<PAGE>
================================================================================

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


                                    FORM 10-Q


  [X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended September 30, 2001.

  [ ]    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                               (I.R.S. Employer
 incorporation or organization)                              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|   No
               -----     -----

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

         Number of Shares 34,373,820        Outstanding as of November 09, 2001
                          ----------                          ---------------


<PAGE>

================================================================================

                           EXCHANGE APPLICATIONS, INC.

               Form 10-Q for the Nine Months Ended September 30, 2001


                                Table of Contents





                          PART I. FINANCIAL INFORMATION

                                                                     Page Number
Item 1.  Financial Statements (unaudited):

         Consolidated Balance Sheets as of September 30, 2001
         and December 31, 2000 (audited)                                  3

         Consolidated Statements of Operations for the
         three and nine months ended September 30, 2001 and 2000          4

         Consolidated Statements of Cash Flows for the
         nine months ended September 30, 2001 and 2000                    5

         Notes to Consolidated Financial Statements                       7

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operation                              14

Item 3.  Quantitative and Qualitative Disclosure about Market Risk       28


                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                               28

Item 6.  Exhibits and Reports on Form 8-K                                29


         Signatures                                                      32

















--------------------------------------------------------------------------------
                                       2


<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                               December 31,  September 30,
                                                                                  2000          2001
                                                                                --------      --------

                                     ASSETS
Current assets:
<S>                                                                             <C>           <C>
  Cash and cash equivalents ................................................    $  8,617      $ 13,803
  Accounts receivable, net of allowance for doubtful accounts ..............      16,969         6,916
  Prepaid expenses and other current assets ................................       4,270         2,298
                                                                                --------      --------
         Total current assets ..............................................      29,856        23,017

Property and equipment, net ................................................      10,413         7,676
Non current assets from MicroStrategy Incorporated transaction .............      42,406        28,522
Goodwill ...................................................................      44,980        29,292
Other intangible assets ....................................................      24,753         6,993
Other assets ...............................................................       9,899           310
                                                                                --------      --------
         Total assets ......................................................    $162,307      $ 95,810
                                                                                ========      ========


  LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable .........................................................    $  5,717      $  5,588
  Accrued expenses .........................................................      15,916        15,596
  Current portion of MicroStrategy Incorporated obligation .................      16,833            --
  Current portion of note payable to certain former
     shareholders of Customer Analytics ....................................       2,875         2,460
  Line of Credit ...........................................................         --          3,671
  Note payable to Insight Capital Partners .................................       1,500            --
  Current portion of capital leases ........................................       1,987         1,768
  Deferred revenue .........................................................       8,636         5,436
                                                                                --------      --------
         Total current liabilities .........................................      53,464        34,519

Long term portion of capital leases, net of current portion.................       1,091            98
Long term portion of note payable to certain former
  shareholders of Customer Analytics, net of current portion................       1,965            --
Long term portion of Convertible Debentures, net of current portion.........         --          1,056

Series A Redeemable Convertible Preferred Stock ............................         --          5,214


Stockholders' equity:
  Preferred Stock; $.001 par value -
  10,000,000 shares authorized, zero shares
  outstanding at December 31, 2000 and September 30, 2001 .................          --            --

  Common Stock, $.001 par value -
  150,000,000 shares authorized; 32,970,359 and 34,404,224 shares
    issued at December 31, 2000 and September 30, 2001, respectively .......          33            35
  Additional paid-in capital ...............................................     250,656       299,165
  Accumulated deficit ......................................................    (144,502)     (244,007)
  Deferred compensation ....................................................        (204)          (18)
  Cumulative translation adjustment ........................................        (196)         (252)
  Treasury stock, at cost; 366,565 and 572,010 shares at December
    31, 2000 and September 30, 2001, respectively ..........................         --            --
                                                                                --------      --------
         Total stockholders' equity ........................................     105,787        54,923
                                                                                --------      --------
         Total liabilities and stockholders' equity ........................    $162,307      $ 95,810
                                                                                ========      ========



                   The accompanying notes are an integral part of these
                   consolidated financial statements.
</TABLE>







--------------------------------------------------------------------------------
                                       3
<PAGE>

                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                             Three months ended,                   Nine months ended
                                                       ------------------------------     ------------------------------
                                                    September 30,2000  September 30,2001   September 30, 2000 September 30, 2001
                                                       ------------      ------------      ------------       ------------

Revenues:
<S>                                                    <C>               <C>               <C>                <C>
  Software license fees .............................  $      5,940      $      3,623      $     29,553       $    17,296
  Services and maintenance ..........................         6,549             5,485            17,736            18,379
                                                       ------------      ------------      ------------       ------------
         Total revenues .............................        12,489             9,108            47,289            35,675
Cost of revenues:
  Software license fees (1)..........................           164                47               526               549
  Services and maintenance ..........................         5,896             3,205            13,386            12,300
                                                       ------------      ------------      ------------       ------------
         Total cost of revenues .....................         6,060             3,252            13,912            12,849

Gross profit ........................................         6,429             5,856            33,377            22,826
Operating expenses:
  Sales and marketing (1)............................         7,424             5,301            18,453            25,029
  Research and development (1).......................         5,885             3,262            13,673            14,637
  General and administrative ........................         6,356             4,319            10,510            13,978
Amortization of MicroStrategy assets ................         4,906             4,074            14,916            13,886
Amortization of goodwill and intangible assets ......         9,288             3,123            12,814            13,442
Impairment of goodwill and intangibles assets .......          --                --                --              19,349
Restructuring charge ................................          --               8,404              --              15,864
                                                       ------------      ------------      ------------       ------------
         Total operating expenses ...................        33,859            28,483            70,366           116,185

Loss from operations ................................       (27,430)          (22,627)          (36,989)          (93,359)

Interest expense, net ...............................          (545)           (2,523)           (1,018)           (4,735)
                                                       ------------      ------------      ------------       ------------
Loss before provision for income taxes ..............       (27,975)          (25,150)          (38,007)          (98,094)

Provision for income taxes ..........................          --                 (21)              (21)              (33)
                                                       ------------      ------------      ------------       ------------
Net loss ............................................  $    (27,975)     $    (25,171)     $    (38,028)      $   (98,127)
                                                       ============      ============      ============       ============
Accretion to redemption value of Series A
  Redeemable Convertible Preferred Stock ............          --                 485              --               1,377
Net loss available to common stockholders ...........  $    (27,975)     $    (25,656)     $    (38,028)      $   (99,504)
                                                       ============      ============      ============       ============
Basic net loss per share ............................        ($0.89)           ($0.76)           ($1.38)           ($2.99)
Diluted net loss per share ..........................        ($0.89)           ($0.76)           ($1.38)           ($2.99)

Basic weighted average common shares outstanding ....    31,578,464        33,603,691        27,530,431        33,233,585
                                                       ============      ============      ============       ============
Diluted weighted average common shares outstanding ..    31,578,464        33,603,691        27,530,431        33,233,585
                                                       ============      ============      ============       ============
</TABLE>



(1)  Cost of software license fees, sales and marketing expenses, and research
     and development expenses listed above are stated exclusive of amortization
     of assets from the MicroStrategy Incorporated transaction, which is stated
     separately. (see Note 3)






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









--------------------------------------------------------------------------------
                                       4

<PAGE>

                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                             Nine months ended September 30,
                                                                                 ----------------------
                                                                                   2000          2001
                                                                                 --------      --------

Cash flows from operating activities:
<S>                                                                              <C>            <C>
  Net loss ...................................................................   $(38,028)      (98,127)
  Adjustments to reconcile net loss to net cash used in operating activities
  Depreciation and other amortization ........................................      2,280         3,733
  Amortization of MicroStrategy asset ........................................     14,916        13,886
  Non cash interest expense related to MicroStrategy obligation ..............      1,874           681
  Non cash interest expense related to notes payable to former
     shareholders of Customer Analytics ......................................       --              81
  Non cash interest expense related to bridge notes and warrants
     issued to Insight Capital Partners ......................................       --           1,493
  Non cash interest expense related to convertible debentures ................       --           1,840
  Non cash interest expense related to warrants issued to Silicon Valley Bank.                       47
  Compensation expense associated with stock options .........................        171            75
  Amortization of goodwill and other intangible assets .......................     12,794        13,442
  Impairment of goodwill and other intangible assets .........................       --          19,349
  Non cash restructuring charges .............................................       --          10,486
  Changes in operating assets and liabilities:
     Accounts receivable .....................................................      2,122        10,053
     Prepaid expenses and other current assets ...............................       (338)        1,591
     Accounts payable ........................................................        493          (129)
     Accrued expenses ........................................................     (5,927)       (1,104)
     Deferred revenue ........................................................     (9,363)       (3,200)
                                                                                 --------      --------
        Net cash used in operating activities ................................    (19,006)      (25,803)
                                                                                 --------      --------

Cash flows from investing activities:
  Sales (purchases) of marketable securities .................................     16,523          --
  Purchases of property and equipment ........................................     (2,931)       (2,244)
  Proceeds from the sale of property, equipment, and improvements ............       --             118
  Increase in other assets ...................................................     (8,595)        1,694
  Cash acquired ..............................................................         72
                                                                                 --------      --------
        Net cash provided by (used in) investing activities ..................      5,069         (432)
                                                                                 --------      --------

Cash flows from financing activities:
  Repayments under capital leases ............................................       (436)       (1,534)
  Repayments of notes payable to former shareholders of Customer Analytics ...        --         (2,460)
  Issuance of common stock under ESPP ........................................        272           230
  Issuance of notes payable to Insight Capital Partner .......................        --          6,867
  Issuance of Convertible Debentures .........................................        --         19,943
  Proceeds from sale of Series A Preferred Stock .............................        --          4,587
  Proceeds from bank line of credit ..........................................        --          3,671
  Exercise of common stock options ...........................................      5,520           173
                                                                                 --------      --------
        Net cash provided by financing activities ............................      5,356        31,477
                                                                                 --------      --------
Effect of exchange rate changes on cash and cash equivalents .................       (163)          (56)
                                                                                 --------      --------
Net increase (decrease) in cash and cash equivalents .........................     (8,744)        5,186
                                                                                 --------      --------
Cash and cash equivalents, beginning of period ...............................     14,678         8,617
                                                                                 --------      --------
Cash and cash equivalents, end of period .....................................   $  5,934      $ 13,803
                                                                                 ========      ========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Cash paid for interest .................................................        $     12      $    356
                                                                                  ========      ========
  Cash paid for income taxes .............................................        $    157      $     12
                                                                                  ========      ========
</TABLE>


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







-------------------------------------------------------------------------------
                                        5
<PAGE>

<TABLE>
<CAPTION>

Supplemental disclosure of non cash financing and investing activities:

