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, 2002


                                       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, 2002 was 25,137,476.

<PAGE>

<TABLE>
<CAPTION>

                                                          INDEX


                                               PART I. FINANCIAL INFORMATION
<S>       <C>                                                                                                          <C>
     ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
          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

     ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations                      7

     ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                                                20

                                                PART II. OTHER INFORMATION

     ITEM 1. Legal Proceedings                                                                                         20

     ITEM 2. Changes in Securities and Use of Proceeds                                                                 21

     ITEM 3. Defaults Upon Senior Securities                                                                           21

     ITEM 4. Submission of Matters to a Vote of Security Holders                                                       21

     ITEM 5. Other Information                                                                                         21

     ITEM 6. Exhibits and Reports on Form 8-K                                                                          21

     SIGNATURES                                                                                                        21

</TABLE>

<PAGE>



                                        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,
                                                                                  2002                2001
                                                                              ------------        ------------
<S>                                                                             <C>                 <C>
Current assets:
  Cash and cash equivalents                                                     $  10,890           $  19,456
  Short-term investments                                                           32,965              26,883
  Accounts receivable, net                                                          3,396               5,393
  Prepaid and other current assets                                                  1,649               1,835
                                                                              ------------        ------------
     Total current assets                                                          48,900              53,567
Property and equipment, net                                                         3,348               3,657
Restricted long-term investments                                                    1,397               1,397
Other assets                                                                          359                 601
                                                                              ------------        ------------
     Total assets                                                               $  54,004           $  59,222
                                                                              ============        ============
                                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                              $   3,708           $   3,672
  Accrued liabilities                                                               3,993               3,977
  Deferred revenue                                                                  3,515               3,488
  Capital lease obligations                                                           228                 240
  Sublease loss accrual                                                               756                 787
                                                                              ------------        ------------
     Total current liabilities                                                     12,200              12,164
Capital lease obligations                                                               -                  54
Sublease loss accrual and other noncurrent liabilities                                624                 809
                                                                              ------------        ------------
     Total liabilities                                                             12,824              13,027
                                                                              ============        ============

Stockholders' equity:
  Common stock                                                                         25                  25
  Additional paid-in capital                                                      147,237             147,394
  Deferred stock compensation                                                        (292)               (504)
  Notes receivable from stockholders                                                 (440)               (433)
  Accumulated comprehensive income                                                    187                 155
  Accumulated deficit                                                            (105,537)           (100,442)
                                                                              ------------        ------------
     Total stockholders' equity                                                    41,180              46,195
                                                                              ------------        ------------
     Total liabilities and stockholders' equity                                 $  54,004           $  59,222
                                                                              ============        ============

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


                                                         1

</TABLE>

<PAGE>

                                                EXTENSITY, INC.
                                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                     (In thousands, except per share data)
                                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended
                                                                                           March 31,
                                                                                -----------------------------
                                                                                  2002                 2001
                                                                                --------             --------
<S>                                                                             <C>                  <C>
Revenues:
  Licenses                                                                      $  1,206             $  6,022
  Services and maintenance                                                         3,123                3,780
  Hosted                                                                             194                    -
                                                                                --------             --------
     Total revenues                                                                4,523                9,802
                                                                                --------             --------

Cost of revenues: (*)
  Licenses                                                                           105                  445
  Services and maintenance                                                         2,404                4,074
  Hosted                                                                             266                    -
                                                                                --------             --------
     Total cost of revenues                                                        2,775                4,519
                                                                                --------             --------

Gross profit                                                                       1,748                5,283
                                                                                --------             --------
Operating expenses: (*)
  Sales and marketing                                                              3,516                7,914
  Research and development                                                         2,104                3,792
  General and administrative                                                       1,493                2,149
                                                                                --------             --------
     Total operating expenses                                                      7,113               13,855
                                                                                --------             --------

Loss from operations                                                              (5,365)              (8,572)
Interest income, net                                                                 270                1,073

                                                                                --------             --------
Net loss                                                                        $ (5,095)            $ (7,499)
                                                                                ========             ========

Basic and diluted net loss per share                                            $  (0.21)            $  (0.32)
Shares used in computing basic and diluted net loss per share                     24,534               23,389

(*) Amounts include non-cash stock based compensation as follows:

Cost of revenues:
  Services and maintenance                                                      $      3             $     50
Operating expenses:
  Sales and marketing                                                                  7                   94
  Research and development                                                             4                   57
  General and administrative                                                           7                   92
                                                                                --------             --------
                                                                                $     21             $    293
                                                                                ========             ========


      The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
                                                       2

<PAGE>

                                               EXTENSITY, INC.
                               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                (In thousands)
                                                 (Unaudited)
<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                                                         March 31,
                                                                                  2002               2001
                                                                                ---------          ---------
<S>                                                                             <C>                <C>
Cash flows from operating activities:
  Net loss                                                                      $ (5,095)          $ (7,499)
  Adjustments to reconcile net loss to cash used in operating activities:
    Depreciation and amortization                                                    432                681
    Amortization of deferred stock compensation and other                             21                293
    Amortization of debt discount and lease line issuance costs                        3                 25
    Interest earned on notes from stockholders                                        (7)                 -

  Changes in operating assets and liabilities:
    Accounts receivable                                                            1,997             (1,195)
    Prepaids and other current assets                                                186                (56)
    Other assets                                                                     242                (66)
    Accounts payable                                                                  36              1,344
    Accrued liabilities                                                               16               (283)
    Other liabilities                                                               (192)                 -
    Deferred revenue                                                                  27                  9

                                                                                ---------          ---------
      Cash used in operating activities                                           (2,334)            (6,747)
                                                                                ---------          ---------
Cash flows from investing activities:
  Purchases of short-term investments                                            (15,034)           (12,973)
  Maturities of short-term investments                                             8,952             29,976
  Capital expenditures                                                              (123)              (706)
  Restricted long-term investments                                                     -                 39
                                                                                ---------          ---------
      Cash provided by (used in) investing activities                             (6,205)            16,336
                                                                                ---------          ---------
Cash flows from financing activities:
  Payments on notes payable                                                            -               (374)
  Payments on capital lease obligation                                               (69)               (38)
  Proceeds from exercise of stock options and warrants                                32                165
                                                                                ---------          ---------
      Cash used in financing activities                                              (37)              (247)
                                                                                ---------          ---------
Effect of exchange rate on cash and cash equivalents                                  10                  -

Increase (decrease) in cash and cash equivalents                                  (8,566)             9,342

Cash and cash equivalents, beginning of year                                      19,456             40,695
                                                                                ---------          ---------
Cash and cash equivalents, end of year                                          $ 10,890           $ 50,037
                                                                                =========          =========


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

                                                       3
</TABLE>

<PAGE>

                                 EXTENSITY, INC.

              NOTES TO CONDENSED 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,
2001 was derived from  audited  financial  statements,  but does not include all
necessary 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 April 1, 2002.

     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. 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.

     Diluted  net loss per share does not  include  the effect of the  following
potential common shares at March 31, 2002 and 2001 (in thousands):

                                                             March 31,
                                                    ----------------------------
                                                       2002               2001
                                                    ----------         ---------
Shares issuable under stock options                     1,008              1,832
Shares of unvested stock subject to repurchase             18                455
                                                    ----------         ---------
                                                        1,026              2,287
                                                    ==========         =========

     The  weighted-average  exercise price of stock options outstanding was $.64
and $1.50 as of March 31,  2002 and 2001,  respectively.  The  weighted  average
repurchase  price of  unvested  stock was $.62 and $.38 as of March 31, 2002 and
2001, respectively.

3. Significant Customers

     Sales to one  customer  accounted  for  approximately  10% and 24% of total
revenues for the three months ended March 31, 2002 and 2001, respectively.

                                       4

<PAGE>

4. Comprehensive Loss

The components of comprehensive loss are as follows (in thousands):

                                                Three Months Ended
                                                     March 31,
                                           -----------------------------
                                              2002               2001
                                           ----------       ------------

Net loss                                   $  (5,095)       $    (7,499)
Foreign currency translation adjustment           32                  -
                                           ----------       ------------
Total comprehensive loss                   $  (5,063)       $    (7,499)
                                           ==========       ============

5. Restructuring

     In response to the continuing economic slowdown,  the Company implemented a
restructuring  plan  in  the  third  quarter  of  fiscal  2001  and  recorded  a
restructuring  charge of $4.5 million.  The goal of the restructuring plan is to
reduce costs and improve  operating  efficiencies  in order to match the current
business  environment.  The  restructuring  charge  consisted of  severance  and
benefits of $729,000  related to the  involuntary  termination  of 70 employees,
which was fully paid as of December 31, 2001. These  terminations  were from all
functions across the Company.  In addition,  the Company accrued for lease costs
of $2.2 million pertaining to the estimated obligations for non-cancelable lease
payments for excess facilities in the United States and Europe. The Company also
wrote off computer  equipment and software with a net book value of $1.6 million
as these assets were taken out of service  because they were deemed  unnecessary
due to the reductions in workforce.

