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 September 30, 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 October
31, 2001 was 24,793,461



<PAGE>



                                      INDEX


                          PART I. FINANCIAL INFORMATION

     ITEM 1. Condensed Consolidated Financial Statements (Unaudited)

          Condensed Consolidated Balance Sheets                                3

          Condensed Consolidated Statements of Operations                      4

          Condensed Consolidated Statements of Cash Flows                      5

          Notes to the Condensed Consolidated Financial Statements             6

     ITEM 2. Management's Discussion and Analysis of
                Financial Condition and Results of Operations                 10

     ITEM 3. Quantitative and Qualitative Disclosures About Market Risk       26

                           PART II. OTHER INFORMATION

     ITEM 1. Legal Proceedings                                                26

     ITEM 2. Changes in Securities and Use of Proceeds                        26

     ITEM 3. Defaults Upon Senior Securities                                  25

     ITEM 4. Submission of Matters to a Vote of Security Holders              25

     ITEM 5. Other Information                                                25

     ITEM 6. Exhibits and Reports on Form 8-K                                 26

     SIGNATURES                                                               27



<PAGE>


                          PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements (Unaudited)

                                 EXTENSITY, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
                                     ASSETS

<CAPTION>
                                                                  September 30,     December 31,
                                                                     2001             2000
                                                                 ------------     ------------

Current assets:
<S>                                                                 <C>              <C>
  Cash and cash equivalents                                         $ 18,741         $ 40,695
  Short-term investments                                              30,947           38,925
  Restricted short-term investments                                    1,397            1,436
  Accounts receivable, net                                             6,223            8,527
  Prepaid and other current assets                                     2,700            3,443
                                                                 ------------     ------------
         Total current assets                                         60,008           93,026
Property and equipment, net                                            4,059            6,279
Other assets                                                             595              457
                                                                 ------------     ------------
         Total assets                                               $ 64,662         $ 99,762
                                                                 ============     ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                   $ 3,970          $ 6,434
  Accrued liabilities                                                  4,280            5,125
  Deferred revenue                                                     5,959           16,041
  Notes payable and capital lease obligations                            532            1,269
                                                                 ------------     ------------
         Total current liabilities                                    14,741           28,869
Capital lease obligations and other long term liabilities              1,851              647
                                                                 ------------     ------------
         Total liabilities                                            16,592           29,516
                                                                 ------------     ------------

Stockholders' equity:
  Common stock                                                            25               24
  Additional paid-in capital                                         147,009          147,475
  Deferred stock compensation                                           (752)          (2,679)
  Notes receivable from stockholders                                    (380)            (380)
  Accumulated comprehensive income                                       268              295
  Accumulated deficit                                                (98,100)         (74,489)
                                                                 ------------     ------------
         Total stockholders' equity                                   48,070           70,246
                                                                 ------------     ------------
         Total liabilities and stockholders' equity                 $ 64,662         $ 99,762
                                                                 ============     ============

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

<PAGE>

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

<TABLE>
<CAPTION>
                                                                         Three Months Ended            Nine Months Ended
                                                                            September 30,                 September 30,
                                                                       -----------------------      -----------------------

                                                                          2001          2000          2001          2000
                                                                        --------      --------      --------      --------

<S>                                                                     <C>           <C>           <C>           <C>
Revenues:
  License                                                               $  4,886      $  4,021      $ 16,559      $  9,280
  Service and maintenance                                                  3,174         3,005        10,434         6,802
  Hosted                                                                      48          --              48          --
                                                                        --------      --------      --------      --------
         Total revenues                                                    8,108         7,026        27,041        16,082
                                                                        --------      --------      --------      --------

Cost of revenues:(*)
  License                                                                    384           267         1,092           482
  Service and maintenance                                                  2,901         3,912        10,419        10,782
  Hosted                                                                     211          --             211          --
                                                                        --------      --------      --------      --------
         Total cost of revenues                                            3,496         4,179        11,722        11,264
                                                                        --------      --------      --------      --------

Gross profit                                                               4,612         2,847        15,319         4,818
                                                                        --------      --------      --------      --------