Effect of beneficial conversion feature on Series A
<S>                                                                              <C>           <C>
Redeemable Convertible Preferred Stock .......................................   $   --        $  2,094
                                                                                 ========      ========
Issuance of warrants to Silicon Valley Bank ..................................   $   --        $    153
                                                                                 ========      ========
Issuance of warrants to Insight Capital Partners .............................   $   --        $ 16,389
                                                                                 ========      ========
Effect of Beneficial conversion feature on Convertible Debentures to Insight
Capital Partners .............................................................   $   --        $ 11,913
                                                                                 ========      ========
Accretion of dividends on Series A Redeemable Convertible Preferred Stock.....   $   --        $    667
                                                                                 ========      ========
Accretion of discount, offering costs, and beneficial conversion
feature on issuance of Series A Redeemable Convertible Preferred Stock .......   $   --        $    710
                                                                                 ========      ========
Conversion of notes payable to Insight Capital Partners into
Series A Redeemable Convertible Preferred Stock ..............................   $   --        $  1,500
                                                                                 ========      ========
Equipment acquired under capital lease .......................................   $  3,000      $    322
                                                                                 ========      ========
Issuance of common stock related to stock subscription and to settle
obligation to MicroStrategy, Incorporated and related interest ...............   $ 37,500      $ 17,514
                                                                                 ========      ========

In connection with the acquisition of Knowledge Stream Partners on March 31,
2000, the following transaction occurred:

  Fair value of assets acquired, net of cash acquired ........................   $ 43,205      $   --
  Issuance of common stock and stock options .................................   $(39,896)     $   --
  Acquisition costs ..........................................................   $   (430)     $   --
  Cash acquired ..............................................................   $     49      $   --
                                                                                 --------      ------
  Liabilities assumed related to acquisition .................................   $  2,928      $   --
                                                                                 ========      ======

In connection with the acquisition of Customer Analytics, Inc.
on June 30, 2000, the following transaction occurred:

  Fair value of assets acquired, net of cash acquired ........................   $139,295      $   --
  Issuance of common stock and stock options .................................  $(110,942)     $   --
  Acquisition costs ..........................................................   $ (2,819)     $   --
  Cash acquired ..............................................................   $     23      $   --
                                                                                 --------      ------
  Liabilities assumed related to acquisition .................................   $ 25,557      $   --
                                                                                 ========      ======
</TABLE>


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









--------------------------------------------------------------------------------
                                       6

<PAGE>

                  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. Xchange 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, the need for
adequate financing to fund future operations and the need for successful
development and marketing of its commercial products and services.


(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A)  PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements are unaudited, except
for the December 31, 2000 consolidated balance sheet, and have been prepared in
accordance with generally accepted accounting principles. These statements
include the accounts of Exchange Applications, Inc. and its wholly owned
subsidiaries.

(B)  INTERIM FINANCIAL REPORTING

     Certain information and footnote disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the operating results for the
interim periods ended September 30, 2000 and 2001, 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, 2000,
which are contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 17, 2001.

(C)  NET INCOME (LOSS) PER SHARE

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE, basic and diluted net loss per common share for the
three and nine months ended September 30, 2000 and 2001 is calculated by
dividing the net loss applicable to common stockholders by the weighted average
number of common shares outstanding.

     Diluted weighted average shares outstanding for the three months ended
September 30, 2000 and 2001 exclude the potential common shares from stock
options, warrants, and Series A Redeemable Convertible Preferred Stock because
to include such shares would have been antidilutive. For the nine months ended
September 30, 2000 and 2001, the Company had 4,523,538 and 166,889,556 potential
common shares outstanding, respectively.

(D)  COMPREHENSIVE INCOME (LOSS)

     The Company has adopted Statement of Financial Accounting Standards 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


--------------------------------------------------------------------------------
                                       7

<PAGE>
and that the accumulated balance of other comprehensive income (loss) be
reported separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The components of comprehensive income
(loss) for the three and nine months ended September 30, 2000 and 2001 are as
follows(in thousands):

<TABLE>
<CAPTION>

                                              Three months ended          Nine months ended
                                                 September 30,              September 30,
                                            ----------------------      ----------------------
                                              2000          2001          2000          2001
                                            --------      --------      --------      --------

Comprehensive income (loss):
<S>                                         <C>          <C>            <C>          <C>
   Net income (loss)                        $(27,975)    $(25,171)      $(38,028)    $(98,127)
   Other comprehensive income (loss):
       Currency translation adjustment          (211)        (122)          (163)         (56)
       Marketable securities adjustment            9          --              52          --
                                            --------      --------      --------      --------
   Comprehensive income (loss)              $(28,177)    $(25,293)      $(38,139)    $(98,183)
                                            ========      ========      ========      ========
</TABLE>

(3)      Amortization of MicroStrategy Assets

    The following amounts represent the components of the amortization of the
MicroStrategy assets for the three and nine months ended September 30, 2000 and
2001 (in thousands):

<TABLE>
<CAPTION>

                                              Three months ended          Nine months ended
                                                  September 30,              September 30,
                                            ----------------------      ----------------------
                                             2000          2001          2000          2001
                                           --------      --------      --------      --------

<S>                                           <C>          <C>            <C>          <C>
   Technology license                         $2,037       $2,037         $6,111       $6,111
   Research and development workforce          2,037        2,037          6,111        6,111
   Prepaid co-marketing services                 832           --          2,694        1,664
                                            --------      --------      --------      --------
   Total amortization of MicroStrategy
   assets                                    $ 4,906       $4,074        $14,916      $13,886
                                            ========      ========      ========      ========
</TABLE>

(4)       Restructuring Charges

     In the second and third quarters of 2001, the Company undertook corporate
restructuring actions to better align costs with its outlook on near term
revenues and to preserve cash. The components of the restructuring charges
resulting from these actions were as follows:

<TABLE>
<CAPTION>

($000s)                             Q2 2001        Q3 2001     TOTAL
                                    -------        -------     -----

<S>                                 <C>             <C>       <C>
Severance                           $ 1,120         $1,119    $2,239
Facilities Related                       -           2,889     2,889
Property and Equipment                   -           1,409     1,409
Asset Impairment                      6,340          2,737     9,077
Others                                   -             250       250
                                    -------         ------   -------
Total Restructuring Costs           $ 7,460         $8,404   $15,864
                                    -------         ------   -------
</TABLE>

     Severance costs relate to the elimination of 193 managerial and staff
positions worldwide, comprising approximately 40% of the workforce. Facility
related costs relate to the consolidation and abandonment of excess facilities.
Property and equipment relate to non-cash write-offs of excess computer
equipment that has been removed from operations as a result of employee
reductions and leasehold improvements on leased facilities that were abandoned
as of September 30, 2001. Asset impairment relates to non-cash write-offs of
certain long-lived assets that are no longer expected to be realized in future
product releases and service offerings due to reprioritizations on the Company's
development efforts.

--------------------------------------------------------------------------------
                                       8

<PAGE>

At September 30, 2001 the Company had the following restructuring accruals
$(000s):

               Severance                            $    62
               Facility Related                       2,551
               Other                                    250
                                                    -------
               Total Restructuring Accruals         $ 2,863
                                                    -------

Severance costs will be paid out in installment through December 31, 2001.
Facility related costs will be paid out through 2005 based on the remaining
lease terms of the abandoned facilities.

SUBSEQUENT EVENT
----------------

   In October of 2001 the Company took additional actions to further adjust its
cost structure. The Company will record additional restructuring charges of
approximately $2.0 million in the fourth quarter of 2001 related to severance
benefits for 56 additional displaced employees and additional facility related
costs. Although the Company will realize significant cost savings as a result of
these measures, it will need to raise additional capital to fund operations.
There is no guarantee that the Company will be able to raise additional funds on
terms that are favorable, or at all. If not successful in obtaining additional
financing, the Company is at risk of running out of money as early as March 31,
2002.


(5) Transactions with Insight Capital Partners

(A) SECURITIES PURCHASE AGREEMENTS

    Pursuant to a Securities Purchase Agreement dated February 20, 2001, the
Company issued a 9% Bridge Promissory Note (the "February Note") and a warrant
to purchase up to 108,877 shares of the Company's common stock (the "February
Warrant") to four funds affiliated with Insight Venture Associates IV, L.L.C
(collectively "Insight") for an aggregate purchase price of $3.0 million. The
February Warrant is exercisable at any time after April 30, 2001 and on or prior
to February 15, 2011 at an exercise price of $2.7554 per share. Approximately
$113,000 of the proceeds of the February Note were allocated to the value of the
February Warrant which was recorded in Additional Paid-in Capital. The resulting
discount was amortized to interest expense over the period from issuance to
maturity on April 30, 2001.

    Pursuant to a Securities Purchase Agreement dated March 28, 2001, the
Company issued a 10% Bridge Promissory Note (the "March Note") and a warrant to
purchase up to 294,118 shares of the Company's common stock (the "March
Warrant") to Insight for an aggregate purchase price of $1.5 million. The March
Warrant is exercisable at any time after June 2001 and on or prior to March 28,
2011 at an exercise price of $1.53 per share. Approximately $145,000 of the
proceeds of the February Note was allocated to the value of the February Warrant
which was recorded in Additional Paid in Capital. The resulting discount was
amortized to interest expense over the period from issuance to maturity on June
28, 2001.

    Pursuant to a Securities Purchase Agreement dated June 1, 2001 (the "June
Securities Purchase Agreement"), the Company issued a 12% Bridge Promissory Note
(the "June Note") for an aggregate purchase price of $7,000,000 to Insight. The
June Note refinanced the February Note and March Note as contemplated in the
Undertaking Letter discussed below and provided $2.5 million of additional
financing. The June Note matures on January 15, 2002. In connection with the
June Securities Purchase Agreement, the Company issued a warrant to purchase
1,363,672 shares of the Company's common stock (the "June Warrant") at a per
share exercise price equal to the lowest market price for the period commencing
on February 20, 2001 and ending on the earlier of (i) the exercise date of the
June Warrant, (ii) the date all principal and interest on the June Note is
repaid and (iii) the date on which all of the Company's obligations under the
June Note are terminated due to a conversion of the June Note pursuant to its
terms. Approximately $ 1,145,000 of the face value of the June Note was
allocated to the value of the June Warrant and was recorded in Additional
Paid-in Capital. The resulting discount was being amortized to interest expense
over the period from issuance to the maturity date of the June Note. During the
three and nine month periods ended September 30, 2001 the Company recognized
$131,000 and $291,000 in interest expense, respectively, associated with the
June Warrants. Pursuant to a Securities Purchase Agreement dated July 26, 2001
(the "July Securities Purchase Agreement"), the June Note was


--------------------------------------------------------------------------------
                                       9

<PAGE>

refinanced with a new security. In addition, pursuant to a Securities Purchase
Agreement dated August 29, 2001 (the "August Securities Purchase Agreement"),
the June Warrant was cancelled. (see Note 5c)

(B) UNDERTAKING LETTER

    On April 16, 2001, the Company received an undertaking letter (the
"Undertaking Letter") from Insight. Under the terms of the letter, Insight
agreed to refinance the February Note and the March Note with an new note that
matures on January 15, 2002 and to provide up to $13.5 million of additional
financing through December 31, 2001 or the consummation of the "Sale of the
Corporation", as defined in the Company's Series A Redeemable Convertible
Preferred Stock documents. In accordance with the terms of the Undertaking
Letter, the additional financing will be available at any time provided that the
Company has used its best efforts to obtain financing from other investors and
has not been successful in obtaining such financing.

