyalty might have against Employee
(except for any claims under Paragraph 9 of this Agreement) shall be resolved
under the Expedited Commercial Rules of the American Arbitration Association. If
either party pursues a claim and such claim results in an Arbitrator's decision,
both parties agree to accept such decision as final and binding. eLoyalty and
Employee agree that any litigation under Paragraph 9 or 10 of this Agreement
shall be brought in the Circuit Court for Cook County, Illinois.




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<PAGE>   8

         19. SEVERABILITY: Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.

         20. ACKNOWLEDGEMENT: Employee acknowledges that Employee has read,
understood and accepts the provisions of this Agreement.


eLoyalty Corporation                            Jay Istvan



By:  /s/ KELLY D. CONWAY                        /s/ JAY ISTVAN
   ---------------------------------------      -------------------------
                  Kelly D. Conway
      President and Chief Executive Officer

Date:                                           Date:
     --------------------------------------          --------------------



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<PAGE>   9





                                    EXHIBIT A



EMPLOYEE:                  Jay Istvan

POSITION:                  Senior Vice President

BASE SALARY:               $400,000 per annum

SIGN-ON BONUS/LOAN:        $250,000

EFFECTIVE DATE:            January 29, 2001

STOCK OPTION:              Initial grant as of the Effective Date, under the
                           Incentive Plan, of a nonqualified option to purchase
                           250,000 shares of eLoyalty Corporation common stock,
                           having the following exercise price and normal
                           vesting schedule, subject to the terms and conditions
                           of the Incentive Plan and the applicable Option
                           Agreement:

                           Exercise Price: Closing price per share of eLoyalty
                           common stock on the date of grant.

                           Vesting Schedule: The Option shall become vested and
                           exercisable with respect to 62,500 shares (25% of the
                           shares covered by the Option) on the last day of the
                           month in which the first anniversary of the Effective
                           Date occurs (subject to Employee's continued
                           employment with eLoyalty). The remaining 187,500
                           shares covered by the Option shall vest and become
                           exercisable in equal monthly increments (each equal
                           to 1/36 of such remaining shares) on the last day of
                           each month over the thirty-six (36) consecutive month
                           period beginning in the month following the month in
                           which the first anniversary of the Effective Date
                           occurs (subject to Employee's continued employment
                           with eLoyalty). The option shall be subject to
                           accelerated vesting upon a change in control of
                           eLoyalty or in the event of death or termination of
                           employment by reason of Disability or Constructive



                                  Exhibit A - 1
<PAGE>   10
                           Discharge in accordance with the terms set forth in
                           the attached option agreement.


    /s/ JAY ISTVAN
---------------------------------           eLoyalty Corporation
         Jay Istvan

                                            By: /s/ KELLY D. CONWAY
                                               ---------------------------------
                                                          Kelly D. Conway
                                                        President and Chief
                                                          Executive Officer

----------------------------------          ------------------------------------
         Date                                        Date

























                                 Exhibit A - 2


<PAGE>   11




                              eLOYALTY CORPORATION
                                  NON-STATUTORY
                      NEW HIRE STOCK OPTION AWARD AGREEMENT

                  eLoyalty Corporation, a Delaware corporation (the "Company"),
hereby grants to the individual whose name appears below (the "Optionholder"),
pursuant to the provisions of the eLoyalty Corporation 1999 Stock Incentive Plan
(the "Plan"), an option to purchase from the Company (the "Option") such number
of shares of its Common Stock, $0.01 par value ("Stock"), as set forth below at
the price per share set forth below but only upon and subject to the terms and
conditions set forth herein, in the Plan, and in Annex I hereto. The Option is a
non-statutory stock option, which means it is not intended to qualify as an
"incentive stock option" under Code Section 422.

                  All terms and conditions set forth in Annex I and the Plan are
deemed to be incorporated herein in their entirety. The terms "Constructive
Discharge," "Disability" and Serious Misconduct shall have the meanings ascribed
to such terms under the Optionholder's employment agreement dated January 29,
2001. All other capitalized terms used in this Agreement and not otherwise
defined herein have the respective meanings assigned to them in Annex I or the
Plan. The Option will become null and void unless the Optionholder accepts this
Agreement by executing it in the space provided and returning it to the
Company's Chief Financial Officer, or his or her designee.


                  OPTIONHOLDER'S NAME:      JAY ISTVAN

                  NUMBER OF SHARES
                   SUBJECT TO OPTION:       250,000

                  EXERCISE PRICE
                   PER SHARE:               [CLOSING PRICE ON 1/29/01]

                  DATE OF OPTION GRANT
                  ("OPTION DATE"):          JANUARY 29, 2001

                  DATE OF EMPLOYMENT
                  ("EMPLOYMENT DATE"):      JANUARY 29, 2001


                  EXERCISE PROVISIONS:

                  (a) The Option will become exercisable as follows: (i) 25% of
the shares subject to the Option will become vested and exercisable on the last
day of the month in which the one year anniversary of the Employment Date
occurs; (ii) additional increments of 1/36 of the remaining shares subject to
the Option will become vested and exercisable on the last day of each calendar
month for 36 months thereafter, beginning the month immediately following the



                                 Exhibit A - 3
<PAGE>   12



month in which the one year anniversary of the Employment Date occurs, such that
the Option will be fully exercisable four years after the Employment Date, and
(iii) as otherwise provided pursuant to paragraphs (b) through (h) of this
Agreement or Section 6.8 of the Plan.

