##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

|       |  |                                                                                  
|------ |  | ---------------------------------------------------------------------------------
|(XBOX) |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the quarterly period ended June 30, 2002.

|      |  |                                                                                   
|----- |  | ----------------------------------------------------------------------------------
|(BOX) |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from _______________to _______________.

Commission file number _________

EXCHANGE APPLICATIONS, INC.
(Exact name of registrant, as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 04-3338916
(I.R.S. Employer
Identification No.)

89 South Street, Boston, Massachusetts 02111

(Address of principal executive offices)                                    (Zip Code)


Registrants telephone number, including area code 617-737-2244





---

(Former name, former address and former fiscal year, if changed since last
report)


Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 (XBOX) No (BOX)

State the number of shares outstanding of the registrants common stock, as of
the latest practicable date.

|                            |  |                                   
|--------------------------- |  | ----------------------------------
|Number of Shares: 1,152,892 |  | Outstanding as of: August 19, 2002





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TABLE OF CONTENTS



|                                       |                                                                                                |  |  |  |  |  |  | 
|-------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I    FINANCIAL INFORMATION      
|                                       | ITEM 1. Financial Statements                                                                  
|                                       | CONSOLIDATED BALANCE SHEETS                                                                   
|                                       | CONSOLIDATED STATEMENTS OF OPERATIONS                                                         
|                                       | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                         
|                                       | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                       | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                                       | ITEM 3. Quantitative and Qualitative Disclosure about Market Risk                             
|Part II  Other Information           
|                                       | Item 1. Legal Proceedings                                                                     
|                                       | Item 3. Defaults Upon Senior Securities                                                       
|                                       | Item 4. Submission of Matters to a Vote of Security Holders                                   
|                                       | Item 6. Exhibits and Reports on Form 8-K                                                      
|                                       | SIGNATURE                                                                                     
|AMENDMENT NO 1 TO WARRANTS TO PURCHASE



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##### Table of Contents



Exchange Applications, Inc.

Form 10-Q for the Three Months Ended June 30, 2002

Table of Contents

PART I. FINANCIAL INFORMATION

|                           |  |                                                                                                 |  |             |    | 
|-------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ----------- | -- | 
|                           |  |                                                                                                 |  | Page Number
|Item 1.                    |  | Financial Statements (unaudited):                                                               |  |             | 3  | 
|                          
|                          
|                          
|                          
|                           |  | Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002                           |  |             | 3  | 
|                          
|                          
|                          
|                          
|                           |  | Consolidated Statements of Operations for the three and six months
ended June 30, 2001 and 2002 |  |             | 4  | 
|                          
|                          
|                          
|                          
|                           |  | Consolidated Statements of Cash Flows for the six months ended June
30, 2001 and 2002           |  |             | 5  | 
|                          
|                          
|                          
|                          
|                           |  | Notes to Consolidated Financial Statements                                                      |  |             | 7  | 
|                          
|                          
|                          
|                          
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and
Results of Operation            |  |             | 11 | 
|                          
|                          
|                          
|                          
|Item 3.                    |  | Quantitative and Qualitative Disclosure about Market Risk                                       |  |             | 19 | 
|                          
|                          
|                          
|                          
|PART
II. OTHER INFORMATION
|                          
|                          
|                          
|                          
|Item 1.                    |  | Legal Proceedings                                                                               |  |             | 19 | 
|                          
|                          
|                          
|                          
|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                             |  |             | 20 | 
|                          
|                          
|                          
|                          
|Item 6.                    |  | Exhibits and Reports on Form 8-K                                                                |  |             | 20 | 
|                          
|                          
|                          
|                          
|                           |  | Signatures                                                                                      |  |             | 22 | 

2



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##### Table of Contents






PART I    FINANCIAL INFORMATION




ITEM 1. Financial Statements

EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |          |        |   | 
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | -------- | ------------ |  | -------- | -------- | ------ | - | 
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          | December 31, |  | June 30,
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          | 2001         |  | 2002    
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |         
|ASSETS                                          |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |         
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |         
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                                        |                                                                                              | $                                                                                      | 7,074    |              |  | $        | 3,870    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable, net of allowance for doubtful accounts                                                                      |                                                                                              |                                                                                        | 7,031    |              |  |          | 2,283    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid expenses and other current assets                                                                                        |                                                                                              |                                                                                        | 1,874    |              |  |          | 1,067    |       
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |          |       
|                                                |                                                                                                                                  | Total current assets                                                                         |                                                                                        |          | 15,979       |  |          |          | 7,220  |  
|                                               
|                                               
|                                               
|                                               
|Property and equipment, net                     |                                                                                                                                  |                                                                                              | 6,187                                                                                  |          |              |  | 3,941    |         
|                                               
|                                               
|                                               
|                                               
|Goodwill                                        |                                                                                                                                  |                                                                                              | 20,407                                                                                 |          |              |  | 20,782   |         
|                                               
|                                               
|                                               
|                                               
|Other intangible assets                         |                                                                                                                                  |                                                                                              | 375                                                                                    |          |              |  |         |         
|                                               
|                                               
|                                               
|                                               
|Other assets                                    |                                                                                                                                  |                                                                                              | 290                                                                                    |          |              |  | 142      |         
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |          |       
|                                                |                                                                                                                                  | Total assets                                                                                 |                                                                                        | $        | 43,238       |  |          | $        | 32,085 |  
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |          |       
|                                                |                                                                                                                                  |                                                                                              | LIABILITIES,
REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS EQUITY (DEFICIT) |          |              |  |          |          |        |   | 
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |         
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable                                                                                                                 |                                                                                              | $                                                                                      | 3,961    |              |  | $        | 2,836    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued expenses                                                                                                                 |                                                                                              |                                                                                        | 6,411    |              |  |          | 5,574    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued restructuring expenses                                                                                                   |                                                                                              |                                                                                        | 4,716    |              |  |          | 1,796    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued interest related to convertible debentures                                                                               |                                                                                              |                                                                                        | 2,132    |              |  |          | 4,449    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued acquisition reserves                                                                                                     |                                                                                              |                                                                                        | 3,086    |              |  |          | 3,059    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Note payable to certain former shareholders of Customer Analytics                                                                |                                                                                              |                                                                                        | 2,487    |              |  |          | 2,540    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Line of credit                                                                                                                   |                                                                                              |                                                                                        | 4,169    |              |  |          | 4,773    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Current portion of capital lease obligations                                                                                     |                                                                                              |                                                                                        | 1,232    |              |  |          | 170      |       
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred revenue                                                                                                                 |                                                                                              |                                                                                        | 3,975    |              |  |          | 3,086    |       
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |          |       
|                                                |                                                                                                                                  | Total current liabilities                                                                    |                                                                                        |          | 32,169       |  |          |          | 28,283 |  
|                                               
|                                               
|                                               
|                                               
|Long term portion of capital lease obligations  |                                                                                                                                  |                                                                                              | 63                                                                                     |          |              |  | 14       |         
|                                               
|                                               
|                                               
|                                               
|Convertible debentures                          |                                                                                                                                  |                                                                                              | 3,102                                                                                  |          |              |  | 7,127    |         
|                                               
|                                               
|                                               
|                                               
|Series A redeemable convertible preferred stock |                                                                                                                                  |                                                                                              | 5,650                                                                                  |          |              |  | 6,519    |         
|                                               
|                                               
|                                               
|                                               
|Stockholders equity:                           |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |         
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred
Stock; $.001 par value 
10,000,000 shares authorized, zero shares outstanding at December 31, 2001 and June 30, 2002, |                                                                                              |                                                                                        |         |              |  |          |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Common Stock, $.001 par value                                                                                                   |                                                                                              |                                                                                        |          |              |  |          |          |       
|                                               
|                                               
|                                               
|                                               
|                                                |                                                                                                                                  | 50,000,000 shares authorized; 1,152,892 shares issued at December 31, 2001 and June 30, 2002 |                                                                                        |          | 1            |  |          |          | 1      |  
|                                               
|                                               
|                                               
|                                               
|                                                | Additional paid-in capital                                                                                                       |                                                                                              |                                                                                        | 299,547  |              |  |          | 299,663  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated deficit                                                                                                              |                                                                                              |                                                                                        | (297,030 | )            |  |          | (309,180 | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Other comprehensive income                                                                                                       |                                                                                              |                                                                                        | (264     | )            |  |          | (342     | )     
|                                               
|                                               
|                                               
|                                               
|                                                | Treasury stock, at cost; 12,219 shares at December 31, 2001 and June 30, 2002                                                    |                                                                                              |                                                                                        |         |              |  |          |         |       
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |          |       
|                                                |                                                                                                                                  | Total stockholders equity (deficit)                                                         |                                                                                        |          | 2,254        |  |          |          | (9,858 | )
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |          |       
|                                                |                                                                                                                                  | Total liabilities and stockholders equity (deficit)                                         |                                                                                        | $        | 43,238       |  |          | $        | 32,085 |  
|                                                |                                                                                                                                  |                                                                                              |                                                                                        |          |              |  |          |          |       

The accompanying notes are an integral part of these consolidated financial statements.

