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 June 30, 2002

                                       or

[ ]      Transition  report  pursuant  to Section 13 or 15(d) of the  Securities
         Exchange Act of 1934

                        Commission file number: 000-28897

                                 EXTENSITY, INC.
             (Exact name of Registrant as specified in its charter)

                                    DELAWARE
         (State or other jurisdiction of incorporation or organization)

                                   68-0368868
                      (IRS Employer Identification Number)

           2200 POWELL STREET, SUITE 300, EMERYVILLE, CALIFORNIA 94608
              (Address of principal executive offices and zip code)

                                 (510) 594-5700
              (Registrant's telephone number, including area code)

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

                                 Yes [X] No [ ]

The number of shares of the Registrant's Common Stock outstanding as of July 31,
2002 was 25,195,813.


<PAGE>


                                      INDEX


                          PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
        Condensed Consolidated Balance Sheets                               1
        Condensed Consolidated Statements of Operations                     2
        Condensed Consolidated Statements of Cash Flows                     3
        Notes to the Condensed Consolidated Financial Statements            4

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk         24


                           PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings                                                  24

ITEM 2. Changes in Securities and Use of Proceeds                          25

ITEM 3. Defaults Upon Senior Securities                                    25

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

ITEM 5. Other Information                                                  26

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)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                     June 30,             December 31,
                                                                       2002                   2001
                                                                    ---------              ---------

<S>                                                                 <C>                    <C>
Current assets:
  Cash and cash equivalents                                         $   4,816              $  19,456
  Short-term investments                                               33,998                 26,883
  Accounts receivable, net                                              3,740                  5,393
  Prepaid and other current assets                                      1,466                  1,835
                                                                    ---------              ---------
         Total current assets                                          44,020                 53,567
Property and equipment, net                                             3,014                  3,657
Restricted long-term investments                                        1,397                  1,397
Other assets                                                              367                    601
                                                                    ---------              ---------
         Total assets                                               $  48,798              $  59,222
                                                                    =========              =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                  $   3,451              $   3,672
  Accrued liabilities                                                   3,281                  3,977
  Deferred revenue                                                      3,182                  3,488
  Capital lease obligations                                               167                    240
  Sublease loss accrual                                                   383                    787
                                                                    ---------              ---------
         Total current liabilities                                     10,464                 12,164
Capital lease obligations                                                --                       54
Sublease loss accrual and other noncurrent liabilities                  1,849                    809
                                                                    ---------              ---------
         Total liabilities                                             12,313                 13,027
                                                                    ---------              ---------

Stockholders' equity:
  Common stock                                                             25                     25
  Additional paid-in capital                                          147,334                147,394
  Deferred stock compensation                                             (94)                  (504)
  Notes receivable from stockholders                                     (446)                  (433)
  Accumulated comprehensive income                                        192                    155
  Accumulated deficit                                                (110,526)              (100,442)
                                                                    ---------              ---------
         Total stockholders' equity                                    36,485                 46,195
                                                                    ---------              ---------
         Total liabilities and stockholders' equity                 $  48,798              $  59,222
                                                                    =========              =========
</TABLE>

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

                                       1
<PAGE>

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

<TABLE>
<CAPTION>
                                                          Three Months Ended                Six Months Ended
                                                                June 30,                        June 30,
                                                       -------------------------       ------------------------
                                                         2002           2001             2002             2001
                                                         ----           ----             ----             ----
<S>                                                    <C>             <C>             <C>             <C>
Revenues:
  License                                              $  1,743        $  5,651        $  2,949        $ 11,673
  Service and maintenance                                 3,074           3,480           6,197           7,260
  Hosted                                                    194            --               388            --
                                                       --------        --------        --------        --------
    Total revenues                                        5,011           9,131           9,534          18,933
                                                       --------        --------        --------        --------

Cost of revenues: (*)
  Licenses                                                  144             263             249             708
  Service and maintenance                                 1,843           3,444           4,247           7,518
  Hosted                                                    340            --               606            --
                                                       --------        --------        --------        --------
    Total cost of revenues                                2,327           3,707           5,102           8,226
                                                       --------        --------        --------        --------

Gross profit                                              2,684           5,424           4,432          10,707
                                                       --------        --------        --------        --------

Operating expenses: (*)
  Sales and marketing                                     2,894           7,043           6,410          14,957
  Research and development                                1,830           3,945           3,934           7,737
  General and administrative                              1,472           1,856           2,965           3,628
  Restructuring and other non-recurring charges           1,695            --             1,695             377
                                                       --------        --------        --------        --------
    Total operating expenses                              7,891          12,844          15,004          26,699
                                                       --------        --------        --------        --------

Loss from operations                                     (5,207)         (7,420)        (10,572)        (15,992)
Interest income, net                                        220             687             490           1,760
                                                       --------        --------        --------        --------
Net loss                                               $ (4,987)       $ (6,733)       $(10,082)       $(14,232)
                                                       ========        ========        ========        ========