     The  sublease  loss  accrual as of December  31, 2001 was  $1,286,000.  The
Company made payments of $165,000 against the accrual in the three-month  period
ending March 31, 2002. The Sublease loss accrual balance as of March 31, 2002 is
$1,121,000. The Company expects to pay the remaining obligations relating to the
non-cancelable lease obligations over the remaining lease terms through 2006.

6. Commitments and Contingencies

     The Company and certain of its officers and  directors,  as well as certain
of the  underwriters  from the Company's  initial public  offering were named as
defendants in a class action  shareholder  complaint  filed in the United States
District  Court for the Southern  District of New York and  captioned  Felzen v.
Extensity,  Inc. et al., Case No.  01-CV-11246.  The plaintiffs seek unspecified
monetary  damages and other  relief.  The Company  believes  these charges to be
without merit and therefore, has not accrued any amounts in connection with this
matter.

     We are also subject to various  other claims and legal  actions  arising in
the ordinary course of business. The ultimate disposition of these various other
claims  and legal  actions  is not  expected  to have a  material  effect on our
business, financial condition or results of operations.

7. Recent Accounting Pronouncements

     In July of 2001, the Financial  Accounting  Standards Board ("FASB") issued
SFAS No.  141  "Business  Combinations"  and SFAS No.  142  "Goodwill  and Other
Intangible Assets". SFAS No. 141 requires business combinations  initiated after
June 30, 2001 to be accounted for using the purchase  method of


                                       5

<PAGE>

accounting, and broadens the criteria for recording intangible assets separately
from goodwill. Recorded goodwill and intangibles will be evaluated against these
new criteria and may result in certain intangibles being subsumed into goodwill,
or  alternatively,  amounts  initially  recorded as goodwill  may be  separately
identified and recognized apart from goodwill.  SFAS No. 142 requires the use of
a  non-amortization  approach  to account  for  purchased  goodwill  and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations,  but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain  intangibles is more
than its fair value.  The provisions of each statement,  which apply to goodwill
and  intangible  assets  acquired  prior to June 30,  2001,  were adopted by the
Company on January 1, 2002.  The adoption of these  accounting  standards had no
impact on our  financial  position  or results of  operations  for any  historic
transactions.

8. Subsequent Event

     In April of 2002, the Company took steps to reduce expenses, which included
reducing full-time equivalent employees at the Company by approximately 18%. The
Company is also  evaluating  the adequacy of their sublease loss accrual for its
lease  commitments  for office  space.  The  Company  expects to incur a related
pretax  restructuring  charge in the range of $1 million to $1.5  million in the
second quarter of 2002.


                                       6
<PAGE>

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  should  be read in  conjunction  with  our  Summary  of
Condensed   Consolidated   Financial  Statements,   our  condensed  consolidated
financial statements and related notes included in this report, and 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
expect to introduce the newest version of our suite of products, Extensity 6, in
the first half of 2002.

     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.  In the third quarter of 2001, we began recognizing  revenue from our
hosted offering. Under this offering, customers pay a monthly usage fee based on
the  number  of  users  and a  one-time  set-up  fee  to  access  the  Extensity
application on our servers.

     We promote and sell our  software  products  through our direct sales force
and through indirect  channels,  including Elite  Information Group and Emplaza,
S.A., a joint venture  between Terra Networks and Meta4.  We also have marketing
referral   arrangements   in  place   with   Cisco   Systems,   IBM,   US  Bank,
Amadeus/eTravel,  Rosenbluth Travel,  WebEx, Digital Think, Visa,  GetThere.com,
and Pro Act Technologies.

     We continue to support our  European  operations;  however,  as part of our
restructuring  plan  implemented  in July 2001,  we  significantly  reduced  our
resources  in this region to match the  current  business  environment.  For the
three  months  ended  March  31,  2002  and  2001,  revenues  derived  from  our
international operations represented approximately 8% and 39%, respectively,  of
total revenues.