3



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##### Table of Contents



EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and share amounts)

|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |        |  
|-------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------ | --------- | ------------------ | ------ | ---------------- | --------- | ------ | ------ | ---- | --------- | ------ | ------ | - | --------- | ------ | ------ | -
|                                                                                 |                                                 |                                      |           | Three Months Ended |        | Six Months Ended
|                                                                                 |                                                 |                                      |           | June 30            |        | June 30         
|                                                                                 |                                                 |                                      |           | 2001               |        | 2002             |           | 2001   |        | 2002
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |     
|Revenues:                                                                        |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Software license fees                           |                                      | $         | 4,628              |        |                  | $         | 1,321  |        |      | $         | 13,673 |        |   | $         | 4,062  |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Services and maintenance                        |                                      |           | 6,179              |        |                  |           | 3,219  |        |      |           | 12,894 |        |   |           | 6,866  |       
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|                                                                                 |                                                 | Total revenues                       |           |                    | 10,807 |                  |           |        | 4,540  |      |           |        | 26,567 |   |           |        | 10,928 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Cost of revenues:                                                                |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Software license fees                           |                                      |           | 298                |        |                  |           | 74     |        |      |           | 501    |        |   |           | 143    |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Services and maintenance                        |                                      |           | 4,601              |        |                  |           | 1,307  |        |      |           | 9,115  |        |   |           | 2,813  |       
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|                                                                                 |                                                 | Total cost of revenues               |           |                    | 4,899  |                  |           |        | 1,381  |      |           |        | 9,616  |   |           |        | 2,956  |  
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Gross profit                                                                     |                                                 |                                      | 5,908     |                    |        |                  | 3,159     |        |        |      | 16,951    |        |        |   | 7,972     |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Operating expenses:                                                              |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Sales and marketing                             |                                      |           | 9,448              |        |                  |           | 2,167  |        |      |           | 19,728 |        |   |           | 4,427  |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Research and development                        |                                      |           | 5,155              |        |                  |           | 1,957  |        |      |           | 11,376 |        |   |           | 4,213  |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | General and administrative                      |                                      |           | 5,417              |        |                  |           | 2,259  |        |      |           | 9,639  |        |   |           | 4,298  |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Amortization of goodwill and intangibles        |                                      |           | 5,189              |        |                  |           |       |        |      |           | 10,319 |        |   |           |       |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Amortization of MicroStrategy non-current asset |                                      |           | 4,906              |        |                  |           |       |        |      |           | 9,812  |        |   |           |       |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Impairment of goodwill and intangible
assets    |                                      |           | 19,349             |        |                  |           |       |        |      |           | 19,349 |        |   |           |       |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Restructuring charge                            |                                      |           | 7,460              |        |                  |           | (825   | )      |      |           | 7460   |        |   |           | (468   | )     
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|                                                                                 |                                                 | Total operating expenses             |           |                    | 56,924 |                  |           |        | 5,558  |      |           |        | 87,683 |   |           |        | 12,470 |  
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Loss from operations                                                             |                                                 |                                      | (51,016   | )                  |        |                  | (2,399    | )      |        |      | (70,732   | )      |        |   | (4,498    | )     
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Interest income (expense):                                                       |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Interest income                                 |                                      |           | 62                 |        |                  |           | 8      |        |      |           | 116    |        |   |           | 25     |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Interest expense                                |                                      |           | (1,733             | )      |                  |           | (3,095 | )      |      |           | (2,328 | )      |   |           | (6,692 | )     
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|                                                                                 |                                                 | Total interest income (expense), net |           |                    | (1,671 | )                |           |        | (3,087 | )    |           |        | (2,212 | ) |           |        | (6,667 | )
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Loss before provision for income taxes                                           |                                                 |                                      | (52,687   | )                  |        |                  | (5,486    | )      |        |      | (72,944   | )      |        |   | (11,165   | )     
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Provision for income taxes                                                       |                                                 |                                      | 6         |                    |        |                  |          |        |        |      | 12        |        |        |   |          |       
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Net loss                                                                         |                                                 | $                                    | (52,693   | )                  |        | $                | (5,486    | )      |        | $    | (72,956   | )      |        | $ | (11,165   | )     
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Accretion to redemption value of Series A redeemable
convertible preferred stock |                                                 |                                      | 477       |                    |        |                  | 498       |        |        |      | 892       |        |        |   | 984       |       
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Net loss available to common stockholders                                        |                                                 | $                                    | (53,170   | )                  |        | $                | (5,984    | )      |        | $    | (73,848   | )      |        | $ | (12,149   | )     
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Net loss per common share:                                                       |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Basic net loss per share applicable to common stockholders                       |                                                 | $                                    | (47.93    | )                  |        | $                | (5.19     | )      |        | $    | (67.04    | )      |        | $ | (10.54    | )     
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Diluted net loss per share applicable to common stockholders                     |                                                 | $                                    | (47.93    | )                  |        | $                | (5.19     | )      |        | $    | (67.04    | )      |        | $ | (10.54    | )     
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Basic weighted average common shares outstanding                                 |                                                 |                                      | 1,109,320 |                    |        |                  | 1,152,892 |        |        |      | 1,101,618 |        |        |   | 1,152,892 |       
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       
|Diluted weighted average common shares outstanding                               |                                                 |                                      | 1,109,320 |                    |        |                  | 1,152,892 |        |        |      | 1,101,618 |        |        |   | 1,152,892 |       
|                                                                                 |                                                 |                                      |           |                    |        |                  |           |        |        |      |           |        |        |   |           |        |       

The accompanying notes are an integral part of these consolidated financial statements.