Basic and diluted net loss per share                   $  (0.20)       $  (0.28)       $  (0.41)       $  (0.60)
Shares used in computing basic and diluted net loss
per share                                                24,818          23,735          24,676          23,562

(*) Amounts include non-cash stock based compensation as follows:
Cost of revenues:
  Service and maintenance                              $   --          $      9        $      3        $     59
Operating expenses:
  Sales and marketing                                      --                18               7             112
  Research and development                                 --                11               4              68
  General and administrative                               --                17               7             109
                                                       --------        --------        --------        --------
                                                       $   --          $     55        $     21        $    348
                                                       ========        ========        ========        ========
</TABLE>

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

                                       2
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                  Six Months Ended
                                                                                      June 30,
                                                                            ----------------------------
                                                                              2002                2001
                                                                            --------            --------

<S>                                                                         <C>                 <C>
Cash flows from operating activities:
Net loss                                                                    $(10,082)           $(14,232)
Adjustments to reconcile net loss to cash used in operating activities:
    Depreciation and amortization                                                850               1,402
    Amortization of deferred stock compensation and other                         35                 433
    Amortization of debt discount and lease line issuance costs                    4                  35
    Interest earned on notes from stockholders                                   (13)               --

Changes in operating assets and liabilities:
    Accounts receivable                                                        1,653               3,044
    Prepaids and other current assets                                            369                (114)
    Other assets                                                                 234                (162)
    Accounts payable                                                            (221)               (295)
    Accrued liabilities                                                         (696)             (1,195)
    Other liabilities                                                            665                --
    Deferred revenue                                                            (306)             (7,112)
                                                                            --------            --------
      Cash used in operating activities                                       (7,508)            (18,196)
                                                                            --------            --------

Cash flows from investing activities:
    Purchases of short-term investments                                      (13,951)            (20,207)
    Maturities of short-term investments                                       6,836              37,208
    Capital expenditures                                                        (207)             (1,704)
    Restricted long-term investments                                            --                    39
                                                                            --------            --------
      Cash (used in) provided by investing activities                         (7,322)             15,336
                                                                            --------            --------

Cash flows from financing activities:
    Payments on notes payable                                                   --                  (614)
    Payments on capital lease obligation                                        (132)               (225)
    Proceeds from exercise of stock options and warrants                         312                 944
                                                                            --------            --------
      Cash provided by financing activities                                      180                 105
                                                                            --------            --------

Effect of exchange rate on cash and cash equivalents                              10                   5

Decrease in cash and cash equivalents                                        (14,640)             (2,750)

Cash and cash equivalents, beginning of period                                19,456              40,695
                                                                            --------            --------

Cash and cash equivalents, end of period                                    $  4,816            $ 37,945
                                                                            ========            ========
</TABLE>

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

                                       3
<PAGE>

                                 EXTENSITY, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

         The accompanying  unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of  management,  are  necessary  for a fair  presentation  of the
financial  results for the periods  shown.  The balance sheet as of December 31,
2001 was derived from  audited  financial  statements,  but does not include all
necessary disclosures required by generally accepted accounting principles.

         These condensed  consolidated  financial  statements  should be read in
conjunction with the audited financial  statements and notes thereto included in
the  Company's  report  on Form  10-K  (File  No.  000-28897),  filed  with  the
Securities and Exchange Commission (the "SEC") on April 1, 2002.

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

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

2. Net Loss Per Share

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

         Diluted net loss per share does not include the effect of the following
potential common shares at June 30, 2002 and 2001 (in thousands):

                                                               June 30,
                                                      --------------------------
                                                          2002           2001
                                                      ------------  ------------
Shares issuable under stock options                           797         3,321
Shares of unvested stock subject to repurchase                  9           300
                                                      ------------  ------------
                                                              806         3,621
                                                      ============  ============

3. Significant Customers

         No  customers  accounted  for more than 10% of total  revenues  for the
three or six-month  periods ended June 30, 2002. For the three months ended June
30, 2001, sales to three customers  accounted for approximately 21%, 13% and 12%
of total revenues. For the six months ended June 30, 2001, sales to one customer
accounted for 12% of total revenues.