Operating expenses:(*)
  Sales and marketing                                                      4,694         7,344        19,651        20,289
  Research and development                                                 2,244         3,633         9,981        10,181
  General and administrative                                               1,821         1,671         5,449         4,762
  Restructuring, impairment loss and other non-recurring charges           5,797          --           6,174          --
  In-process research and development                                       --             318          --             318
                                                                        --------      --------      --------      --------
          Total operating expenses                                        14,556        12,966        41,255        35,550
                                                                        --------      --------      --------      --------

Loss from operations                                                      (9,944)      (10,119)      (25,936)      (30,732)

Interest income, net                                                         565         1,417         2,325         3,828

                                                                        --------      --------      --------      --------
Net loss                                                                $ (9,379)     $ (8,702)     $(23,611)     $(26,904)
                                                                        ========      ========      ========      ========

Basic and diluted net loss per share                                    $  (0.39)     $  (0.38)     $  (1.00)     $  (1.31)
Shares used in computing basic and diluted net loss per share             23,970        22,742        23,680        20,607

(*) Amounts include non-cash stock based compensation as follows:
     Cost of revenues:
       Service and maintenance                                          $   --        $    154      $     59      $    578
     Operating expenses:
       Sales and marketing                                                  --             326           112         1,227
       Research and development                                             --             202            68           759
       General and administrative                                           --             279           109         1,048
                                                                        --------      --------      --------      --------
                                                                        $   --        $    961      $    348      $  3,612
                                                                        ========      ========      ========      ========

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

<PAGE>

                         EXTENSITY, INC.
         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (In thousands)
                           (Unaudited)

<TABLE>
<CAPTION>
                                                                             Nine Months Ended
                                                                               September 30,
                                                                       ------------------------------

                                                                         2001                  2000
                                                                       --------              --------
<S>                                                                    <C>                   <C>
Cash flows from operating activities:
Net loss                                                               $(23,611)             $(26,904)
Adjustments to reconcile net loss to cash used in
  operating activities:
   Depreciation and amortization                                          1,915                 1,182
   Amortization of deferred stock compensation and other                    434                 3,612
   Amortization of debt discount and lease line issuance costs               42                    74
   Write-off of computer equipment and software                           2,882                  --
   In-process research and development                                     --                     318

Changes in operating assets and liabilities:
   Accounts receivable                                                    2,304                (3,970)
   Prepaid and other current assets                                         556                (1,016)
   Other assets                                                            (138)                 --
   Accounts payable                                                      (2,464)                2,540
   Accrued liabilities                                                     (845)                3,407
   Deferred revenue                                                     (10,082)                4,484
   Other liabilitiies                                                     1,461                    93
   Restricted short-term investments                                         39                  (943)
                                                                       --------              --------
      Cash used in operating activities                                 (27,507)              (17,123)
                                                                       --------              --------

Cash flows from investing activities:
  Purchases of short-term investments                                   (39,545)              (56,336)
  Sales of short-term investments                                        47,523                25,268
  Capital expenditures                                                   (2,389)               (4,109)
  Business acquisition                                                     --                     (90)
                                                                       --------              --------
      Cash provided by (used in) investing activities                     5,589               (35,267)
                                                                       --------              --------

Cash flows from financing activities:
  Payments on notes payable                                                (770)                 (800)
  Payments on capital lease obligations                                    (308)                 (299)
  Proceeds from employee stock plans                                      1,028                   743
  Net proceeds from issuance of common stock                               --                  83,348
                                                                       --------              --------
      Cash provided by (used in) financing activities                       (50)               82,992
                                                                       --------              --------

Effect of exchange rate on cash and cash equivalents                         14                    20
Increase (decrease) in cash and cash equivalents                        (21,954)               30,622
Cash and cash equivalents, beginning of period                           40,695                10,416
                                                                       --------              --------

Cash and cash equivalents, end of period                               $ 18,741              $ 41,038
                                                                       ========              ========

<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</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, 2000 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 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.  In July of 2001,  the Company
closed the Australian office as part of the restructuring  plan. 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.