4



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##### Table of Contents



EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |         |       |        |        |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------- | ------ | -------------------------- | ------- | ------- | ----- | ------ | ------ | -
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        | Six
Months Ended 
June 30,
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        | 2001                       |         | 2002   
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|Cash flows from operating activities:                        |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net loss                                                                                             |                                                                                                                        | $                                         | (72,956                               | )      |                            | $       | (11,165 | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Adjustments to reconcile net loss to net cash used in operating activities:                          |                                                                                                                        |                                           |                                       |        |                            |         |         |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Depreciation and other amortization                                                                                    |                                           |                                       | 2,625  |                            |         |         | 1,712 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Amortization of MicroStrategy asset                                                                                    |                                           |                                       | 9,812  |                            |         |         |      |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Compensation expense associated with stock options                                                                     |                                           |                                       | 57     |                            |         |         |      |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash interest related to convertible debentures                                                                    |                                           |                                       |       |                            |         |         | 6,342 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non cash interest expense related to MicroStrategy obligation                                                          |                                           |                                       | 567    |                            |         |         |      |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash interest related to notes payable to former Customers Analytics
shareholders                                  |                                           |                                       | 54     |                            |         |         | 53    |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash interest expense related to bridge notes and warrants issued to
Insight                      Venture Partners |                                           |                                       | 768    |                            |         |         |      |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Amortization of goodwill and intangibles                                                                               |                                           |                                       | 10,319 |                            |         |         |      |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Impairment of goodwill and other intangibles assets                                                                    |                                           |                                       | 19,349 |                            |         |         |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash interest expense related to warrants issued to Silicon Valley Bank                                            |                                           |                                       |       |                            |         |         | 40    |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash restructuring charge                                                                                          |                                           |                                       | 6,690  |                            |         |         | 554   |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Changes in operating assets and liabilities:                                                                           |                                           |                                       |        |                            |         |         |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                                                        | Accounts receivable                       |                                       |        | 9,766                      |         |         |       | 4,748  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                                                        | Prepaid expenses and other current assets |                                       |        | 1,543                      |         |         |       | 767    |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                                                        | Accounts payable                          |                                       |        | (422                       | )       |         |       | (1,075 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                                                        | Accrued expenses                          |                                       |        | (1,407                     | )       |         |       | (3,835 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                                                        | Deferred revenue                          |                                       |        | (944                       | )       |         |       | (889   | )     
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|                                                             |                                                                                                      |                                                                                                                        |                                           | Net cash used in operating activities |        |                            | (14,179 | )       |       |        | (2,748 | )
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|Cash flows from investing activities:                        |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchases of property and equipment                                                                  |                                                                                                                        |                                           | (1,981                                | )      |                            |         | (31     | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from the sale of property, equipment, and improvements                                      |                                                                                                                        |                                           |                                      |        |                            |         | 12      |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Decrease in other assets                                                                             |                                                                                                                        |                                           | 110                                   |        |                            |         | 148     |      
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|                                                             |                                                                                                      | Net cash used in investing activities                                                                                  |                                           |                                       | (1,871 | )                          |         |         | 129   |       
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|Cash flows from financing activities:                        |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from the issuance of Series A redeemable convertible preferred
stock, net of issuance costs |                                                                                                                        |                                           | 4,587                                 |        |                            |         |        |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from the issuance of notes payable to Insight VentureCapital Partners                       |                                                                                                                        |                                           | 6,867                                 |        |                            |         |        |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Repayments under capital leases                                                                      |                                                                                                                        |                                           | (986                                  | )      |                            |         | (1,111  | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Repayment of notes payable to Customer Analytics shareholders                                        |                                                                                                                        |                                           | (2,460                                | )      |                            |         |        |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from bank line of credit                                                                    |                                                                                                                        |                                           | 4,012                                 |        |                            |         | 604     |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Issuance of common stock under ESPP                                                                  |                                                                                                                        |                                           | 230                                   |        |                            |         |        |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Exercise of common stock options                                                                     |                                                                                                                        |                                           | 164                                   |        |                            |         |        |      
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|                                                             |                                                                                                      | Net cash provided by (used in) financing activities                                                                    |                                           |                                       | 12,414 |                            |         |         | (507  | )     
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                                                      |                                                                                                                        | 67                                        |                                       |        |                            | (78     | )      
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|Net decrease in cash and cash equivalents                    |                                                                                                      |                                                                                                                        | (3,569                                    | )                                     |        |                            | (3,204  | )      
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|Cash and cash equivalents, beginning of period               |                                                                                                      |                                                                                                                        | 8,617                                     |                                       |        |                            | 7,074   |        
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |        
|Cash and cash equivalents, end of period                     |                                                                                                      | $                                                                                                                      | 5,048                                     |                                       |        | $                          | 3,870   |        
|                                                             |                                                                                                      |                                                                                                                        |                                           |                                       |        |                            |         |         |      

The accompanying notes are an integral part of these consolidated financial statements.

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##### Table of Contents



|                                                                                                                                    |                            |   |        |     |  |   |     |    | 
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | - | ------ | --- |  | - | --- | -- | 
|Supplemental
disclosure of cash flow information                                                                                    |                            |   |        |     |  |   |     |   
|                                                                                                                                    | Cash paid for interest     |   | $      | 238 |  |   | $   | 93 | 
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|                                                                                                                                    | Cash paid for income taxes |   | $      | 12  |  |   |     |   | 
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|Effect of beneficial conversion feature on
Series A redeemable convertible preferred stock                                          |                            | $ | 2,094  |     |  |   |    |   
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|Issuance of warrants to Insight Venture Partners                                                                                    |                            | $ | 1,402  |     |  |   |    |   
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|Issuance of warrants to Silicon Valley Bank                                                                                         |                            | $ | 132    |     |  |   |    |   
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|Accretion of dividends and discount on Series A
redeemable convertible preferred stock                                              |                            | $ | 434    |     |  | $ | 503 |   
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|Accretion of discount, offering costs, and
beneficial conversion feature on issuance of
Series A redeemable preferred stock         |                            | $ | 458    |     |  | $ | 482 |   
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|Conversion of notes payable to Insight Venture
Partners into Series A redeemable convertible
preferred stock                        |                            | $ | 1,500  |     |  |   |    |   
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|Issuance of common stock related to stock
subscription and to settle obligation to
Microstrategy, Incorporated and related interest |                            | $ | 11,666 |     |  |   |     |   
|                                                                                                                                    |                            |   |        |     |  |   |     |   
|Equipment acquired under capital
lease                                                                                              |                            | $ | 305    |     |  |   |    |   
|                                                                                                                                    |                            |   |        |     |  |   |     |   

The accompanying notes are an integral part of these consolidated financial statements.

6



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##### Table of Contents



EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Background and Basis of Presentation

Exchange Applications, Inc. and its subsidiaries (the Company), doing
business as Xchange, Inc., provides Customer Relationship Management (CRM)
solutions that help companies earn a greater share of their customers business
through relevant, personalized customer communications. The Company provides an
open-platform CRM software and services solution that enables clients to
customize offers based on profile information, synchronize offers across all
customer channels in real-time and track the responses. This solution provides
companies with the opportunity to improve their acquisition and retention of
customers and increase customer relationship profitability.

The Company is subject to a number of risks common to rapidly growing
technology-based companies, including limited operating history, dependence on
key individuals, rapid technological changes, competition from substitute
products and larger companies, high customer concentration, and the need for
successful development and marketing of its commercial products and services.

The Company has sustained net losses and negative cash flows from
operations in 2000, 2001 and the six months ended June 30, 2002. In addition,
at June 30, 2002 the Company had a significant working capital deficit and
certain notes payable that matured in June 2002 have been left unpaid. The
Companys ability to meet its obligations in the ordinary course of the
business and to continue as a going concern is dependent on its ability to
reduce net operating expenses and refinance its existing obligations, or raise
additional financing through public and private equity financing or other
sources of financing. There is no assurance that the Company will be successful
in its efforts to raise additional capital, renegotiate its existing
obligations or to sufficiently reduce its operating expenses, all of which may
have a material adverse impact on the Companys solvency.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The accompanying consolidated financial statements are unaudited and have
been prepared in accordance with generally accepted accounting principles.
These statements include the accounts of Exchange Applications, Inc. and its
wholly owned subsidiaries.

(b) Interim Financial Reporting

Certain information and footnote disclosures normally included in the
Companys annual consolidated financial statements have been condensed or
omitted. The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the operating results for the
interim periods ended June 30, 2001 and 2002, respectively. The results of
operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the entire year. It is suggested that
these interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2001,
which are contained in the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission on May 14, 2002.

(c) Net Loss Per Share

In accordance with Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings per Share, basic and diluted net loss per common share for
the three and six months ended June 30, 2001 and 2002 is calculated by dividing
the net loss applicable to common stockholders by the weighted average number
of common shares outstanding.

7



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##### Table of Contents



EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Diluted weighted average shares outstanding for the three and six months
ended June 30, 2001 and 2002 exclude the potential common shares from stock
options, warrants and Series A redeemable convertible preferred stock because
to include such shares would have been antidilutive. As of June 30, 2001 and
2002, 519,032 and 7,492,267 potential common shares were outstanding,
respectively.

(d) Comprehensive Income (Loss)

The Company has adopted SFAS No. 130, Reporting Comprehensive Income
(SFAS No. 130). SFAS No. 130 requires that items defined as other
comprehensive income (loss), such as foreign currency translation adjustments,
be separately classified in the financial statements and that the accumulated
balance of other comprehensive income (loss) be reported separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet. The components of comprehensive income (loss) for the three and
six months ended June 30, 2001 and 2002 are as follows:

|                             |                                    |                             |   |                    |    |                  |   |        |     |      |   |         |    |  |   |         |     |  
|---------------------------- | ---------------------------------- | --------------------------- | - | ------------------ | -- | ---------------- | - | ------ | --- | ---- | - | ------- | -- |  | - | ------- | --- | -
|                             |                                    |                             |   | Three months ended |    | Six months ended
|                             |                                    |                             |   | June 30,           |    | June 30,        
|                             |                                    |                             |   | 2001               |    | 2002             |   | 2001   |     | 2002
|                             |                                    |                             |   |                    |    |                  |   |        |     |     
|                             |                                    |                             |   | (in thousands)     |    | (in thousands)   |   |        |     |     
|Comprehensive income (loss): |                                    |                             |   |                    |    |                  |   |        |     |      |   |         |    |  |   |        
|                            
|                            
|                            
|                            
|                             | Net income (loss)                  |                             | $ | (52,693            | )  |                  | $ | (5,486 | )   |      | $ | (72,956 | )  |  | $ | (11,165 | )  
|                            
|                            
|                            
|                            
|                             | Other comprehensive income (loss): |                             |   |                    |    |                  |   |        |     |      |   |         |    |  |   |         |    
|                            
|                            
|                            
|                            
|                             |                                    | Foreign currency adjustment |   |                    | 72 |                  |   |        | (52 | )    |   |         | 66 |  |   |         | (78 | )
|                             |                                    |                             |   |                    |    |                  |   |        |     |      |   |         |    |  |   |         |    
|                             | Comprehensive income (loss)        |                             | $ | (52,621            | )  |                  | $ | (5,538 | )   |      | $ | (72,890 | )  |  | $ | (11,243 | )  
|                             |                                    |                             |   |                    |    |                  |   |        |     |      |   |         |    |  |   |         |    