                                       4
<PAGE>

4. Comprehensive Loss

The components of comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
                                           Three Months Ended                Six Months Ended
                                                June 30,                         June 30,
                                         -----------------------        -------------------------
                                           2002           2001             2002           2001
                                         --------       --------        ---------       ---------
<S>                                      <C>            <C>             <C>             <C>
Net loss                                 $ (4,987)      $ (6,733)       $ (10,082)      $ (14,232)
Foreign currency translation adjustment         5              3               37               3
                                         --------       --------        ---------       ---------
Total comprehensive                      $ (4,982)      $ (6,730)       $ (10,045)      $ (14,229)
                                         ========       ========        =========       =========
</TABLE>

5. Restructuring

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

         In April of 2002, the Company took additional steps to reduce expenses,
which  included  reducing  full-time  equivalent  employees  at the  Company  by
approximately  18% and  evaluating the adequacy of its sublease loss accrual for
its lease  commitments  for office space.  The Company  incurred a restructuring
charge of  approximately  $1.5 million for the three months ended June 30, 2002.
The charge  consisted  of  severance  and  benefits of  $523,000  related to the
involuntary  termination  of 39  employees,  which was fully paid as of June 30,
2002. In addition, the Company accrued for lease costs of $946,000 pertaining to
the  estimated   obligations  for  non-cancelable   lease  payments  for  excess
facilities in the United States.

         The sublease loss accrual as of December 31, 2001 was  $1,286,000.  The
Company made payments of $243,000  against the accrual in the  six-month  period
ending June 30, 2002.  The sublease loss accrual  balance as of June 30, 2002 is
$1,989,000. The Company expects to pay the remaining obligations relating to the
non-cancelable lease obligations over the remaining lease terms through 2006.

6. Commitments and Contingencies

         In November 2001, the Company and certain of its officers and directors
were named as defendants in a class action  shareholder  complaint  filed in the
United  States  District  Court for the  Southern  District  of New York and now
captioned  as  In  re  Extensity,   Inc.  Initial  Public  Offering   Securities
Litigation.  The plaintiffs seek unspecified  monetary damages and other relief.
The Company  believes these charges to be without merit and  therefore,  has not
accrued any amounts in connection with this matter.

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


                                       5
<PAGE>


7. Recent Accounting Pronouncements

         In July of 2001,  the Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial  Accounting  Standards  ("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,  were adopted by the Company on January 1, 2002.  The adoption
of these accounting standards had no impact on our financial position or results
of operations for any historic transactions.

         In July 2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
Associated  with  Exit or  Disposal  Activities".  SFAS No.  146  nullifies  the
guidance  of the  Emerging  Issues  Task Force  (EITF) in EITF  Issue No.  94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity  (including  Certain  Costs  Incurred in a  Restructuring)".
Under EITF Issue No. 94-3, an entity  recognized a liability for an exit cost on
the date that the entity committed itself to an exit plan. In SFAS 146, the FASB
acknowledges that an entity's commitment to a plan does not, by itself, create a
present obligation to other parties that meets the definition of a liability and
requires that a liability for a cost that is associated with an exit or disposal
activity be recognized when the liability is incurred.  It also establishes that
fair value is the objective for the initial  measurement of the liability.  SFAS
146 will be effective for exit or disposal  activities  that are initiated after
December  31,  2002.  The  Company  does not  expect an impact on its  financial
position and results of operating from the adoption of SFAS 146.

                                       6
<PAGE>


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

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

         The following  discussion  and analysis of our financial  condition and
results  of  operations  should  be read in  conjunction  with  our  Summary  of
Condensed  Consolidated  Financial  Data, 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
introduced  the newest  version of our suite of  products,  Extensity 6, in June
2002.

         We generate  revenue  principally  from licensing our  applications and
providing related  services,  including  product  installation,  maintenance and
support, consulting and training. We license our applications individually or as
an  integrated  suite of  products.  The pricing of our  software  and  services
fluctuates on a per transaction basis depending on various factors,  such as the
number of seats covered by a contract and the degree of customization  requested
by the particular  customer.  The dollar amounts of our contracts  depend on the
number  of users  and  applications  being  used and the  professional  services
requested.  In the third quarter of 2001, we began recognizing  revenue from our
hosted offering. Under this offering, customers pay a monthly usage fee based on
the  number  of  users  and a  one-time  set-up  fee  to  access  the  Extensity
application on our servers.


                                       7
<PAGE>

         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, DigitalThink, Visa, GetThere.com, and
ProAct Technologies.

         For the six months ended June 30, 2002 and 2001,  revenues derived from
our international operations represented approximately 12% of total revenues.

Critical Accounting Policies

         A summary of the Company's critical  accounting policies is included in
our report on Form 10K for the year ended December 31, 2001.

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.