    In connection with the Undertaking Letter, the Company issued a warrant (the
"April Warrant") to purchase a minimum of 818,182 and up to 1,519,091 shares of
the Company's common stock to Insight at a per share exercise price equal to the
lowest closing price per share of the Company's common stock from April 16, 2001
until the earlier of (a) the date of first exercise and (b) the earliest of (i)
December 31, 2001, (ii) the date that Insight's obligations, if any, with
respect to the Undertaking Letter, terminates due to notification from the
Company to that effect and (iii) the date of the consummation of a "Sale of the
Corporation" as defined in the Company's Series A Redeemable Convertible
Preferred Stock documents. Under the terms of the Undertaking Letter, additional
vesting of warrants in excess of the 818,182 minimum is accreted daily based on
the number of days lapsed from the date of the Undertaking Letter. The Company
has recorded deferred financing charges of $1.3 million representing the value
of the original issuance of 818,182 warrants. This charge is being amortized to
interest expense over the term of the Undertaking Letter. Additional financing
charges related to the vesting of warrants in excess of the minimum share value
are valued at their fair market value on the date the warrants become vested and
are recorded to interest expense during the period in which the warrants become
vested. During the three and nine month periods ended September 30, 2001 the
Company recorded $ 207,000 and $877,000 in non-cash interest expense,
respectively, related to the April Warrant. Upon the execution of the July
Securities Purchase Agreement, the remaining balance of the deferred financing
charges were netted against the carrying value of the debt. In connection with
the August Securities Purchase Agreement the number of warrant shares issuable
under the April Warrant was fixed at 1,179,337 as of August 29, 2001 with a per
share exercise price of $0.33 per share (see Note 5c).

(C) ISSUANCE OF CONVERTIBLE DEBENTURES

    Pursuant to the July Securities Purchase Agreement, the Company issued
convertible debentures in the amount of $12.2 million (the "July Debentures").
The July Debentures refinanced the June Note including all accrued and unpaid
interest and provided an additional investment of $5.0 million. The July
Debentures bear interest at 12% and mature on January 10, 2005.

     Pursuant to the August Securities Purchase Agreement the following
transactions occurred:

    o The Company issued $15.5 million of new convertible debentures to certain
investors including Insight (the "August Debentures").

    o The terms of the July Debentures were amended to be identical to the terms
of the August Debentures.

    o The June Warrant was canceled.

    o The number of shares issuable under the April Warrant was fixed at
1,179,337 as of August 29, 2001 with a per share exercise price of $0.33 per
share.

    The August Debentures bear interest at 12% per annum through August 29, 2003
and 15% per annum for the period commencing on August 29, 2003 through their
maturity date on January 10, 2005. The interest rate will increase to 20% in the
event that the Company's stockholders fail to approve an amendment to the
Company's certificate of incorporation increasing the number of authorized
shares of common


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                                       10

<PAGE>

stock to at least 225,000,000 or cause a sufficient number of authorized or
unissued shares to become available to enable the Company to issue common stock
upon the conversion or exercise of all the "Transaction Securities" (as defined
in the August Securities Purchase Agreement) by December 15, 2001. The holders
of the August Debentures have the option to require prepayment of the
outstanding obligations in an amount equal to the aggregate principal amount
multiplied by a factor of 103% plus all unaccrued and unpaid interest upon the
occurrence of (i) an event of default, as defined in the August Security
Purchase Agreement, (ii) a "Liquidity Event", as defined in the August
Securities Purchase Agreement, or (iii) January 10, 2004. The August Debentures
are convertible at the option of the holder into the number of shares equal the
product of the unpaid principal multiplied by a factor of 103% plus any accrued
and unpaid interest divided by the conversion price, currently $0.3183 per share
(subject to adjustment as defined in the August Securities Purchase Agreement).
In no event shall the holders of the convertible debt be entitled to convert any
amount in excess of 75% of the original principal amount of the debenture until
the Company has increased the authorized number of shares of common stock to
225,000,000.

    Warrants to purchase 43,198,241 shares of common stock (the "August
Warrant") were issued to the holders of the August Debentures. The August
Warrant has an exercise price of $0.3183 per share and expires on August 29,
2011. The August Warrant is not exercisable until the Company's stockholders
approve an amendment to the Company's certificate of incorporation increasing
the number of authorized shares of common stock to at least 225,000,000 or the
Company has a sufficient number of authorized and unissued shares to enable the
Company to issue common stock upon the conversion or exercise of all the
"Transaction Securities" (as defined in the August Securities Purchase
Agreement).

    The entire proceeds of the July Debentures and the August Debentures
(collectively "Convertible Debentures"), net of all financing and transaction
costs, were allocated to the beneficial conversion feature, in the amount of
$11.9 million, and to the value of the warrants issued, in the amount of $13.3
million. These allocations are recorded as reductions to the carrying value of
the Convertible Debentures and as contributions to Additional Paid-in Capital.
The resulting discount on the Convertible Debentures will be accreted up through
interest expense over the maturity period of the Convertible Debentures. The
Company accreted $1.1 million of the discount to Interest Expense in the three
months ended September 30, 2001.


(6) Bank Line of Credit

    In April 2001, the Company entered into a $5.0 million secured credit
facility with Silicon Valley Bank. Availability under the credit facility is
based on a percentage of the Company's eligible receivables as defined in the
credit facility documentation. Borrowings under the credit facility bear
interest at the bank's prime rate (6.0% at September 30, 2001) plus 2.5% points.
The credit facility matures on April 25, 2002. Under the terms of the credit
facility documentation, the Company must maintain at least $2.0 million of
excess availability or cash and investments at all times. In connection with the
line of credit, the Company issued a warrant to purchase 70,094 shares of the
Company's common stock with a per share exercise price of $2.14. The warrant
expires in April 24, 2008. The Company has valued the warrant at $132,000, which
is being amortized to interest expense over the remaining term of credit
facility documentation. At June 30, 2001, the Company was out of compliance with
certain financial covenants of the line of credit. In July 2001, certain terms
of the credit facility were modified pursuant to which the bank agreed to waive
the Company's non compliance with certain financial covenants provided that
Company receive $5 million of additional funding from the sale of equity
securities or subordinated debt on or before July 31, 2001 and $2.5 million of
additional funding from the sale of equity securities or subordinated debt on or
before September 30, 2001. In July and August 2001, the Company received $5.0
million and $15.5 million, respectively, from the sale of the Convertible
Debentures (see Note 4c). In connection with the loan modification, the Company
issued an additional warrant to the bank to purchase 50,000 shares of the
Company's common stock with a per share exercise price of $0.51. The warrant
expires on July 24, 2008. The Company has valued the warrant at $20,854 which is
being amortized to interest expense over the remaining term of the agreement.
During the three months ended September 30, 2001, the Company recorded $25,000
of interest expense related to the amortization of the value of the bank's
warrants. At September 30, 2001, the Company was out of compliance with certain
financial convenants of the


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                                       11

<PAGE>

line of credit. In October 2001, the bank waived the event of default and
modified the financial convenants through the maturity of the line of credit.


(7) Redeemable Convertible Preferred Stock

In January 2001, the Company designated 5,330,000 shares of its authorized
Preferred Stock, $.001 par value, as Series A Convertible Redeemable Preferred
Stock (the "Series A Preferred Stock"). The Company issued 5,325,645 shares at a
purchase price of $1.2628 per share resulting in gross proceeds of $6.7 million
including the conversion of a $1.5 million note payable to Insight. Each share
of Series A Preferred Stock accrues cumulative dividends at a rate of 10% per
annum. The holders of the Series A Preferred Stock may require the Company to
redeem outstanding shares at any time after January 10, 2004 for an amount equal
to a 3% premium over the purchase price per share and all accrued and unpaid
dividends. Each share of Series A Preferred Stock is convertible into the number
of shares of the Company's common stock equal to the initial purchase price plus
all accrued and unpaid dividends divided by the conversion price (currently
$0.32262); however absent approval by a majority of the Company's shareholders,
the Series A Preferred Stock is convertible into a maximum of 6,488,781 shares
of the Company's Common Stock. The conversion price is subject to adjustment for
certain dilutive events, as defined in the Series A Preferred Stock documents.
The holders of the Series A Preferred Stock are entitled to vote on all matters
together with the common stock holders as one class. The holders of the Series A
Preferred Stock are entitled to the number of votes equal to the number of
shares of common stock into which the Series A Preferred Stock are then
convertible.

In connection with the issuance of the Series A Preferred Stock, the Company has
recorded a $2.1 million beneficial conversion feature of the Series A Preferred
Stock as a reduction to the carrying value of the Series A Preferred Stock and
as a contribution of capital to Additional Paid-in Capital. The resulting
discount on the Series A Preferred Stock will be accreted over the period from
issuance to the first redemption date of the Series A Preferred Stock. During
the three and nine months ended September 30, 2001, the company recorded
accretion of dividends of $233,000 and $667,000, respectively, from the Series A
Preferred Stock. In addition, the Company recorded $252,000 and $710,000 of the
accretion of the discount on the Series A Preferred Stock for the three and nine
months ended September 30, 2001, respectively.


(8) LEGAL PROCEEDINGS

    The Company is engaged in legal proceedings incidental to the normal course
of business. Although the ultimate outcome of these matters cannot be
determined, the Company believes the final outcome of these proceedings will not
seriously harm its business.

    The Company and certain of our current and former officers (the "Xchange
Defendants") and its certified public accountants, Arthur Andersen, LLP, have
been named defendants in a consolidated class action lawsuit originally filed on
February 21, 2001 and subsequently filed a Consolidated Amended Class Action
Complaint on August 3, 2001, filed on behalf of a purported class of purchasers
of our common stock during the period from December 9, 1998 through September
29, 2000. The Amended Class Action Complaint alleges the Company made false or
misleading statements that inflated its common stock price during the class
period. The relief sought is damages on behalf of the class. Through its
attorneys, the Xchange Defendants filed a Motion to Dismiss the Amended Class
Action Complaint on October 3, 2001. The action is pending in the United States
District Court for the District of Massachusetts. The Company believes the
allegations are without merit and intends to defend the litigation vigorously.

