##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

|                                               |  |                                                                                   
|---------------------------------------------- |  | ----------------------------------------------------------------------------------
|(X BOX)                                        |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                              
|                                              
|                                              
|                                              
|                                               |  |                                                                                   
|                                              
|                                              
|                                              
|                                              
|For the quarterly period
ended March 31, 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                                                       |  | 04-3338916                          
|                                                              
|                                                              
|                                                              
|                                                              
|(State or other jurisdiction of
incorporation or organization) |  | (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 (X BOX)     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: May 15, 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 4. Submission of Matters to a Vote of Security Holders                                   
|                                 | Item 6. Exhibits and Reports on Form 8-K.                                                     
|                                 |                                                                                                | SIGNATURES                                



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##### Table of Contents



Exchange Applications, Inc.

Form 10-Q for the Three Months Ended March 31, 2002

Table of Contents

|        |  |                                                                                          |  |            
|------- |  | ---------------------------------------------------------------------------------------- |  | -----------
|        |  |                                                                                          |  | Page Number
|        |  |                                                                                          |  |            
|        |  | PART I. FINANCIAL INFORMATION                                                            |  |            
|       
|       
|       
|       
|        |  |                                                                                          |  |            
|       
|       
|       
|       
|Item 1. |  | Financial Statements (unaudited):                                                        |  |            
|       
|       
|       
|       
|        |  | Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002                   |  | 3          
|       
|       
|       
|       
|        |  | Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2002 |  | 4          
|       
|       
|       
|       
|        |  | Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2002 |  | 5          
|       
|       
|       
|       
|        |  | Notes to Consolidated Financial Statements                                               |  | 7          
|       
|       
|       
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and
Results of Operation     |  | 10         
|       
|       
|       
|       
|Item 3. |  | Quantitative and Qualitative Disclosure about Market Risk                                |  | 18         
|       
|       
|       
|       
|        |  |                                                                                          |  |            
|       
|       
|       
|       
|        |  | PART II. OTHER INFORMATION                                                               |  |            
|       
|       
|       
|       
|        |  |                                                                                          |  |            
|       
|       
|       
|       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                      |  | 18         
|       
|       
|       
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                         |  | 19         
|       
|       
|       
|       
|        |  | Signatures                                                                               |  | 20         

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, |        | March 31,
|                                                                                       |                                                                                                                                   |                                                      |        | 2001         |        | 2002     
|                                                                                       |                                                                                                                                   |                                                      |        |              |        |          
|ASSETS                                                                                 |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Current assets:                                                                        |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Cash and cash equivalents                                                                                                         |                                                      | $      | 7,074        |        |           | $      | 3,760    |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Accounts receivable, net of allowance for doubtful accounts                                                                       |                                                      |        | 7,031        |        |           |        | 5,960    |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Prepaid expenses and other current assets                                                                                         |                                                      |        | 1,874        |        |           |        | 775      |       
|                                                                                       |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                       |                                                                                                                                   | Total current assets                                 |        |              | 15,979 |           |        |          | 10,495 |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Property and equipment, net                                                            |                                                                                                                                   |                                                      | 6,187  |              |        |           | 5,249  |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Goodwill                                                                               |                                                                                                                                   |                                                      | 20,407 |              |        |           | 20,782 |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other intangible assets                                                                |                                                                                                                                   |                                                      | 375    |              |        |           |       |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other assets                                                                           |                                                                                                                                   |                                                      | 290    |              |        |           | 285    |         
|                                                                                       |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                       |                                                                                                                                   | Total assets                                         |        | $            | 43,238 |           |        | $        | 36,811 |  
|                                                                                       |                                                                                                                                   |                                                      |        |              |        |           |        |         
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS EQUITY (DEFICIT) |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Current liabilities:                                                                   |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Accounts payable                                                                                                                  |                                                      | $      | 3,961        |        |           | $      | 3,202    |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Accrued expenses                                                                                                                  |                                                      |        | 16,345       |        |           |        | 16,513   |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Note payable to certain former shareholders of Customer Analytics                                                                 |                                                      |        | 2,487        |        |           |        | 2,513    |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Line of credit                                                                                                                    |                                                      |        | 4,169        |        |           |        | 2,909    |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Current portion of capital leases                                                                                                 |                                                      |        | 1,232        |        |           |        | 645      |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Deferred revenue                                                                                                                  |                                                      |        | 3,975        |        |           |        | 3,711    |       
|                                                                                       |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                       |                                                                                                                                   | Total current liabilities                            |        |              | 32,169 |           |        |          | 29,493 |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Long term portion of capital leases                                                    |                                                                                                                                   |                                                      | 63     |              |        |           | 16     |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Convertible debentures                                                                 |                                                                                                                                   |                                                      | 3,102  |              |        |           | 5,104  |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Redeemable convertible preferred stock                                                 |                                                                                                                                   |                                                      | 5,650  |              |        |           | 6,080  |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Stockholders equity:                                                                  |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Preferred Stock; $.001 par value 
10,000,000 shares authorized, zero shares outstanding at December 31, 2001
and March 31, 2002, |                                                      |        |             |        |           |        |         |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Common Stock, $.001 par value 
50,000,000 shares authorized; 1,152,892 shares issued at December 31, 2001
and March 31, 2002     |                                                      |        | 1            |        |           |        | 1        |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Additional paid-in capital                                                                                                        |                                                      |        | 299,547      |        |           |        | 299,605  |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Accumulated deficit                                                                                                               |                                                      |        | (297,030     | )      |           |        | (303,198 | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Other comprehensive income                                                                                                        |                                                      |        | (264         | )      |           |        | (290     | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Treasury stock, at cost; 12,219 shares at December 31, 2001 and March 31, 2002                                                    |                                                      |        |             |        |           |        |         |       
|                                                                                       |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                       |                                                                                                                                   | Total stockholders equity (deficit)                 |        |              | 2,254  |           |        |          | (3,882 | )
|                                                                                       |                                                                                                                                   |                                                      |        |              |        |           |        |         
|                                                                                       |                                                                                                                                   | Total liabilities and stockholders equity (deficit) |        | $            | 43,238 |           |        | $        | 36,811 |  
|                                                                                       |                                                                                                                                   |                                                      |        |              |        |           |        |         