<PAGE>


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                  Nine Months Ended
                                                     September 30,                       September 30,
                                               --------------------------          --------------------------
                                                 2001              2000              2001              2000
                                               --------          --------          --------          --------

<S>                                            <C>               <C>               <C>               <C>
Numerator:
  Net loss                                     $ (9,379)         $ (8,702)         $(23,611)         $(26,904)
Denominator:
  Weighted average shares                        24,541            23,789            24,369            21,753
  Weighted average unvested common shares          (571)           (1,047)             (689)           (1,146)

                                               --------          --------          --------          --------
     Total weighted average shares               23,970            22,742            23,680            20,607
                                               --------          --------          --------          --------

Basic and diluted net loss per share           $  (0.39)         $  (0.38)         $  (1.00)         $  (1.31)
                                               ========          ========          ========          ========
</TABLE>

Diluted  net loss per  share  does  not  include  the  effect  of the  following
potential common shares at September 30, 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                         September 30,
                                                                 -------------------------
                                                                 2001                2000
                                                                 -----               -----
<S>                                                              <C>                 <C>
Shares issuable under stock options                              3,348               3,948
Shares of unvested stock subject to repurchase                     249                 840
Shares issuable pursuant to warrants to purchase common stock       20                --
                                                                 -----               -----
                                                                 3,617               4,788
                                                                 =====               =====
</TABLE>

The  weighted-average  exercise price of stock options outstanding was $5.52 and
$8.35 as of September  30, 2001 and 2000,  respectively.  The  weighted  average
repurchase  price of unvested stock was $1.57 and $1.32 as of September 30, 2001
and 2000,  respectively.  The weighted  average  exercise  price of warrants was
$14.50 as of September 30, 2001.


3. Significant Customers

For the three and nine months ended September 30, 2001,  there were no customers
that accounted for more than 10% of total  revenues.  For the three months ended
September 30, 2000,  sales to one customer  accounted for 10% of total revenues.
For the nine months ended  September 30, 2000,  sales to one customer  accounted
for 14% of total revenues.

4. Stock Option Exchange

Pursuant  to a  Tender  Offer  Statement  filed  with  the  SEC on May 4,  2001,
employees  surrendered for cancellation  1,744,400 options to purchase shares of
the Company's  common stock at exercise prices ranging from $5.44 to $38.81.  In
exchange,  the Company on June 5, 2001  granted  short-term  options to purchase
174,440  shares of the  Company's  common  stock at an  exercise  price of $8.82
covering  ten  percent  (10%) of the number of shares that were  cancelled.  The
short-term  options  will become 100% vested six months  after the date of grant
and will expire if not  exercised  before March 5, 2002 or earlier if employment
is terminated.

<PAGE>


On a date between  December 6, 2001 and December 12, 2001,  subject to continued
employment,  the Company will grant a new option ("New  Option") equal to ninety
percent (90%) of the number of shares that were cancelled. The exercise price of
the New Option will be equal to the closing price of the Company's  Common Stock
on the date of grant.

The grant of  short-term  options will result in  compensation  charges over the
nine-month life of the options as prescribed under the provisions of FIN No. 44,
"Accounting for Certain Transactions Involving Stock Compensation". For the nine
months ended September 30, 2001,  there was no compensation  expense  associated
with such  options,  as the  Company's  stock price was lower than the  exercise
price.

5. Comprehensive Loss

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

<TABLE>
<CAPTION>
                                                   Three Months Ended                    Nine Months Ended
                                                      September 30,                         September 30,
                                                2001               2000               2001               2000
                                              --------           --------           --------           --------

<S>                                           <C>                <C>                <C>                <C>
Net loss                                      $ (9,379)          $ (8,702)          $(23,611)          $(26,904)
Foreign currency translation adjustment             31                (89)                28               (107)
                                              --------           --------           --------           --------
Total comprehensive loss                      $ (9,348)          $ (8,791)          $(23,583)          $(27,011)
                                              ========           ========           ========           ========
</TABLE>


6. Restructuring, Impairment Loss and Other Non Recurring Charges

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.
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,  Europe and  Australia.  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 of workforce.