    The Company, along with BT Alex Brown, Inc., Hambrecht & Quist, LLC, Adams,
Harkness & Hill, Inc., Sound-View Technology Group, Inc. (together, the
"Underwriter Defendants") and certain current and former officers and directors,
including Andrew J. Frawley, John G. O'Brien, Jeffrey Horing, Ramanan
Raghavendran, David G. Mcfarlane, Michael D. McGonagle, Patrick A. Mchugh, and
N. Wayne Townsend, have purportedly been named defendants in a class action
complaint filed on behalf of a class of purchasers of its common stock during
the period from December 9, 1998 through December 6, 2000. XCHANGE HAS NOT YET
BEEN SERVED WITH THIS COMPLAINT, but it purportedly alleges that documents filed
in connection with the


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                                       12

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Xchange's initial and follow-on public offerings (the "Offerings") were
materially false and misleading because they failed to disclose that (1) the
Underwriter Defendants solicited and received excessive and undisclosed
commissions from certain investors in exchange for which the Underwriter
Defendants allocated to those investors material portions of the restricted
stock issued in connection with the Offerings, and (2) the Underwriter
Defendants had entered into agreements with customers whereby they agreed to
allocate Xchange's shares to those customers in the Offerings in exchange for
which the customers agreed to purchase additional shares in the after-market at
pre-determined prices. The action is pending in the United States District Court
for the Southern District of New York. The Company believes the allegations are
without merit and intends to defend the litigation vigorously.













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                                       13

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

     THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. EXCHANGE APPLICATIONS' ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS DOCUMENT.


OVERVIEW

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 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 over 300 client sites in 33
countries, including six leading U.S. marketing service bureaus.


CORPORATE OVERVIEW

     The Company was incorporated in November 1996. Prior to incorporation, the
Company operated as a separate division of two entities, Grant & Partners, Inc.
and Grant & Partners Limited Partnership. Our activities during our 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 the market in July 1996 of the first module of the
Xchange Dialogue product family, the Company's marketing automation software
product. Since this initial introduction of Xchange Campaign, we have continued
to focus significant resources on the development of additional functionality
and features of the Xchange Dialogue suite as well as the development and
acquisition of additional solutions within our CRM solution set including
Xchange Real Time, Xchange EnAct, and the email marketing and analytic modules
of the Xchange Dialogue suite. We have also continued to expand our marketing
activities, build the Xchange identity, develop the competencies of the
professional services group, build international sales and distribution channels
and develop its general and administrative infrastructure. Xchange has shifted
its primary business focus from providing services to selling software products.
However, continuing to provide superior professional services will be critical
to maximizing its opportunities for future revenues.

     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 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. Most
recently, 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.

The Company generates revenue from software licenses, professional service
arrangements and software maintenance agreements. We recognize revenue based on
the provisions of 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.



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                                       14

<PAGE>

     Software license fee revenues are generated from licensing the rights to
the use of our packaged software products. Services and maintenance revenues are
generated from sales of maintenance, consulting, training and hosting services
performed for customers that license our products. For sales of products
(typically our Xchange Real Time, Xchange Enact and certain Xchange Dialogue
sales) where we are responsible for services that are essential to the
functionality of the software, we 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 past experience has shown
expended hours to be the best measure of progress on these engagements. In
situations where the Company is not responsible for such 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, we recognize services 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 may enter into transactions with third
parties to acquire technology from those entities at the same time the Company
sells our 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.

      In the second and third quarters of 2001, the Company undertook corporate
restructuring actions to better align costs with its outlook on near term
revenues and to preserve cash. The components of the restructuring charges
resulting from these actions were as follows:

($000s)                             Q2 2001        Q3 2001    TOTAL
                                    -------        -------    -----

Severance                           $ 1,120         $1,119   $2,239
Facilities Related                       -           2,889    2,889
Property and Equipment                   -           1,409    1,409
Asset Impairment                      6,340          2,737    9,077
Others                                   -             250      250
                                    -------         ------  -------
Total Restructuring Costs           $ 7,460         $8,404  $15,864
                                    -------         ------  -------

     Severance costs relate to the elimination of 193 managerial and staff
positions worldwide, comprising approximately 40% of the workforce. Facility
related costs relate to the consolidation and abandonment of excess facilities.
Property and equipment relate to non-cash write-offs of excess computer
equipment that has been removed from operations as a result of employee
reductions and leasehold improvements on leased facilities that were abandoned
as of September 30, 2001. Asset impairment relates to non-cash write-offs of
certain long-lived assets that are no longer expected to be realized in future
product releases and service offerings due to reprioritizations on the Company's
development efforts.


   In October of 2001 the Company took additional actions to further adjust its
cost structure. The Company will record additional restructuring charges of


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                                       15

<PAGE>

approximately $2.0 million in the fourth quarter of 2001 related to severance
benefits for 56 additional displaced employees and additional facility related
charges. Although the Company will realize significant cost savings as a result
of these measures, it will need to raise additional capital to fund operations.
There is no guarantee that the Company will be able to raise additional funds on
terms that are favorable, or at all. If not successful in obtaining additional
financing, the Company is at risk of running out of money as early as March 31,
2002.


RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that
all business combinations initiated after June 30, 2001, be accounted for using
the purchase method of accounting. Statement No. 142 discusses how intangible
assets that are acquired should be accounted for in financial statements upon
their acquisition and also how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Beginning on January 1, 2002, with the adoption of Statement No.
142, goodwill and certain purchased intangibles existing on June 30, 2001, will
no longer be subject to amortization over their estimated useful life. Rather
the goodwill and certain purchased intangibles will be subject to an assessment
for impairment. The provisions of Statement No. 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. The Company is
currently assessing the potential impact SFAS No. 142 will have on its financial
statements.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." Under this
statement it is required that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and it broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The Company is currently evaluating the ultimate impact of this statement on its
results of operations or financial position until such time as its provisions
are applied.


THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001

REVENUES

    The Company's total revenues decreased 27.1% from $12.5 million for the
three months ended September 30, 2000 to $9.1 million for the three months ended
September 30, 2001. Software license fee revenues decreased 39.0% from $5.9
million, or 47.6% of total revenues, in the three months ended September 30,
2000 to $3.6 million, or 39.8% of total revenues, in the three months ended
September 30, 2001. The decrease in software license fees is attributable
primarily to (i) delays in completing sales resulting from the Company's efforts
to reorganize its sales and distribution strategy and personnel to effectively
sell its new product and service suite, (ii) a longer sales cycle and (iii)
fewer sales resulting from a general market slowdown of information technology
spending. As of September 30, 2001, the Company had 21 direct sales
representatives as compared to 30 at September 30, 2000.

    Services and maintenance revenues decreased 16.2% from $6.5 million or 52.4%
of total revenues, in the three months ended September 30, 2000 to $5.5 million,
or 60.2% of total revenues, in the three months ended September 30, 2001. The
decrease in services and maintenance revenues in absolute dollars is the result
of the decrease in software license revenues and the services work typically
associated with those sales as well as the increased use of partners to perform
certain consulting services.




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                                       16

<PAGE>

    For the three months ended September 30, 2001, the top five customers
accounted for 35.9% of total revenues as compared to 37.9% of total revenues for
the three months ended September 30, 2000. None of the top five customers during
the three months ended September 30, 2001 was a top five customer during the
three months ended September 30, 2000. The largest customer during the three
months ended September 30, 2001 represented 15.2% of total revenues, while the
largest customer for the three months ended September 30, 2000 represented 13.0%
of total revenues.

    Revenues from customers outside North America were $3.3 million for the
three months ended September 30, 2001, representing approximately 36% of total
revenues as compared to $7.0 million or approximately 56% of total revenues, for
the comparable period in the prior year.

COST OF REVENUES

    The Company's cost of revenues consists of costs associated with software
license fees and costs associated with services and maintenance. Total cost of
revenues as a percentage of total revenues decreased from 48.5% in the three
months ended September 30, 2000 to 35.7% in the three months ended September 30,
2001.

    Cost of software license fees consists primarily of royalty payments made to
third parties for licensed intellectual property and costs associated with
software packaging and distribution. Cost of software license fees decreased
from $164,000, or 1.3% of total revenues, for the three months ended September
30, 2000 to $47,000, or 0.5% of total revenues for the three months ended on
September 30, 2001. Cost of software license fees as a percentage of software
license fee revenues decreased from 2.8% to 1.3% for the three months ended
September 30, 2000 and 2001, respectively. The decrease in cost of software
license fees for the three months ended September 30, 2001 over September 30,
2000 resulted from lower sales of Xchange Enact and Xchange Analytics during the
2001 period, both of which require higher royalty payments to third-parties. The
Company anticipates the cost of software revenues to be between two and four
percent of total revenues in the future, depending on the number of third party
leveraged components in software revenue.

    The Company's cost of services and maintenance consists primarily of
personnel, facility and system costs incurred in providing professional
consulting services, training, hosted software services for the Xchange Dialogue
product suite, and customer support services. As a result of the decrease in the
contribution of services and maintenance revenues to the overall revenue mix,
cost of services and maintenance revenues as a percentage of total revenues
decreased from 47.2% for the three months ended September 30, 2000 to 35.2% for
the three months ended September 30, 2001. Cost of services and maintenance as a
percentage of services and maintenance revenues were 90.0% and 58.4% for the
three months ended September 30, 2000 and 2001, respectively. The decrease is
attributable primarily to a higher contribution of maintenance revenue to the
overall mix of services, lower use of third-party contractors, improved staff
utilization and overall cost reductions resulting from the company's
restructuring and cost containment efforts in 2001.

    Overall gross margin increased from 51.5% for the three months ended
September 30, 2000 to 64.3% for the three months ended September 30, 2001 due to
the increase in the contribution of software and license revenue to the overall
revenue mix and improved margins on services and maintenance revenue.

OPERATING EXPENSES

    SALES AND MARKETING. The Company's sales and marketing expenses consist
primarily of salaries for sales and marketing personnel, commissions, travel and
promotional expenses. For the three months ended September 30, 2000 and 2001,
sales and marketing expenses were 59.4% and 58.2% of total revenues, or $7.4
million and $5.3 million, respectively. The decrease in absolute dollars is
primarily attributable to a decrease in sales and marketing personnel from 112
at September 30, 2000 to 78 at September 30, 2001, as well as decreased spending
on certain promotional activities including trade shows, seminars, and the
development of collateral materials as a results of the Company's restructuring
and cost containment efforts in 2001. The Company anticipates selling and
marketing expense will continue to decrease in the fourth quarter of 2001 both
in absolute dollars and as a percentage of total revenue as a result of the
elimination of 80 sales and marketing positions since March 31,2001 due to
corporate restructuring in the second, third and fourth quarters of 2001 and
employee attrition.