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
|                                                                                 |                                                 |                                      |           | March 31          
|                                                                                 |                                                 |                                      |           | 2001               |        | 2002
|                                                                                 |                                                 |                                      |           |                    |        |     
|Revenues:                                                                        |                                                 |                                      |           |                    |        |      |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Software license fees                           |                                      | $         | 9,045              |        |      | $         | 2,741  |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Services and maintenance                        |                                      |           | 6,715              |        |      |           | 3,648  |       
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|                                                                                 |                                                 | Total revenues                       |           |                    | 15,760 |      |           |        | 6,389  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Cost of revenues:                                                                |                                                 |                                      |           |                    |        |      |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Software license fees                           |                                      |           | 203                |        |      |           | 70     |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Services and maintenance                        |                                      |           | 4,514              |        |      |           | 1,506  |       
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|                                                                                 |                                                 | Total cost of revenues               |           |                    | 4,717  |      |           |        | 1,576  |  
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|Gross profit                                                                     |                                                 |                                      | 11,043    |                    |        |      | 4,813     |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Operating expenses:                                                              |                                                 |                                      |           |                    |        |      |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Sales and marketing                             |                                      |           | 10,280             |        |      |           | 2,259  |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Research and development                        |                                      |           | 6,221              |        |      |           | 2,256  |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | General and administrative                      |                                      |           | 4,241              |        |      |           | 2,040  |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Amortization of goodwill and intangibles        |                                      |           | 5,130              |        |      |           |       |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Amortization of MicroStrategy non-current asset |                                      |           | 4,906              |        |      |           |       |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Restructuring charge                            |                                      |           |                   |        |      |           | 357    |       
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|                                                                                 |                                                 | Total operating expenses             |           |                    | 30,778 |      |           |        | 6,912  |  
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|Loss from operations                                                             |                                                 |                                      | (19,735   | )                  |        |      | (2,099    | )     
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Interest income (expense):                                                       |                                                 |                                      |           |                    |        |      |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Interest income                                 |                                      |           | 54                 |        |      |           | 17     |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Interest expense                                |                                      |           | (595               | )      |      |           | (3,597 | )     
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|                                                                                 |                                                 | Total interest income (expense), net |           |                    | (541   | )    |           |        | (3,580 | )
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|Loss before provision for income taxes                                           |                                                 |                                      | (20,276   | )                  |        |      | (5,679    | )     
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Provision for income taxes                                                       |                                                 |                                      | 6         |                    |        |      |          |       
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|Net loss                                                                         |                                                 | $                                    | (20,282   | )                  |        | $    | (5,679    | )     
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|Accretion to redemption value of Series A redeemable
convertible preferred stock |                                                 |                                      | 415       |                    |        |      | 487       |       
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|Net loss available to common stockholders                                        |                                                 | $                                    | (20,697   | )                  |        | $    | (6,166    | )     
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|Net loss per common share (Note 2(c)):                                           |                                                 |                                      |           |                    |        |      |           |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Basic
and diluted net loss per share applicable to common stockholders           |                                                 | $                                    | (18.92    | )                  |        | $    | (5.41     | )     
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       
|Basic
and diluted weighted average common shares outstanding                     |                                                 |                                      | 1,093,915 |                    |        |      | 1,140,673 |       
|                                                                                 |                                                 |                                      |           |                    |        |      |           |       

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)