                                       8
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   Three Months Ended           Six Months Ended
                                                                        June 30,                     June 30,
                                                                  ---------------------       ---------------------

                                                                    2002          2001          2002          2001
                                                                  -------       -------       -------       -------
<S>                                                               <C>           <C>           <C>           <C>
Revenues:
      License                                                     $ 1,743       $ 5,651       $ 2,949       $11,673
      Service and maintenance                                       3,074         3,480         6,197         7,260
      Hosted                                                          194          --             388           --
                                                                  -------       -------       -------       -------
           Total revenues                                         $ 5,011       $ 9,131       $ 9,534       $18,933
                                                                  =======       =======       =======       =======

Cost of revenues:(*)
     License                                                      $   144       $   263       $   249       $   708
     Service and maintenance                                        1,843         3,435         4,244         7,459
     Hosted                                                           340          --             606           --
                                                                  -------       -------       -------       -------
           Total cost of revenues                                 $ 2,327       $ 3,698       $ 5,099       $ 8,167
                                                                  =======       =======       =======       =======

Operating expenses:(*)
     Sales and marketing                                          $ 2,894       $ 7,025       $ 6,403       $14,845
     Research and development                                       1,830         3,934         3,930         7,669
     General and administrative                                     1,472         1,839         2,958         3,519
     Restructuring and other non recurring charges                  1,695          --           1,695           377

Interest income, net                                              $   220       $   687       $   490       $ 1,760

(*) Amounts exclude the amortization of non-cash stock based
     compensation as follows:
      Cost of revenues:
        Service and maintenance                                   $  --         $     9       $     3       $    59
      Operating expenses:
        Sales and marketing                                          --              18             7           112
        Research and development                                     --              11             4            68
        General and administrative                                   --              17             7           109
                                                                  -------       -------       -------       -------
                                                                  $  --         $    55       $    21       $   348
                                                                  =======       =======       =======       =======
</TABLE>

Revenues

         Total  revenues  decreased  to $5.0  million for the three months ended
June 30, 2002 from $9.1  million for the three  months  ended June 30,  2001,  a
decrease of 45%.  Total  revenues  decreased  to $9.5 million for the six months
ended June 30, 2002 from $18.9 million for the six months ended June 30, 2001, a
decrease of 50%. No customers  accounted for more than 10% of total revenues for
the three or six-month  periods  ended June 30, 2002.  Sales to three  customers
accounted  for  approximately  21%, 13% and 12% of total  revenues for the three
months ended June 30, 2001 and sales to one customer accounted for approximately
12% of total revenues for the six months ended June 30, 2001.

                                       9
<PAGE>


         License  Revenues.  Our license revenues  decreased to $1.7 million for
the three  months  ended June 30, 2002 from $5.7  million  for the three  months
ended June 30,  2001,  a decrease  of 69%.  License  revenue  decreased  to $2.9
million for the six months  ended June 30,  2002 from $11.7  million for the six
months ended June 30,  2001, a decrease of 75%. The decrease in license  revenue
for the three and six-month  periods ended June 30, 2002 was  attributable  to a
decrease in revenue  recognized on shipment  from our direct and indirect  sales
channels which have been impacted by the decrease in capital spending associated
with the current global  economic  downturn.  In the three months ended June 30,
2001,  $1.9  million of license  revenue was  recognized  through the  Company's
relationship  with a reseller.  The Company and the reseller  jointly decided to
terminate the reseller arrangement.

         Service and Maintenance Revenues.  Our service and maintenance revenues
decreased  to $3.1  million for the three  months  ended June 30, 2002 from $3.5
million for the three months ended June 30, 2001, a decrease of 12%. Service and
maintenance revenues decreased to $6.2 million for the six months ended June 30,
2002 from $7.3 million for the six-month  period ended June 30, 2001, a decrease
of 15%. The decrease in the three and six-month  periods ended June 30, 2002 was
attributable  to a  decrease  in  professional  services  billing  opportunities
resulting  from a decrease in capital  spending  associated  with current global
economic conditions.

         Hosted Revenues. Our hosted revenues were $194,000 and $388,000 for the
three and  six-month  periods  ended June 30,  2002,  respectively.  This is the
fourth quarterly  period the Company has recognized  revenue from this offering.
The Company does not believe these revenues will be a significant  percentage of
total revenues in the near term.

Cost of Revenues

         Total cost of revenues  decreased  to $2.3 million for the three months
ended June 30, 2002 from $3.7  million for the three months ended June 30, 2001,
a decrease of 37%. Total cost of revenues  decreased to $5.1 million for the six
months  ended June 30, 2002 from $8.2  million for the six months ended June 30,
2001, a decrease of 38%.

         Cost of License Revenues.  Cost of license revenues consists  primarily
of  third-party  license and  support  fees and,  to a lesser  extent,  costs of
duplicating  media and  documentation  and  shipping.  Cost of  license  revenue
decreased to $144,000 for the three months ended June 30, 2002 from $263,000 for
the three  months  ended June 30,  2001.  Cost of license  revenue  decreased to
$249,000 for the six months ended June 30, 2002 from $708,000 for the six months
ended  June 30,  2001.  The  decrease  in cost for both the three and  six-month
periods ended June 30, 2002 was due primarily to decreased sales activity.  As a
percentage of license revenues, cost of license revenues increased to 8% for the
three  months  ended June 30, 2002 from 5% for the three  months  ended June 30,
2001. As a percentage of license revenues, cost of license revenues increased to
8% for the six months  ended June 30, 2002 from 6% for the six months ended June
30, 2001.  Cost of revenues as a percentage of license revenue may increase over
the  current  level  in the  future  if we  incorporate  additional  third-party
products into our offerings.

