<PAGE>   1

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

                                   FORM 10-Q

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

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       OR

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

                       COMMISSION FILE NUMBER: 000-28897

                                EXTENSITY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                    DELAWARE
         (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)

                                   68-0368868
                      (IRS EMPLOYER IDENTIFICATION NUMBER)

          2200 POWELL STREET, SUITE 300, EMERYVILLE, CALIFORNIA 94608
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

                                 (510) 594-5700
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X]  No [ ]

     The number of shares of the Registrant's Common Stock outstanding as of
April 30, 2001 was 24,462,370.

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<PAGE>   2

                                     INDEX

                         PART I. FINANCIAL INFORMATION

<TABLE>
<S>      <C>                                                           <C>
Item 1.  Condensed Consolidated Financial Statements (Unaudited).....    1
         Condensed Consolidated Balance Sheets.......................    1
         Condensed Consolidated Statements of Operations.............    2
         Condensed Consolidated Statements of Cash Flows.............    3
         Notes to the Condensed Consolidated Financial Statements....    4
         Management's Discussion and Analysis of Financial Condition
Item 2.  and Results of Operations...................................    6
         Quantitative and Qualitative Disclosures About Market
Item 3.  Risk........................................................   19

                        PART II. OTHER INFORMATION
Item 1.  Legal Proceedings...........................................   20
Item 2.  Changes in Securities and Use of Proceeds...................   20
Item 3.  Defaults Upon Senior Securities.............................   20
Item 4.  Submission of Matters to a Vote of Security Holders.........   20
Item 5.  Other Information...........................................   20
Item 6.  Exhibits and Reports on Form 8-K............................   21
SIGNATURES...........................................................   22
</TABLE>

                                        i
<PAGE>   3

                         PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                EXTENSITY, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              MARCH 31,    DECEMBER 31,
                                                                2001           2000
                                                              ---------    ------------
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................  $ 50,037       $ 40,695
  Short-term investments....................................    21,922         38,925
  Restricted short-term investments.........................     1,397          1,436
  Accounts receivable, net..................................     9,722          8,527
  Prepaids and other current assets.........................     3,499          3,443
                                                              --------       --------
          Total current assets..............................    86,577         93,026
Property and equipment, net.................................     6,304          6,279
Other assets................................................       523            457
                                                              --------       --------
          Total assets......................................  $ 93,404       $ 99,762
                                                              ========       ========
                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  7,778       $  6,434
  Accrued liabilities.......................................     4,842          5,125
  Deferred revenue..........................................    16,050         16,041
  Notes payable and capital lease obligations...............       920          1,269
                                                              --------       --------
          Total current liabilities.........................    29,590         28,869
Capital lease obligations and other.........................       609            647
                                                              --------       --------
          Total liabilities.................................    30,199         29,516
                                                              ========       ========
Stockholders' equity:
  Common stock..............................................        24             24
  Additional paid-in capital................................   147,134        147,475
  Deferred stock compensation...............................    (1,880)        (2,679)
  Notes receivable from stockholders........................      (380)          (380)
  Cumulative translation adjustment.........................       295            295
  Accumulated deficit.......................................   (81,988)       (74,489)
                                                              --------       --------
          Total stockholders' equity........................    63,205         70,246
                                                              --------       --------
          Total liabilities and stockholders' equity........  $ 93,404       $ 99,762
                                                              ========       ========
</TABLE>

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

                                        1
<PAGE>   4

                                EXTENSITY, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              -------------------
                                                               2001        2000
                                                              -------    --------
<S>                                                           <C>        <C>
Revenues:
  Licenses..................................................  $ 6,022    $  2,225
  Services and maintenance..................................    3,780       1,498
                                                              -------    --------
          Total revenues....................................    9,802       3,723
                                                              =======    ========
Cost of revenues:
  Licenses..................................................      445          84
  Services and maintenance..................................    4,074       3,089
                                                              -------    --------
          Total cost of revenues............................    4,519       3,173
                                                              -------    --------
Gross profit................................................    5,283         550
                                                              -------    --------
Operating expenses:(*)
  Sales and marketing.......................................    7,914       6,133
  Research and development..................................    3,792       3,136
  General and administrative................................    2,149       1,604
                                                              -------    --------
          Total operating expenses..........................   13,855      10,873
                                                              -------    --------
Loss from operations........................................   (8,572)    (10,323)
Interest income, net........................................    1,073         986
                                                              -------    --------
Net loss....................................................  $(7,499)   $ (9,337)
                                                              =======    ========
Basic and diluted net loss per share........................  $ (0.32)   $  (0.56)
Shares used in computing basic and diluted net loss per
  share.....................................................   23,389      16,607
---------------------------------------------------------------------------------
(*) Amounts include non-cash based compensation as follows:
     Cost of revenues:
       Service and maintenance..............................  $    50    $    239
     Operating expenses:
       Sales and marketing..................................       94         508
       Research and development.............................       57         314
       General and Administrative...........................       92         433
                                                              -------    --------
                                                              $   293    $  1,494
                                                              =======    ========
</TABLE>

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

                                        2
<PAGE>   5

                                EXTENSITY, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              -------------------
                                                               2001        2000
                                                              -------    --------
<S>                                                           <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(7,499)   $ (9,337)
  Adjustments to reconcile net loss to cash used in
     operating activities:
     Depreciation and amortization..........................      681         325
     Amortization of deferred stock compensation............      293       1,494
     Amortization of debt discount and lease line issuance
      costs.................................................       25          25
  Changes in operating assets and liabilities:
     Increase in accounts receivable........................   (1,195)       (686)
     Increase in prepaids and other current assets..........      (56)       (491)
     Increase in other non current assets...................      (66)         --
     Increase in accounts payable...........................    1,344       1,773
     Increase (decrease) in accrued liabilities.............     (283)      1,668
     Increase in deferred revenue...........................        9       1,377
                                                              -------    --------
          Cash used in operating activities.................   (6,747)     (3,788)
                                                              -------    --------
Cash flows from investing activities:
  Purchases of short-term investments.......................  (12,973)    (30,890)
  Sales of short-term investments...........................   29,976       4,618
  Capital expenditures......................................     (706)     (1,451)
  Decrease in restricted cash...............................       39          --
                                                              -------    --------
          Cash provided by (used in) investing activities...   16,336     (27,723)
                                                              -------    --------
Cash flows from financing activities:
  Payments on notes payable.................................     (374)       (293)
  Payments on capital lease obligations.....................      (38)       (115)
  Proceeds from exercise of stock options...................      165         611
  Net proceeds from issuance of common stock................       --      83,348
                                                              -------    --------
          Cash provided by (used in) financing activities...     (247)     83,551
                                                              -------    --------
Increase in cash and cash equivalents.......................    9,342      52,040
Cash and cash equivalents, beginning of period..............   40,695      10,416
                                                              -------    --------
Cash and cash equivalents, end of period....................  $50,037    $ 62,456
                                                              =======    ========
</TABLE>

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

                                        3
<PAGE>   6

                                EXTENSITY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary for a fair presentation of the
financial results for the periods shown. The balance sheet as of December 31,
2000 was derived from audited financial statements, but does not include all
required disclosures required by generally accepted accounting principles.