|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |        |        |        |        |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------- | ------------------------------------- | ----- | ------------------ | ------ | ------ | ------ | ------ | ------ | -
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       | Three Months Ended
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       | March 31,         
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       | 2001               |        | 2002  
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|Cash flows from operating activities:                        |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net loss                                                                                             |                                                                                | $                                         | (20,282                               | )     |                    | $      | (5,679 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Adjustments to reconcile net loss to net cash used in operating activities:                          |                                                                                |                                           |                                       |       |                    |        |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Depreciation and other amortization                                            |                                           |                                       | 1,305 |                    |        |        | 885    |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Amortization of MicroStrategy asset                                            |                                           |                                       | 4,906 |                    |        |        |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Compensation expense associated with stock options                             |                                           |                                       | 31    |                    |        |        |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash interest related to convertible debentures                            |                                           |                                       |      |                    |        |        | 3,425  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non cash interest expense related to MicroStrategy obligation                  |                                           |                                       | 339   |                    |        |        |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash interest related to notes payable to Customers Analytics
shareholders |                                           |                                       | 27    |                    |        |        | 26     |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash interest expense related to notes payable to Insight Venture
Partners |                                           |                                       | 74    |                    |        |        |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Amortization of goodwill and intangibles                                       |                                           |                                       | 5,130 |                    |        |        |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash interest expense related to warrants issued to Silicon Valley Bank    |                                           |                                       |      |                    |        |        | 40     |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Non-cash restructuring charge                                                  |                                           |                                       |      |                    |        |        | 94     |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      | Changes in operating assets and liabilities:                                   |                                           |                                       |       |                    |        |        |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                | Accounts receivable                       |                                       |       | 4,192              |        |        |        | 1,071  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                | Prepaid expenses and other current assets |                                       |       | 117                |        |        |        | 1,059  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                | Accounts payable                          |                                       |       | (1,388             | )      |        |        | (759   | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                | Accrued expenses                          |                                       |       | (882               | )      |        |        | (1,255 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                                      |                                                                                | Deferred revenue                          |                                       |       | (305               | )      |        |        | (264   | )     
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|                                                             |                                                                                                      |                                                                                |                                           | Net cash used in operating activities |       |                    | (6,736 | )      |        |        | (1,357 | )
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|Cash flows from investing activities:                        |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchases of property and equipment                                                                  |                                                                                |                                           | (1,151                                | )     |                    |        | (42    | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Decrease in other assets                                                                             |                                                                                |                                           | 171                                   |       |                    |        | 5      |       
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|                                                             |                                                                                                      | Net cash used in investing activities                                          |                                           |                                       | (980  | )                  |        |        | (37    | )     
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|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                       |                                                                                |                                           | 4,432                                 |       |                    |        |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Repayments under capital leases                                                                      |                                                                                |                                           | (482                                  | )     |                    |        | (634   | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Repayment
of notes payable to Customer Analytics shareholders                                        |                                                                                |                                           | (2,460                                | )     |                    |        |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Repayment
of line of credit                                                                          |                                                                                |                                           |                                      |       |                    |        | (1,260 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Exercise of common stock options                                                                     |                                                                                |                                           | 99                                    |       |                    |        |       |       
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|                                                             |                                                                                                      | Net cash provided by (used in) financing activities                            |                                           |                                       | 6,176 |                    |        |        | (1,894 | )     
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|Effect of exchange rate changes on cash and cash equivalents |                                                                                                      |                                                                                | (5                                        | )                                     |       |                    | (26    | )     
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|Net decrease in cash and cash equivalents                    |                                                                                                      |                                                                                | (1,545                                    | )                                     |       |                    | (3,314 | )     
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|Cash and cash equivalents, beginning of period               |                                                                                                      |                                                                                | 8,617                                     |                                       |       |                    | 7,074  |       
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       
|Cash and cash equivalents, end of period                     |                                                                                                      | $                                                                              | 7,072                                     |                                       |       | $                  | 3,760  |       
|                                                             |                                                                                                      |                                                                                |                                           |                                       |       |                    |        |       

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

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|                                                                                                                            |                            |   |       |    |  |   |     |     | 
|--------------------------------------------------------------------------------------------------------------------------- | -------------------------- | - | ----- | -- |  | - | --- | --- | 
|Supplemental disclosure of cash flow information                                                                            |                            |   |       |    |  |   |     |    
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                            | Cash paid for interest     |   | $     | 34 |  |   | $   | 112 | 
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                            | Cash paid for income taxes |   | $     | 6  |  |   |     |    | 
|                                                                                                                            |                            |   |       |    |  |   |     |    
|Effect of beneficial conversion feature on
Series A redeemable convertible preferred stock                                  |                            | $ | 2,094 |    |  |   |    |    
|                                                                                                                            |                            |   |       |    |  |   |     |    
|Issuance of warrants to Insight Venture Partners                                                                            |                            | $ | 257   |    |  |   |    |    
|                                                                                                                            |                            |   |       |    |  |   |     |    
|Accretion of dividends and discount on Series A
redeemable convertible preferred stock                                      |                            | $ | 201   |    |  | $ | 248 |    
|                                                                                                                            |                            |   |       |    |  |   |     |    
|Accretion of discount, offering costs, and
beneficial conversion feature on issuance of
Series A redeemable preferred stock |                            | $ | 214   |    |  | $ | 239 |    
|                                                                                                                            |                            |   |       |    |  |   |     |    
|Conversion of notes payable to Insight Venture
Partners into Series A redeemable convertible
preferred stock                |                            | $ | 1,500 |    |  |   |    |    
|                                                                                                                            |                            |   |       |    |  |   |     |    
|Equipment acquired under capital
lease                                                                                      |                            | $ | 132   |    |  |   |    |    
|                                                                                                                            |                            |   |       |    |  |   |     |    

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

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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 three months ended March 31, 2002. In
addition, at March 31, 2002 the Company had a significant working capital
deficit and certain notes payable mature in June 2002. 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 to fund
operations. 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 accounting principles generally
accepted in the United States.
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 March 31, 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 months ended March 31, 2001 and 2002 is calculated by dividing the
net loss applicable to common stockholders by the weighted average number of
common shares outstanding.

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EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Diluted weighted average shares outstanding for the three months ended
March 31, 2001 and 2002 exclude the potential common shares from stock options,
warrants, Series A redeemable convertible preferred stock and
convertible debentures because to include
such shares would have been antidilutive. As of March 31, 2001 and 2002,
246,986 and 6,211,704 potential common shares were outstanding.