(3) Restructuring Charges

During the second quarter of 2002, the Company continued to undertake
certain restructuring actions to better align its cost structure with its
outlook on near term revenues and to conserve cash. The components of the
restructuring charges resulting from these actions are as follows (in
thousands):

|                       |  |   |        |  
|---------------------- |  | - | ------ | -
|Severance              |  | $ | 43     |  
|                      
|                      
|                      
|                      
|Facilities and related |  |   | (1,328 | )
|                      
|                      
|                      
|                      
|Property and equipment |  |   | 460    |  
|                       |  |   |        |  
|                       |  | $ | (825   | )
|                       |  |   |        |  

Severance costs relate to the elimination of 4 managerial and staff
positions worldwide, comprising approximately 2% of the beginning of the year
workforce in the following areas: one in sales and marketing, and three in
professional services. Property and equipment relate to non-cash write-offs of
excess office furniture and computer equipment that has been removed from
operations as a result of employee reductions. During the second quarter, the
Company was able to renegotiate certain operating leases which reduced its
facility and related obligations previously accrued for as restructuring
charges during the period ended December 31, 2001.

8



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##### Table of Contents



The following summarizes the activity in the Companys restructuring
accruals through June 30, 2002:

|                      |  |              |       |               |  |                  |        |   |  |                       |       |  |  |   |       | 
|--------------------- |  | ------------ | ----- | ------------- |  | ---------------- | ------ | - |  | --------------------- | ----- |  |  | - | ----- | 
|Restructuring accrual |  |              |       |               |  |                  |        |   |  | Restructuring accrual |       |  |  |  
|at December 31, 2001  |  | Additions    |       | Cash payments |  | at June 30, 2002 |        |   |  |                      
|                      |  |              |       |               |  |                  |        |   |  |                      
|                      |  | (Reductions) |       |               |  |                  |        |   |  |                       |       |  |  |  
|(in thousands)        |  |              |       |              
|Severance             |  | $            | 245   |               |  | $                | 307    |   |  | $                     | 509   |  |  | $ | 43    | 
|                     
|                     
|                     
|                     
|Facilities related    |  |              | 3,992 |               |  |                  | (1,328 | ) |  |                       | 1,179 |  |  |   | 1,485 | 
|                     
|                     
|                     
|                     
|Others                |  |              | 479   |               |  |                  |       |   |  |                       | 211   |  |  |   | 268   | 
|                      |  |              |       |               |  |                  |        |   |  |                       |       |  |  |   |       | 
|Total                 |  | $            | 4,716 |               |  | $                | (1,021 | ) |  | $                     | 1,899 |  |  | $ | 1,796 | 
|                      |  |              |       |               |  |                  |        |   |  |                       |       |  |  |   |       | 

The severance accrued at June 30, 2002 relates primarily to 4 employees
who positions were eliminated in June 2002. The severance accrual will be paid
out in installments through August 8, 2002. Facility costs will be paid out
through 2005 based on the remaining lease terms of the abandoned facilities.
Other accruals relate to non-cancelable payments due for marketing events which
have been canceled as a result of the Companys cost containment initiatives.

(5) Bank Line of Credit

On May 3, 2002 the Company secured two credit facilities with Silicon
Valley Bank (SVB).

The first replaces the Companys existing secured credit facility with a
$4 million revolving credit facility secured by all the Companys assets (the
Receivables Line). Availability under the Receivables Line is based on
advances against the Companys trade receivables. The Receivables Line bears
interest at SVBs prime rate plus 2.5% points, and matures on May 3, 2003.

The second line is a $4 million credit facility (the Guaranteed Line)
collateralized by a guarantee by Insight Venture Partners (Insight). The
Guaranteed Line bears interest at SVBs prime rate plus 0.5% points and matures
on May 3, 2003. In consideration for SVB issuing the Guaranteed Line, the
Company agreed to reprice 4,003 previously-issued warrants to purchase common
stock of the Company to $1.38 per share. In the event of a default by the
Company on the Guaranteed Line, the Company must sell, and Insight must buy,
notes (the Insight Notes) equal to the then outstanding principal and unpaid
interest balance of the Guaranteed Line, the proceeds of which must be used to
repay SVB in full. The Insight Notes will bear interest at a rate of 2% per
month and mature 30 days after issuance. In the event of default, interest will
increase by 1% point per month until the Insight Notes are repaid.

In consideration for Insight guaranteeing the Guaranteed Line, the Company
granted Insight a Contingent Value Right (the CVR). Under the terms of the
CVR agreement, Insight may request that the Company redeem the CVR for a cash
payment based on the occurrence of a Trigger Event. Trigger Events include:
a) the sale of the Company; b) the Company achieving trailing 12 month
consolidated revenues in excess of $50 million, or c) the Company achieving
trailing 12 month consolidated earnings before interest, taxes, depreciation
and amortization expense of $10 million. The value of the CVR will be $3.0
million, except in the event of b) above, in which case the CVR will be the
greater of $3.5 million or 7% of consolidated revenues, subject to a $10
million cap.

On August 15, 2002, the Company and SVB entered into the First Amendment
to the Accounts Receivable Financing Agreement (the Amended Receivables
Line). The Amended Receivables Line amends the Receivables Line and gives the
Company access to a $1.25 million revolving credit facility secured by trade
receivables. The Amended Receivables Line will be converted into a $4 million
revolving credit facility if the Company meets certain targets as specified
therein.

(6) Offer from Investor Group

9



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##### Table of Contents



On May 3, 2002, the Company announced it had received a preliminary offer
from a group led by Insight to acquire the Company. The offer is non-binding
and subject to customary conditions, including the execution of definitive
agreements. The Companys Board of Directors has formed a Special Independent
Committee to evaluate the offer.

(7) Subsequent Events

Employee Stock Purchase Plan

On August 1, 2002, the board of directors voted to discontinue the
Employee Stock Purchase Plan.

10



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##### Table of Contents






ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations.

This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements include, but are not
limited to, statements regarding contingencies, future prospects, liquidity and
capital expenditures herein under Part I Financial InformationItem 2
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Actual results could differ materially from those projected in
the forward-looking statements as a result of the risk factors set forth below
and detailed in our other filings with the Commission during the past 12
months.

Overview

The Company provides CRM solutions that help companies earn a greater
share of their customers business through relevant, personalized customer
communications. The Company provides an open-platform CRM software and
services solution that is designed to help clients customize offers based on
profile information, synchronize offers across multiple customer channels in
real-time and track the responses. This solution is designed to provide
companies with opportunities to improve their acquisition and retention of
customers and to increase customer relationship profitability. The Companys
CRM solutions are licensed for use at approximately 300 client sites in 33
countries, as well as the six leading U.S. marketing service bureaus.

Corporate Overview

The Company was incorporated in November 1996. Prior to incorporation,
the Company operated as a separate division of two entities, Grant & Partners,
Inc. and Grant & Partners Limited Partnership. The Companys activities during
its early stages of operation focused on the development of software solutions
to provide customer communications support to businesses. In 1995, the Company
began providing professional services in the areas of marketing program design
and execution and data warehousing. In March 1997, the Company ceased
providing marketing program design services. The Companys development efforts
culminated in the introduction to market in July 1996 of Xchange Campaign.
Since this initial introduction of Xchange Campaign, the Company has continued
to focus significant resources on the development of additional functionality
and features of its original products as well as the development and
acquisition of additional solutions within the Companys CRM solution set
including Xchange Real Time, Xchange eMessaging and Xchange Analytics. In
October 2001 the Company announced Xchange 8, which is a bundling of the
Companys existing products, as part of a strategy to move away from selling
individual software components to selling an integrated set of software
solutions

The Company also has continued to expand its marketing activities, build
the its identity, develop the competencies of the professional services group,
establish international sales and distribution channels and develop its general
and administrative infrastructure.