     These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's report on Form 10-K (File No. 000-28897), filed with the
Securities and Exchange Commission (the "SEC") on March 30, 2001.

     The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Extensity Europe Limited, which
commenced operations in September 1999 and Extensity Australia PTY Limited,
which commenced operations in February of 2001. All significant intercompany
balances and transactions have been eliminated in consolidation.

     The results of operations for the current interim period are not
necessarily indicative of the results to be expected for the entire current year
or other future interim periods.

 2. NET LOSS PER SHARE

     Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options and warrants were not
included in the computation of diluted net loss per share because the effect
would be antidilutive.

     The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                                               MARCH 31,
                                                           ------------------
                                                            2001       2000
                                                           -------    -------
<S>                                                        <C>        <C>
Numerator:
  Net loss...............................................  $(7,499)   $(9,337)
Denominator:
  Weighted average shares................................   24,196     17,841
  Weighted average unvested common shares................     (807)    (1,234)
                                                           -------    -------
          Total weighted average shares..................   23,389     16,607
                                                           -------    -------
Basic and diluted net loss per share.....................  $ (0.32)   $ (0.56)
                                                           =======    =======
</TABLE>

     Diluted net loss per share does not include the effect of the following
potential common shares at March 31, 2001 and March 31, 2000:

<TABLE>
<CAPTION>
                                                                MARCH 31,
                                                          ---------------------
                                                            2001        2000
                                                          ---------   ---------
<S>                                                       <C>         <C>
Shares issuable under stock options.....................  5,100,496   3,404,374
Shares of unvested stock subject to repurchase..........    512,942   1,139,086
Shares issuable pursuant to warrants to purchase common
  stock.................................................     20,000     183,888
                                                          ---------   ---------
                                                          5,633,438   4,727,348
                                                          =========   =========
</TABLE>

     The weighted-average exercise price of stock options outstanding was $9.68
and $3.32 as of March 31, 2001 and 2000, respectively. The weighted average
repurchase price of unvested stock was $1.12 and $1.09 as

                                        4
<PAGE>   7
                                EXTENSITY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

of March 31, 2001 and 2000, respectively. The weighted average exercise price of
warrants was $14.50 and $3.08 as of March 31, 2001 and 2000, respectively.

 3. SIGNIFICANT CUSTOMERS

     One customer accounted for 24% of total revenues for the three months ended
March 31, 2001. One customer accounted for 18% of total revenues for the three
months ended March 31, 2000.

                                        5
<PAGE>   8

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

     This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding the
Company's expectations, beliefs, intentions, or future strategies that are
signified by the words "expects", "anticipates", "intends", "believes", or
similar language. All forward-looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward looking statements.
Actual results could differ materially from those projected in the forward
looking statements. In evaluating the Company's business, prospective investors
should carefully consider the information set forth below under the caption
"Risk Factors" in addition to the other information set forth herein. The
Company cautions investors that its business and financial performance are
subject to substantial risks and uncertainties.

     The following discussion and analysis of our financial condition and
results of operations of Extensity should be read in conjunction with our
Summary of Condensed Consolidated Financial Statements and our condensed
consolidated financial statements and related notes included in this report, and
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and related financial information contained in the Company's Form
10-K (File No. 000-28897).

OVERVIEW

     Extensity was formed in November 1995 and introduced its first commercial
product for general availability in March 1998. During this period, our
operating activities consisted of the design and development of our product
architecture and our first application, the building of our corporate
infrastructure, and the development of our professional services and customer
support organizations. Our first application, Extensity Expense Reports, was
released for general availability in March 1998. We released Extensity Travel
Plans in December 1998 and Extensity Timesheets and Extensity Purchase Reqs in
July 1999. Extensity Connect, our portalized application front end, role-based
reporting tool, and content and commerce gateway was released in March 2000.

     We generate revenue principally from licensing our applications and
providing related services, including product installation, maintenance and
support, consulting and training. We license our applications individually or as
an integrated suite of products. The pricing of our software and services
fluctuates on a per transaction basis depending on various factors, such as the
number of seats covered by a contract and the degree of customization requested
by the particular customer. The dollar amounts of our contracts depend on the
number of users and applications being used and the professional services
requested.

     Our software products typically require significant customization,
installation and other services. Prior to the release in July 1999 of Version
4.0 of our application suite, it was difficult to generate dependable estimates
of the costs necessary to complete product implementations. Therefore, we
accounted for our software licenses and implementation revenues using the
completed contract method of contract accounting as required under the
provisions of SOP 97-2, "Software Revenue Recognition", and SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts".

     Following the release of Version 4.0 in July 1999, we were able to generate
dependable estimates of the costs necessary to complete product implementations.
Consequently, we are accounting for our software licenses and implementation
revenues using the percentage-of-completion method of contract accounting. In
cases where a sale of a license does not include implementation services (e.g.,
a sale of additional seats or a sale of product to be implemented by a third
party), revenue is recorded upon delivery with an appropriate deferral for
maintenance services, if applicable.

     We defer amounts billed for maintenance and recognize such amounts ratably
over the maintenance period.

     We have entered into two distribution arrangements under which the
distributors would receive unspecified future products over the life of the
arrangements (two or three years) in consideration for agreed-

                                        6
<PAGE>   9

upon, non-refundable fees. We recognize such fees ratably, on a subscription
basis, over the life of these related agreements.

     Payments received in advance of revenue recognition are recorded as
deferred revenues. All of our customers enter into one-year maintenance and
support contracts when they purchase their initial Extensity applications and
have the option to purchase additional contracts after completion of the initial
contract period. Although we do not grant any rights to our customers to return
products, we do provide warranties that our products will function according to
written documentation.

     We promote and sell our software products through our direct sales force
and through indirect channels, including JD Edwards, Niku and Elite. We also
have marketing referral arrangements in place with Cisco Systems, IBM, Commerce
One, WebEx, Digital Think, EventSource, Visa, GetThere.com, Pro Act Technologies
and Elcom.

     In 2000, we expanded our European operations through opening a second
office in Frankfurt, Germany. In February of 2001 we opened a sales office in
Sydney, Australia. We have continued to hire staff in both our European and
Australian operations and expect to continue to do so in advance of anticipated
revenues. Therefore, we expect our costs for establishing international sales to
exceed related revenues as we invest in international operations. For the three
months ended March 31, 2001, revenues derived from our international sales
represented 39% of the total revenues for this period.