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                                       17

<PAGE>

    RESEARCH AND DEVELOPMENT. The Company's research and development expenses
consist primarily of employee salary and benefits, consultant costs, and
equipment and purchased software depreciation costs associated with new product
development, enhancement of existing products and quality assurance activities.
For the three months ended September 30, 2000 and 2001, research and development
expenses were 47.1% and 35.8% of total revenues, or $5.9 million and $3.3
million, respectively. This decrease in absolute dollars was a result of the
decrease in research and development personnel from 166 at September 30, 2000 to
84 at September 30, 2001. The Company anticipates research and development
expenses will continue to decrease in absolute dollars and as a percentage of
total revenues as a result of the elimination of 85 research and development
positions since March 31,2001 due to corporate restructuring in the second,
third and fourth quarters of 2001 and employee attrition.

    GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
from $6.4 million, or 50.9% of total revenues, for the three months ended
September 30, 2000 to $4.3 million, or 47.4% of total revenues, for the three
months ended September 30, 2001. The decrease in absolute dollars was the result
of the decrease in the number of personnel dedicated to its finance, information
systems, and human resources departments from 60 at September 30, 2000 to 40 at
September 30, 2001 as well as the current year benefit of not incurring legal
and accounting fees associated with fund raising activities in the third quarter
of 2000. The Company expects general and administrative expenses will continue
to decrease both in absolute dollars and as percentage of revenues as a result
of the elimination of 33 general and administrative positions since March
31,2001 due to corporate restructuring in the second, third and fourth quarters
of 2001 and employee attrition.

    AMORTIZATION EXPENSE. Amortization expense for the three months ended
September 30, 2001 was approximately $7.2 million consisting of $3.1 million of
amortization of goodwill and other intangible assets acquired in the
acquisitions of KSP in March 2000, and CA in June 2000 and $4.1 million of
amortization of the investment in MicroStrategy Incorporated technology
("MicroStrategy technology") in December 1999. Amortization expense for the
three months ended September 30, 2000 was approximately $14.2 million consisting
of $9.3 of amortization of goodwill and other intangible and $4.9 million of
amortization of the MicroStrategy investment. The year-over-year decrease in
amortization expense is attributed to an impairment charge of $19.3 million
recorded in the second quarter of 2001 related to the CA acquisition, which
resulted in the reduction of subsequent amortization charges.

Interest Expense, Net

    Net interest income decreased from $169,000 for the three months ended
September 30, 2000 to $30,000 for the three months ended September 30, 2001. The
decrease in interest income was the result of the decrease in the Company's
average cash and investment balances during the three months ended September 30,
2001 as compared to the three months ended September 30, 2000. Interest expense
increased from $714,000 for the three months ended September 30, 2000 compared
to $2.6 million for the three months ended September 30, 2001. Interest expense
during the three months ended September 30, 2000 related primarily to non-cash
interest on the MicroStrategy obligation. Interest expense during the three
months ended September 30, 2001 was comprised primarily of $2.2 million of
non-cash interest expense related to the accretion of discounts on notes payable
to Insight and on convertible debentures, $115,000 of non-cash interest related
to the MicroStrategy obligation, $88,000 of interest expense related our bank
line of credit and $83,000 of interest expense related to capital leases.


Provision for Income Taxes

For the three months ended September 30, 2001, the Company recorded income tax
expense of $21,000 related primarily to foreign minimum income taxes. No
provisions were made for the three months ended September 30, 2000. No
significant provision for foreign, federal , or state income taxes was recorded
for the three months ended September 30, 2000 and 2001 because the Company
incurred a net loss during the three-month periods.





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                                       18

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NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001

REVENUES

     The Company's total revenues decreased 24.6% from $47.3 million in the nine
months ended September 30, 2000 to $35.7 million for the nine months ended
September 30, 2001. Software license fee revenues decreased 41.5% from $29.6
million, or 62.5% of total revenues, in the nine months ended September 30, 2000
to $17.3 million, or 48.5% of total revenues, in the nine months ended September
30, 2001. The decrease in software license fees is attributable primarily to (i)
delays in completing sales resulting from the Company's efforts to reorganize
its sales and distribution strategy and personnel to effectively sell its new
product and service suite and (ii) a longer sales cycle and fewer sales
resulting from a general market slowdown of information technology spending. As
of September 30, 2001 the Company had 21 direct sales representatives as
compared to 39 at September 30, 2000.

     Services and maintenance revenues increased 3.6% from $17.7 million, or
37.5% of total revenues for the nine months ended September 30, 2000, to $18.4
million, or 51.5% of total revenues for the nine months ended September 30,
2001. The growth of services and maintenance revenues was directly attributable
to additional service engagements, including $1.9 million of incremental revenue
from ASP services, as well as additional maintenance fees from our increased
base of customers. The increase in services and maintenance revenues as a
percentage of total revenues is the result of the decrease of the contribution
of software license fee revenues to the overall revenue mix during the nine
months ended September 30, 2001 as compared to the nine months ended September
30, 2001.

     As the Company looks to strengthen its relationships with third party
software integrators, such as Cap Gemini Ernst & Young and IBM Global Services
it is expected that we will see a shift in some of the services work
historically performed by us to these third party integrators. However, we
expect to continue the expansion of service offerings to include newly
identified opportunities as well as projects that require unique expertise or
familiarity with the our CRM solution set. In addition, our second generation
Xchange Dialogue product set as well as the Xchange Real Time and Xchange EnAct
offerings have a high dependency on professional services for successful
deployment. While systems integrators will perform many of these services, it is
expected that certain domain specific services work will continue to be
delivered by Xchange.

     For the nine months ended September 30, 2001, the top five customers
accounted for 37.0% of total revenues as compared to 29.7% of total revenues for
the nine months ended September 30, 2000. None of the top five customers during
the nine months ended September 30, 2001 was a top five customer during the nine
months ended September 30, 2000. The largest customer during the nine months
ended September 30, 2001 represented 24.5% of total revenues, while the largest
customer for the nine months ended September 30, 2000 represented 12.5% of total
revenues.

     Revenues from customers outside North America were $9.8 million for the
nine months ended September 30, 2001, representing approximately 27.6% of total
revenues as compared to $15.0 million or 32.0% of total revenues for the
comparable period in the prior year.

COST OF REVENUES

     The Company's cost of revenues consists of costs associated with software
license fees and costs associated with services and maintenance. Total cost of
revenues as a percentage of total revenues increased from 29.4% in the nine
months ended September 30, 2000 to 36.0% in the nine months ended September 30,
2001.

     Cost of software license fees consists primarily of royalty payments made
to third parties for licensed intellectual property and costs associated with
software packaging and distribution. Cost of software license fees increased
from $526,000, or 1.1% of total revenues for the nine months ended September 30,
2000 to $549,000, or 1.5% of total revenues for the nine months ended September
30, 2001. Cost of software license fees as a percentage of software license fee
revenues increased to



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                                       19

<PAGE>

3.2% during the nine months ended September 30, 2001 from 1.8% during the nine
months ended September 30, 2000. The increase in cost of software license fees
for the nine months ended September 30, 2001 over September 30, 2001 primarily
resulted from an incremental royalty costs associated with sales of the Xchange
Analytics and Xchange Enact products during the nine months ended September 30,
2001. We anticipate cost of software revenues to be between two and four percent
of total revenues in the future, depending on the number of third party
leveraged components in software revenue.

     The Company's cost of services and maintenance consists primarily of
personnel, facility and system costs incurred in providing professional
consulting services, training, hosted software services for the Xchange
eMessaging product, and customer support services. Cost of services and
maintenance revenues as a percentage of total revenues increased from 28.3% for
the nine months ended September 30, 2000 to 34.5% for the nine months ended
September 30, 2001, attributable primarily to the increase in the contribution
of services and maintenance revenue to the overall revenue mix during the nine
months ended September 30, 2001. Cost of services and maintenance as a
percentage of services and maintenance revenues was 75.5% and 66.9% for the nine
months ended September 30, 2000 and 2001, respectively. The decrease in cost of
services and maintenance as a percentage of services and maintenance revenues is
attributable primarily to the decreased use of third party sub-contractors on
certain service engagements and improved staff utilization.

         Overall gross margin decreased from 70.6% for the nine months ended
September 30, 2000 to 64.0% for the nine months ended September 30, 2001 due
primarily to the decrease in the contribution of software license revenue to the
overall revenue mix, partially offset by improved gross margins on services and
maintenance revenues.

OPERATING EXPENSES

    SALES AND MARKETING. Marketing expenses consist primarily of salaries for
sales and marketing personnel, commissions, travel and promotional expenses. For
the nine months ended September 30, 2000 and 2001, sales and marketing expenses
were 39.0% and 70.2% of total revenues, or $18.5 million and $25.0 million,
respectively. The increase in absolute dollars is primarily attributable to an
increase in the average number of sales and marketing personnel in the nine
month period this year versus last year, as well as increased spending on
certain promotional activities including trade shows, seminars, and the
development of collateral materials designed to increase awareness of Xchange
and its products.

    RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of employee salary and benefits, consultant costs, and equipment and
purchased software depreciation costs associated with new product development,
enhancement of existing products and quality assurance activities. For the nine
months ended September 30, 2000 and 2001, research and development expenses were
28.9% and 41.0% of total revenues, or $13.7 million and $14.6 million,
respectively. This increase in absolute dollars was primarily a result of an
increase in the average number research and development personnel in the
nine-month period this year versus last year.

    GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $10.5 million, or 22.2% of total revenues, for the nine months ended
September 30, 2000 to $14.0 million, or 39.2% of total revenues, for the nine
months ended September 30, 2001. The increase in absolute dollars was the result
of the increase in the average number of personnel dedicated to its finance,
information systems, and human resources departments in the nine month period
last year versus this year, as well as additional investments in infrastructure
and increased legal and accounting expense associated with fundraising
activities earlier in the year. In addition, the Company incurred approximately
$2.8 million in 2000 of one-time charges associated with an increase in our bad
debt and other reserves.

    AMORTIZATION EXPENSE. Amortization expense for the nine months ended
September 30, 2001 was approximately $27.3 million consisting of $13.4 million
of amortization of goodwill and other intangible assets acquired in the
acquisitions of KSP in March 2000, and CA in June 2000 and $13.9 million of
amortization of the MicroStrategy technology investment acquired in December
1999. Amortization expense for the nine months ended September 30, 2000, was
approximately $27.7 million consisting of $12.8 million of amortization of
goodwill and other


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                                       20

<PAGE>

intangible assets acquired in the acquisitions of KSP and CA and $14.9 million
of amortization of the MicroStrategy investment.