In August 1999, the Company acquired eXstatic Software, Inc. (formerly
known as Gino Borland, Inc.) (eXstatic) in a transaction accounted for as a
pooling of interest. eXstatic develops and markets software products that
enable businesses to plan, create and execute highly personalized,
permission-based email communications based on customer profiles. In
accordance with pooling of interests accounting, the results of operations have
been restated to reflect the historical results of eXstatic on an as combined
basis. In March 2000, the Company acquired Knowledge Stream Partners, Inc.
(KSP) in a transaction accounted for under the purchase method. KSP
specializes in consulting and software development for advanced data mining and
online/offline analytics. In June 2000, the Company acquired Customer
Analytics, Inc. (CA) in a transaction accounted for under the purchase
method. CA develops and markets campaign management solutions focused on
creating, executing, analyzing and measuring customer communications at the
local or branch level.

Critical Accounting Policies and Significant Judgements and Estimates

11



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##### Table of Contents



The Companys discussion and analysis of its financial condition and
results of operations are based on the Companys consolidated financial
statements which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting periods. Management bases its
estimates on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgements about the timing and amounts of certain
transactions and carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.

The significant accounting policies that management believes are most
critical to aid in fully understanding and evaluating our reported financial
results include the following:

Revenue Recognition

The Companys revenues are primarily generated from the sale of perpetual
licenses to its proprietary Xchange 8 products and services. The Company
generates its services revenue from consulting and training services performed
for customers and from maintenance and support. As described below, significant
management judgements and estimates must be made and used in connection with
the revenue recognized in any accounting period. Material differences may
result in the amount and timing of our revenue for any period if management
made different judgements or utilized different estimates.

The Company recognizes revenue based on the provisions of Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements, Statement of
Position, (SOP), No. 97-2, Software Revenue Recognition, as amended by SOP No.
98-4 and SOP No. 98-9, and the provisions of SOP No. 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.The
Company recognizes revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fees are
fixed or determinable and collection of the resulting receivable is reasonably
assured. The Company does not offer a right of return on its products.

For all sales, the Company uses either a binding purchase order or signed
license agreement as evidence of an arrangement. At the time of the
transaction, the Company assesses whether the fee associated with the
transaction is fixed or determinable based on the payment terms associated with
the transaction. If a significant portion of the fee is due after our normal
payment terms the Company accounts for the fee as not being fixed or
determinable. In these cases, the Company recognizes revenue as the fees become
due. Credit worthiness for follow-on transactions is assessed through a review
of the transaction history with the customer. The Company does not request
collateral from its customers. If collection of a fee is not reasonably
assured, the Company defers the fee and recognizes revenue at the time
collection becomes reasonably assured, which is generally upon receipt of cash.

Software license fee revenues are generated from licensing the rights to
the use of the Companys packaged software products. Services and maintenance
revenues are generated from sales of maintenance, consulting, training and
hosting services performed for customers that license the Companys products.
The Company has concluded that effective with the new generation of Xchange
Analytics and Xchange Real Time, certain of the implementation services related
to these products are essential to the customers use of the packaged software
products. Similarly, the implementation services for the Companys Xchange
EnAct product is essential to the customers use of those packaged software
products. For sales of these products where the Company is responsible for
implementation, the Company recognizes revenue for these arrangements following
the percentage-of-completion method over the implementation period. Percentage
of completion is measured by the percentage of implementation hours incurred to
date compared to estimated total implementation hours. This method is used
because management has determined that expended hours to be the best measure of
progress on these engagements. In situations where the Company is not
responsible for implementation services, or where the product configuration
being delivered does not require the implementation services deemed to be
essential to the customers use of the software, the Company recognizes
revenue on delivery of the packaged software if there is persuasive
evidence of an arrangement, collection is

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probable, the fee is fixed or
determinable and vendor-specific objective evidence exists to allocate the
total fees to all undelivered elements of the arrangement.

Vendor-specific objective evidence is based on the price charged when an
element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple-element arrangements could consist of software
products, maintenance, consulting and training services.

Revenue from maintenance services is recognized ratably over the term of
the contract, typically one year. Professional services revenue is primarily
related to implementation and consulting services performed on a
time-and-materials basis under separate service arrangements. Revenues from
professional service arrangements are recognized on either a time and materials
or percentage-of-completion basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible by
management. In addition, the Company recognizes consulting revenue for its
application hosting service. The revenue is recognized over the service
delivery period based on either a pre-determined monthly service fee or a usage
based pricing model.

In certain situations, the Company has entered into transactions with
third parties to acquire technology from those entities at the same time that
the Company sells its technology to those same third parties. In those
instances, the Company applies Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transactions, and Emerging Issues Task Force Issue
No. 86-29, Nonmonetary Transactions: Magnitude of the Boot and the Exceptions
to the Use of Fair Value,to such transactions.

Revenues for maintenance and support are recognized ratably over the term
of the support period. Revenues from consulting and training services are
recognized as the services are performed.

Goodwill and Intangibles

Purchase accounting requires extensive use of accounting estimates and
judgements to allocate the purchase price to the fair market value of the
assets purchased and liabilities assumed. In recording the acquisition of KSP
in March 2000, and CA in June 2000, values were assigned to intangible assets
for assembled workforces, acquired technology and existing customer bases. The
value assigned to these assets were based on independent third-party
appraisals. The excess of the purchase price over the fair value of assets
acquired was recorded as goodwill.

Intangible assets are tested for impairment whenever events or changes in
circumstances indicate that the carrying value for the asset may not be
recoverable. In 2001, the Company recorded impairment charges relative to its
investment in the technology of MicroStrategy, Inc. MicroStrategy and
acquisition of CA. In both instances the Company made the strategic decision to
no longer sell or support the products or assets underlying the original
acquisitions. During the fourth quarter of 2001, in response to continuing
negative operating trends, the Company determined that the remaining goodwill
balance was impaired based upon a third-party indication of value of the
Company as a whole. The Company recorded an additional impairment charge of
the carrying value of such goodwill in the amount of $3.8 million.

(4) Restructuring Charges

During the second quarter of 2002, the Company continued to undertake
certain restructuring actions to better align its cost structure with its
outlook on near term revenues and to conserve cash. The components of
restructuring charges resulting from these actions are as follows (in
thousands):

|                       |  |   |        |  
|---------------------- |  | - | ------ | -
|Severance              |  | $ | 43     |  
|                      
|                      
|                      
|                      
|Facilities and Related |  |   | (1,328 | )
|                      
|                      
|                      
|                      
|Property and equipment |  |   | 460    |  
|                       |  |   |        |  
|                       |  | $ | (825   | )
|                       |  |   |        |  

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Severance costs relate to the elimination of 4 managerial and staff
positions worldwide, comprising approximately 2% of the beginning of the year
workforce in the following areas: one in sales and marketing, and three in
professional services. Property and equipment relate to non-cash write-offs of
excess office furniture and computer equipment that has been removed from
operations as a result of employee reductions. During the second quarter, the
Company was able to renegotiate certain operating leases which reduced its
facility and related obligations previously accrued for as restructuring
charges during the period ended December 31, 2001.

The following summarizes the activity in the Companys restructuring accruals
through June 30, 2002:

|                   |  |                       |       |              |  |               |        |                  |  |                       |       |  |  |   |       | 
|------------------ |  | --------------------- | ----- | ------------ |  | ------------- | ------ | ---------------- |  | --------------------- | ----- |  |  | - | ----- | 
|                   |  | Restructuring accrual |       | Additions    |  |               |        |                  |  | Restructuring accrual
|                   |  | at December 31, 2001  |       | (Reductions) |  | Cash payments |        | at June
30, 2002
|                   |  |                       |       |              |  |               |        |                 
|(in thousands)    
|Severance          |  | $                     | 245   |              |  | $             | 307    |                  |  | $                     | 509   |  |  | $ | 43    | 
|                  
|                  
|                  
|                  
|Facilities related |  |                       | 3,992 |              |  |               | (1,328 | )                |  |                       | 1,179 |  |  |   | 1,485 | 
|                  
|                  
|                  
|                  
|Others             |  |                       | 479   |              |  |               |       |                  |  |                       | 211   |  |  |   | 268   | 
|                   |  |                       |       |              |  |               |        |                  |  |                       |       |  |  |   |       | 
|Total              |  | $                     | 4,716 |              |  | $             | (1,021 | )                |  | $                     | 1,899 |  |  | $ | 1,796 | 
|                   |  |                       |       |              |  |               |        |                  |  |                       |       |  |  |   |       | 

The severance accrued at June 30, 2002 relates primarily to 4 employees
who positions were eliminated in June 2002. The severance accrual will be paid
out in installments through August 8, 2002. Facility costs will be paid out
through 2005 based on the remaining lease terms of the abandoned facilities.
Other accruals relate to non-cancelable payments due for marketing events which
have been canceled as a result of the Companys cost containment initiatives.