(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
months ended March 31, 2001 and 2002 are as follows:

|                                   |                             |                |                    |    |      |   |        |     |  
|---------------------------------- | --------------------------- | -------------- | ------------------ | -- | ---- | - | ------ | --- | -
|                                   |                             |                | Three months ended
|                                   |                             |                | March 31,         
|                                   |                             |                | 2001               |    | 2002
|                                   |                             |                |                    |    |     
|                                   |                             | (in thousands)
|Comprehensive income (loss):       |                             |               
|Net income (loss)                  |                             | $              | (20,282            | )  |      | $ | (5,679 | )  
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                             |                |                    |    |      |   |        |    
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency adjustment |                |                    | (5 | )    |   |        | (26 | )
|                                   |                             |                |                    |    |      |   |        |    
|Comprehensive income (loss)        |                             | $              | (20,287            | )  |      | $ | (5,705 | )  
|                                   |                             |                |                    |    |      |   |        |    

(e) Goodwill and other
intangibles

Effective
January 1, 2002, the Company adopted SFAS 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 will continue to assess the need for a future
impairment charge upon adoption of SFAS 142. Pro forma net loss and
basic and diluted net loss per share available to common stockholders for the three months ended March 31,
2001 had the Company applied SFAS 142 as of January 1, 2001 are $16.5
million and $15.58 per share, respectively.

(3) Amortization of MicroStrategy Assets

The following amounts represent the components of the amortization of the
MicroStrategy assets for the three months ended March 31, 2002 (in thousands):

|                                           |  |   |       | 
|------------------------------------------ |  | - | ----- | 
|Technology License                         |  | $ | 2,037 | 
|                                          
|                                          
|                                          
|                                          
|Research and development workforce         |  |   | 2,037 | 
|                                          
|                                          
|                                          
|                                          
|Prepaid co-marketing services              |  |   | 832   | 
|                                           |  |   |       | 
|Total amortization of MicroStrategy Assets |  | $ | 4,906 | 
|                                           |  |   |       | 

In the fourth quarter of 2001, the Company recognized an impairment charge
for the unamortized balance of the MicroStrategy assets in connection with its
decision to discontinue the use of the MicroStrategy technology in its updated
release of Xchange 8.0 in December 2001. Therefore, there is no
amortization related to the MicroStrategy assets for the three
months ended March 31, 2002.

(4) Restructuring Charges

In the first quarter of 2002, the Company undertook 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              |  | $ | 264 | 
|                      
|                      
|                      
|                      
|Property and equipment |  |   | 93  | 
|                       |  |   |     | 
|                       |  | $ | 357 | 
|                       |  |   |     | 

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Severance costs relate to the elimination of 17 managerial and staff
positions worldwide, comprising approximately 10% of the beginning of the year
workforce in the following areas: three in sales and marketing, four in
research and development, seven in professional services and three in
administration. 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.

The following summarizes the activity in the Companys restructuring
accruals in 2002:

|                   |  |                     |       |           |  |               |     |          |  |   |     |                  |  |   |       | 
|------------------ |  | ------------------- | ----- | --------- |  | ------------- | --- | -------- |  | - | --- | ---------------- |  | - | ----- | 
|                   |  | Restructuring       |       |           |  |               |     |          |  |   |     | Restructuring   
|                   |  | accrual at December |       |           |  |               |     |          |  |   |     | accrual at March
|                   |  | 31, 2001            |       | Additions |  | Cash payments |     | 31, 2002
|                   |  |                     |       |           |  |               |     |         
|                   |  | (in thousands)     
|Severance          |  | $                   | 245   |           |  | $             | 264 |          |  | $ | 207 |                  |  | $ | 302   | 
|                  
|                  
|                  
|                  
|Facilities related |  |                     | 3,992 |           |  |               |    |          |  |   | 396 |                  |  |   | 3,596 | 
|                  
|                  
|                  
|                  
|Others             |  |                     |      |           |  |               |    |          |  |   | 82  |                  |  |   | 397   | 
|                   |  |                     |       |           |  |               |     |          |  |   |     |                  |  |   |       | 
|Total              |  | $                   | 4,716 |           |  | $             | 264 |          |  | $ | 685 |                  |  | $ | 4,295 | 
|                   |  |                     |       |           |  |               |     |          |  |   |     |                  |  |   |       | 

The
severance accrued at March 31, 2002 will be paid out in
installments through July 2, 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) Subsequent Events

Additional Financing

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
(receivables line). Availability under the receivables line is based on
advances against the Companys trade receivables. The 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 (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 the repricing of 4,003 warrants previously issued 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 (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
notes are repaid.

In consideration for Insight guaranteeing the guaranteed line, the Company
granted Insight a Contingent Value Right (CVR). Under the terms of the CVR
agreement, Insight may request 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 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.

Offer from Investor Group

On May 2, 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.

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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

Exchange Applications, Inc. and its subsidiaries (Xchange or 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 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. (GPI) and Grant & Partners Limited Partnership (GPLP). 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 Xchange 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.

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Critical Accounting Policies and Significant Judgements and Estimates

Xchange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. On an ongoing basis, management
evaluates its estimates and judgements, including those related to revenue
recognition, bad debts, intangible assets, and income taxes. 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

11



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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 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
(EITF) 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.

Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may
become uncollectible in the future. The estimated allowance for uncollectible
amounts is based primarily on a specific analysis of accounts in the receivable
portfolio and historical write-off experience. While management believes the
allowance to be adequate, if the financial condition of the Companys customers
were to deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required.

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. The value of goodwill and intangibles assets
are amortized using the straight-line method over three to five years based on
management estimate of the assets useful life.

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 MicroStrategy technology 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.

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Accounting for Income Taxes

The preparation of consolidated financial statements requires the Company
to estimate income taxes in each of the jurisdictions in which it operates,
including those outside the United States which may be subject to certain risks
that ordinarily would not be expected in the United States. The income tax
accounting process involves estimating actual current exposure together with
assessing temporary differences resulting from differing treatment of items,
such as deferred revenue, for tax and accounting purposes. These differences
result in the recognition of deferred tax assets and liabilities. The Company
must then record a valuation allowance to reduce its deferred tax assets and
liabilities to the amount that is more likely than not to be realized.

Significant management judgement is required in determining the provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. The Company recorded a
valuation allowance of $65.2 million as of December 31, 2001, due to
uncertainties related to its ability to utilize some of its deferred tax
assets, primarily consisting of certain net operating losses carried forward
before they expire. The valuation allowance is based on our estimates of
taxable income by jurisdiction in which the Company operates and the period
over which our deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or the Company adjusts these
estimates in future periods the Company may need to adjust its valuation
allowance which could materially impact its financial position and results of
operations.

Restructuring Charges

In the first quarter of 2002, the Company undertook 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 is as follows (in thousands):

|                       |  |   |     | 
|---------------------- |  | - | --- | 
|Severance              |  | $ | 264 | 
|                      
|                      
|                      
|                      
|Property and Equipment |  |   | 93  | 
|                       |  |   |     | 
|                       |  | $ | 357 | 
|                       |  |   |     | 

Severance costs relate to the elimination of 17 managerial and staff
positions worldwide, comprising approximately 10% of the beginning of the year
workforce in the following areas: three in sales and marketing, four in
research and development, seven in professional services and three in
administration. Property and equipment relates to non-cash write-offs of
excess office furniture and computer equipment that has been removed from
operations as a result of employee reductions.

The following summarizes the activity in the Companys restructuring
accruals in 2002:

|                   |  |                     |       |           |  |               |     |          |  |   |     |                  |  |   |       | 
|------------------ |  | ------------------- | ----- | --------- |  | ------------- | --- | -------- |  | - | --- | ---------------- |  | - | ----- | 
|                   |  | Restructuring       |       |           |  |               |     |          |  |   |     | Restructuring   
|                   |  | accrual at December |       |           |  |               |     |          |  |   |     | accrual at March
|                   |  | 31, 2001            |       | Additions |  | Cash payments |     | 31, 2002
|                   |  |                     |       |           |  |               |     |         
|                   |  | (in thousands)     
|Severance          |  | $                   | 245   |           |  | $             | 264 |          |  | $ | 207 |                  |  | $ | 302   | 
|                  
|                  
|                  
|                  
|Facilities related |  |                     | 3,992 |           |  |               |    |          |  |   | 396 |                  |  |   | 3,596 | 
|                  
|                  
|                  
|                  
|Others             |  |                     | 479   |           |  |               |     |          |  |   | 82  |                  |  |   | 397   | 
|                   |  |                     |       |           |  |               |     |          |  |   |     |                  |  |   |       | 
|Total              |  | $                   | 4,716 |           |  | $             | 264 |          |  | $ | 685 |                  |  | $ | 4,295 | 
|                   |  |                     |       |           |  |               |     |          |  |   |     |                  |  |   |       | 

The
severance accrued at March 31, 2002 will be paid out in
installments through July 2, 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 containment initiatives.

13



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##### Table of Contents



Three Months Ended March 31, 2001 and 2002

Revenues

|                         |  |               |      |         |  |   |     |   |  |                     |      |   |  |  |       |   
|------------------------ |  | ------------- | ---- | ------- |  | - | --- | - |  | ------------------- | ---- | - |  |  | ----- | --
|                         |  |               |      |         |  |   |     |   |  | increase (decrease)
|                         |  |               |      |         |  |   |     |   |  | Q1 2001 to Q1 2002 
|                         |  | Q1 2001       |      | Q1 2002 |  | $ |     | %
|                         |  |               |      |         |  |   |     |  
|                         |  | (in millions)
|Software license fees    |  | $             | 9.1  |         |  | $ | 2.7 |   |  | $                   | (6.4 | ) |  |  | (69.7 | %)
|                        
|                        
|                        
|                        
|Services and maintenance |  |               | 6.7  |         |  |   | 3.7 |   |  |                     | (3.0 | ) |  |  | (45.7 | %)
|                         |  |               |      |         |  |   |     |   |  |                     |      |   |  |  |       |   
|Total revenue            |  | $             | 15.8 |         |  | $ | 6.4 |   |  | $                   | (9.4 | ) |  |  | (59.5 | %)
|                         |  |               |      |         |  |   |     |   |  |                     |      |   |  |  |       |   

The Companys total revenues decreased by $9.4 million, or 59.5%, from
$15.8 million in Q1 2001 to $6.4 million in Q1 2002. In Q1 2001, the Companys
top five customers accounted for 49.6% of total revenues compared to 34.2% for
Q1 2002. None of the top five customers during Q1 2001 was a top five customer
during Q1 2002. The two largest customers during Q1 2001 represented 25.2% and
8.8% of total revenues, respectively, while the two largest customers for Q1
2002 represented 11.7% and 9.0% of total revenues, respectively.