The  following   table  sets  forth  an  analysis  of  the   components  of  the
restructuring charge and the payments made against the reserve through September
30, 2001 (in thousands):

<TABLE>
<CAPTION>
                                                                      Computer
                                             Severance and         Equipment and        Accrued Lease
                                                Benefits              Software              Costs
                                                -------               -------               -------

<S>                                             <C>                   <C>                   <C>
Restructuring provision:
     Severance and benefits                     $   729               $  --                 $  --
     Accrued lease costs                           --                    --                   2,187
     Property and equipment write-off              --                   1,577                  --
                                                -------               -------               -------
         Total                                      729                 1,577                 2,187
Cash paid                                          (729)                 --                    (683)
Non cash charges                                   --                  (1,577)                 --
                                                -------               -------               -------
Reserve balance at September 30, 2001           $  --                 $  --                 $ 1,504
                                                =======               =======               =======
</TABLE>

<PAGE>


The  Company  expects  to  pay  the  remaining   obligations   relating  to  the
non-cancelable lease obligations over the remaining lease terms through 2006.

In the third quarter of 2001,  the Company  incurred an impairment  loss of $1.3
million.  This charge was  attributed to the  write-down  of assets  acquired in
conjunction with building the hosted offering. These assets were written down to
a level  commensurate  with the expected future cash flows as prescribed by SFAS
No. 121 Accounting  For the  Impairment of Long-Lived  Assets and for Long-Lived
Asset to Be Disposed Of.

During  the first  quarter  of 2001,  the  Company  incurred  $377,000  of other
non-recurring general and administrative  expenses. This expense was incurred in
connection with exploring potential merger and acquisition transactions.

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 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,  will be adopted by the
Company on January 1, 2002.  We do not expect the  adoption of these  accounting
standards to result in a significant impact on our financial position or results
of operations for any historic transactions.

In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"),  "Accounting for the
Impairment  or Disposal of Long-Lived  Assets".  SFAS 144  supersedes  SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and applies to all  long-lived  assets  (including  discontinued
operations) and consequently  amends Accounting  Principles Board Opinion No. 30
(APB 30), "Reporting Results of Operations  Reporting the Effects of Disposal of
a Segment of a Business".  SFAS 144 develops one accounting  model (based on the
model in SFAS 121) for long-lived  assets that are to be disposed of by sale, as
well as addresses the principal  implementation  issues.  SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. That requirement eliminates APB 30's
requirement that discontinued  operations be measured at net realizable value or
that  entities  include  under   "discontinued   operations"  in  the  financial
statements   amounts  for   operating   losses  that  have  not  yet   occurred.
Additionally,  SFAS 144 expands the scope of discontinued  operations to include
all components of an entity with operations that (1) can be  distinguished  from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the  entity in a  disposal  transaction.  SFAS 144 is  effective  for  financial
statements  issued for fiscal years  beginning  after  December  15,  2001.  The
Company  does not expect the  adoption of SFAS 144 to have a material  impact on
the Company's financial position or results of operations.



<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  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.

     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 accounted for our software licenses and implementation revenues
using the percentage-of-completion  method of contract accounting. Since then we
have  released  several new  versions of our  software  culminating  in our most
recent  release of version 5.6,  which  further  simplified  the  implementation
process. As a result,  implementations of our software have been streamlined and
are no longer deemed  essential to the  functionality  of the software.  We have
also  formed  relationships  with  several  implementation   partners  who  have
performed  a  significant  number  of  implementations  over the last  year.  In
addition,  an increasing trend of software sales without  accompanying  services
have allowed us to further  develop vendor specific  objective  evidence for the
fair value of our software licenses. Therefore, in the third quarter of 2001,
<PAGE>

we began  recognizing  license  revenue on shipment  and  continue to  recognize
implementation revenue as services are performed.

     Payments  received  in advance  of  revenue  recognition  are  recorded  as
deferred  revenue.  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 defer amounts billed for  maintenance  and recognize
such amounts ratably over the maintenance period

     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.

 In the second quarter of 2001, JD Edwards, a reseller of Extensity's  products,
and the Company jointly  terminated their  relationship.  This event resulted in
the Company accelerating recognition of revenue of approximately $1.1 million in
prepaid  royalties  that  would  have been  recognized  in the third and  fourth
quarters of 2001.