Three Months Ended June 30, 2001 and 2002

Revenues

The Companys total revenues decreased by $6.3 million, or 58.3%, from
$10.8 million in Q2 2001 to $4.5 million in Q2 2002. In Q2 2001, the Companys
top five customers accounted for 57.9% of total revenues compared to 32.2% for
Q2 2002. The two largest customers during Q2 2001 represented 36.3% and 8.6% of
total revenues, respectively, while the two largest customers for Q2 2002
represented 8.5% and 8.0% of total revenues, respectively.

Software license fees decreased by $3.3 million, or 71.7%, from $4.6
million in Q2 2001 to $1.3 million in Q2 2002. Included in software license
fee revenue in Q2 2001 was $3.1 million from Carreker Corporation (Carreker)
related to guaranteed royalties on sales of the EnAct product. In Q4 2001, the
Company decided to discontinue the sales and support of the EnAct product and
sold the EnAct technology to Carreker, therefore there was no comparable EnAct
royalty revenue in Q2 2002. The remaining decrease is attributed primarily to
fewer sales resulting from a general market slowdown in information technology
spending.

Services and maintenance revenues decreased by $3.0 million, or 48.4%,
from $6.2 million in Q2 2001 to $3.2 million at Q2 2002. The decrease is
attributed to decreases in services engagement revenue of $1.5 million,
eMessaging ASP revenue of $.8 million and maintenance revenue of $.6 million.
The decrease in services engagement revenue is due partially to the reduction
in software license fees revenue, resulting in reduced software implementation
and integration services. The decrease in eMessaging ASP revenue reflects the
growing competition for these services due to excess eMessaging capacity in the
marketplace. The decrease in maintenance reflects the decrease in the Companys
base of customers due to customers electing to not renew annual maintenance.

Cost of Revenues

Cost of software license fees consists primarily of royalty payments made
to third-parties for licensed intellectual property included in Xchange
software products, and cost associated with software packaging and
distribution. The

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cost of software license fees decreased in absolute dollars
from $298,000 in Q2 2001 to $74,000 in Q2 2002. It decreased as a percentage of
software license fee revenue from 6.4% to 5.6%. The slight decrease as a
percentage of software license fee revenue is due to a decrease in the
third-party royalties for components of the Xchange 8.0 product suite.

Cost of services and maintenance consists primarily of personnel,
facilities and system costs incurred in providing professional consulting
services, training, hosting software services for the Xchange eMessaging
software product, and customer support services. Cost of services and
maintenance as a percentage of services and maintenance revenue was 74.5% in Q2
2001 and 40.6% in Q2 2002. The decrease in cost of services and maintenance in
both absolute dollars and a percentage of services and maintenance revenues is
due primarily to corrective actions the Company took throughout the later half
of 2001 and into Q2 of 2002 designed to adjust its infrastructure costs
downward to better match the lower anticipated level of revenues.

Overall gross profit percentage improved from 54.7% in Q2 2001 to 70.0% in
Q1 2002, as a result of the Companys costs containment restructuring efforts.

Operating Expenses

Sales and marketing expense consists primarily of employee salaries and
benefits for sales and marketing personnel, commissions and promotional
expenses. Sales and marketing expense decreased by $7.2 million, or 76.6%, from
$9.4 million in Q2 2001 to $2.2 million in Q2 2002. Sales and marketing
expenses decreased as a percentage of revenue from 87% in Q2 2001 to 48% in Q2
2002. The decrease is due to the Companys corrective actions in the later half
of 2001 and into Q2 of 2002 designed to adjust its infrastructure costs
downward to better match the lower anticipated revenues.

Research and development expense consists primarily of employee salary and
benefits, consultant costs and equipment and software maintenance costs
associated with new product development, enhancement of existing products and
quality assurance activities. Research and development costs decreased by $3.2
million, or 61.5% from $5.2 million in Q2 2001 to $2.0 million in Q2 2002.
Research and development costs as a percentage of revenue decreased from 48% in
Q2 2001 to 43% in Q2 2002. The decrease in both absolute dollars and as a
percentage of revenue is the result of corrective actions the Company took in
the latter part of 2001 and into Q2 2002 to reprioritize its investments and
commitment to existing and new product offerings and features given its reduced
revenue base and need to conserve cash.

General and administrative expense consists primarily of employee salaries
and related costs, outside professional fees, provision for uncollectible
accounts receivable and equipment and software depreciation cost associated
with the finance, legal, human resources, information systems and executive
functions of the Company. General and administrative expenses decreased $3.1
million, or 57.4%, from $5.4 million in Q2 2001 to $2.3 million in Q2 2002. The
decrease is the result of corrective actions the Company took in the later part
of 2001 and into Q2 of 2002 designed to reduce general and administrative
expenses in line with the overall reduced infrastructure needs of the Company
and the need to conserve cash.

Goodwill and intangibles

In 2001, the Company amortized its purchased intangibles and its
investment in MicroStrategy assets over these assets estimated useful lifes in
accordance with then generally accepted accounting principals. In Q4 2001, the
Company recorded impaired charges to fully write-off its investments in
MicroStrategy assets and intangible assets related to the acquisition of CA,
and to partially write-off its intangible assets associated with the KSP
acquisition. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangibles(SFAS 142), and accordingly will no longer amortize purchased
intangibles over their estimated useful life. Rather, intangible assets will be
subject to annual assessments of impairment. The Company did not require an
impairment change upon adoption of SFAS 142.

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Interest income (expense), net

Interest expense, net in Q2 2001 was comprised of $228,000 of non-cash
interest expense associated with the MicroStrategy obligation, $1,251,000 of
non-cash interest associated with the amortization of discounts of the issuance
of $4.5 million of convertible notes and warrants to Insight, $64,000 in
interest payable on convertible notes payable to certain former shareholders of
CA, $94,000 in interest on capital leases and other lease obligations, $22,000
non-cash interest expense associated with warrants issued to SVB, $74,000
related to interest on the Companys bank line of credit, offset by $62,000 of
interest income. Interest expense, net in Q2 2002 was comprised primarily of
$2.0 million in non-cash interest related to the accretion of discounts on
convertible debentures, $894,000 in non-cash interest related to the
convertible debentures, $19,000 of non-cash interest related to warrants issued
to SVB, $64,000 in interest payable on convertible notes payable on certain
former shareholders of CA, $84,000 related to interest on the Companys bank
line of credit and $9,000 interest on capital leases and other lease
obligations, offset by $8,000 of interest income.

Six Months Ended June 30, 2001 and 2002

Revenues

The Companys total revenues decreased 59.0% from $26.6 million in the six
months ended June 30, 2001 to $10.9 million for the six months ended June
30,2002. Software license fees decreased by $9.6 million, or 70.3%, from $13.7
million in the six months ended June 30, 2001 to $4.1 million in the six months
ended June 30, 2002. Included in software license fee revenue in the six
months ended June 30, 2001 was $7.1 million from Carreker related to guaranteed
royalties on sales of the EnAct product. In Q4 2001, the Company decided to
discontinue the sales and support of the EnAct product and sold the EnAct
technology to Carreker, therefore there was no comparable EnAct royalty revenue
in the six months ended June 30, 2002. The remaining decrease is attributed
primarily to fewer sales resulting from a general market slowdown in
information technology spending.

Services and maintenance revenues decreased by $6.0 million, or 46.5%,
from $12.9 million in the six months ending June 30, 2001 to $6.9 million in
the six months ended June 30, 2002. The decrease is attributed to decreases in
services engagement revenue of $3.8 million, eMessaging ASP revenue of $1.2
million and maintenance revenue of $1.0 million. The decrease in services
engagement revenue is due partially to the reduction in software license fees
revenue, resulting in reduced software implementation and integration services.
The decrease in eMessaging ASP revenue reflects the growing competition for
these services due to excess eMessaging capacity in the marketplace. The
decrease in maintenance reflects the decrease in the Companys base of
customers due to customers electing to not renew annual maintenance.