                                        7
<PAGE>   10

RESULTS OF OPERATIONS

     The following table sets forth certain statement of operations data in
absolute dollars for the periods indicated. The data has been derived from the
condensed consolidated financial statements contained in this report. The
operating results discussed below do not include the amortization of non-cash
stock based compensation. These amounts are discussed separately within this
discussion.

                SUMMARY OF CONDENSED CONSOLIDATED FINANCIAL DATA
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                 MARCH 31,
                                                             ------------------
                                                              2001       2000
                                                             -------    -------
<S>                                                          <C>        <C>
Revenues:
  Licenses.................................................  $6,022     $2,225
  Services and maintenance.................................   3,780      1,498
                                                             ------     ------
          Total revenues...................................  $9,802     $3,723
                                                             ======     ======
Cost of revenues:(*)
  Licenses.................................................  $  445     $   84
  Services and maintenance.................................   4,024      2,850
                                                             ------     ------
                                                             $4,469     $2,934
                                                             ======     ======
Operating expenses:(*)
  Sales and marketing......................................  $7,820     $5,625
  Research and development.................................   3,735      2,822
  General and administrative...............................   1,680      1,171
  Non-recurring general and administrative.................     377         --
-------------------------------------------------------------------------------

(*) Amounts exclude the amortization of non-cash stock based compensation as
follows:

     Cost of revenues:
       Services and maintenance............................  $   50     $  239
     Operating expenses:
       Sales and marketing.................................      94        508
       Research and development............................      57        314
       General and administrative..........................      92        433
                                                             ------     ------
                                                             $  293     $1,494
                                                             ======     ======
</TABLE>

REVENUES

     Total revenues increased to $9.8 million for the three months ended March
31, 2001 from $3.7 million for the three months ended March 31, 2000, an
increase of 163%. For the three months ended March 31, 2001, sales to one
customer accounted for 24% of total revenues. For the three months ended March
31, 2000 one customer accounted for 18% of total revenues.

     License Revenues. Our license revenues increased to $6.0 million for the
three months ended March 31, 2001 from $2.2 million for the three months ended
March 31, 2000, an increase of 171%. The increase was attributable to our
growing customer base and in the amount of license revenue recognized upon
shipment, an increase in the revenue attributable to our indirect sales channels
and to a lesser extent, an increase in the average size of the sales contracts
entered into by our customers.

     Service and Maintenance Revenues. Our service and maintenance revenues
increased to $3.8 million for the three months ended March 31, 2001 from $1.5
million for the three months ended March 31, 2000, an

                                        8
<PAGE>   11

increase of 152%. This increase was attributable to our growing customer base,
an increase in professional services revenues recognized on a time and materials
basis, an increase in revenues recognized from work performed on partner
integration, and to a lesser extent, an increase in the average size of the
sales contracts that customers have signed.

COST OF REVENUES

     Total cost of revenues increased to $4.5 million for the three months ended
March 31, 2001 from $2.9 million for the three months ended March 31, 2000, an
increase of 52%.

     Cost of License Revenues. Cost of license revenues consists primarily of
third-party license and support fees and, to a lesser extent, costs of
duplicating media and documentation and shipping. This cost increased to
$445,000 for the three months ended March 31, 2001 from $84,000 for the three
months ended March 31, 2000, due primarily to increased sales activity. As a
percentage of license revenues, cost of license revenues increased to 7.4% for
the three months ended March 31, 2001 from 3.8% for the three months ended March
31, 2000. Cost of revenues as a percentage of license revenue may increase over
the current level in the future as we incorporate additional third-party
products in our offerings.

     Cost of Service and Maintenance Revenues. Cost of service and maintenance
revenues consists of compensation and related overhead costs for personnel
engaged in consulting, training, maintenance and support services for our
customers as well as costs for third parties contracted to provide such services
to our customers. This cost increased to $4.0 million for the three months ended
March 31, 2001 from $2.9 million for the three months ended March 31, 2000, an
increase of 41%. As a percentage of service revenues, cost of service revenues
decreased to 106% for the three months ended March 31, 2001 from 190% for the
three months ended March 31, 2000. Approximately 81% of the increase for the
three month period ended March 31, 2001 in the cost of service revenues was due
to our hiring of additional service and maintenance personnel. These additional
costs were necessary to support our expanding customer base. Total costs have
exceeded our service and maintenance revenues as we have built our consulting
and customer support groups in advance of growing contract volume. We are
seeking to reduce our cost of service revenues as a percentage of total revenue
and are also seeking to engage third parties to provide a substantial portion of
services related to our applications.

OPERATING EXPENSES

     Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel, including
commissions and marketing program costs. Sales and marketing expenses increased
to $7.8 million for the three months ended March 31, 2001 from $5.6 million for
the three months ended March 31, 2000, an increase of 39%. As a percentage of
total revenues, sales and marketing expenses decreased to 80% for the three
months ended March 31, 2001 from 151% for the three months ended March 31, 2000.
Approximately 76% of the increase in sales and marketing expenses for the
three-month period ended March 31, 2001 was attributable to increased
compensation, commissions and other related costs associated with hiring
additional sales representatives, management and marketing personnel. We expect
that the absolute dollar amount of sales and marketing expenses will increase as
we expand our domestic and international sales force and increase our marketing
efforts to capitalize on the growth of our market.

     Research and Development. Research and development expenses consist
primarily of compensation and related personnel costs and fees associated with
contractors. Research and development expenses increased to $3.7 million for the
three months ended March 31, 2001 from $2.8 million for the three months ended
March 31, 2000, an increase of 32%. As a percentage of total revenues, research
and development expenses decreased to 38% for the three months ended March 31,
2001 from 76% for the three months ended March 31, 2000. Approximately 72% of
the costs increase for the three-month period ended March 31, 2001 was
attributable to the addition of personnel and cost related to contractors. These
increases resulted from our continuing efforts to add enhancements to our
existing software applications and to develop software applications that
incorporate new functionality into our integrated suite. We expect that the
absolute dollar

                                        9
<PAGE>   12

amount of research and development expenses will continue to increase as we make
additional investments in our technology and products.

     General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for our executive, finance and
administrative personnel and other related expenses. General and administrative
expenses, excluding the non-recurring charge, increased to $1.7 million for the
three months ended March 31, 2001 from $1.2 million for the three months ended
March 31, 2000, an increase of 43%. For the three months ended March 31, 2001
non-recurring general and administrative expenses were $377,000. These expenses
were incurred in connection with exploring potential strategic transactions. The
entire charge was expensed in this period as no final actions were taken. As a
percentage of total revenues, general and administrative expenses, excluding the
non recurring charge, decreased to 17% for the three months ended March 31, 2001
from 31% for the three months ended March 31, 2000. Approximately 81% of the
increase in general and administrative expenses, excluding the non-recurring
charge, in the three-month period ended March 31, 2001 was attributable to
hiring additional financial, human resources and internal information technology
personnel. The absolute dollar amount of general and administrative expenses may
continue to increase as we expand our operations.