    RESTRUCTURING CHARGE. During the nine months ended September 30, 2001, the
Company recorded restructuring charges of $15.9 million related to corporate
restructuring actions in the second and third quarters. The charge is comprised
of $2.2 million of severance, $2.9 million of facility consolidation and
abandonment charges, $1.4 million of excess property and equipment write-offs
and $9.1 million of write-offs of long-lived assets not expected to be realized
on future product and services offerings due to the reprioritization our
development efforts, and $250,000 of other charges.

    IMPAIRMENT OF GOODWILL. During the nine months ended September 30, 2001, the
Company recorded an impairment charge of $19.3 million related to the goodwill
recorded in connection with the acquisition of CA.

Interest Expense, net

   Interest income decreased from $1.0 million for the nine months ended
September 30, 2000 to $146,000 for the nine months ended September 30, 2001
primarily as a result of the decrease in our cash and investment balance on hand
during the comparable periods. Interest expense increased from $2.0 million for
the nine months ended September 30, 2000 to $4.9 million for the nine months
ended September 30, 2001. Interest expense for the nine months ended September
30, 2000 was comprised primarily of non-cash interest on the MicroStrategy
obligation. Interest expense during the nine months ended September 30, 2001 was
comprised primarily of $3.3 million of non-cash interest expense related to the
accretion of discounts on notes payable to Insight and on convertible debentures
issued, $700,000 of non-cash interest related to the MicroStrategy obligation,
$81,000 of non cash interest related to the accretion of discounts on notes
payable to former shareholders of CA, $111,000 in interest expense related to
the notes payable to former shareholders of CA, $241,000 of interest expense
related to the notes payable to Insight, $161,000 of interest expense related
our bank line of credit and $280,000 of interest expense related to capital
leases.

Provision for Income Taxes

   For the nine months ended September 30, 2000 and 2001, the Company recorded
an income tax provision of $21,000 and $33,000, respectively, related primarily
to minimum state income tax requirements and foreign withholding taxes which
will not be recovered. No significant provision for foreign or federal, or state
income taxes was recorded for the nine months ended September 30, 2000 and 2001
because the Company incurred a net loss during the six month period.

LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents as of September 30, 2001 increased $5.2
million from December 31, 2000. Net cash used in operations of approximately
$25.8 million resulted primarily from a loss of $32.7 million before
amortization expense and other non-cash charges offset by an increase of $6.9
million in net operating assets and liabilities.

         Net cash used in investing activities for the nine months ended
September 30, 2001, of $432,000 was primarily the result of property and
equipment purchases during the first quarter of 2001 related to the increase in
headcount and investments in infrastructure.

         Net cash provided by financing activities of $31.5 million consisted of
$19.9 million in net proceeds from the issuance of Convertible Debentures, $4.6
million in net proceeds from the sale of Series A Redeemable Convertible
Preferred Stock, $ 6.9 million in net proceeds from the issuance of notes
payable to Insight, $3.7 million in net borrowings under our credit facility,
$173,000 from exercise of common stock options and $230,000 of proceeds from the
sale of common stock under our Employee Stock Purchase Plan during the nine
months ended September 30, 2001. These contributions were offset by the
repayment of $1.5 million of capital lease obligations and $2.5 million from the
repayment of notes payable to former investors of CA.

         On April 16, 2001, the Company received an Undertaking Letter from
Insight under which Insight agreed to provide additional financing to support
the Company's

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                                       21

<PAGE>

ongoing business operations (the "Additional Financing"). In June 2001, the
Company issued a bridge note (the "June Note") to Insight for an aggregate
purchase price of $7,000,000. The June Note refinanced previously issued notes
to Insight as well as provided an additional $2.5 million in funding. In July
2001, the Company issued convertible debentures ("July Debentures") to Insight
in the amount of $12.2 million. The July Debentures refinanced the Company's
obligations under the June Note and provided an additional $5.0 million in
funding. In August 2001, the Company issued an additional $15.5 million of
convertible debentures to Insight and several other investors. In connection
with the closing of the sale of the August Debentures, the terms of the July
Debentures were modified to be identical to the August Debentures. As of
September 30, 2001, Insight had fulfilled its obligation under the terms of the
Undertaking Letter. Under Nasdaq Marketplace Rules 4350(i), shareholder approval
is normally required for investments similar to the Convertible Debentures.
However, the Company requested from Nasdaq an exception to this shareholder
approval requirement pursuant to Nasdaq Marketplace Rule 4350(i)(2). Rule
4350(i)(2) provides that "exceptions may be made upon application to Nasdaq
when: (A) the delay in securing shareholder approval would seriously jeopardize
the financial viability of the enterprise; and (B) reliance by the company on
this exception is expressly approved by the Audit Committee or a comparable body
of the Board of Directors." The Company obtained such exception to the
shareholder approval requirements from Nasdaq, citing its immediate need for
funds.


         In addition, in April 2001, the Company received a $5.0 million secured
credit facility from Silicon Valley Bank. Availability under the credit facility
is based on a percentage of our eligible receivables as defined. In addition, we
must maintain at least $2.0 million of excess availability or cash and
investments at all times. During the nine months ended September 30, 2001, the
Company received net proceeds of $3.7 million under the line of credit. The
credit facility expires in April 2002. The Company is subject to certain
operational and financial covenants under the terms of the agreement. As of
September 30, 2001 the Company was out of compliance with certain financial
covenants of the line of credit. In October 2001, certain terms of the credit
facility were modified pursuant to which the bank agreed to waive the Company's
noncompliance at September 30, 2001.


















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                                       22

<PAGE>

                                  RISK FACTORS

    STATEMENTS IN THIS REPORT CONCERNING THE FUTURE RESULTS OF OPERATIONS,
FINANCIAL CONDITION AND BUSINESS OF THE COMPANY ARE "FORWARD-LOOKING" STATEMENTS
AS DEFINED IN THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF
1934. INVESTORS ARE CAUTIONED THAT INFORMATION CONTAINED IN THESE
FORWARD-LOOKING STATEMENTS IS INHERENTLY UNCERTAIN, AND THAT ACTUAL PERFORMANCE
AND RESULTS MAY DIFFER MATERIALLY DUE TO NUMEROUS RISK FACTORS, INCLUDING BUT
NOT LIMITED TO THE FOLLOWING:


Our limited operating history makes evaluating our business difficult.

    We began commercial shipment of the initial Xchange Campaign product in July
1996. We were not a separate company until November 1996. Accordingly, we have
only a limited operating history in order to evaluate our business. The risks,
expenses and difficulties that an early-stage company like ours faces must be
considered. These risks include our ability to successfully respond to
competitive developments; continue to upgrade our products and service
offerings; and continue to attract, retain and motivate qualified personnel.


WE WILL REQUIRE ADDITIONAL FINANCING, WHICH MAY BE DIFFICULT TO OBTAIN AND MAY
DILUTE OUR SHAREHOLDER'S OWNERSHIP INTEREST.

    We will require additional capital to fund our operations. We may seek
additional funding through public or private financings. Additional funding may
not be available on terms acceptable to us or at all. If we raise additional
funds by issuing equity securities, further dilution to our then existing
stockholders may result. In addition, the terms may adversely affect the rights
of our stockholders.


OUR FOUNDER, OFFICERS AND PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL AND
HAVE THE ABILITY IN THE FUTURE TO EXERT EVEN GREATER CONTROL OVER OUR VOTING
STOCK AND HAVE THE ABILITY TO MAKE DECISIONS THAT COULD ADVERSELY AFFECT OUR
STOCK PRICE.

    As of September 30, 2001, our current officers, directors and principal
stockholders held approximately 19.8% of our outstanding common stock and voting
common stock equivalents. If these stockholdes fully convert all of their
warrants, debentures and Series A Converible Preferred Stock then this group
would hold approximately 78% of our outstanding voting stock. Consequently, this
group may be able to control the outcome of all matters submitted for
stockholder action, including the election of members to our Board of Directors
and the approval of significant change in control transactions, which may have
the effect of delaying or preventing a change in control. We have not identified
candidates for additional positions on the Board of Directors.


OUR QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY AND YOU SHOULD NOT
RELY ON THEM TO PREDICT OUR FUTURE PERFORMANCE.

    Our quarterly revenues, expenses and operating results may vary
significantly from quarter to quarter due to a number of factors. Therefore,
period-to-period comparisons of results of operations should not be relied on as
an indication of future performance. Moreover, our operating results may fall
below market analysts' expectations in some future quarters. This could cause
the trading price of our common stock to decline.

OUR BUSINESS MAY SUFFER IF NEW CUSTOMERS DO NOT ACCEPT OUR SOLUTIONS.

    We currently derive all of our revenues from our Xchange 8 product suite and
services related to our CRM solution. We anticipate that these sources will
continue to account for a majority of our revenues for the foreseeable future.
As a result, our business will suffer if the market does not accept our
solutions and our future enhancements of these solutions. If demand for our
solutions drops as a result of competition, technological change or other
factors, our business could be substantially harmed.

The market for CRM applications is still emerging and it may not continue to
grow. Even if the market does grow, businesses may not adopt our solutions. We
have


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                                       23

<PAGE>

spent, and intend to continue to spend, considerable resources educating
potential customers about customer optimization software and services in general
and about the features and functions of our products and services in particular.
However, our solutions may not achieve any additional degree of market
acceptance. If the market for our solutions fails to grow or grows more slowly
than we currently anticipate, our business would be materially harmed.


WE DEPEND ON A FEW INDUSTRIES FOR MOST OF OUR SALES, AND WE MAY NOT BE
SUCCESSFUL IN EXPANDING BEYOND THOSE LIMITED MARKETS.

    A substantial portion of our revenues has been derived from sales to
telecommunications companies and financial institutions, including retail banks,
credit card issuers and mutual fund companies. We may not continue to be
successful in these markets. In addition, we may not be successful in achieving
significant market acceptance in other markets that we target.


THE LOSS OF ONE OF OUR LARGEST CUSTOMERS COULD CAUSE OUR REVENUES TO DROP
QUICKLY AND UNEXPECTEDLY.

    In fiscal 1999 and 2000 and the nine months ended September 30, 2001, our
top five customers accounted for 37.7%, 26.8% and 37.0% of total revenues,
respectively. We cannot be certain that our current customers will continue to
do business with us, that business from existing customers will continue at the
levels of previous periods, or that we will be able to do a significant amount
of business with new customers. If we lose one of our customers, our revenues
could drop more quickly than we could reduce expenses. This could substantially
harm our financial results.


OUR BUSINESS WILL NOT GROW IF WE DO NOT KEEP PACE WITH RAPIDLY CHANGING
TECHNOLOGIES.