Cost of Revenues

Cost of software license fees consists primarily of royalty payments made
to third-parties for licensed intellectual property included in Xchange
software products, and cost associated with software packaging and
distribution. The cost of software license fees decrease in absolute dollars
from $501,000 in the six months ended June 30, 2001 to $144,000 in the six
months ended June 30, 2002. It decreased as a percentage of software license
fee revenue from 3.7% to 3.5%. The slight decrease as a percentage of software
license fee revenue is due to a decrease in the third-party royalties for
components of the Xchange 8.0 product suite.

Cost of services and maintenance consists primarily of personnel,
facilities and system costs incurred in providing professional consulting
services, training, hosting software services for the Xchange eMessaging
software product, and customer support services. Cost of services and
maintenance as a percentage of services and maintenance revenue was 70.7% in
the six months ended June 30, 2001 and 36.5% in the six months ended June 30,
2002. The decrease in cost of services and maintenance in both absolute dollars
and a percentage of services and maintenance revenues is due primarily to
corrective actions the Company took throughout the later half of 2001 and into
Q2 of 2002 designed to adjust its infrastructure cost downward to better match
the lower anticipated level of revenues.

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Overall gross profit percentage improved from 63.8% in the six months
ended June 30, 2001 to 72.9% in the six months ended June 30, 2002, as a result
of the Companys costs containment and restructuring efforts.

Operating Expenses

Sales and marketing expense consists primarily of employee salaries and
benefits for sales and marketing personnel, commissions and promotional
expenses. Sales and marketing expense decreased by $15.3 million, or 77.6%,
from $19.7 million in the six months ended June 30, 2001 to $4.4 million in the
six months ended June 30, 2002. Sales and marketing expenses decreased as a
percentage of revenue from 74% in the six months ended June 30, 2001 to 41% in
the six months ended June 30, 2002. The decrease is due to the Companys
corrective actions in the later half of 2001 and into Q2 of 2002 designed to
adjust its infrastructure costs downward to better match the lower anticipated
revenues.

Research and development expense consists primarily of employee salary and
benefits, consultant costs and equipment and software maintenance costs
associated with new product development, enhancement of existing products and
quality assurance activities. Research and development costs decreased by $7.2
million, or 63.0% from $11.4 million in the six months ended June 30, 2001 to
$4.2 million in the six months ended June 30, 2002. Research and development
costs as a percentage of revenue decreased from 43% in the six months ended
June 30, 2001 to 39% in the six months ended June 30, 2002. The decrease in
both absolute dollars and as a percentage of revenue is the result of
corrective actions the Company took in the latter part of 2001 and into Q2 2002
to reprioritize its investments and commitment to existing and new product
offerings and features given its reduced revenue base and need to conserve
cash.

General and administrative expense consists primarily of employee salaries
and related costs, outside professional fees, provision for uncollectible
accounts receivable and equipment and software depreciation cost associated
with the finance, legal, human resources, information systems and executive
functions of the Company. General and administrative expenses decreased $5.3
million, or 55.4%, from $9.6 million in the six months ended June 30, 2001 to
$4.3 million in the six months ended June 30, 2002. The decrease is the result
of corrective actions the Company took in the later part of 2001 and into Q2 of
2002 designed to reduce general and administrative expenses in line with the
overall reduced infrastructure needs of the Company and the need to conserve
cash.

Interest income (expense), net

Interest expense, net in the six months ended June 30, 2001 was comprised
of $567,000 of non-cash interest expense associated with the MicroStrategy
obligation, $1,355,000 of non-cash interest associated with the amortization of
discounts of the issuance of $4.5 million of convertible notes and warrants to
Insight, $127,000 in interest payable on convertible notes payable to certain
former shareholders of CA, $183,000 in interest on capital leases and other
lease obligations, $22,000 non-cash interest expense associated with warrants
issued to SVB, $74,000 related to interest on the Companys bank line of
credit, offset by $116,000 of interest income. Interest expense, net in the six
months ended June 30, 2002 was comprised primarily of $4.0 million in non-cash
interest related to the accretion of discounts on convertible debentures, $2.3
million in non-cash interest related to the convertible debentures, $60,000 of
non-cash interest related to warrants issued to SVB, $127,000 in interest
payable on convertible notes payable on certain former shareholders of CA,
$147,000 related to interest on the Companys bank line of credit and $16,000
interest on capital leases and other lease obligations, offset by $25,000 of
interest income.

Liquidity and Capital Resources

Since inception, the Company has financed its operations primarily
through the sale of equity securities in private placements, the issuance of
notes payable to related parties, the issuance of convertible debentures and
the sales of common stock as part of its initial public stock offering in
December 1998 and its follow-on public stock offering in June 1999.

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The Company has sustained net losses and negative cash flows from
operations in 2000 and 2001 and the six months ended June 30, 2002. In
addition, as of June 30, 2002 the Company has a significant working capital
deficit. Certain other notes payable were due in June 2002 and remained unpaid
as of this filing. The Companys ability to meet its obligations in the
ordinary course of business and to continue as a going concern is dependent on
its ability to reduce net operating expenses and refinance its existing
obligations, or raise additional financing through public or private equity
financing or other sources of financing. There is no assurance that the Company
will be successful in its efforts to renew its credit facility, raise
additional capital, renegotiate its existing obligations or to sufficiently
reduce it operating expenses, all of which may have a material adverse impact
on the Companys solvency. These factors raise substantial doubt about the
Companys ability to continue as a going concern. The financial statements do
not include any adjustments that might result in the event of the occurrence of
this uncertainty.

For the six months ended June 30, 2002, net cash used in operating
activities was $2.7 million, resulting primarily from a loss of $2.5 million
before depreciation expense and other non-cash charges and an increase in
working capital of $284,000.

Net cash used by financing activities of $.5 million was comprised of net
borrowings against the SVB line of credit of $.6 million and payments for
capital leases of $1.1 million.

On May 3, 2002 the Company secured from SVB two secured credit facilities.
The first replaces the Companys previous secured credit facility with a $4
million revolving credit facility secured by all the Companys assets.
Availability under this credit line is based on advances against the Companys
accounts receivable in a similar fashion as the previous secured credit line.
The line bears interest at SVBs prime rate plus 2.5% points and matures in one
year. The second line is the $4 million Guaranteed Line guaranteed by Insight.
The Guaranteed Line bears interest at SVBs prime rate plus 0.5% points. In the
event of a default on the Guaranteed Line, Insight must purchase, and the
Company must sell, notes equal to the then outstanding principal and interest
on the collateralized line, the proceeds of which must be used to repay SVB in
full.

On May 3, 2002 the Company announced it had received a preliminary offer
from a group led by Insight to acquire the Company. The offer is non-binding
and subject to customary conditions, including the execution of definitive
agreements. The Companys Board of Directors has formed a Special Independent
Committee to evaluate the offer.

On August 15, 2002, the Company and SVB entered into the First Amendment
to the Accounts Receivable Financing Agreement (the Amended Receivables
Line). The Amended Receivables Line amends the Receivables Line and gives the
Company access to a $1.25 million revolving credit facility secured by trade
receivables. The Amended Receivables Line will be converted into a $4 million
revolving credit facility if the Company meets certain targets as specified
therein.

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ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

The following discussion about the Companys market risk disclosures
involves forward looking statements. Actual results could differ materially
from those projected in the forward-looking statements. The Company is exposed
to market risk related to changes in interest rates and foreign currency
exchange rates. The Company does not use derivative financial instruments for
speculative or trading purposes.

Interest Rate Sensitivity.The Company maintains a short-term investment
portfolio consisting mainly of corporate debt securities and U.S. government
agency treasury bills and notes with an average maturity of less then twelve
months. These available-for-sale securities are subject to interest rate risk
and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10 percent from levels at
June 30, 2002, the fair value of the portfolio would decline by an immaterial
amount.

Foreign Currency Exchange Risk.With sales and services offices in the
United States, United Kingdom and Australia, and a global customer base, the
Company faces exposure to adverse movements in foreign currency exchange rates.
These exposures may change over time as business practices evolve and could
have a material adverse impact on the Companys financial results.
Historically the Companys primary exposure has been nondollar-denominated
operating expenses and sales by its United Kingdom subsidiary. The introduction
of the Euro as a common currency for members of the European Monetary Union, of
which the United Kingdom is not a member, occurred in January 2000. To date, we
have not noticed any material impact from the introduction of the Euro. The
Company is prepared to hedge against fluctuations in the British Sterling,
Euro, or other foreign currency if the exposure becomes material. As of June
30, 2002 the Companys material nondollar-denominated assets and liabilities
primarily consisted of cash, accounts receivable, and accounts payable
denominated in British Sterling and Australian dollars.