      In February 2001, we opened a sales office in Sydney, Australia;  however,
we closed the Sydney office in July of 2001 as part of our  restructuring  plan.
We  continue  to  support  our  European  operations,  however;  as  part of our
restructuring  plan  implemented  in  July  2001we  significantly   reduced  our
resources in this geography to match the current business  environment.  For the
nine months ended September 30, 2001,  revenues  derived from our  international
operations represented 22% the total revenues.


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.


<PAGE>

        Summary of Condensed Consolidated Financial Data
                         (In thousands)
                          (Unaudited)

<TABLE>
<CAPTION>
                                                                            Three Months Ended           Nine Months Ended
                                                                               September 30,               September 30,
                                                                           ---------------------       ---------------------

                                                                             2001          2000          2001          2000
                                                                           -------       -------       -------       -------
<S>                                                                        <C>           <C>           <C>           <C>
Revenues:
      License                                                              $ 4,886       $ 4,021       $16,559       $ 9,280
      Service and maintenance                                                3,174         3,005        10,434         6,802
      Hosted                                                                    48          --              48          --
                                                                           -------       -------       -------       -------
           Total revenues                                                  $ 8,108       $ 7,026       $27,041       $16,082
                                                                           =======       =======       =======       =======

Cost of revenues:(*)
     License                                                               $   384       $   267       $ 1,092       $   482
     Service and maintenance                                                 2,901         3,758        10,360        10,204
     Hosted                                                                    211          --             211          --
                                                                           -------       -------       -------       -------
           Total cost of revenues                                          $ 3,496       $ 4,025       $11,663       $10,686
                                                                           =======       =======       =======       =======

Operating expenses:(*)
     Sales and marketing                                                   $ 4,694       $ 7,018       $19,539       $19,062
     Research and development                                                2,244         3,431         9,913         9,422
     General and administrative                                              1,821         1,392         5,340         3,714
     Restructuring, impairment loss and other non-recurring charges          5,797          --           6,174          --
     In-process research and development                                      --             318          --             318
                                                                           -------       -------       -------       -------
           Total operating expenses                                        $14,556       $12,159       $40,966       $32,516
                                                                           =======       =======       =======       =======

(*) Amounts exclude the amortization of non-cash stock based
     compensation as follows:
      Cost of revenues:
        Service and maintenance                                            $  --         $   154       $    59       $   578
      Operating expenses:
        Sales and marketing                                                   --             326           112         1,227
        Research and development                                              --             202            68           759
        General and administrative                                            --             279           109         1,048
                                                                           -------       -------       -------       -------
                                                                           $  --         $   961       $   348       $ 3,612
                                                                           =======       =======       =======       =======
</TABLE>

Revenues

Total  revenues  increased to $8.1 million for the three months ended  September
30, 2001 from $7.0  million for the three months ended  September  30, 2000,  an
increase of 15%. Total  revenues  increased to $27.0 million for the nine months
ended  September 30, 2001 from $16.1 million for the nine months ended September
30, 2000, an increase of 68%. For the three and nine months ended  September 30,
2001,  there were no customers who accounted for 10% or more of total  revenues.
For the three months ended September 30, 2000,  sales to one customer  accounted
for 10% of total revenues.  For the nine months ended September 30, 2000,  sales
to one customer accounted for 14% of total revenues.

     License  Revenues.  Our license revenues  increased to $4.9 million for the
three  months  ended  September  30, 2001 from $4.0 million for the three months
ended September 30, 2000, an increase of 22%. Our license revenues



<PAGE>

increased  to $16.6  million for the nine months ended  September  30, 2001 from
$9.3 million for the nine months ended  September  30, 2000, an increase of 78%.
In the nine months ended  September 30, 2001,  $1.9 million of license  revenues
were recognized through the Company's  relationship with a reseller. The Company
and the reseller jointly decided to terminate their  relationship.  The increase
in license revenue for the nine months ended September 30, 2001 was attributable
to an increase in revenue  recognized  on  shipment,  an increase in the average
size of the sales  contracts  entered  into by our  customers,  acceleration  of
revenue recognition resulting from the termination of the reseller relationship,
and an increase in the revenue attributable to our indirect sales channels.