Software
license fees decreased by $6.4 million, or 69.7%, from $9.1
million in Q1 2001 to $2.7 million in Q1 2002. Included in software license
fee revenue in Q1 2001 was $4.0 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 Q1 2002. The remaining decrease is attributed primarily to:
(i) decrease in demand for the Companys products, (ii) longer sales cycles,
and (iii) fewer sales resulting from a general market slowdown for information
technology spending. The Company expects revenues to increase moderately for
the remainder of 2002 as direct sales representatives achieve productivity and
the new Xchange 8 product suite gains market acceptance. As of March 31, 2002,
the Company had 16 direct sales representatives, down from 29 at March 31,
2001.

Services
and maintenance revenues decreased by $3.0 million, or 45.7%,
from $6.7 million in Q1 2001 to $3.7 million at Q1 2002. The decrease is
attributed to decreases in services engagement revenue of $2.0 million,
eMessaging ASP revenue of $.6 million and maintenance revenue of $.4 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, and partially to the Companys strategy of selling
software licenses through third-party resellers that perform the services work
historically performed by the Company. 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.

Services and maintenance revenue was 57% of total revenues in Q1 2002. The
Company anticipates this mix to shift to a higher percentage of software
license fee revenue over the course of 2002 as the Company strengthens its
relationships with third-party software resellers, thereby reducing services
engagement and revenue opportunities, while maintenance revenue will grow at a
slower rate resulting from lower new customer growth in the latter half of
2001.

Cost of Revenues

|                         |  |               |     |         |  |   |     |   |  |                     |      |   |  |  |       |   
|------------------------ |  | ------------- | --- | ------- |  | - | --- | - |  | ------------------- | ---- | - |  |  | ----- | --
|                         |  |               |     |         |  |   |     |   |  | increase (decrease)
|                         |  |               |     |         |  |   |     |   |  | Q1 2001 to Q2 2002 
|                         |  | Q2 2001       |     | Q1 2002 |  | $ |     | %
|                         |  |               |     |         |  |   |     |  
|                         |  | (in millions)
|Software license fees    |  | $             | .2  |         |  | $ | .1  |   |  | $                   | (.1  | ) |  |  | (65.5 | %)
|                        
|                        
|                        
|                        
|Services and maintenance |  |               | 4.5 |         |  |   | 1.5 |   |  |                     | (3.0 | ) |  |  | (66.6 | %)
|                         |  |               |     |         |  |   |     |   |  |                     |      |   |  |  |       |   
|Total cost of revenue    |  | $             | 4.7 |         |  | $ | 1.6 |   |  | $                   | (3.1 | ) |  |  | (66.6 | %)
|                         |  |               |     |         |  |   |     |   |  |                     |      |   |  |  |       |   

14



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##### Table of Contents



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. While the cost of software license fees decrease in absolute
dollars from $203,000 in Q1 2001 to $70,000 in Q1 2002, it increased as a
percentage of software license fee revenue from 2.2% to 2.5%. The slight
increase as a percentage of software license fee revenue is due to an increase
in the third-party royalties for components of the Xchange 8.0 product suite.
As the Company migrates from selling its software components individually to
selling them combined in the Xchange 8.0 product suite it anticipates selling a
larger number of third-party software components and, therefore, the cost of
revenues as a percentage of software license fee revenues is expected to
increase in the future.

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 67.2% in Q1
2001 and 41.3% in Q1 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 Q1 of 2002 designed to adjust its infrastructure cost downward
to better match the lower anticipated level of revenues. These actions included
reducing the headcount of billable consultants, customer support staff and
management from 111 at March 31, 2001 to 42 at March 31, 2002 through both
employee severance and attrition, as well as rationalizing facility and other
infrastructure costs.

Overall gross profit percentage improved from 70.1% in Q1 2001 to 75.3% in
Q1 2002, as a result of the Companys costs containment efforts and anticipated
shift to a higher percentage of software license fee revenue. The Company
anticipates the gross profit percentage will continue to improve throughout
2002.

Operating Expenses

|                    |  |               |      |         |  |   |     |   |  |                     |      |   |  |  |       |   
|------------------- |  | ------------- | ---- | ------- |  | - | --- | - |  | ------------------- | ---- | - |  |  | ----- | --
|                    |  |               |      |         |  |   |     |   |  | increase (decrease)
|                    |  |               |      |         |  |   |     |   |  | Q1 2001 to Q2 2002 
|                    |  | Q1 2001       |      | Q1 2002 |  | $ |     | $
|                    |  |               |      |         |  |   |     |  
|                    |  | (in millions)
|Sales and marketing |  | $             | 10.3 |         |  | $ | 2.3 |   |  | $                   | (8.0 | ) |  |  | (78.0 | %)

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 $8.0 million,
or 78.0%, from
$10.3 million in Q1 2001 to $2.3 million in Q1 2002. Sales and marketing
expenses decreased as a percentage of revenue from 65% in Q1 2001 to 35% in Q1
2002. Included in sales and marketing expense in Q1 2001 was approximately
$900,000 related to an off-site Company sales and strategy meeting which did
not take place in 2002. The remainder of the decrease is due to the Companys
corrective actions in the later half of 2001 and into Q1 of 2002 designed to
adjust its infrastructure costs downward to better match the lower anticipated
revenues. These actions included reducing the headcount of direct salesmen,
sales support, marketing and management personnel from 126 at March 31, 2001 to
37 at March 31, 2002 through employee severance and attrition, as well as
rationalizing facilities and other infrastructure costs and canceling a number
of significant marketing related promotional activities.