                                       7
<PAGE>

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 Condensed Consolidated Financial Data
                                                (In thousands)
                                                 (Unaudited)
<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                                                        March 31,
                                                                                --------------------------
                                                                                 2002                2001
                                                                                ------              ------
<S>                                                                             <C>                 <C>
Revenues:
  License                                                                       $1,206              $6,022
  Service and maintenance                                                        3,123               3,780
  Hosted                                                                           194                   -
                                                                                ------              ------
    Total revenues                                                              $4,523              $9,802
                                                                                ======              ======

Cost of revenues:(*)
  License                                                                       $  105              $  445
  Service and maintenance                                                        2,401               4,024
  Hosted                                                                           266                   -
                                                                                ------              ------
    Total cost of revenues                                                      $2,772              $4,469
                                                                                ======              ======

Operating expenses:(*)
  Sales and marketing                                                           $3,509              $7,820
  Research and development                                                       2,100               3,735
  General and administrative                                                     1,486               1,680
  Non recurring general and administrative                                           -                 377

Interest income                                                                 $  270              $1,073

(*) Amounts exclude the amortization of non-cash stock based
    compensation as follows:
Cost of revenues:
    Service and maintenance                                                     $    3              $   50
Operating expenses:
    Sales and marketing                                                              7                  94
    Research and development                                                         4                  57
    General and administrative                                                       7                  92
                                                                                ------              ------
                                                                                $   21              $  293
                                                                                ------              ------

</TABLE>

Revenues

     Total  revenues  decreased to $4.5 million for the three months ended March
31, 2002 from $9.8 million for the three months ended March 31, 2001, a decrease
of 54%. Sales to one customer  accounted for  approximately 10% and 24% of total
revenues for the three months ended March 31, 2002 and 2001, respectively.

                                       8
<PAGE>

     License  Revenues.  Our license revenues  decreased to $1.2 million for the
three  months  ended March 31, 2002 from $6.0 million for the three months ended
March 31, 2001, a decrease of 80%. The decrease in license revenue for the three
months ended March 31, 2002 was attributable to a decrease in revenue recognized
on  shipment  from our direct and  indirect  sales  channels.  This  decrease is
primarily  attributable to the decrease in capital spending  associated with the
current global economic conditions.

     Service and  Maintenance  Revenues.  Our service and  maintenance  revenues
decreased  to $3.1  million for the three  months ended March 31, 2002 from $3.8
million for the three  months  ended  March 31,  2001,  a decrease of 17%.  This
decrease  was  attributable  to a decrease  in  professional  services  revenues
recognized on a time and materials basis and a decrease in revenue recognized on
partner  integration  resulting from a decrease in capital  spending  associated
with the current global economic conditions.

     Hosted  Revenues.  Our hosted  revenues  were $194,000 for the three months
ended  March 31,  2002.  This is the third  quarterly  period  the  Company  has
recognized  revenue  from this  offering.  The Company  does not  believe  these
revenues will be a significant percentage of total revenues in the near term.

Cost of Revenues

     Total cost of revenues decreased to $2.8 million for the three months ended
March 31, 2002 from $4.5  million for the three  months  ended March 31, 2001, a
decrease of 38%.

     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  decreased  to
$105,000 for the three  months ended March 31, 2002 from  $445,000 for the three
months ended March 31, 2001,  due primarily to decreased  sales  activity.  As a
percentage of license revenues, cost of license revenues increased to 9% for the
three  months  ended March 31, 2002 from 7% for the three months ended March 31,
2001.  Cost of revenues as a percentage of license revenue may increase over the
current level in the future if we incorporate  additional  third-party  products
into 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 decreased to $2.4 million for the three months ended
March 31, 2002 from $4.0  million for the three  months  ended March 31, 2001, a
decrease of 40%. As a percentage of service  revenues,  cost of service revenues
decreased  to 77% for the three  months  ended  March 31, 2002 from 106% for the
three months ended March 31, 2001. The decrease for the three months ended March
31,  2002 was  attributable  to lower  compensation  costs  associated  with our
restructuring  plan  implemented in July of 2001 and lower costs for third party
consultants.  We expect the cost of service and maintenance revenues to be lower
in  the  second  quarter  of  2002  as we  begin  realizing  the  impact  of the
restructuring  plan  implemented  in April of 2002.  Overall,  we are seeking to
further  reduce our cost of service  revenues as a percentage  of total  service
revenue and are also  seeking to engage third  parties to provide a  substantial
portion of services related to our applications.