    Because the market for our software products is rapidly changing, our future
success will depend upon our ability to continue to enhance our current product
line. We also must develop and introduce new products that keep pace with
technological developments, satisfy increasingly sophisticated customer
requirements and achieve market acceptance. If we are not successful in
developing and marketing, on a timely and cost-effective basis, fully functional
product enhancements or new products that respond to technological advances by
others, our business will not grow and our financial results will suffer. In
particular, our business could be harmed by:

     o    any significant errors or "bugs" in our software shipped to customers;

     o    any delay by customers in making purchasing decisions in anticipation
          of the general availability of new or enhanced products;

     o    significant delays in the general availability of our new products or
          releases;

     o    significant problems in the installation or implementation of our new
          products or releases; or

     o    customer dissatisfaction with our new products or releases.


OUR STOCK PRICE OR OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE
TO EFFICIENTLY INTEGRATE ACQUISITIONS.

    We have consummated and we may continue to pursue acquisitions that provide
new technologies, products or service offerings. Future acquisitions by us may
involve potentially dilutive issuances of equity securities. We also may incur
substantial additional liabilities and expenses, such as debt or amortization
expenses related to goodwill and other intangible assets. If any of these occur,
the market price of our common stock and our financial results could suffer.

    Acquisitions also involve numerous risks, including:


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                                       24

<PAGE>

     o    difficulties in the assimilation of the operations, technologies,
          products and personnel of the acquired company;

     o    the diversion of management's attention from other business concerns;

     o    risks of entering markets in which we have no or limited prior
          experience; and

     o    the potential loss of key employees of the acquired company.

    If we are not successful integrating acquisitions, it could increase our
expenses and harm our business.


COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS.

    Our competitors may be able to develop products and services that are more
attractive to businesses than our products and services. Many of our competitors
have longer operating histories, significantly greater financial, technical,
marketing and other resources, greater name recognition and larger customer
bases. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They also may be able to
devote greater resources to the promotion and sale of their products and
services than we may. If these companies introduce products and services that
effectively competed with our products and services, they could be in a position
to charge lower prices or to bundle their products and services with their other
products and services. This could give them a competitive advantage over us.

    In order to be successful in the future, we must continue to respond
promptly and effectively to the challenges of technological change and
competitors' innovations. If we cannot compete successfully with existing or new
competitors, we may have to reduce prices on our products, which could lead to
reduced profits. We could also lose market share, which would materially and
adversely affect our business.


REDUCTIONS IN CAPITAL SPENDING BY OUR EXISTING AND POTENTIAL CUSTOMERS COULD
REDUCE THE DEMAND FOR OUR PRODUCTS.

Historically, corporations and other organizations have tended to reduce or
defer major capital expenditures in response to slower economic growth or
recession. Market analysts have observed a significant reduction in the growth
of corporate spending on information technology projects in response to the
current economic slowdown. To the extent that current economic uncertainty
persists, some of the prospective customers in our current sales pipeline could
choose to postpone or reduce orders for our products, or may delay implementing
our solutions within their organizations. In addition, existing customers
seeking to reduce capital expenditures may cancel or postpone plans to expand
use of our products in additional operating divisions, or may defer plans to
purchase additional modules of our solutions. Any of the foregoing would have an
adverse impact on our revenues and our operating results, particularly if the
current period of volatility in the stock market and the general economy were
prolonged.


IF WE DO NOT SUCCESSFULLY MAINTAIN OUR RELATIONSHIPS WITH INDIRECT DISTRIBUTION
CHANNELS, OUR SALES COULD DECLINE OR COULD GROW MORE SLOWLY THAN EXPECTED.

    We expect to increase the amount of our products that we distribute through
various indirect channels. We are unable to predict the extent to which our
distribution partners will be successful in distributing our products. We rely
on the marketing and sales efforts of these organizations, many of who also
market and sell competitive products. The loss of one or more of our
relationships with these organizations could have a material adverse effect on
our business.

    Our future performance will also depend, in part, on our ability to attract
organizations that will be able to market and support our products effectively,
especially in markets in which we have not previously distributed our products.
None of our agreements governing the re-seller or co-marketing relationships
with these organizations includes any commitments on the part of these
organizations to effect any minimum number of sales of our products, or
otherwise to provide us with



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                                       25

<PAGE>

business. If revenues arising from our relationships with these organizations do
not exceed historical levels, our business will not grow as expected.


WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND OTHERS
COULD INFRINGE ON OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS.

    Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions.

    Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and, while we are unable to determine the extent to which piracy of
our software products exists, we expect software piracy to be a problem. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as the laws of the United States. Furthermore, our
competitors may independently develop technology similar to ours.

    The number of intellectual property claims may increase as the number of
competing products grows and the functionality of products in different industry
segments overlaps. Although we are not aware that any of our products infringe
upon the proprietary rights of third parties, there can be no assurance that
third parties will not claim infringement by us with respect to current or
future products. Any of these claims, with or without merit, could be time-
consuming to address, result in costly litigation, cause product shipment delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, might not be available on terms acceptable to
us or at all, which could have a material adverse effect upon our business.


IF WE DO NOT SUCCESSFULLY MANAGE OUR INTERNATIONAL OPERATIONS, OUR BUSINESS MAY
SUFFER.

    We have operations in a number of foreign markets. We believe that we must
generate sales in international markets in order for our business to be
successful. If we are unable to do so in a timely and effective manner, our
growth in international sales will be limited, and our business could be
materially adversely affected. We have begun to translate our products into
different languages and character sets, which may be more difficult or expensive
to complete than expected. In addition, other markets may have longer selling
cycles and different product requirements than the United States and we may not
be able to successfully adapt our products and methods.

    Our international operations are also subject to the risks inherent in any
international business activities, including, in particular:

     o    management of an organization spread over various countries;

     o    longer accounts-receivable payment cycles in certain countries;

     o    compliance with a variety of foreign laws and regulations;

     o    unexpected changes in regulatory requirements;

     o    overlap of different tax structures; and

     o    general economic conditions.


CURRENCY FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN OUR FOREIGN MARKETS MAY
IMPACT OUR CUSTOMERS' SPENDING AND THE VALUE OF MONEY OWED TO US.

With sales and services offices in London, Sydney, Johannesburg, Korea and Tokyo
the Company faces exposure to adverse movements in foreign currency exchange
rates. These exposures may change overtime as business practices evolve and
could have a material adverse impact on the Company's financial results.
Historically, the Company's primary exposure has been nondollar-denominated
operating expenses and



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                                       26

<PAGE>

sales by its United Kingdom subsidiary. The introduction of the Euro as a common
currency for members of the European Monetary Union, of which the United Kingdom
is not a member, occurred in January 1999. To date, we have not noticed any
material impact from the introduction of the Euro. The Company is prepared to
hedge against fluctuations in the British Sterling, Euro, or other foreign
currency if the exposure becomes material. As of September 30, 2001 the
Company's material nondollar-denominated assets and liabilities primarily
consisted of cash, accounts receivable, and accounts payable denominated in
British Sterling and Australian dollars.

WE HAVE BEEN, AND MAY IN THE FUTURE BE, SUBJECT TO PRODUCT LIABILITY CLAIMS.

    While our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that these provisions may not be effective under the laws of certain
jurisdictions. A successful product liability claim brought against us could
have a material adverse effect on our business. Moreover, defending these
claims, regardless of merit, could entail substantial expense and require the
time and attention of key management personnel.

                                       26
OUR COMMON STOCK PRICE IS LIKELY TO BE VOLATILE.

    The market for securities of most high technology companies, including our
common stock, has been highly volatile. It is likely that the market price of
the common stock will continue to fluctuate widely in the future. Factors
affecting the trading price of our common stock include:

     o    responses to quarter-to-quarter variations in our results of
          operations;

     o    the announcement of new products or product enhancements by us or our
          competitors;

     o    technological innovation by us or our competitors;

     o    general market conditions or market conditions specific to particular
          industries; and

     o    changes in earnings estimates by analysts.


WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD AFFECT THE MARKET PRICE OF
OUR COMMON STOCK OR OUR ABILITY TO SELL OUR BUSINESS.

    Certain provisions of our amended and restated certificate of incorporation
and our by-laws could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. In addition, certain
provisions of Delaware law and our stock incentive plans may also have the
effect of discouraging, delaying or preventing a sale.


WE ARE, AND MAY IN THE FUTURE BE, INVOLVED IN SECURITIES CLASS ACTION
LITIGATION.

    Xchange and certain of our current or former officers have been named
defendants in two securities class action lawsuits filed on behalf of a
purported class of purchasers of the our common stock during the period December
8, 1998 through September 29, 2000. These lawsuits seek monetary damages for
alleged violations of securities laws. If the plaintiffs are successful and
their recoveries exceed the limits of our insurance coverage, our financial
position will be harmed. Litigation is inherently uncertain and an adverse
resolution of the actions may have a negative effect on our operating results in
the period in which they are resolved. For further discussion of these lawsuits
see the discussion of Legal Proceedings elsewhere in this prospectus.


WE MAY HAVE DIFFICULTY MEETING NASDAQ MINIMUM LISTING REQUIREMENTS.

    We failed to maintain the minimum closing bid price of $1.00 for 30
consecutive trading days as required by the Nasdaq National Market. Nasdaq has
suspended the minimum bid price requirement through January 2, 2002. If the
minimum bid price is


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<PAGE>

reinstated after that date and we are unable to demonstrate compliance with this
or any other Nasdaq requirement, Nasdaq may take further action with respect to
a potential delisting of our common stock. We may appeal any such decision by
Nasdaq to the Nasdaq Listing Qualifications Panel.


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.

     FOREIGN CURRENCY EXCHANGE RISK. With sales and services offices in London,
Sydney, Johannesburg, Korea and Tokyo the Company faces exposure to adverse
movements in foreign currency exchange rates. These exposures may change over
time as business practices evolve and could have a material adverse impact on
the Company's financial results. Historically, the Company's primary exposure
has been nondollar-denominated operating expenses and sales by its United
Kingdom subsidiary. The introduction of the Euro as a common currency for
members of the European Monetary Union, of which the United Kingdom is not a
member, occurred in January 1999. To date, we have not noticed any material
impact from the introduction of the Euro. The Company is prepared to hedge
against fluctuations in the British Sterling, Euro, or other foreign currency if
the exposure becomes material. As of September 30, 2001 the Company's material
nondollar-denominated assets and liabilities primarily consisted of cash,
accounts receivable, and accounts payable denominated in British Sterling and
Australian dollars.


PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         The Company is engaged in legal proceedings incidental to the normal
course of business. Although the ultimate outcome of these matters cannot be
determined, the Company believes the final outcome of these proceedings will not
seriously harm its business.