|                         |  |               |     |         |  |   |     |   |  |                     |      |   |  |  |       |   
|------------------------ |  | ------------- | --- | ------- |  | - | --- | - |  | ------------------- | ---- | - |  |  | ----- | --
|                         |  |               |     |         |  |   |     |   |  | increase (decrease)
|                         |  |               |     |         |  |   |     |   |  | Q1 2001 to Q2 2002 
|                         |  | Q1 2001       |     | Q1 2002 |  | $ |     | $
|                         |  |               |     |         |  |   |     |  
|                         |  | (in millions)
|Research and development |  | $             | 6.2 |         |  | $ | 2.3 |   |  | $                   | (3.9 | ) |  |  | (63.7 | %)

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 $3.9
million, or 63.7% from

15



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##### Table of Contents



$6.2 million in Q1 2001 to $2.3 million in Q1 2002. Research and
development costs as a percentage of revenue decreased from 39% in Q1 2001 to
35% in Q1 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 Q1 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. These actions included reducing research and
development, engineering and management personnel from 142 at March 31, 2001 to
59 at March 31, 2002 through employee severance and attrition, reduced use of
third-party consultants and rationalizing facility and other infrastructure
related costs.

|                           |  |               |     |         |  |   |     |   |  |                     |      |   |  |  |       |   
|-------------------------- |  | ------------- | --- | ------- |  | - | --- | - |  | ------------------- | ---- | - |  |  | ----- | --
|                           |  |               |     |         |  |   |     |   |  | increase (decrease)
|                           |  |               |     |         |  |   |     |   |  | Q1
2001 to Q2 2002 
|                           |  | Q1 2001       |     | Q1 2002 |  | $ |     | $
|                           |  |               |     |         |  |   |     |  
|                           |  | (in millions)
|General and administrative |  | $             | 4.2 |         |  | $ | 2.0 |   |  | $                   | (2.2 | ) |  |  | (51.9 | %)

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 $2.2
million, or 51.9%, from $4.2 million in Q1 to $2.0 million in Q1 2002. The
decrease is the result of corrective actions the Company took in the later part
of 2001 and into Q1 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. The actions included reducing general and
administrative headcount from 73 at March 31, 2001 to 20 at March 31, 2002
through employee severance and attrition, and rationalizing facility and other
infrastructure costs.

|                                         |  |               |      |         |  |   |   |   |  |                     |       |   |  |  |        |   
|---------------------------------------- |  | ------------- | ---- | ------- |  | - | - | - |  | ------------------- | ----- | - |  |  | ------ | --
|                                         |  |               |      |         |  |   |   |   |  | increase (decrease)
|                                         |  |               |      |         |  |   |   |   |  | Q1
2001 to Q2 2002 
|                                         |  | Q1 2001       |      | Q1 2002 |  | $ |   | $
|                                         |  |               |      |         |  |   |   |  
|                                         |  | (in millions)
|Amortization
of MicroStrategy asset      |  | $             | 4.9  |         |  | $ |  |   |  | $                   | (4.9  | ) |  |  | (100.0 | %)
|                                        
|                                        
|                                        
|                                        
|Amortization of goodwill and intangibles |  |               | 5.1  |         |  |   |  |   |  |                     | (5.1  | ) |  |  | (100.0 | %)
|                                         |  |               |      |         |  |   |   |   |  |                     |       |   |  |  |        |   
|                                         |  | $             | 10.0 |         |  | $ |  |   |  | $                   | (10.0 | ) |  |  | (100.0 | %)
|                                         |  |               |      |         |  |   |   |   |  |                     |       |   |  |  |        |   

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 Statement of
Financial Accounting Standard (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 will continue to assess
the need for a future impairment
charge upon adoption of SFAS 142.

Interest income (expense), net

|                               |  |               |     |         |  |   |      |   |  |                     |      |   |  |  |        |   
|------------------------------ |  | ------------- | --- | ------- |  | - | ---- | - |  | ------------------- | ---- | - |  |  | ------ | --
|                               |  |               |     |         |  |   |      |   |  | increase (decrease)
|                               |  |               |     |         |  |   |      |   |  | Q1 2001 to Q2 2002 
|                               |  | Q1 2001       |     | Q1 2002 |  | $ |      | $
|                               |  |               |     |         |  |   |      |  
|                               |  | (in millions)
|Interest income (expense), net |  | $             | (.5 | )       |  | $ | (3.6 | ) |  | $                   | (3.1 | ) |  |  | (561.7 | %)

Interest expense, net in Q1 2001 was comprised of $339,000 of non-cash
interest expense associated with the MicroStrategy obligation, $74,000 of
non-cash interest associated the amortization of discounts of the issuance of
$4.5 million of convertible notes to Insight Venture Partners (Insight),
$30,000 in interest payable on convertible notes payable to certain former
shareholders of CA, $88,000 in interest on capital leases and other lease
obligations,

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##### Table of Contents



offset by $54,000 of interest income. Interest expense, net in Q1 2002 was
comprised primarily of $2.0 million in non-cash interest related to the
accretion of discounts on convertible debentures, $1.4 million in non-cash
interest related to the convertible debentures, $40,000 of non-cash interest
related to warrants issue to Insight, $62,000 related to interest on the
Companys bank line of credit and $37,000 related to the notes payable.