         Cost  of  Service  and  Maintenance  Revenues.   Cost  of  service  and
maintenance  revenues  consists of compensation  and related  overhead costs for
personnel engaged in consulting,  training, maintenance and support services for
our  customers  as well as costs for third  parties  contracted  to provide such
services to our customers. The cost of service and maintenance revenue decreased
to $1.8  million for the three  months ended June 30, 2002 from $3.4 million for
the three months ended June 30, 2001, a decrease of 46%. The cost of service and
maintenance revenues decreased to $4.2 million for the six months ended June 30,
2002 from $7.5  million for the six months  ended June 30,  2001,  a decrease of
43%. As a percentage of service revenues,

                                       10
<PAGE>


cost of service  revenues  decreased  to 60% for the three months ended June 30,
2002 from 99% for the three  months  ended June 30,  2001.  As a  percentage  of
service revenues,  cost of service revenues  decreased to 68% for the six months
ended  June 30,  2002 from 103% for the six  months  ended  June 30,  2001.  The
decrease  for  the  three  and  six-month   periods  ended  June  30,  2002  was
attributable to lower compensation costs associated with our restructuring plans
implemented  in July of 2001 and  April  2002 and lower  costs  for third  party
consultants.  The Company does not expect these costs to significantly  increase
in the near term.  Overall, we are seeking to further reduce our cost of service
revenues as a percentage of total  service  revenue and are also seeking to keep
third parties engaged in providing services related to our applications.

         Cost of Hosted Revenues.  Cost of hosted revenues consists primarily of
compensation and related overhead costs for personnel  engaged in supporting the
hosted customer base,  server costs,  and  telecommunications  charges.  For the
three months ended June 30, 2002, cost of hosted revenues was $340,000.  For the
six months  ended June 30,  2002,  cost of hosted  revenues  was  $606,000.  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 $2.9  million for the three  months ended June 30, 2002 from $7.0 million for
the three months ended June 30,  2001,  a decrease of 59%.  Sales and  marketing
expenses  decreased  to $6.4 million for the six months ended June 30, 2002 from
$14.8  million for the six months  ended June 30,  2001, a decrease of 57%. As a
percentage of total revenues,  sales and marketing expenses decreased to 58% for
the three  months  ended June 30, 2002 from 77% for the three  months ended June
30, 2001.  As a  percentage  of total  revenues,  sales and  marketing  expenses
decreased  to 67% for the six months  ended  June 30,  2002 from 78% for the six
months ended June 30, 2001. The decrease in sales and marketing expenses for the
three and  six-month  periods  ended  June 30,  2002 was  attributed  to reduced
commission  expense  associated with the decrease in license revenue and reduced
compensation  costs and lower program costs  associated  with our  restructuring
plans  implemented  in July  2001 and April  2002.  We do not  expect  sales and
marketing expenses,  excluding commission charges, to increase  significantly in
the near term.  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 $1.8 million for the
three  months  ended June 30, 2002 from $3.9  million for the three months ended
June 30, 2001, a decrease of 53%. Research and development expenses decreased to
$3.9  million for the six months  ended June 30, 2002 from $7.7  million for the
six months  ended June 30,  2001,  a decrease of 49%. As a  percentage  of total
revenues,  research  and  development  expenses  decreased  to 37% for the three
months ended June 30, 2002 from 43% for the three months ended June 30, 2001. As
a percentage of total revenues,  research and development  expenses were 41% for
both  six-month  periods ended June 30, 2002 and June 30, 2001.  The decrease in
research and  development  cost for the three and six- month  periods ended June
30, 2002 was  attributable  to reduced  compensation  costs  associated with our
restructuring plans implemented in July of 2001 and April 2002. We do not expect
research  and  development  costs to  significantly  increase  in the near term.
Research  and  development  expenses  may  increase  in the long term if we make
additional investments in our technology and products.

                                       11
<PAGE>


         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 decreased to $1.5 million for the three months ended June 30, 2002 from
$1.8  million  for the three  months  ended June 30,  2001,  a decrease  of 20%.
General and administrative expenses decreased to $3.0 million for the six months
ended June 30, 2002 from $3.5  million for the six months ended June 30, 2001, a
decrease of 16%. As a percentage of total revenues,  general and  administrative
expenses  increased to 29% for the three months ended June 30, 2002 from 20% for
the three months ended June 30, 2001. As a percentage of total revenues  general
and  administrative  expenses increased to 31% for the six months ended June 30,
2002 from 19% for the six months  ended June 30,  2001.  The decrease in general
and  administrative  expenses in the three and six-month  periods ended June 30,
2002  was  primarily  attributable  to the  impact  of our  restructuring  plans
implemented in July of 2001 and April 2002. General and administrative  expenses
tend  to  be   relatively   fixed  in  the  short  term  because  the  Company's
discretionary  general  and  administrative  expenses  are limited and there are
significant costs associated with being a public company. As a result, declining
revenues  have caused an increase  in general and  administrative  expenses as a
percentage  of total  revenues.  We do not  expect  general  and  administrative
expenses to significantly increase in the short term. General and administrative
costs may increase in the long term if we expand our operations.