                  (b) If the Optionholder's employment with the Company is
terminated by the Company for Serious Misconduct or is terminated by the
Optionholder other than pursuant to a Constructive Discharge or Disability, the
Option will be exercisable only with respect to the number of shares subject to
the Option that are exercisable as of the effective date of the Optionholder's
termination of employment with the Company. The Option may thereafter be
exercised with respect to such number of shares for a period of 90 days from the
effective date of the Optionholder's termination of employment or until the
Expiration Date, whichever period is shorter, after which the Option will
terminate in its entirety. The Option shall terminate upon the effective date of
such termination of employment with respect to any shares subject thereto that
are not exercisable as of such effective date.

                  (c) If, the Optionholder's employment with the Company is
terminated by the Company for reasons other than Serious Misconduct or by the
Optionholder pursuant to a Constructive Discharge, the Option will continue to
vest and become exercisable in accordance with paragraph (a) above through the
last day of the month coincident with or immediately preceding the first
anniversary of the effective date of the Optionholder's termination of
employment with the Company and may be exercised for a period of 90 days from
such first anniversary or until the Expiration Date, whichever period is
shorter, after which the Option will terminate in its entirety. The Option shall
terminate as of the first anniversary of the effective date of such termination
of employment with respect to any shares subject thereto that are not
exercisable as of such first anniversary.

                  (d) If the Optionholder's employment with the Company
terminates by reason of the Optionholder's death, the Option will become fully
vested and exercisable as of the date of death with respect to all of the shares
subject to the Option. The Option may thereafter be exercised by the
Optionholder's legal representative for a period of one year from the date of
death or until the Expiration Date, whichever period is shorter, after which the
Option will terminate in its entirety.

                  (e) If the Optionholder's employment with the Company
terminates by reason of the Optionholder's Disability, the Option will become
exercisable as of the effective date of such termination with respect to all of
the shares subject to the Option. The Option may thereafter be exercised for a
period of 90 days from the effective date of such termination or until the
Expiration Date, whichever period is shorter, after which the Option will
terminate in its entirety.

                  (f) If the Optionholder's employment with the Company
terminates by reason of the Optionholder's retirement after the Optionholder has
completed five years of service as an Employee of the Company and is at least 55
years of age ("Retirement"), the Option will remain exercisable with respect to
the number of shares subject to the Option that are exercisable as of the


                                 Exhibit A - 4
<PAGE>   13



effective date of the Optionholder's Retirement, and may thereafter be exercised
for a period of two years from the effective date of the Optionholder's
Retirement or until the Expiration Date, whichever period is shorter, after
which the Option will terminate in its entirety. The Option shall terminate as
of the effective date of the Optionholder's Retirement with respect to any
shares subject thereto that are not exercisable as of such Retirement effective
date.

                  (g) In the event of a Change in Control during the
Optionholder's employment by the Company, the Option shall become immediately
vested and exercisable with respect to the number of shares with respect to
which the Option would otherwise become vested during the twenty-four-month
period immediately following the Change in Control. The preceding sentence shall
not result in accelerated vesting with respect to the number of shares as to
which the Option would become vested after such twenty-four-month period. In the
event of a termination of the Optionholder's employment during the twenty-four
month period immediately following a Change in Control either by the Company for
reasons other than Serious Misconduct or by the Optionholder pursuant to a
Constructive Discharge, then, in lieu of vesting under paragraph (c) above, the
Option shall become immediately vested and exercisable with respect to the
number of shares as to which the Option would otherwise become vested during the
twelve-month period immediately following such twenty-four month period and may
be exercised as to all shares for a period of 90 days from the effective date of
such termination of employment.

                  (h) If the Optionholder dies following the termination of the
Optionholder's employment with the Company, the Option will be exercisable only
to the extent that it is exercisable as of the date of the Optionholder's death
and may thereafter be exercised only for that period of time for which the
Option is exercisable immediately prior to the Optionholder's death; provided,
however, that in the event of the Optionholder's death within 30 days of the
last date on which such Option could otherwise be exercised by the Optionholder,
the Option shall continue to be exercisable until 30 days after the date of
death or until the Expiration Date, whichever is shorter.

                  GENERAL:

                  This Agreement is subject to the provisions of the Plan, and
will be interpreted in accordance therewith. In the event of a discrepancy
between this Agreement, or any other material describing this Agreement or the
Option awarded hereunder, and the actual terms of the Plan, the Plan will govern
in all respects. A copy of the Plan is available upon request by contacting the
Legal Department at the Company's Lake Forest, Illinois office. The Optionholder
hereby acknowledges that he or she has read a copy of the Plan. This Agreement
may be executed in two counterparts each of which will constitute one and the
same instrument.