Provision for Income Taxes

For the three months ended March 31, 2001 the Company recorded an income
tax provision of $6,000 related primarily to minimum state income tax
requirements. No provision for foreign, federal, or state income taxes was
required for the three months ended March 31, 2002.

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. The
Company also has utilized $2.9 million of a $5 million secured credit from
Silicon Valley Bank (SVB). As of March 31, 2002 the Company had $3.8 million
in cash and cash equivalents.

The Company has sustained net losses and negative cash flows from
operations in 2000 and 2001 and the three months ended March 31, 2002. In
addition, as of March 31, 2002 the Company has a significant working capital
deficit, its bank line of credit matured on April 25, 2002, and certain other
notes payable are due in June 2002. 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 to fund
operations. 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 three months ended March 31, 2002, net cash used in operating
activities was $1.4 million, resulting primarily from a loss of $1.2 million
before depreciation expense and other non-cash charges and an increase in
working capital of $152,000.

Net cash used by financing activities of $1.9 million was comprised of net
pay-downs against the SVB line of credit of $1.3 million and capital leases of
$633,000.

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 the 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 a $4 million credit facility collateralized (guaranteed
line) by a guarantee 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 2, 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.

17



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##### Table of Contents






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.

The Company currently has sales offices in the United Kingdom, Japan, 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 March 31, 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 4.Submission of Matters to a Vote of Security Holders

The Company held a Special Meeting of Shareholders on February 27, 2002 to
consider the matters set forth below:

The Company submitted a proposal to amend the Companys Certificate of
Incorporation to effect a reverse stock split at a ratio of 1:10, 1:20, 1:30,
or 1:40. The results of the proposal, adjusted to reflect the reverse stock
split effected by the Company as of March 18, 2002, were as follows:

|          |  |         |        |         |  |         |       |  |  |  |       | 
|--------- |  | ------- | ------ | ------- |  | ------- | ----- |  |  |  | ----- | 
|For       |  | Against |        | Abstain |  | No Vote
|          |  |         |        |         |  |        
|1,135,409 |  |         | 36,166 |         |  |         | 2,287 |  |  |  | 1,375 | 

The Company submitted a proposal to amend the Companys Certificate of
Incorporation to increase the number of authorized shares of common stock that
the Company is authorized to issue from 150,000,000 to 400,000,000 (such
proposal to be implement only in lieu of, and not in conjunction with, the
proposal set forth above). The results of the proposal, adjusted to reflect the
reverse stock split effected by the Company as of March 18, 2002, were as
follows:

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##### Table of Contents



|          |  |         |        |         |  |         |       |  |  |  |       | 
|--------- |  | ------- | ------ | ------- |  | ------- | ----- |  |  |  | ----- | 
|For       |  | Against |        | Abstain |  | No Vote
|          |  |         |        |         |  |        
|1,107,077 |  |         | 64,002 |         |  |         | 2,783 |  |  |  | 1,375 | 

The Company submitted a proposal to ratify an amendment to the 1998 Stock
Incentive Plan to increase the number of shares authorized for issuance
thereunder. The results of the proposal, adjusted to reflect the reverse stock
split effected by the Company as of March 18, 2002, were as follows:

|        |  |         |        |         |  |         |       |  |  |  |         | 
|------- |  | ------- | ------ | ------- |  | ------- | ----- |  |  |  | ------- | 
|For     |  | Against |        | Abstain |  | No Vote
|        |  |         |        |         |  |        
|406,586 |  |         | 96,313 |         |  |         | 5,595 |  |  |  | 666,743 | 

The Company submitted a proposal to approve the issuance of shares of
Common Stock upon conversion of shares of Series A Convertible Reedemable
Preferred Stock. The results of the proposal, adjusted to reflect the reverse
stock split effected by the Company as of March 18, 2002, were as follows:

|        |  |         |        |         |  |         |       |  |  |  |         | 
|------- |  | ------- | ------ | ------- |  | ------- | ----- |  |  |  | ------- | 
|For     |  | Against |        | Abstain |  | No Vote
|        |  |         |        |         |  |        
|460,808 |  |         | 44,023 |         |  |         | 3,663 |  |  |  | 666,743 | 

More information about each of these matters can be found in the Proxy
Statement filed by the Company on January 25, 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)
|      
|      
|      
|      
|       |  |                                                                                                                                                                                                                  
|      
|      
|      
|      
|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)                           



|* |  | Incorporated by reference
|- |  | -------------------------

(b)  Reports on Form 8-K

Report on Form 8-K filed with the SEC on March 19, 2002.

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##### Table of Contents






SIGNATURES

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)
|                   
|                   
|                   
|                   
|                    |  |                                          |  |                                                                                                                                                       
|                   
|                   
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|                   
|Dated: May 15, 2002 |  |                                          |  |                                                                                                                                                       
|                   
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|                   
|                    |  |                                          |  |                                                                                                                                                       
|                   
|                   
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|                    |  | By:                                      |  | /s/ J. Christopher Wagner

J. Christopher Wagner
President, Chief Executive Officer,
(authorized officer and principal finance
and accounting officer)

20