     Service and  Maintenance  Revenues.  Our service and  maintenance  revenues
increased to $3.2 million for the three  months  ended  September  30, 2001 from
$3.0 million for the three months ended  September  30, 2000, an increase of 6%.
Our service and  maintenance  revenues  increased to $10.4  million for the nine
months  ended  September  30, 2001 from $6.8  million for the nine months  ended
September 30, 2000, an increase of 53%.  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 entered into by our customers.

     Hosted  Revenues.  Our hosted  revenues  were  $48,000 for the three months
ended  September 30, 2001.  This is the first 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. As discussed in
Note 6 of the Notes to the  Financial  Statements,  we  incurred  an  impairment
charge associated with our hosted offering.

Cost of Revenues

     Total cost of revenues decreased to $3.5 million for the three months ended
September  30, 2001 from $4.0 million for the three months ended  September  30,
2000, a decrease of 13%.  Total cost of revenues  increased to $11.7 million for
the nine months ended  September 30, 2001 from $10.7 million for the nine months
ended September 30, 2000, an increase of 9%.

     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
$384,000  for the three months ended  September  30, 2001 from  $267,000 for the
three  months  ended  September  30, 2000,  due  primarily  to  increased  sales
activity. The cost increased to $1.1 million for the nine months ended September
30,  2001  from  $482,000  for the nine  months  ended  September  30,  2000 due
primarily to increased sales activity. As a percentage of license revenues, cost
of license  revenues  increased to 8% for the three months ended  September  30,
2001 from 7% for the three months ended  September  30, 2000. As a percentage of
license revenues,  cost of license revenues  increased to 7% for the nine months
ended  September 30, 2001 from 5% for the nine months ended  September 30, 2000.
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 $2.9 million for the three months ended
September  30, 2001 from $3.8 million for the three months ended  September  30,
2000,  a decrease  of 23%.  This cost  increased  to $10.4  million for the nine
months  ended  September  30, 2001 from $10.2  million for the nine months ended
September 30, 2000, an increase of 2%. As a percentage of service revenues, cost
of service  revenues  decreased to 91% for the three months ended  September 30,
2001 from 125% for the three months ended September 30, 2000. As a percentage of
service revenues,  cost of service revenues decreased to 99% for the nine months
ended September 30, 2001 from 150% for the nine months ended September 30, 2000.
The decrease for the three months ended  September 30, 2001 was  attributable to
lower costs for third party  consultants  offset in part by higher payroll costs
as the Company replaced third party consultants with permanent employees. We are
seeking to further 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.

     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.
<PAGE>

For the three  months ended  September  30,  2001,  cost of hosted  revenues was
$211,000.  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 $4.7 million for the three months ended  September 30, 2001 from $7.0 million
for the three months  ended  September  30,  2000, a decrease of 33%.  Sales and
marketing  expenses  increased  to  $19.5  million  for the  nine  months  ended
September  30, 2001 from $19.1  million for the nine months ended  September 30,
2000, an increase of 2%. As a percentage of total revenues,  sales and marketing
expenses  decreased to 58% for the three months  ended  September  30, 2001 from
100% for the three months ended  September  30, 2000.  As a percentage  of total
revenues,  sales and  marketing  expenses  decreased  to 72% for the nine months
ended September 30, 2001 from 119% for the nine months ended September 30, 2000.
The  decrease  in sales  and  marketing  expenses  for the  three  months  ended
September  30,  2001 was  attributed  to  reduced  compensation  costs and lower
program  costs  associated  with our  restructuring  plan.  We expect  sales and
marketing  expenses,  excluding  commission  charges,  to be lower in the fourth
quarter of 2001 as we realize a full quarter's impact of the restructuring plan.
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 $2.2 million for the
three  months  ended  September  30, 2001 from $3.4 million for the three months
ended  September  30, 2000, a decrease of 35%.  Research and  development  costs
increased to $9.9 million for the nine months ended September 30, 2001 from $9.4
million for the nine months ended  September  30, 2000,  an increase of 5%. As a
percentage of total revenues, research and development expenses decreased to 28%
for the three  months  ended  September  30, 2001 from 48% for the three  months
ended  September  30, 2000.  As a  percentage  of total  revenues,  research and
development  expenses  decreased to 37% for the nine months ended  September 30,
2001 from 59% for the nine months  ended  September  30,  2000.  The decrease in
research and development  cost for the three months ended September 30, 2001 was
attributable to reduced  compensation  costs  associated with our  restructuring
plan. The increase in costs between the nine months ended September 30, 2001 and
September 30, 2000 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 research and
development  expenses to be lower in the fourth  quarter of 2001 as we realize a
full  quarter's  impact of the  restructuring  plan.  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  restructuring,  impairment  loss and  other  non-recurring
charges, increased to $1.8 million for the three months ended September 30, 2001
from $1.4 million for the three months ended  September 30, 2000, an increase of
31%. General and administrative expenses,  excluding  restructuring,  impairment
loss and other  non-recurring  charges,  increased  to $5.3 million for the nine
months  ended  September  30, 2001 from $3.7  million for the nine months  ended
September  30,  2000,  an increase of 44%. As a  percentage  of total  revenues,
general and administrative expenses,  excluding  restructuring,  impairment loss
and other  non-recurring  charges,  increased  to 22% for the three months ended
September 30, 2001 from 20% for the three months ended  September 30, 2000. As a
percentage of total revenues,  general and  administrative  expenses,  excluding
restructuring,  impairment and other non-recurring charges, decreased to 20% for
the nine months  ended  September  30,  2001 from 23% for the nine months  ended
September 30, 2000. The increase in general and  administrative  expenses in the
three-month  period  ended  September  30, 2001 and the nine month  period ended
September  30,  2001 was  primarily  attributable  to  hiring  additional  human
resources and internal information  technology personnel.  We expect general and
administrative  expenses to be lower in the fourth quarter of 2001 as we realize
a full quarter's impact of the restructuring  plan.  General and  administrative
expenses may increase in the long term if we expand our operations.