     Cost of Hosted  Revenues.  Cost of hosted  revenues  consists  primarily of
compensation and related overhead costs for personnel  engaged in supporting the
hosted customer base,  server costs,  and  telecommunications  charges.  For the
three months ended March 31, 2002,  cost of hosted  revenues was  $266,000.  The
Company does not expect these costs to significantly increase in the near term.

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 decreased
to $3.5  million for the three months ended March 31, 2002 from $7.8 million for
the three months  ended March 31,  2001,  a decrease of 55%. As a percentage  of
total


                                       9
<PAGE>

revenues,  sales and  marketing  expenses  decreased to 78% for the three months
ended March 31, 2002 from 80% for the three  months  ended March 31,  2001.  The
decrease in sales and  marketing  expenses  for the three months ended March 31,
2002 was attributed to reduced  commission  expense associated with the decrease
in license  revenue  and  reduced  compensation  costs and lower  program  costs
associated with our restructuring plan implemented in July 2001. We expect sales
and marketing expenses,  excluding commission charges, to be lower in the second
quarter  of 2002 as we begin  realizing  the  impact of the  restructuring  plan
implemented  in April of 2002.  Commission  charges will vary depending upon the
sales activity. Sales and marketing expenses may increase in the long term if we
expand our domestic  and  international  sales force and increase our  marketing
efforts.

     Research  and  Development.   Research  and  development  expenses  consist
primarily of compensation and related  personnel costs, and fees associated with
contractors. Research and development expenses decreased to $2.1 million for the
three  months  ended March 31, 2002 from $3.7 million for the three months ended
March 31, 2001, a decrease of 44%. As a percentage of total  revenues,  research
and development  expenses  increased to 46% for the three months ended March 31,
2002  from 38% for the three  months  ended  March 31,  2001.  The  decrease  in
research  and  development  cost for the three  months  ended March 31, 2002 was
attributable to reduced  compensation  costs  associated with our  restructuring
plan implemented in July of 2001. The increase in costs as a percentage of total
revenues  for the  three  months  ended  March  31,  2002 is  attributed  to the
company's  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  research and  development
expenses  in the  second  quarter  of 2002 to be  somewhat  lower than the first
quarter expenses;  however,  the restructuring plan implemented in April of 2002
will not significantly  impact this area. Research and development  expenses may
increase in the long term if 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 non-recurring general and administrative charges, decreased
to $1.5  million for the three months ended March 31, 2002 from $1.7 million for
the three months  ended March 31,  2001,  a decrease of 12%. As a percentage  of
total revenues,  general and administrative  expenses,  excluding  non-recurring
general and administrative charges,  increased to 33% for the three months ended
March 31, 2002 from 17% for the three months ended March 31, 2001.  The decrease
in general and administrative expenses in the three-month period ended March 31,
2002  was  primarily  attributable  to  the  impact  of our  restructuring  plan
implemented in July of 2001. General and administrative expenses may increase in
the long term if we expand our operations.

     Non-Recurring  General  and  Administrative.  There  were no  non-recurring
general and  administrative  charges for the three  months ended March 31, 2002,
compared to non-recurring general and administrative charges of $377,000 for the
three  months ended March 31, 2001.  The $377,000 of  non-recurring  general and
administrative  expenses was incurred in  connection  with  exploring  potential
merger and acquisition transactions. The entire charge was expensed in the three
months ended March 31, 2001 as these discussions were terminated.

Interest Income, Net

     Interest income, net was $270,000 for the three months ended March 31, 2002
and $1.1  million for the three  months ended March 31, 2001, a decrease of 75%.
Interest  income is  attributed  to  interest  earned on the  proceeds  from the
Company's  initial public offering  ("IPO").  The decrease in interest income is
attributed  to  lower  interest  rates  and  lower  cash,  cash  equivalent  and
short-term  investments balances.  Interest income will fluctuate depending upon
the  overall  interest  rate  environment  and our  cash,  cash  equivalent  and
short-term investments balances.

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


                                       10
<PAGE>

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 include and will continue to include deferred compensation
expense at least through 2003. Amortization of non-cash stock based compensation
decreased to $21,000 for the three months ended March 31, 2002 from $293,000 for
the three months ended March 31,  2001.  The lower  expense in 2002 is primarily
attributable to the impact of forfeitures  and the use of an accelerated  method
of amortization.  We estimate that we will recognize  approximately $284,000 for
the remainder of 2002; however,  this amount may change as employee terminations
impact the amortization schedule.