                                  Exhibit A - 5

<PAGE>   14




                  IN WITNESS WHEREOF, this Agreement has been executed as the
Option Date set forth above.



Accepted and agreed this
29th  day of January, 2001                  eLoyalty Corporation

/s/ JAY ISTVAN                              By: /s/ KELLY D. CONWAY
-----------------------------                  ---------------------------------
Jay Istvan                                              Kelly D. Conway
                                                   Its:  Chief Executive Officer















                                 Exhibit A - 6


<PAGE>   15

                                     ANNEX I
                                       TO
                             STOCK OPTION AGREEMENT

                  1. Meaning of Certain Terms. As used herein, the following
terms have the meanings set forth below. "Board" means the Company's Board of
Directors. "Code" means the Internal Revenue Code of 1986, as amended.
References to this "Agreement," the "Option" and "herein" are deemed to include
the Stock Option Agreement and this Annex I to Stock Option Agreement taken as a
whole. This Annex I and the Stock Option Agreement are deemed to be one and the
same instrument. The term "employment" shall have the meanings set forth in
Section 1.4 of the Plan. Other capitalized terms used herein without definition
shall have the respective meanings set forth in the Stock Option Agreement or
the Plan, as appropriate.

                  2.       Time and Manner of Exercise of Option.


                  2.1. Term and Termination of Option. The maximum term of the
Option will be the date which is 10 years after the Option Date (the "Expiration
Date"). The Option will terminate, to the extent not exercised or earlier
terminated pursuant to the terms of this Agreement, on its Expiration Date.
Notwithstanding any other term of this Agreement, in no event may the Option be
exercised, in whole or in part, after the Expiration Date or its earlier
termination.

                  2.2. Exercisability of Option. The Option will become
exercisable on the date or dates as set forth in this Agreement.

                  2.3. Manner of Exercise. The Option may be exercised in whole
or in part by the Optionholder in the manner described in or established by the
Committee pursuant to Section 2.1(c) of the Plan.

                  2.4 Tax Withholding. The Company will be entitled to withhold,
or secure payment from the Optionholder in lieu of withholding, the amount of
any Federal, state, local or other withholding taxes due upon exercise of the
Option, in accordance with Section 6.5 of the Plan.

                  3. Miscellaneous Provisions.

                  3.1. Option Confers No Rights as Stockholder. Neither the
Optionholder nor any other person has or will have any rights as a security
holder of the Company or any successor with respect to any shares of Common
Stock or other securities which are or become subject to the Option hereunder
unless and until the Optionholder becomes a holder of record with respect to
such shares of Common Stock or other securities following proper exercise of the
Option.

                  3.2. Option Confers No Rights to Continue Employment or
Service. In no event will the granting of the Option or its acceptance by the
Optionholder confer upon the Optionholder any right to continued employment or


                                 Exhibit A - 7


<PAGE>   16
service with the Company, or any subsidiary or affiliate of the Company, or
affect in any manner the right of the Company, or its subsidiary or affiliate,
to terminate the employment or service of the Optionholder at any time without
liability hereunder.

                  3.3. Designation as Nonqualified Stock Option. The Option is
hereby designated as a non-statutory stock option and shall not constitute an
"incentive stock option" within the meaning of section 422 of the Code; this
Agreement will be interpreted and treated consistently with such designation.

                  3.4. Decisions of the Committee. Subject to Section 1.3 of the
Plan, the Committee has the right to resolve all questions which may arise in
connection with the Option or its exercise. Any interpretation, determination or
other action made or taken by the Committee regarding the Plan or this Agreement
shall be final, binding and conclusive.

                  3.5. Non-transferability. Subject to Section 6.4 of the Plan,
the Option may not be transferred, assigned or pledged.

                  3.6 Conformity with Plan. The Option is intended to conform in
all respects with, and is subject to all applicable provisions of, the Plan,
which is incorporated herein by reference. In the event of any discrepancy
between the Option, or a document that describes or explains the Option, and the
Plan, the Plan will govern in all respects.

                  3.7. Successors. This Agreement will be binding upon and inure
to the benefit of any successor or successors of the Company and any person or
persons who acquire any rights under Section 6.4 of the Plan.

                  3.8. Notices. All notices, requests or other communications
relating to the exercise of this Option (including, without limitation, the
"cashless exercise" thereof or tax withholdings relating thereto) will be made
in writing in such form and substance, and provided in accordance with such
procedures, as may be prescribed by the Committee from time to time and then in
effect. Any other notices, requests or other communications provided for in this
Agreement will be made in writing either (1) by actual delivery to the party
entitled thereto, or (2) by mailing in the U.S. mails to the last known address
of the party entitled thereto, via certified or registered mail, return receipt
requested. Any such other notices will be deemed to be received in case (1) on
the date of its actual receipt by the party entitled thereto, and in case (2) on
the date of its mailing.

                  3.9. Governing Law. This Agreement, and all determinations
made and actions taken pursuant thereto, to the extent not otherwise governed by
the Code or the laws of the United States, will be governed by the laws of the
State of Delaware and construed in accordance therewith, without giving effect
to the principles of conflicts of laws.




                                 Exhibit A - 8