Restructuring,  Impairment Loss and Other Non-Recurring  Charges.  For the three
months  ended  September  30,  2001,  restructuring,  impairment  loss and other
non-recurring charges were $5.8 million.  Approximately,  $4.5 of
<PAGE>

these expenses was incurred in connection with our restructuring  plan effective
July 2001.  Additionally,  $1.3  million  was  incurred in  connection  with the
write-down of assets  associated with our hosted  offering.  For the nine months
ended September 30, 2001, restructuring, impairment loss and other non-recurring
charges were $6.2 million  comprised of the $4.5million in  restructuring,  $1.3
million  write-down  of assets and $377,000 of other  non-recurring  general and
administrative  expenses.  The  $377,000  of  other  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.

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
include and will  continue  to include  deferred  compensation  expense at least
through 2003. No expense was recognized for the three months ended September 30,
2001, as employee  terminations  resulted in stock cancellations that offset the
current period  amortization  expense.  For the three months ended September 30,
2000, we recognized  $961,000.  We recognized $348,000 for the nine months ended
September  30, 2001 and $3.6  million for the nine months  ended  September  30,
2000.

Interest Income, Net

     Interest income,  net was $565,000 for the three months ended September 30,
2001 and $1.4 million for the three months ended  September  30, 2000.  Interest
income,  net was $2.3 million for the nine months ended  September  30, 2001 and
$3.8 million for the nine months ended  September 30, 2000.  Interest  income is
attributed  to interest  earned on the  proceeds  from the  Company's  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.

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 September
30,  2001  we had  $51.1  million  in  cash,  cash  equivalents  and  short-term
investments and $45.3 million in working capital.

     Net cash used in operating activities was $27.5 million for the nine months
ended  September 30, 2001 and $17.1 million for the nine months ended  September
30, 2000. For the nine months ended  September 30, 2001,  cash used in operating
activities was primarily  attributable to a net loss of $23.6 million,  adjusted
for a non-cash charge  associated  with the write-off of computer  equipment and
software of $2.9 million,  depreciation  and  amortization  of $1.9  million,  a
decrease in deferred revenue of $10.1 million, a decrease in accounts payable of
$2.5  million,  and a decrease in accrued  liabilities  of $845,000  offset by a
decrease  in  accounts  receivable  of $2.3  million  and an  increase  in other
liabilities of $1.4 million.  For the nine months ended September 30, 2000, cash
used in operating  activities  was  primarily  attributed to a net loss of $26.9
million,  adjusted for the  amortization of deferred stock  compensation of $3.6
million,  depreciation  and  amortization of $1.2 million,  increase in accounts
payable of $2.5 million, increase in accrued liabilities of $3.4 million, and an
increase in deferred  revenue of $4.5 million  offset by an increase in accounts
receivable of $4.0 million,  an increase in prepaid and other current  assets of
$1.0 million, and an increase in restricted cash of $943,000.