         Restructuring and other  non-recurring  charges.  For the three and six
months ended June 30, 2002,  restructuring and other non-recurring  charges were
approximately  $1.7  million,  comprised of $523,000 of  severance  and benefits
associated with the termination of 39 employees, $946,000 of accrued lease costs
pertaining to the estimated  obligations for  non-cancelable  lease payments for
excess  facilities  in the United  States and  $225,000  of other  non-recurring
general and administrative  charges incurred in connection with exploring merger
and  acquisition  transactions.  The  entire  other  non-recurring  general  and
administration  charge was  expensed in the three  months  ended June 30,  2002.
There were no other  non-recurring  charges for the three  months ended June 30,
2001 and there were $377,000 of other non-recurring  charges incurred in the six
months  ended June 30, 2001.  These  charges were  incurred in  connection  with
exploring potential merger and acquisition  transactions.  The entire charge was
expensed in the three  months  ended March 31,  2001 as these  discussions  were
terminated.

Interest Income, Net

         Interest  income,  net was $220,000 for the three months ended June 30,
2002 and  $687,000  for the three months ended June 30, 2001, a decrease of 68%.
Interest  income,  net was  $490,000  for the six months ended June 30, 2002 and
$1.8 million for the six months ended June 30, 2001, a decrease of 72%. Interest
income is  attributed  to interest  earned on the  proceeds  from the  Company's
initial public offering  ("IPO") and working  capital.  The decrease in interest
income  for both  the  three  and  six-month  periods  ended  June  30,  2002 is
attributed  to  lower  interest  rates  and  lower  cash,  cash  equivalent  and
short-term  investments balances.  Interest income will fluctuate depending upon
the  overall  interest  rate  environment  and our  cash,  cash  equivalent  and
short-term investments balances.

Amortization of Non-Cash Stock Based Compensation

         Prior to our IPO, we granted  certain stock options to our officers and
employees at prices deemed to be below the fair value of the  underlying  stock.
The cumulative  difference between the fair value of the 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

                                       12
<PAGE>


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 in the three months ended June 30, 2002.
For the three  months  ended  June 30,  2001,  amortization  of  non-cash  based
compensation was $55,000.  For the six months ended June 30, 2002,  amortization
of non-cash based compensation was $21,000 and for the six months ended June 30,
2001,  amortization  of non-cash  based  compensation  was  $348,000.  The lower
expense  in  both  the  three  and  six-month   periods  in  2002  is  primarily
attributable to the impact of forfeitures  and the use of an accelerated  method
of amortization.  We estimate that we will recognize  approximately  $68,000 for
the remainder of 2002; however,  this amount may change as employee terminations
impact the amortization schedule.

Liquidity and Capital Resources

         Since inception, we have financed our operations and funded our capital
expenditures  through  proceeds  from our IPO  completed in January 2000 and the
private sale of equity securities, supplemented by loan facilities and equipment
leases.  As of June 30, 2002, we had $38.8 million in cash, cash equivalents and
short-term  investments,  $1.4 million in restricted  long-term  investments and
$33.6 million in working capital.

         Net cash used in  operating  activities  was $7.5  million  for the six
months  ended June 30, 2002 and $18.2  million for the six months ended June 30,
2001.  For the six months ended June 30, 2002 cash used in operating  activities
was  primarily  attributed  to a net  loss  of  $10.1  million,  adjusted  for a
depreciation and amortization of $850,000, and a decrease in accounts receivable
of $1.7  million.  For the six  months  ended  June 30,  2001  net cash  used in
operating activities was primarily  attributable to a net loss of $14.2 million,
adjusted for  depreciation  and amortization of $1.4 million and amortization of
deferred  stock  compensation  and other of  $433,000,  a decrease  in  deferred
revenue of $7.1 million,  and a decrease in accrued  liabilities of $1.2 million
offset by a decrease in accounts receivable of $3.0 million.

         Net cash used in  investing  activities  was $7.3  million  for the six
months  ended June 30, 2002 and net cash  provided by investing  activities  was
$15.3 million for the six months ended June 30, 2001. Net cash used in investing
activities for the six months ended June 30, 2002 was primarily  attributable to
the  purchases  of  short-term  investments.  Net  cash  provided  by  investing
activities for the six months ended June 30, 2001 was primarily  attributable to
maturities of short-term investments.