AMORTIZATION OF NON-CASH STOCK BASED COMPENSATION

     Prior to our IPO, we granted certain stock options to our officers and
employees at prices deemed to be below the fair value of the underlying stock.
The cumulative difference between the fair value of the underlying stock at the
date the options were granted and the exercise price of the granted options was
$12.1 million as of the IPO date. This amount is being amortized, using the
accelerated method of FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable or Award Plans, over the four-year
vesting period of the granted options. Accordingly, our results of operations
will include deferred compensation expense at least through 2003. We recognized
$293,000 of this expense for the three months ended March 31, 2001 and $1.5
million for the three months ended March 31, 2000.

INTEREST INCOME, NET

     Interest income, net was $1.1 million for the three months ended March 31,
2001 and $986,000 for the three months ended March 31, 2000. Interest income,
net for the three months ended March 31, 2001 was attributed to interest earned
on the proceeds from the Company's IPO. Interest income will fluctuate depending
upon the overall interest rate environment and our cash, cash equivalent
balances and short-term investments.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have financed our operations and funded our capital
expenditures through funds raised from our initial public offering completed in
January 2000 and the private sale of equity securities, supplemented by loan
facilities and equipment leases. Aggregate net proceeds from private equity
financings totaled $42.3 million and proceeds from the Company's IPO were $83.3
million, net of offering costs of approximately $2.2 million. As of March 31,
2001 we had $72 million in cash, cash equivalents and short-term investments and
$57 million in working capital.

     Net cash used in operating activities was $6.7 million for the three months
ended March 31, 2001 and $3.8 million for the three months ended March 31, 2000.
For the three months ended March 31, 2001, cash used in operating activities was
primarily attributable to a net loss of $7.5 million, adjusted for depreciation
and amortization of $681,000, amortization of deferred stock compensation of
$293,000 and an increase in accounts payable of $1.3 million offset by an
increase in accounts receivable of $1.2 million. For the three months ended
March 31, 2000, cash used in operating activities was primarily attributable to
net loss from operations of $9.3 million, adjusted for amortization of deferred
stock compensation of $1.5 million, and offset by an increase in accounts
payable of $1.8 million, an increase in accrued liabilities of $1.7 million and
an increase in deferred revenue of $1.4 million.

                                        10
<PAGE>   13

     Net cash provided by investing activities was $16.3 million for the three
months ended March 31, 2001 and net cash used in investing activities was $27.7
million for the three months ended March 31, 2000. For the three months ended
March 31, 2001 investing activities consisted primarily of a decrease in
short-term investments offset by capital expenditures of $706,000. For the three
months ended March 31, 2000 investing activities consisted primarily of an
increase in short-term investments and capital expenditures.

     Net cash used in financing activities was $247,000 for the three months
ended March 31, 2001 due to payments on notes payable and capital lease
obligations of $412,000 and offset by stock options issuances of $165,000. Net
cash provided by financing activities was $83.6 million for the three months
ended March 31, 2000, primarily due to the net proceeds of $83.3 million from
the company's IPO.

     As we execute our strategy, we expect significant increases in our
operating expenses, especially in sales and marketing. Presently, we anticipate
that our existing capital resources will meet our operating and investing needs
for at least the next 12 months. After that time, we cannot be certain that
additional funding will be available on acceptable terms or at all. If we
require additional capital resources to grow our business, execute our operating
plans, or acquire complimentary technologies or businesses at any time in the
future, we may seek to sell additional equity or debt securities or secure
additional lines of credit, which may result in additional dilution to our
stockholders.

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                                  RISK FACTORS

     The following is a discussion of certain factors that currently impact or
may impact our business, operating results and/or financial condition. Any
investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the risks and other information contained in the Company's Annual Filing on Form
10-K (File No. 000-28897) and its periodic reports filed pursuant to the
Exchange Act in evaluating our business. The market price of our common stock
could decline, and you may lose all or part of the money you paid to buy our
common stock.

                         RISKS RELATED TO OUR BUSINESS

OUR LIMITED OPERATING HISTORY AND THE FACT THAT WE OPERATE IN A NEW INDUSTRY
MAKES OUR BUSINESS PROSPECTS DIFFICULT TO EVALUATE.

     We were incorporated in November 1995 and commenced licensing of our
software applications in March 1998. An investor in our common stock must
consider the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as the market for
Internet-based software applications. Risks and difficulties include our ability
to:

     - expand our base of customers with fully installed and deployed systems
       that can serve as reference accounts for our ongoing sales efforts;

     - expand our pipeline of sales prospects in order to promote greater
       predictability in our period-to-period sales levels;

     - continue to offer new products that complement our existing product line,
       in order to make our suite of applications more attractive to customers;

     - continue to develop and upgrade our technology to add additional features
       and functionality;

     - continue to attract and retain qualified personnel;

     - expand sales channels through geographic expansion and the development of
       indirect channels such as relationships with OEM customers and
       distributors;

     - increase awareness of our brand; and

     - maintain our current, develop new, third-party relationships, including
       but not limited to third-party implementors.

     The Company may not be able to successfully address these risks or
difficulties and our business strategy may not be successful. If we fail to
address these risks or difficulties adequately, our business will likely suffer.

WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND EXPECT THIS TO CONTINUE
FOR THE CURRENT FISCAL YEAR.

     Our business is new; we have offered products for a relatively short period
of time; and our base of customers and prospective customers is still relatively
small. We have spent significant funds to date to develop our current products
and to develop our sales and market resources. We have incurred significant
operating losses and have not achieved profitability. As of March 31, 2001, we
had an accumulated deficit of $82.0 million. We expect to continue to invest in
research and development to enhance current products and develop future
products. We also plan to continue to grow our sales force and to spend
significant funds in marketing to promote our company and our products. We
expect to continue to hire additional people in all other areas of our company
in order to support our growing business. As a result, we will need to increase
our revenues significantly to achieve profitability. In addition, because we
expect to continue to invest in our business ahead of anticipated future
revenues, we expect that we will continue to incur operating losses through the
current fiscal year.

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OUR BUSINESS IS CHANGING RAPIDLY, WHICH COULD CAUSE OUR QUARTERLY OPERATING
RESULTS TO VARY AND OUR STOCK PRICE TO FLUCTUATE.

     Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are beyond our control. We
expect to continue to expend significant sums in all areas of our business,
particularly in our sales and marketing operations, in order to promote future
growth. Because the expenses associated with these activities are relatively
fixed in the short-term, we may be unable to adjust spending quickly enough to
offset any unexpected shortfall in revenue growth or any decrease in revenue
levels. As a result, we expect our quarterly operating results to fluctuate.
Moreover, because we primarily use the percentage-of-completion method of
contract accounting with respect to recognition of implementation fees and a
significant portion of our license fees, if our professional service
organization is unable to implement our applications for use by customers within
our anticipated time frames, our recognition of revenue for those customers
could be deferred, which could cause our quarterly revenue to fluctuate. Our
financial results may, as a consequence of quarterly revenue fluctuations, fall
short of the expectations of public market analysts or investors. If this
occurs, the price of our common stock may drop.

     We also seek to develop and maintain a significant pipeline of potential
sales prospects, but it is difficult to predict when individual customer orders
will be closed. Our base of customers and the number of additional customer
licenses we enter into each quarter are still relatively small. Accordingly, the
loss or deferral of a small number of anticipated large customer orders in any
quarter could result in a significant shortfall in revenues for that quarter and
future quarters, which could result in a drop in the price of our stock.

     Other important factors that could cause our quarterly results and stock
price to fluctuate materially include:

     - our ability to grow our customer base and our base of referencing
       customers, in light of our relatively limited number of customers to
       date;

     - our ability to successfully develop alternative sales channels for our
       products, such as sales through OEM customers or distributors;

     - our ability to expand our implementation and consulting resources through
       third-party relationships, in light of the fact that we have limited
       third-party implementation and consulting relationships currently in
       place; and

     - technical difficulties or "bugs" affecting the operation of our software.

     Due to our limited operating history, the early stage of our market and the
factors discussed above, you should not rely on quarter-to-quarter comparisons
of our results of operations as indicators of our future performance.

OUR BUSINESS WILL SUFFER IF WE DO NOT SIGNIFICANTLY EXPAND OUR SALES
CAPABILITIES.

     We sell our workforce optimization applications primarily through our
direct sales force. We must significantly expand our direct sales operations to
increase our revenues. We cannot be certain that we will be successful in these
efforts. Our products and services require sophisticated sales efforts and our
ability to increase our direct sales operation will depend on our ability to
recruit, train and retain top sales people with effective sales skills and
advanced technical knowledge. Competition for qualified personnel is intense in
our industry. Moreover, new sales personnel require training and take time to
achieve full productivity. If we are unable to hire or retain qualified sales
personnel, if newly hired personnel fail to develop the necessary skills, or if
they reach productivity more slowly than anticipated, we may be unable to grow
our revenues as rapidly as planned, if at all, and our business could be harmed.

WE FACE INTENSE COMPETITION, WHICH COULD AFFECT OUR ABILITY TO INCREASE REVENUE,
MAINTAIN OUR MARGINS AND INCREASE MARKET SHARE.

     The market for our Internet-based workforce optimization applications is
intensely competitive and we expect competition to increase in the future.
Competitors vary in size and in the scope and breadth of the

                                        13
<PAGE>   16

products and services they offer. Companies offering one or more products
directly competitive with our products include Ariba, Captura Software, Concur
Technologies, IBM, PeopleSoft Corporation and Oracle Corporation. As a result of
the large market opportunity for workforce optimization applications, we also
expect competition from other established and emerging companies.

     Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition, and a larger installed base
of customers than us. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidation. Increased
competition may result in price reductions, reduced margins and loss of market
share, any one of which could seriously harm our business.

IF WE DO NOT PROVIDE SOFTWARE APPLICATIONS AND RELATED SERVICES THAT MEET THE
CHANGING DEMANDS OF OUR CUSTOMERS, THE MARKET FOR OUR PRODUCTS WILL NOT GROW OR
MAY DECLINE, AND OUR PRODUCT SALES WILL SUFFER.

     To successfully implement our business strategy, we have to provide
software applications and related services that meet the demands of our
customers and prospective customers as the market and customer requirements
evolve. We expect that competitive factors will create a continuing need for us
to improve and add to our suite of software applications. Not only will we have
to expend significant funds and other resources to continue to improve our
existing suite of applications, but we must also properly anticipate, address
and respond to customer preferences and demands. As organizations' needs change
with respect to their enterprise applications, our existing suite of software
applications may become obsolete or inefficient relative to our competitors'
offerings and may require modifications or improvements. The addition of new
products and services will also require that we continue to improve the
technology underlying our applications. These requirements could be significant,
and we may fail to fulfill them quickly and efficiently. If we fail to expand
the breadth of our applications quickly in response to customer needs or if
these offerings fail to achieve market acceptance, the market for our products
will not grow or may decline, and our business may suffer significantly.

     Our workforce optimization software products and related services have
accounted for all of our revenues to date. We anticipate that revenues from
these products and related services will continue to constitute substantially
all of our revenues for the foreseeable future. Consequently, our future
financial performance will depend, in significant part, upon the successful
development, introduction and customer acceptance of enhanced versions of our
workforce optimization applications and any new products or services that we may
develop or acquire. We cannot assure you that we will be successful in
enhancing, upgrading or continuing to effectively market our workforce
optimization applications or that any new products or services that we may
develop or acquire will achieve market acceptance.

EVOLVING TECHNOLOGICAL DEVELOPMENTS AND EMERGING INDUSTRY STANDARDS WILL REQUIRE
US TO ENHANCE THE FUNCTIONALITY OF OUR WORKFORCE OPTIMIZATION APPLICATIONS, AND
ANY INABILITY TO ENHANCE FUNCTIONALITY COULD CAUSE OUR SALES TO DECLINE.

     Because the market for our products is emerging and subject to rapid
technological change and evolving industry standards, the life cycles of our
products are difficult to predict. Competitors may introduce new products or
enhancements to existing products employing new technologies, which could render
our existing products and services obsolete and unmarketable. For example, our
currently available software applications are written entirely in the Java
computer language. While we believe that this provides our solution with
significant advantages in terms of functionality and flexibility, the market for
Java-based software is still relatively new and it is not clear whether
Java-based systems will continue to maintain commercial acceptance.

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<PAGE>   17

     To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
market acceptance. Our results of operations would be seriously harmed if we are
unable to develop, release and market new software product enhancements on a
timely and cost-effective basis, or if new products or enhancements do not
achieve market acceptance or fail to respond to evolving industry or technology
standards.

     In developing new products and services, we may also fail to develop and
market products that respond to technological changes or evolving industry
standards in a timely or cost-effective manner, or experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these new products and services.