Liquidity and Capital Resources

     Since  inception,  we have financed our  operations  and funded our capital
expenditures  through  proceeds  from our IPO  completed in January 2000 and the
private sale of equity securities, supplemented by loan facilities and equipment
leases. As of March 31, 2002, we had $43.9 million in cash, cash equivalents and
short-term  investments,  $1.4 million in restricted  long-term  investments and
$36.7 million in working capital.

     Net cash used in operating activities was $2.3 million for the three months
ended March 31, 2002 and $6.7 million for the three months ended March 31, 2001.
For the three months ended March 31, 2002 cash used in operating  activities was
primarily attributed to a net loss of $5.1 million,  adjusted for a depreciation
and  amortization  of $432,000,  and a decrease in accounts  receivable  of $2.0
million.  For the three  months  ended March 31, 2001 net cash used in operating
activities was primarily  attributable  to a net loss of $7.5 million,  adjusted
for the amortization of deferred stock compensation of $681,000 and offset by an
increase  in  accounts  receivable  of $1.2  million and an increase in accounts
payable of $1.3 million.

     Net cash used in investing activities was $6.2 million for the three months
ended March 31, 2002 and net cash  provided by  investing  activities  was $16.3
million for the three months  ended March 31,  2001.  Net cash used in investing
activities for the three months ended March 31, 2002 was primarily  attributable
to the  purchases  of  short-term  investments.  Net cash  provided by investing
activities for the three months ended March 31, 2001 was primarily  attributable
to maturities of short-term investments.

     Net cash used in  financing  activities  was $37,000  for the three  months
ended March 31, 2002 due to payments  on capital  lease  obligations  of $69,000
offset by  proceeds  from  employee  stock  plans of  $32,000.  Net cash used in
financing  activities  was  $247,000  for the three months ended March 31, 2001,
primarily due to payments on notes payable of $374,000.

     Presently,  we anticipate that our existing capital resources will meet our
operating  and  investing  needs  for  at  least  the  next  twelve  months.  In
particular, we believe that our current cash balances are sufficient to fund any
existing cash  obligations or commercial  commitments as well as any cash needed
for planned operating activities.  Furthermore,  should our operating results be
worse  than  expected,  we could use more cash in funding  operating  activities
which would diminish our capital resources. While we do not presently anticipate
a need for additional  capital, if we do require additional capital resources to
grow our  business,  execute  our  operating  plans,  or  acquire  complementary
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. Additional funding may or
may not be available on acceptable terms or at all.


                                       11
<PAGE>

                                  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 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
make 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 employee
relationship  management 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   direct  sales   channels  and  indirect   channels   such  as
          relationships with OEM customers and distributors;

     -    increase awareness of our brand; and

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

     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
through 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, 2002, we
had an accumulated deficit of $105.5 million. We expect to continue to invest in
research and development to enhance current products and develop future products
and support our current sales and marketing efforts that promote our company and
our  products in the  marketplace.  As a result,  we will need to  increase  our
revenues significantly to achieve profitability.  In addition, because we expect
to continue to


                                       12
<PAGE>

invest in our business ahead of anticipated  future revenues,  we expect that we
will continue to incur operating losses through the current fiscal year.

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.  Even
after our  reorganization  in April of 2002,  where headcount was  significantly
reduced,  we  expect  to  continue  to make  expenditures  in all  areas  of our
businessin  order  to  promote  future  revenue  growth.  Because  the  expenses
associated with these activities are relatively fixed in the short-term, we will
be unable to adjust spending quickly enough in any particular  quarter to offset
any  unexpected  shortfall  in  revenue.  As a result,  we expect our  quarterly
operating  results 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;

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

     -    delays  in  the  introduction  of  new  or  enhanced  versions  of our
          products.

     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.

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 employee relationship management software
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
products  and  services  they offer.  Companies  offering  one or more  products
directly competitive with our products include Ariba,  Captura Software,  Concur
Technologies,  IBM,  PeopleSoft  and  Oracle.  As a result of the  large  market
opportunity  for  employee  relationship  management  solutions  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


                                       13
<PAGE>

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  additional  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 employee relationship management software products and related services
have accounted for substantially 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 employee  relationship  management software 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 employee  relationship  management software  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 employee relationship management software
applications,  and any inability to enhance  functionality could cause our sales
to decline.