     Net cash  provided by  investing  activities  was $5.6 million for the nine
months ended  September 30, 2001 and net cash used in investing  activities  was
$35.3 million for the nine months ended  September 30, 2000. For the nine months
ended September 30, 2001, investing activities consisted primarily of a decrease
in short-term investments of $8.0 million offset by capital expenditures of $2.4
million.  For the nine months ended  September  30, 2000,

<PAGE>

investing   activities   consisted   primarily  of  an  increase  in  short-term
investments of $31.2 million and capital expenditures of $4.1 million.

     Net cash used in financing activities was $50,000 for the nine months ended
September  30,  2001,  due to  payments  on  notes  payable  and  capital  lease
obligations  of  approximately  $1.1  million,  offset by proceeds from employee
stock plans of  approximately  $1.0  million.  Net cash  provided  by  financing
activities  was $83.0  million for the nine months  ended  September  30,  2000,
primarily due to the net proceeds of $83.3 million from the Company's IPO.

    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.  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.



<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,  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
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
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   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
for the last quarter of the current fiscal year and into the next 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 September 30, 2001,
we had an accumulated  deficit of $98.1 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 invest in our  business  ahead of  anticipated
future  revenues,  we expect  that we will  continue to incur  operating  losses
through  the last  quarter of the  current  fiscal year and into the next fiscal
year.


<PAGE>

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  make  expenditures  in  all  areas  of  our  business,
particularly in our sales and marketing  operations,  in 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; 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.


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 Corporation and Oracle Corporation. 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 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.


<PAGE>

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  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.

     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 employee relationship management software 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 September 30, 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
<PAGE>


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

      For the three and nine  months  ended  September  30,  2001,  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  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  September  30,  2001,  our  largest   implementation   included
approximately  18,000  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 deployments, 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 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 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
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 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


<PAGE>


markets where 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  and  established  a  relationship  with  an  international
reseller.  In 2000, we expanded our European Operations through opening a second
office in  Frankfurt,  Germany.  As of September  30, 2001, we had a total of 15
employees in our international  operations.  For the nine months ended September
30, 2001, we derived 22% 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 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.  In the early stages of
this market,  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 the time of  individual  orders is  uncertain,  our
period-to-period revenues are difficult to predict.


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.


<PAGE>


     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 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.

Our hosted product offering may fail.

     We offer our suite of  software  products  under an  Internet-based  hosted
model to complement our traditional  licensing of these  products.  We offer our
hosted  solutions  on a  subscription  basis to  companies  seeking to outsource
certain  employee  relationship  management  functions.  This business  model is
unproven and represents a significant departure from the strategies we and other
enterprise  software  vendors  have  traditionally  employed.  We  have  limited
experience selling products or services under a hosted model, and our efforts to
develop  the hosted  business  divert our  financial  resources  and  management
attention away from other aspects of our business. In connection with our hosted
business,  we have engaged  third-party service providers to perform many of the
necessary  services  as  independent  contractors,  and they may fail to perform
those services  adequately.  If any service provider delivers inadequate support
or service to our customers,  our reputation could be harmed. If our strategy of
offering  products to customers  over the Internet  proves  successful,  some of
those  Internet  customers may be ones that  otherwise might




<PAGE>


have  purchased  our  software and services  through our  traditional  licensing
arrangements,  which is likely to reduce  the amount of  revenue  recognized  on
shipment.

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

      If customers  determine that our hosted model 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 an 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.

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.




<PAGE>


     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  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.

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 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  especially  this past year,  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 the company.  Such
litigation  could result in  substantial  costs and  diversion  of  management's
attention and resources


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.


<PAGE>

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 September 30, 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 all of
the proceeds to fund working capital.

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


<PAGE>


None.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K:

         None


<PAGE>


                                    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.


November 13, 2001                               EXTENSITY, INC.



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