OUR REVENUES HAVE BEEN DERIVED FROM A RELATIVELY SMALL NUMBER OF CUSTOMERS, AND
THE LOSS OF A SMALL NUMBER OF MAJOR CUSTOMERS OR POTENTIAL CUSTOMERS COULD
ADVERSELY IMPACT OUR REVENUES OR OPERATING RESULTS.

     We licensed our first workforce optimization application in March 1998 and
have fully implemented our applications for only a limited number of customers
to date due to the time required to implement. Moreover, as of March 31, 2001,
we had not completed an implementation of our Extensity Purchase Reqs
application for any customer. We expect that we will continue to derive a
significant portion of our revenues from a relatively small number of customers
in the future. Accordingly, the loss of a small number of major customers could
materially and adversely affect our business, and the deferral or loss of
anticipated orders from a small number of prospective customers could materially
and adversely impact our revenues and operating results in any period.

IF WE FAIL TO ACHIEVE POSITIVE MARGINS ON SERVICE REVENUES IN THE FORESEEABLE
FUTURE, OUR RESULTS OF OPERATIONS COULD SUFFER.

     Our margins on service revenues to date have been negative. While we
anticipate that our margins will be positive in the current year, we cannot
guarantee we will achieve profitability. Once we reach profitability we cannot
assure you we will continue to maintain profitability. Failure to achieve
positive margins on service revenues could cause our business to suffer. For
more information related to our costs associated with our service revenues, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

WE HAVE LIMITED EXPERIENCE WITH LARGE-SCALE IMPLEMENTATIONS, WHICH ARE IMPORTANT
TO OUR FUTURE SUCCESS.

     We have limited experience in implementing our applications on a large
scale. As of March 31, 2001, our largest implementation included approximately
13,400 employee users. We believe that the ability of large customers to
roll-out our products across large numbers of users is critical to our future
success. If our customers cannot successfully deploy our applications on a large
scale, or if they determine for any reason that our products cannot accommodate
large-scale deployment, our business could be harmed.

IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND CONSULTING SERVICES TO OUR CUSTOMERS, WE MAY BE UNABLE TO
GROW OUR REVENUES AND OUR BUSINESS COULD BE HARMED.

     In order for us to focus more effectively on our core business of
developing and licensing software solutions, we need to establish relationships
with third parties that can provide implementation and consulting services to
our customers. Third-party implementation and consulting firms can also be
influential in the choice of workforce optimization applications by new
customers. To date, we have established limited relationships with a few
third-party implementation and consulting firms. In general, however, if we are
unable to establish and maintain effective, long-term relationships with
implementation and consulting providers, or if these providers do not meet the
needs or expectations of our customers, we may be unable to grow our revenues
and our business could be seriously harmed. As a result of the limited resources
and capacities of many third-party implementation providers, we may be unable to
attain sufficient focus and resources from the third-party providers to meet all
of our customers' needs, even if we establish relationships with these third

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<PAGE>   18

parties. If sufficient resources are unavailable, we will be required to provide
these services internally, which could limit our ability to expand our base of
customers. A number of our competitors have significantly more established
relationships with these third parties and, as a result, these third parties may
be more likely to recommend competitors' products and services rather than our
own. Even if we are successful in developing relationships with third-party
implementation and consulting providers, we will be subject to significant risk,
as we cannot control the level and quality of service provided by third-party
implementation and consulting partners.

CUSTOMER SATISFACTION AND DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO
EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION.

     We believe that growth in our product sales depends on our ability to
provide our customers with professional services to assist with support,
training, consulting and initial implementation and deployment of our products
and to educate third-party systems integrators in the use of our products. As a
result, we plan to increase the number of professional services personnel to
meet these needs. New professional services personnel will require training and
take time to reach full productivity. We may not be able to attract or retain a
sufficient number of highly qualified professional services personnel.
Competition for qualified professional services personnel is intense due to the
limited number of people who have the requisite knowledge and skills. To meet
our customers' needs for professional services, we may also need to use more
costly third-party consultants to supplement our own professional services
group. In addition, we could experience delays in recognizing revenue if our
professional services group fails to complete implementations in a timely
manner.

WE HAVE ONLY RECENTLY UNDERTAKEN TO CREATE A CONTENT AND COMMERCE GATEWAY
BETWEEN OUR CUSTOMERS' EMPLOYEES AND THIRD-PARTY PROVIDERS, AND OUR FUTURE
OPERATING RESULTS MAY DEPEND ON OUR ABILITY TO SUCCEED IN THIS STRATEGY.

     One component of our business strategy includes establishing an integrated
point of access, or gateway, between the network of customer employees that
utilize our workforce optimization solution and third-party content, commerce
and service providers who consider this employee base to be potentially valuable
business customers. We cannot assure you that we will be successful in
developing this gateway. Moreover, we cannot assure you that our customers will
consider a content and commerce gateway to be a valuable feature of our
workforce optimization applications, or that third-party providers will choose
to access our network of customer employees to generate e-commerce. If a market
for such a gateway develops and we are unable to establish a compelling product
offering within this market our business could be seriously harmed.

OUR EXPECTATIONS OF FUTURE GROWTH DEPEND ON OUR ABILITY TO EXPAND
INTERNATIONALLY, AND FACTORS SPECIFIC TO OUR INTERNATIONAL EXPANSION MAY PREVENT
US FROM ACHIEVING OUR ANTICIPATED GROWTH.

     We intend to expand our international operations to achieve our anticipated
growth, but we may face significant challenges to our international expansion.
The expansion of our existing international operations and entry into additional
international markets will require significant management attention and
financial resources. To achieve broad acceptance in international markets, our
products must be localized to handle a variety of factors specific to each
international market, such as tax laws and local regulations. The incorporation
of these factors into our products is a complex process and often requires
assistance from third parties. We have limited experience in localizing our
products and we may not adequately address all of the factors necessary to
achieve broad acceptance in our target international markets. Further, to
achieve broad usage by employees across international organizations, our
products must be localized to handle native languages and cultures in each
international market. Localizing our products is also a complex process and we
intend to work with third parties to develop localized products. To date, we
have localized our product for the markets where English language is the native
language. We have not completed a localization in a non-English market. We
cannot assure you that our localization efforts will be successful.

     We have only a limited history of marketing, selling and supporting our
products and services internationally. In 1999, we opened a regional office in
the United Kingdom and established a relationship with an international
reseller. In 2000, we expanded our European Operations through opening a second
office

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in Frankfurt, Germany. In the February of 2001, we opened a sales office in
Sydney, Australia. As of March 31, 2001, we had a total of 36 employees in our
international operations. For the three months ended March 31, 2001, we derived
39 % of our revenues from our International Operations. To expand
internationally we must hire and train experienced international personnel as
well as recruit and retain qualified domestic personnel to staff and manage our
international operations. However, we may experience difficulties in recruiting
and training an international staff. We must also be able to enter into
strategic relationships with companies in international markets. If we are not
able to maintain successful strategic relationships internationally or recruit
additional companies to enter into strategic relationships, our future growth
could be limited. We also face other risks inherent in conducting business
internationally, such as:

     - difficulties in collecting accounts receivable and longer collection
       periods;

     - seasonal business activity in certain parts of the world;

     - fluctuations in currency exchange rates; and

     - trade barriers.