     Because  the market  for our  products  is  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,  it is not clear whether
Java-based systems will continue to maintain commercial acceptance.

     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.


                                       14
<PAGE>

     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.


In any given  quarter,  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 quarterly  revenues or operating
results.

     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
quarterly revenues and operating results in any period.

If we fail to maintain  positive  margins on service revenues in the foreseeable
future, our results of operations could suffer.

     For the quarter ended March 31, 2002,  our service  margins were  positive.
While we anticipate that our margins will continue to be positive in the future,
we cannot guarantee that they will remain positive. Failure to maintain positive
margins  on service  revenues  would  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."

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 must  continue 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 employee  relationship  management software
applications by new customers.  To date, we have established  relationships with
several 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
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  additional  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.

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.

     Over time, 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


                                       15
<PAGE>

regulations.  The  incorporation of these factors into our products is a complex
process and often requires  assistance from third parties. 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 continue  working with third parties to
develop  localized  products.  To date,  we have  localized  our product for the
markets  where  the  English  language  is the  native  language  and  completed
translations for the German, French, Italian and Spanish languages.

     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. In 2000, we expanded our European Operations through opening
a second office in Frankfurt,  Germany;  however,  as part of our  restructuring
plan implemented in April of 2002, we closed the Frankfurt  office.  As of March
31, 2002, we had a total of 13 employees in our  international  operations.  For
the three  months  ended  March 31,  2002,  we derived  approximately  8% of our
revenues from our international operations. To succeed internationally,  we must
react quickly to the business environment in which we operate overseas. Thus, we
must  effectively  monitor  the  size of our  international  workforce  and make
adjustments  as  necessary.  During  periods  of  growth  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 additional  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.


Our  sales  cycles  are long and  unpredictable,  which  makes  period-to-period
revenues difficult to predict.

     Because  the  market  for our  employee  relationship  management  software
products  and  related  services  is  relatively  new,  we  experience  long and
unpredictable  sales  cycles.  The  sales  cycle for our  employee  relationship
management software  applications  typically ranges from two to nine months. Our
customers  have  frequently  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 timing
of individual orders is uncertain,  our period-to-period  revenues are difficult
to predict.


                                       16
<PAGE>

We may be unable  to  attract  and  retain  highly  skilled  employees  that are
necessary for the success of our business plan.

     Our ability to execute our business 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. Over time, 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.


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
the release,  customer  dissatisfaction  and lower revenues and service  margins
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 dependent 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,  synchronization software from AETHER Systems and
reporting  software  from  BUSINESS  OBJECTS.  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 and 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 of
America.  Our means of protecting our proprietary rights may not be adequate and
our


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<PAGE>

competitors  may  independently   develop  similar  technology,   duplicate  our
products, or design around our proprietary intellectual property.

Security and other concerns may discourage  customers from purchasing our hosted
product.

     If customers  determine that our hosted product is not scaleable,  does not
provide  adequate  security  for  the  dissemination  of  information  over  the
Internet, or is otherwise inadequate for Internet-based use, or if for any other
reason  customers fail to accept our hosted  products for use on the Internet or
on a subscription  basis, our business will be harmed. As a hosted provider,  we
expect  to  receive  confidential  information  including  credit  card,  travel
booking,  employee,  purchasing,  supplier,  and other  financial and accounting
data,  through the Internet and there can be no assurance that this  information
will not be subject to computer  break-ins,  theft, and other improper  activity
that could  jeopardize the security of information for which we are responsible.
Any such lapse in security could expose us to litigation,  loss of customers, or
otherwise harm our business.  In addition,  any person who is able to circumvent
our security measures could misappropriate  proprietary or confidential customer
information  or cause  interruptions  in our  operations.  We may be required to
incur  significant  costs to protect against  security  breaches or to alleviate
problems caused by breaches.  Additionally,  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. Further,
a  well-publicized  compromise  of security  could  deter  people from using the
Internet  to  conduct  transactions  that  involve   transmitting   confidential
information.  Our  failure  to prevent  security  breaches,  or  well-publicized
security breaches  affecting the Internet in general,  could  significantly harm
our business, operating results and financial condition.

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.