         In addition, the Company and certain of our current and former officers
(the "Xchange Defendants") and its certified public accountants, Arthur
Andersen, LLP, have been named defendants in a consolidated class action lawsuit
originally filed on February 21, 2001 and subsequently filed a Consolidated
Amended Class Action Complaint on August 3, 2001, filed on behalf of a purported
class of purchasers of our common stock during the period from December 9, 1998
through September 29, 2000. The Amended Class Action Complaint alleges that we
made false or misleading statements that inflated our common stock price during
the class period. The relief sought is damages on behalf of the class. Through
our attorneys, the Xchange Defendants filed a Motion to Dismiss the Amended
Class Action Complaint on October 3, 2001. The action is pending in the United
States District Court for the District of Massachusetts. The Company believes
the allegations are without merit and intends to defend the litigation
vigorously.

       Also, the Company, along with BT Alex Brown, Inc., Hambrecht & Quist,
LLC, Adams, Harkness & Hill, Inc., Sound-View Technology Group, Inc. (together,
the "Underwriter Defendants") and certain current and former officers and
directors, including Andrew J. Frawley, John G. O'Brien, Jeffrey Horing, Ramanan
Raghavendran, David G. Mcfarlane, Michael D. McGonagle, Patrick A. Mchugh, and
N. Wayne Townsend, have purportedly been named defendants in a class action
complaint filed on behalf of a class of purchasers of its common stock during
the period from December 9, 1998 through December 6, 2000. THE COMPANY HAS NOT
YET BEEN SERVED WITH THIS COMPLAINT, but it purportedly alleges that documents
filed in connection with the Company's initial and secondary public offerings
(the "Offerings") were materially false and misleading because they failed to
disclose that (1) the Underwriter Defendants solicited and received excessive
and undisclosed commissions from certain investors in exchange for which the
Underwriter Defendants allocated to those investors material portions of the
restricted stock issued in connection with the Offerings, and (2) the
Underwriter Defendants had entered into agreements with


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customers whereby they agreed to allocate Xchange's shares to those customers in
the Offerings in exchange for which the customers agreed to purchase additional
shares in the after-market at pre-determined prices. The action is pending in
the United States District Court for the Southern District of New York. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

        Not applicable


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

        Not applicable


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

        Not applicable

ITEM 5.  OTHER INFORMATION

        Not applicable


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits

Exhibit 4.1*      Certificate of Designation of Series A Preferred Stock of
                  Exchange, dated as of January 10, 2001. (Incorporated by
                  reference to the Company's Form 8-K dated January 10, 2001,
                  filed with the Commission on January 24, 2001)

Exhibit 10.1*     Securities Purchase Agreement, dated as of January 10,  2001,
                  by and among Exchange and the purchasers of the Series A
                  Preferred Stock, includes all Schedules thereto. (Incorporated
                  by reference to the Company's Form 8-K dated January 10, 2001,
                  filed with the Commission on January 24, 2001)

Exhibit 10.2*     Registration Rights Agreement by and among Exchange and the
                  purchasers of the Series A Preferred Stock, dated as of
                  January 10, 2001. (Incorporated by reference to the Company's
                  Form 8-K dated January 10, 2001, filed with the Commission on
                  January 24, 2001)

Exhibit 99.1*     Form of Securities Purchase Agreement, dated as of February
                  20, 2001, by and among the Company and InSight. (Incorporated
                  by reference to the Company's Form 8-K dated February 20, 2001
                  filed with the Commission on April 12, 2001)

Exhibit 99.2*     Form of 9% Bridge Promissory Note in the aggregate principal
                  amount of up to $3,000,000 issued by the Company to InSight,
                  dated as of February 20, 2001. (Incorporated by reference to
                  the Company's Form 8-K dated February 20, 2001 filed with the
                  Commission on April 12, 2001)

Exhibit 99.3*     Form of Warrant issued by the Company to InSight, dated
                  February 20, 2001. (Incorporated by reference to the Company's
                  Form 8-K dated February 20, 2001 filed with the Commission on
                  April 12, 2001)

Exhibit 99.4*     Form of Amended and Restated Registration Rights Agreement,
                  dated as of February 20, 2001, by and among the Company and
                  InSight. (Incorporated by reference to the Company's Form 8-K
                  dated February 20, 2001 filed with the Commission on April 12,
                  2001)


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Exhibit 99.5*     Form of Securities Purchase Agreement, dated as of March
                  28, 2001, by and among the Company and InSight. (Incorporated
                  by reference to the Company's Form 8-K dated February 20, 2001
                  filed with the Commission on April 12, 2001)

Exhibit 99.6*     Form of 10% Bridge Promissory Note in the aggregate principal
                  amount of up to $1,500,000 issued by the Company to InSight,
                  dated as of March 28, 2001. (Incorporated by reference to the
                  Company's Form 8-K dated February 20, 2001 filed with the
                  Commission on April 12, 2001)

Exhibit 99.7*     Form of Warrant issued by the Company to InSight, dated March
                  28, 2001. (Incorporated by reference to the Company's Form
                  8-K dated February 20, 2001 filed with the Commission on
                  April 12, 2001)

Exhibit 99.8*     Form of Second Amended and Restated Registration Right
                  Agreement, dated as of March 28, 2001, by and among the
                  Company and InSight. (Incorporated by reference to the
                  Company's Form 8-K dated February 20, 2001 filed with the
                  Commission on April 12, 2001)

Exhibit 99.9*     Form of Loan and Security Agreement with Silicon Valley Bank
                  dated as of April 25, 2001. (Incorporated by reference to the
                  Company's Form 10-Q dated May 15, 2001 filed with the
                  Commission on May 15, 2001)

Exhibit 99.10*    Form of Securities Purchase Agreement, dated as of June 1,
                  2001, by and among the Company and InSight. (Incorporated by
                  reference to the Company's Form 8-K June 1, 2001 filed with
                  the Commission on June 11, 2001)

Exhibit 99.11*    Form of 12% Bridge Promissory Note in the aggregate principal
                  amount of up to $7,000,000 issued by the Company to InSight,
                  dated as of June 1, 2001. (Incorporated by reference to the
                  Company's Form 8-K June 1, 2001 filed with the Commission on
                  June 11, 2001)

Exhibit 99.12*    Form of Warrant issued by the Company to InSight, dated June
                  1, 2001. (Incorporated by reference to the Company's Form 8-K
                  June 1, 2001 filed with the Commission on June 11, 2001)

Exhibit 99.13*    Form of Third Amended and Restated Registration Rights
                  Agreement, dated as of June 1, 2001, by and among the Company
                  and InSight. (Incorporated by reference to the Company's Form
                  8-K June 1, 2001 filed with the Commission on June 11, 2001)

Exhibit 99.14*    Form of Securities Purchase Agreement, dated as of July 26,
                  2001, by and among the Company, eXstatic and Insight.
                  (Incorporated by reference to the Company's Form 8-K July 26,
                  2001 filed with the Commission on August 10, 2001)

Exhibit 99.15*    Form of 12% Senior Subordinated Convertible Debenture issued
                  by the Company to Insight, dated July 26, 2001. (Incorporated
                  by reference to the Company's Form 8-K July 26, 2001 filed
                  with the Commission on August 10, 2001)

Exhibit 99.16*    Form of 12% Senior Subordinated Convertible Debenture, issued
                  by the Company to Insight, dated July 26, 2001. (Incorporated
                  by reference to the Company's Form 8-K July 26, 2001 filed
                  with the Commission on August 10, 2001)

Exhibit 99.17*    Form of Fourth Amended and Restated Registration Right
                  Agreement, dated as of July 26, 2001, by and among the Company
                  and Insight. (Incorporated by reference to the Company's Form
                  8-K July 26, 2001 filed with the Commission on August 10,
                  2001)

Exhibit 99.18*    Form of Security Agreement, dated as of July 26, 2001, by and
                  among the Company, eXstatic and Insight. (Incorporated
                  by reference to the Company's Form 8-K July 26, 2001 filed
                  with


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                  the Commission on August 10, 2001)

Exhibit 99.19*    Form of Undertaking Letter, dated April 16, 2001 between
                  Exchange and Insight. (Filed as Exhibit 10.19 to the Company's
                  Annual Report on Form 10-K, dated April 17, 2001)

Exhibit 99.20*    Form of Warrant, dated April 16, 2001, issued to Insight by
                  Exchange. (Filed as Exhibit 10.20 to the Company's Annual
                  Report on Form 10-K dated April 17, 2001)

Exhibit 99.21*    Form of Loan Modification Agreement between Silicon Valley
                  Bank and Exchange Applications, Inc. and eXstatic
                  Software, Inc.  (Filed as Exhibit 99.21 to the Company's
                  Quarterly Report on Form 10-Q dated August 14, 2001)

Exhibit 99.22*    Form of Securities Purchase Agreement, dated as of August 29,
                  2001, by and between the Company and the Purchasers.
                  (Incorporated by reference to the Company's Form 8-K, August
                  29, 2001 filed with the Commission on September 12, 2001)

Exhibit 99.23*    Letter Agreement dated August 29, 2001 between the Company and
                  Insight. (Incorporated by reference to the Company's Form 8-K
                  August 29, 2001 filed with the Commission on September 12,
                  2001)

Exhibit 99.24*    Amendment No.1 dated August 29, 2001 to Security Agreement,
                  dated as of August 29, 2001, between the Company and Insight.
                  (Incorporated by reference to the Company's Form 8-K August
                  29, 2001 filed with the Commission on September 12, 2001)

Exhibit 99.25*    Press Release dated September 4, 2001. (Incorporated by
                  reference to the Company's Form 8-K August 29, 2001 filed with
                  the Commission on September 12, 2001)

Exhibit 99.26*    Form of Waiver Agreement from Silicon Valley Bank dated
                  October 11, 2001. (Incorporated by reference to the Company's
                  Form S-1 October 12, 2001 filed with the Commission on
                  October 12,2001)

Exhibit 99.27*    Form of Employment Agreement between Exchange Applications and
                  J. Christopher Wagner. (Incorporated by reference to the
                  Company's Form S-1 October 12, 2001 filed with the Commission
                  on October 12,2001)


Exhibit 99.28*    Form of Employment Agreement between Exchange Applications and
                  Andrew J. Frawley. (Incorporated by reference to the Company's
                  Form S-1 October 12, 2001 filed with the Commission on
                  October 12,2001)


* Incorporated by reference


(b)   Reports on Form 8-K

         Report on Form 8-K filed with the SEC on August 10, 2001. Report on
         Form 8-K filed with the SEC on September 12, 2001.










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                                   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)

Dated: November 12, 2001

                                             By: /s/ Thomas J. Phair, Jr.
                                                 --------------------------
                                                (authorized officer and
                                                 principal finance and
                                                 accounting officer)























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