     Any of these factors could seriously harm our international operations and,
consequently, our business.

WE ARE GROWING RAPIDLY, AND OUR FAILURE TO MANAGE THIS GROWTH COULD HARM OUR
BUSINESS.

     We have experienced and are currently experiencing a period of significant
growth. Our full-time employees increased from 83 at December 31, 1998 to 175 at
December 31, 1999 to 289 at December 31, 2000 to 303 at March 31, 2001. Our
revenues have grown 265% between fiscal 1999 and 2000. This growth has placed a
significant strain on our resources. We expect that any future growth would
cause similar or increased strains on our resources. As part of this growth, we
will have to continually enhance our operational and financial systems,
procedures and controls; expand, train and manage our employee base; and
maintain close coordination among our technical, accounting, finance, marketing
and sales staffs. If we are unable to manage our growth effectively, our
business, results of operations and financial condition could be adversely
affected.

     Several members of our senior management joined us in 1999, including David
Yarnold, our Senior Vice President of North American Sales and Mark Oney, our
Senior Vice President of Engineering. Additionally, in 2000, Jennifer Burt
joined us as Vice President of Human Resources and Don Smith joined us as Vice
President of Customer Support and Hosted Operations. Although all but two of our
executive staff have been employed for more than one year, we cannot assure you
that our management team will be able to continue to work together effectively
or to manage our growth successfully. We believe that the successful integration
of our management team is critical to our ability to manage our operations
effectively and support our anticipated future growth.

WE MAY BE UNABLE TO ATTRACT AND RETAIN HIGHLY SKILLED EMPLOYEES THAT ARE
NECESSARY FOR THE SUCCESS OF OUR GROWTH PLAN.

     In addition to our dependence on our sales and professional services
personnel as previously discussed, our ability to execute our growth plan and be
successful also depends on our continued ability to attract and retain highly
skilled employees. We depend on the services of senior management and other
personnel, particularly Robert A. Spinner, our Chief Executive Officer. As we
continue to grow, we will need to hire additional personnel in all operational
areas. Competition for personnel in our industry is intense. We have in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications. If we do not succeed in attracting or retaining personnel, our
business could be adversely affected.

OUR SALES CYCLES ARE LONG AND UNPREDICTABLE, WHICH MAKES PERIOD-TO-PERIOD
REVENUES DIFFICULT TO PREDICT.

     Because the market for our workforce optimization software products and
related services is new, we experience long and unpredictable sales cycles. The
sales cycle for our workforce optimization applications typically ranges from
two to nine months. In the early stages of this market, our customers have
frequently

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<PAGE>   20

viewed the purchase of our products as part of a long-term strategic decision
regarding the management of their workforce-related operations and expenditures.
This decision process has sometimes resulted in customers taking a long period
of time to assess alternative solutions by our competitors or deferring a
purchase decision until the market evolves. Sales cycles continue to be long and
the timing of purchase decisions by individual customers remain at times
uncertain. We must continue to educate potential customers on the use and
benefits of our products and services, as well as the integration of our
products and services with additional software applications utilized by the
individual customers. Because the sales cycle is long and the time of individual
orders is uncertain, our period-to-period revenues are difficult to predict.

SOFTWARE DEFECTS COULD LEAD TO LOSS OF REVENUE OR DELAY THE MARKET ACCEPTANCE OF
OUR APPLICATIONS.

     Our enterprise applications software is complex and, accordingly, may
contain undetected errors or failures when first introduced or as new versions
are released. This may result in loss of, or delay in, market acceptance of our
products. We have in the past discovered software errors in our new releases and
new products after their introduction. In the event that we experience
significant software errors in future releases, we could experience delays in
release, customer dissatisfaction and potentially lost revenues during the
period required to correct these errors. We may in the future discover errors,
and additional scalability limitations, in new releases or new products after
the commencement of commercial shipments. Any of these errors or defects could
cause our business to be materially harmed.

WE MAY BECOME INCREASINGLY DEPENDANT ON THIRD-PARTY SOFTWARE INCORPORATED IN OUR
PRODUCTS AND, IF SO, IMPAIRED RELATIONS WITH THESE THIRD PARTIES, ERRORS IN
THIRD-PARTY SOFTWARE OR INABILITY TO ENHANCE THE SOFTWARE OVER TIME COULD HARM
OUR BUSINESS.

     We incorporate third-party software into our products. Currently, the
third-party software we use includes application server software that we license
from BEA Systems, off-line database software from Pointbase, off-line client
server software from PUMATECH and synchronization software from AETHER Systems.
We may incorporate additional third-party software into our products as we
expand our product line and broaden the content and services accessible through
our gateway. The operation of our products would be impaired if errors occur in
the third-party software that we license. It may be more difficult for us to
correct any errors in third-party software because the software is not within
our control. Accordingly, our business would be adversely affected in the event
of any errors in this software. Furthermore, it may be difficult for us to
replace any third-party software if a vendor seeks to terminate our license to
the software.

OUR SUCCESS DEPENDS IN PART UPON OUR ABILITY TO PROTECT OUR INTELLECTUAL
PROPERTY, WE MAY NOT BE ABLE TO DO SO ADEQUATELY.

     Our success depends in large part upon our proprietary technology. We rely
on a combination of copyright, trademark and trade secret protection,
confidentiality and nondisclosure agreements and licensing arrangements to
establish and protect our intellectual property rights. We license rather than
sell our solutions and require our customers to enter into license agreements,
which impose restrictions on their ability to utilize the software. In addition,
we seek to avoid disclosure of our trade secrets through a number of means,
including requiring those persons with access to our proprietary information to
execute nondisclosure agreements with us and restricting access to our source
code. We seek to protect our software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.

     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, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our
products, or design around our proprietary intellectual property.

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WE MAY FACE COSTLY DAMAGES OR LITIGATION COSTS IF A THIRD PARTY CLAIMS THAT WE
INFRINGE ITS INTELLECTUAL PROPERTY.

     There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe upon their intellectual property. We expect that
software product developers and providers of Internet-based software
applications will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business.

ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISTRACTION
OF OUR MANAGEMENT AND DISRUPTIONS TO OUR BUSINESS.