We are the target of a  securities  class  action  complaint  and are at risk of
securities class action  litigation,  which may result in substantial  costs and
divert management attention and resources.

     In November 2001, the Company and certain of its officers and directors, as
well as  certain  of the  underwriters  from the  Company's  IPO,  were named as
defendants in a class action  shareholder  complaint  filed in the United States
District Court for the Southern District of New York and consolidated  under the
caption, In re Extensity,  Inc. Initial Public Offering  Securities  Litigation,
Case No. 01-CV-11246.  In the complaint, the plaintiffs allege that the Company,
certain of its officers and directors and the  underwriters  of its IPO violated
the federal securities laws because the Company's IPO registration statement and
prospectus  contained  untrue  statements of material  fact or omitted  material
facts  regarding the  compensation  to be received by, and the stock  allocation
practices of, the IPO  underwriters.  The plaintiffs seek  unspecified  monetary
damages  and other  relief.  Similar  complaints  were  filed in the same  court
against  numerous  public  companies  that  conducted IPOs of their common stock
since the  mid-1990s.  This  action may  divert the  efforts  and  attention  of
management  and, if determined  adversely to the Company,  could have a material
impact on our business.


                                       18
<PAGE>

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  certain  agreements  entered  into by or for the benefit 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 Annual  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  employee
relationship management software applications.

     The market for our employee  relationship  management software 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 employee  relationship  management
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  employee  relationship  management  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.

Market prices of technology companies have been highly volatile,  and the market
for our stock may continue to be volatile as well.

     The stock  market has  experienced  significant  price and  trading  volume
fluctuations  and the  market  prices of  technology  companies  generally,  and
Internet-related software companies particularly,  have been extremely volatile.
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 that company.  Such  litigation  would likely result in
substantial costs and diversion of management's attention and resources.


                                       19
<PAGE>

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 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, 2002.


                           PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

     In November 2001, the Company and certain of its officers and directors, as
well as  certain  of the  underwriters  from the  Company's  IPO,  were named as
defendants in a class action  shareholder  complaint  filed in the United States
District Court for the Southern District of New York and consolidated  under the
caption, In re Extensity,  Inc. Initial Public Offering  Securities  Litigation,
Case No. 01-CV-11246.  In the complaint, the plaintiffs allege that the Company,
certain of its officers and directors and the  underwriters  of its IPO violated
the federal securities laws because the Company's IPO registration statement and
prospectus  contained  untrue  statements of material  fact or omitted  material
facts  regarding the  compensation  to be received by, and the stock  allocation
practices of, the IPO  underwriters.  The plaintiffs seek  unspecified  monetary
damages  and other  relief.  Similar  complaints  were  filed in the same  court
against  numerous  public  companies  that  conducted IPOs of their common stock
since the mid-1990s (collectively, the "IPO Lawsuits").

     On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes
before  United  States Judge Shira  Scheindlin  of the Southern  District of New
York. Judge  Scheindlin held an initial case management  conference on September
7, 2001, at which time she ordered,  among other  things,  that the time for all
defendants to respond to any  complaint be postponed  until further order of the
court.  Thus, the Company has not been required to answer the complaint,  and no
discovery has been served on the Company.

     In accordance with Judge Scheindlin's  orders at further status conferences
in March and April,  the  appointed  lead  plaintiffs'  counsel  filed  amended,
consolidated  complaints in the IPO Lawsuits on April 19,


                                       20
<PAGE>

2002.  However,  Judge  Scheindlin does not expect any of the defendants to file
motions to dismiss the amended, consolidated complaints until at least summer of
2002.  The Company  believes  that this lawsuit is without  merit and intends to
defend against it vigorously.

ITEM 2. Changes in Securities and Use of Proceeds

a.       Not applicable.

b.       Not applicable.

c.       Not applicable.

d.       Not applicable.


ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Submission of Matters To a Vote of Security Holders

None

ITEM 5. Other Information

None.

ITEM 6. Exhibits and Reports on Form 8-K

(a)      Exhibits

There is no update to the  exhibit  index  included in the  Company's  Form 10-K
filed with the SEC on April 1, 2002 (File No. 000-28897).

None

(b) Reports on Form 8-K:

         None

                                    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.


May 15, 2002                                          EXTENSITY, INC.



                                    By /s/ Kenneth R. Hahn
                                    Chief Financial Officer (Principal Financial
                                    and Accounting Officer)


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