         Net cash  provided by  financing  activities  was  $180,000 for the six
months  ended June 30,  2002 due to  payments on capital  lease  obligations  of
$132,000  offset by proceeds  from  employee  stock plans of $312,000.  Net cash
provided by financing  activities was $105,000 for the six months ended June 30,
2001,  primarily due to payments on notes payable and capital lease  obligations
of $839,000, offset by proceeds from employee stock plans of $944,000.

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

                                       13
<PAGE>


                                  RISK FACTORS

The following is a discussion of certain  factors that  currently  impact or may
impact  our  business,   operating  results  and/or  financial  condition.   Any
investment  in our  common  stock  involves  a high  degree of risk.  You should
consider carefully the following information about these risks in evaluating our
business.  The market price of our common stock could decline,  and you may lose
all or part of the money you paid to buy our common stock.


                          RISKS RELATED TO OUR BUSINESS

Our limited  operating  history  and the fact that we operate in a new  industry
make our business prospects difficult to evaluate.

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

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

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

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

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

         -        continue to attract and retain qualified personnel;

         -        expand  direct sales  channels and indirect  channels  such as
                  relationships with OEM customers and distributors;

         -        increase awareness of our brand; and

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

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

We have a history of losses and  negative  cash flow and expect this to continue
into the current fiscal year.

         Our  business is new; we have offered  products for a relatively  short
period of time;  and our base of customers  and  prospective  customers is still
relatively small. We have spent significant funds to date to develop our current
products  and to  develop  our  sales and  market  resources.

                                       14
<PAGE>


We  have   incurred   significant   operating   losses  and  have  not  achieved
profitability.  As of June 30,  2002,  we had an  accumulated  deficit of $110.5
million.  We expect to continue to invest in research and development to enhance
current  products and develop future  products and support our current sales and
marketing  efforts that promote our company and our products in the marketplace.
As a result,  we will need to increase  our  revenues  significantly  to achieve
profitability.  In  addition,  because  we expect to  continue  to invest in our
business ahead of anticipated  future revenues,  we expect that we will continue
to incur operating losses through the current fiscal year.

Our  business is changing  rapidly,  which could cause our  quarterly  operating
results to vary and our stock price to fluctuate.

         Our revenues and operating results may vary  significantly from quarter
to quarter  due to a number of  factors,  many of which are beyond our  control.
Even  after  our   reorganization   in  April  of  2002,   where  headcount  was
significantly  reduced,  we expect to continue to make expenditures in all areas
of our business 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;

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

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

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

We face intense competition, which could affect our ability to increase revenue,
maintain our margins and increase market share.

                                       15
<PAGE>


         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, Concur Technologies,  IBM,
PeopleSoft and Oracle. As a result of the large market  opportunity for employee
relationship   management  solutions  we  also  expect  competition  from  other
established and emerging companies.

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

If we do not provide  software  applications  and related services that meet the
changing demands of our customers,  the market for our products will not grow or
may decline, and our product sales will suffer.

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

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

                                       16
<PAGE>


In any given  quarter,  our revenues  have been derived from a relatively  small
number  of  customers,  and the loss of a small  number  of major  customers  or
potential  customers could adversely impact our quarterly  revenues or operating
results.

         We expect that we will continue to derive a significant  portion of our
revenues from a relatively small number of customers in the future. Accordingly,
the loss of a small number of major  customers  could  materially  and adversely
affect our business, and the deferral or loss of anticipated orders from a small
number of  prospective  customers  could  materially  and  adversely  impact our
quarterly revenues and operating results in any period.

If we are unable to maintain our Nasdaq National  Market listing,  the liquidity
of our common stock would be seriously limited.

         Since July 3, 2002,  our stock had  minimum  closing bid prices of less
than $1.00 per share,  which is the minimum bid price  requirement for continued
listing with the Nasdaq National  Market.  If we fail to comply with the minimum
bid price  requirement  for 30 straight  trading days, we will likely  receive a
deficiency notice from the Nasdaq National Market. We will then have 90 calendar
days to reestablish compliance with that requirement. To reestablish compliance,
our  minimum  closing  bid  price  must be more  than  $1.00  per  share  for 10
consecutive  trading  days.  If we  do  not  reestablish  compliance  with  this
requirement during the 90-day period, Nasdaq will commence delisting proceedings
and we may be delisted from the Nasdaq National Market. Our shares will continue
to  trade  on  the  Nasdaq  National  Market  unless  and  until  the  delisting
proceedings have commenced and been completed and the Nasdaq National Market has
made a determination to delist us. In the event our shares are delisted from the
Nasdaq National  Market,  we will attempt to have our common stock traded on the
Nasdaq Small Cap Market.  If our common stock is  delisted,  it could  seriously
limit the  liquidity  of our common  stock and would  limit our ability to raise
future capital through the sale of our common stock,  which could seriously harm
our business.