The Company currently has sales offices in the United Kingdom and
Australia, in addition to the United States. The Companys revenues from
international operations have been denominated in foreign currencies which
historically have been stable in relation to U.S. dollars. As a result, the
gain or loss from foreign currency transactions has not been material to its
operating results. As of June 30, 2002, the material assets and liabilities
denominated in foreign currencies include accounts receivable, accounts payable
and cash and cash equivalents. Due to the stability of the foreign economies
where these assets and liabilities are denominated, the Company has not adopted
a policy of hedging foreign currency risks. While it is anticipated that
foreign transactions will continue to be denominated in local currencies, the
Company expects to use hedging instruments to offset potential currency
exposures arising as its international operations expand into less stable
economic environments.




Part II  Other Information




Item 1. Legal Proceedings

From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this filing, management believes that it has adequate coverage
under its Directors and Officers and Errors and Omissions insurance policies
such that it is managements opinion that the Company is not a party to any
legal proceedings that, if decided adversely to the Company, would have a
material adverse effect on its results of operations or financial position.

The Company and certain of its current and former officers (the Xchange
Defendants) and its former certified public accountants, Arthur Andersen, LLP,
have been named defendants in a consolidated class action lawsuit originally
filed on February 21, 2001 and subsequently filed as a Consolidated Amended
Class Action Complaint on August 3, 2001, filed on behalf of a purported class
of purchasers of the Companys common stock during the period from December 9,
1998 through September 29, 2000. The Amended Class Action Complaint alleges
that the Company made false or misleading statements that inflated its common
stock price during the class period. The relief sought is damages on behalf of
the class; however, at this time, the Company is unable to ascertain

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the monetary damages sought by the class. Through its attorneys, the Company has
filed a Motion to Dismiss the Amended Class Action Complaint on October 3,
2001. The action is pending in the United States District Court for the
District of Massachusetts. The Company believes these allegations are without
merit and intends to continue to defend the litigation vigorously.

The Company, certain of its current and former officers and directors,
including Andrew J. Frawley, John G. OBrien, Jeffrey Horing, Ramanan
Raghavendran, David G. Mcfarlane, Michael D. McGonagle, Patrick A. Mchugh, and
N. Wayne Townsend, and the Underwriter Defendants (as defined herein) have
purportedly been named defendants in a class action complaint filed on behalf
of a class of purchasers of its common stock during the period from December 9,
1998 through December 6, 2000. The Underwriter Defendants are BT Alex Brown,
Inc., Hambrecht & Quist, LLC, Adams, Harkness & Hill, Inc., and Sound-View
Technology Group, Inc. The Company has not yet been served with this
complaint, but it purportedly alleges that documents filed in connection with
the Companys initial and follow-on public offerings (the Offerings) were
materially false and misleading because they failed to disclose that (1) the
Underwriter Defendants solicited and received excessive and undisclosed
commissions from certain investors in exchange for which the Underwriter
Defendants allocated to those investors material portions of the restricted
stock issued in connection with the Offerings, and (2) the Underwriter
Defendants had entered into agreements with customers whereby they agreed to
allocate the Companys shares to those customers in the Offerings in exchange
for which the customers agreed to purchase additional shares in the
after-market at pre-determined prices. At this time, the Company is unable to
ascertain the monetary damages sought by the class. The action is pending in
the United States District Court for the Southern District of New York. The
Company believes these allegations are without merit and intends to defend the
litigation vigorously.




Item 3.Defaults Upon Senior Securities

The Company is in default on certain notes payable that had been entered
into as part of the June, 2000 CA acquisition. These notes, which have an
aggregate principal balance of approximately $2.5 million, matured on June 1,
2002; however, the various noteholders have entered into subordination
agreements with SVB (the Subordination Agreements). Pursuant to the
Subordination Agreements, the Company is restricted from making any payments to
these noteholders, and the noteholders are restricted from demanding any such
payment, until the SVB debt is paid in full.




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

The Company held its Annual Shareholders Meeting on June 10, 2002 to consider a
proposal to elect Deven Parekh and Steven Perkins as directors to hold office
for a term to expire at the 2005 Annual Shareholder Meeting or until their
successors have been elected and qualified.

The results of the proposal were as follows:

|               |  |     |           |         |  |         |   |         |  |  |       |  |  |  |   | 
|-------------- |  | --- | --------- | ------- |  | ------- | - | ------- |  |  | ----- |  |  |  | - | 
|               |  | For |           | Against |  | Abstain |   | No Vote
|               |  |     |           |         |  |         |   |        
|Deven Parekh   |  |     | 1,952,938 |         |  |         |  |         |  |  | 7,142 |  |  |  |  | 
|               |  |     |           |         |  |         |   |         |  |  |       |  |  |  |   | 
|Steven Perkins |  |     | 1,953,428 |         |  |         |  |         |  |  | 6,652 |  |  |  |  | 
|               |  |     |           |         |  |         |   |         |  |  |       |  |  |  |   | 

More information about this proposal can be found in the Proxy Statement filed
by the Company on April 30, 2002.




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|       |  |                                                                                                                                                                                                                  
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.01* |  | Amendment No. 1 to warrants to purchase stock, dated May 3, 2002,
between the Company and Silicon Valley Bank (SVB) (Incorporated
by reference as Exhibit 10.28 to the Companys Form 10-K, dated May
14, 2002)

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|       |  |                                                                                                                                                                                                
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|      
|      
|      
|99.01* |  | Amended and Restated Loan and Securities Agreement, dated May 3,
2002, between the Company and SVB. (Incorporated by reference as
Exhibit 99.11 to the Companys Form 10-K, dated May 14, 2002)
|      
|      
|      
|      
|99.02* |  | Form of Accounts Receivable Financing Agreement, dated May 3, 2002,
between the Company and SVB. (Incorporated by reference as Exhibit
99.12 to the Companys Form 10-K, dated May 14, 2002)   
|      
|      
|      
|      
|99.03* |  | Form of Security Agreement, dated May 3, 2002, between the Company
and Insight. (Incorporated by reference as Exhibit 99.13 to the
Companys Form 10-K, dated May 14, 2002)                    
|      
|      
|      
|      
|99.04* |  | Form of Senior Secured Note, dated May 3, 2002 between the Company
and Insight. (Incorporated by reference as Exhibit 99.14 to the
Companys Form 10-K, dated May 14, 2002)                    
|      
|      
|      
|      
|99.05* |  | Form of Contingent Value Right, dated May 3, 2002, between the
Company and Insight.
(Incorporated by reference as Exhibit 99.15 to the Companys Form
10-K, dated May 14, 2002)                
|      
|      
|      
|      
|99.06* |  | Form of Securities Purchase Agreement, dated May 3, 2002, between
the Company and Insight. (Incorporated by reference as Exhibit
99.16 to the Companys Form 10-K, dated May 14, 2002)         
|      
|      
|      
|      
|99.07  |  | First Amendment to Accounts Receivable Financing Agreement, dated
August 15, 2002, between the Company and SVB.                                                                                
|      
|      
|      
|      
|*      |  | Incorporated by reference                                                                                                                                                                      

(b) Reports on Form 8-K



| |  |  | Report on Form 8-K filed with the SEC on May 24, 2002.
Report on Form 8-K filed with the SEC on June 14, 2002.
Report on Form 8-K filed with the SEC on August 7, 2002.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURE

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code)

The undersigned Chief Executive Officer certifies that this Quarterly
Report on Form 10-Q fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and the information contained in
the report fairly presents, in all material respects, the financial condition
and results of operations of the Company.

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                       |  |                                          |  |                                                                                                                            
|---------------------- |  | ---------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|                       |  | EXCHANGE APPLICATIONS, INC.
(Registrant)
|                      
|                      
|                      
|                      
|                       |  |                                          |  |                                                                                                                            
|                      
|                      
|                      
|                      
|Dated: August 19, 2002 |  |                                          |  |                                                                                                                            
|                      
|                      
|                      
|                      
|                       |  |                                          |  |                                                                                                                            
|                      
|                      
|                      
|                      
|                       |  | By:                                      |  | /s/ J. CHRISTOPHER WAGNER                                                                                                  
|                       |  |                                          |  |                                                                                                                            
|                       |  |                                          |  | J. Christopher Wagner
President, Chief Executive Officer,
(authorized officer and principal finance
and accounting officer)

22