     We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time we may engage in discussions and negotiations with companies regarding
our acquiring or investing in such companies' businesses, products, services or
technologies. We cannot make assurances that we will be able to identify future
suitable acquisition or investment candidates, or if we do identify suitable
candidates, that we will be able to make such acquisitions or investments on
commercially acceptable terms or at all. If we acquire or invest in another
company, we could have difficulty assimilating that company's personnel,
operations, technology or products and service offerings. In addition, the key
personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness or issue equity securities to pay for any
future acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.

WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND IN OUR CONTRACTS THAT COULD
DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY, EVEN IF SUCH AN ACQUISITION
WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.

     Provisions of our certificate of incorporation, our bylaws, Delaware law
and the employment agreements of some of our key officers could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders.

OUR BUSINESS MAY FACE ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US, WHICH WOULD CAUSE OUR BUSINESS TO SUFFER.

     In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this Quarterly Report, we may face additional risks and
uncertainties not presently known to us or that we currently deem immaterial
which ultimately may impair our business, results of operations and financial
condition.

                         RISKS RELATED TO OUR INDUSTRY

OUR SUCCESS WILL DEPEND UPON THE GROWTH AND ACCEPTANCE OF THE MARKET WE ADDRESS
AND OUR ABILITY TO MEET THE NEEDS OF THE EMERGING MARKET FOR SOLUTIONS.

     The market for our workforce optimization applications and services is at
an early stage of development. Our success will depend upon the continued
development of this market and the increasing acceptance by customers of the
benefits to be provided by workforce optimization applications and services. In
addition, as the market evolves, it is unclear whether the market will accept
our suite of applications as a preferred solution for workforce optimization
needs. Accordingly, our products and services may not achieve significant market
acceptance or realize significant revenue growth. Unless a critical mass of
organizations and their suppliers use our solutions and recommend them to new
customers, our solutions may not achieve widespread market acceptance, which may
cause our business to suffer.

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CUSTOMERS MAY NOT ACCEPT THE INTERNET AS A MEANS TO ACCESS ENTERPRISE
APPLICATIONS, AND THIS WOULD LIKELY CAUSE OUR BUSINESS MODEL TO BE UNSUCCESSFUL.

     To date, enterprises have generally managed operational functions through
internal computer or manual systems rather than over the Internet. Our business
model assumes that enterprises and their employees will increasingly adopt the
Internet or corporate intranets as a means of managing important business
functions. This business model is not yet proven, and if we are unable to
successfully implement our business model, our business will be materially
adversely affected.

MARKET PRICES OF INTERNET AND TECHNOLOGY COMPANIES HAVE BEEN HIGHLY VOLATILE,
AND THE MARKET FOR OUR STOCK MAY CONTINUE TO BE VOLATILE AS WELL.

     The stock market has experience significant price and trading volume
fluctuations especially this past year, and the market prices of technology
companies generally, and Internet-related software companies particularly, have
been extremely volatile. Recent initial public offerings by technology
companies, including ours, have been accompanied by exceptional share price and
trading volume changes. Technology companies that have been publicly traded for
a long period of time have also experienced extreme fluctuations in the price of
their common stock. Investors may not be able to resell their shares at or above
the price they paid for the stock. In the past, following periods of volatility
in the market price of a public company's securities, securities class action
litigation has often been instituted against the company. Such litigation could
result in substantial costs and diversion of management's attention and
resources.

SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
ELECTRONIC COMMERCE.

     A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other websites to protect proprietary information. If any
well-publicized compromises of security were to occur, it could have the effect
of substantially reducing the use of the Internet for commerce and
communications. Anyone who circumvents our security measures could
misappropriate proprietary information or cause interruptions in our services or
operations. The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses and software programs that
disable or impair computers have been distributed and have rapidly spread over
the Internet. Computer viruses could be introduced into our systems or those of
our customers or suppliers, which could disrupt our software solutions or make
them inaccessible to customers or suppliers. We may be required to expend
significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. To the extent
that our activities may involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could expose us to a
risk of loss or litigation and possible liability. Our security measures may be
inadequate to prevent security breaches, and our business would be harmed if we
do not prevent them.

INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES AND
OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND SERVICES.

     As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
taxation of goods and services provided over the Internet, and content and
quality of products and services. It is possible that legislation could expose
companies involved in electronic commerce to liability, which could limit the
growth of electronic commerce generally. Legislation could dampen the growth in
Internet usage and decrease its acceptance as a communications and commercial
medium. If enacted, these laws, rules or regulations could limit the market for
our products and services.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We develop products in the United States and market our products in North
America and, to a lesser extent, in Europe and the rest of the world. As a
result, our financial results could be affected by factors such

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<PAGE>   23

as changes in foreign currency rates or weak economic conditions in foreign
markets. Because the majority of our revenues are currently denominated in U.S.
dollars, a strengthening of the dollar could make our products less competitive
in foreign markets.

INTEREST RATE RISK

     We have an investment portfolio of money market funds and fixed income
certificates of deposit. The fixed income certificates of deposit, like all
fixed income securities, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this exposure by
investing primarily in short-term securities. In view of the nature and mix of
our total portfolio, a 10% movement in market interest rates would not have a
significant impact on the total value of our portfolio as of March 31, 2001.

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     The company is not involved in any legal proceedings that are material to
its business or financial condition.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     a. Not applicable

     b. Not applicable

     c. Not applicable

     d. Use of proceeds from sale of Registered Securities.

     On January 27, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1/A. Pursuant to this Registration Statement, the Company
completed an initial public offering of 4,600,000 shares of its common stock
(including 600,000 shares sold pursuant to the exercise of the Underwriters'
over-allotment option) at an initial public offering price of $20.00 per share
("the Offering"). Proceeds to the Company, after deduction of the underwriters'
discount and commission, from the Offering totaled approximately $83.3 million,
net of offering costs of approximately $2.2 million.

     To date we have used $56 million to fund working capital. All remaining
proceeds are invested in cash, cash equivalents, or short-term investments
consisting of highly liquid money market funds, commercial paper,
government/federal notes and bonds, certificates of deposit, and auction rate
preferred stock. The use of these proceeds does not represent a material change
in the use of proceeds described in the prospectus.

     Upon completion of the Offering, the Company's preferred stock was
converted into 14,594,549 shares of common stock. Upon conversion of the
preferred stock, all rights to accrued and unpaid dividends were terminated.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

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

     None.

ITEM 5. OTHER INFORMATION

     None.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

     None

(b) Reports on Form 8-K:

     None

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                                   SIGNATURE

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

March 15, 2001                            EXTENSITY, INC.

                                          By       /s/ KENNETH R. HAHN
                                            ------------------------------------
                                            Kenneth R. Hahn
                                            Chief Financial Officer (Principle
                                             Financial
                                            and Accounting Officer)

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