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

         For the  three-month  and six-month  periods  ended June 30, 2002,  our
service  margins  were  positive.  While we  anticipate  that our  margins  will
continue to be positive in the future, we cannot guarantee that they will remain
positive.  Failure to maintain  positive margins on service revenues would cause
our business to suffer.  For more  information  related to our costs  associated
with  our  service  revenues,  see  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations."

Evolving technological developments and emerging industry standards will require
us to enhance the functionality of our employee relationship management software
applications,  and any inability to enhance  functionality could cause our sales
to decline.

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

                                       17
<PAGE>


         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.

If we fail to expand our  relationships  with  third  parties  that can  provide
implementation  and consulting  services to our  customers,  we may be unable to
grow our revenues and our business could be harmed.

         In order  for us to focus  more  effectively  on our core  business  of
developing  and  licensing  software  solutions,  we must  continue to establish
relationships with third parties that can provide  implementation and consulting
services to our customers.  Third-party  implementation and consulting firms can
also be influential in the choice of employee  relationship  management software
applications by new customers.  To date, we have established  relationships with
several third-party implementation and consulting firms. In general, however, if
we are unable to establish and maintain effective,  long-term relationships with
implementation and consulting  providers,  or if these providers do not meet the
needs or  expectations  of our customers,  we may be unable to grow our revenues
and our business could be seriously harmed. As a result of the limited resources
and capacities of many third-party implementation providers, we may be unable to
attain sufficient focus and resources from the third-party providers to meet all
of our customers'  needs,  even if we establish  relationships  with these third
parties. If sufficient resources are unavailable, we will be required to provide
these services  internally,  which could limit our ability to expand our base of
customers.  A number of our  competitors  have  significantly  more  established
relationships with these third parties and, as a result, these third parties may
be more likely to recommend  competitors'  products and services rather than our
own.  Even if we are  successful  in developing  additional  relationships  with
third-party  implementation  and  consulting  providers,  we will be  subject to
significant risk, as we cannot control the level and quality of service provided
by third-party implementation and consulting partners.

Our   expectations   of  future   growth   depend  on  our   ability  to  expand
internationally, and factors specific to our international expansion may prevent
us from achieving our anticipated growth.

         Over time, we intend to expand our international  operations to achieve
our  anticipated  growth,  but  we  may  face  significant   challenges  to  our
international  expansion. The expansion of our existing international operations
and  entry  into  additional  international  markets  will  require  significant
management  attention and financial  resources.  To achieve broad  acceptance in
international  markets,  our  products  must be localized to handle a variety of
factors  specific  to each  international  market,  such as tax laws  and  local
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

                                       18
<PAGE>


localized our product for the markets  where the English  language is the native
language and completed  translations for the German, French, Italian and Spanish
languages.

         We have only a limited history of marketing, selling and supporting our
products and services  internationally.  In 1999, we opened a regional office in
the United Kingdom. In 2000, we expanded our European Operations through opening
a second office in Frankfurt,  Germany;  however,  as part of our  restructuring
plan  implemented in April of 2002, we closed the Frankfurt  office.  As of June
30, 2002, we had a total of 10 employees in our  international  operations.  For
the six months ended June 30, 2002, we derived approximately 12% 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.

                                       19
<PAGE>


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

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

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. None of our senior management is
obligated  to continue to provide  services to the Company.  Over time,  we will
need to hire  additional  personnel in all  operational  areas.  Competition for
personnel in our industry is intense.  We have in the past  experienced,  and we
expect to  continue  to  experience  in the  future,  difficulty  in hiring  and
retaining highly skilled employees with appropriate qualifications. If we do not
succeed in attracting or retaining  personnel,  our business  could be adversely
affected.

Software defects could lead to loss of revenue or delay the market acceptance of
our applications.

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

We may become increasingly dependent on third-party software incorporated in our
products and, if so,  impaired  relations  with these third  parties,  errors in
third-party  software or inability to enhance the software  over time could harm
our business.

         We incorporate third-party software into our products.  Currently,  the
third-party software we use includes application server software that we license
from BEA Systems,  off-line  database  software from Pointbase,  off-line client
server  software from Pumatech,  synchronization  software from Aether  Systems,
reporting   software  from  Business   Objects  and  Java  Web  Start  from  Sun
Microsystems.  We may  incorporate  additional  third-party  software  into  our
products  as we

                                       20
<PAGE>


expand our product line and broaden the content and services  accessible through
our gateway.  The operation of our products would be impaired if errors occur in
the  third-party  software that we license.  It may be more  difficult for us to
correct any errors in  third-party  software  because the software is not within
our control.  Accordingly, our business would be adversely affected in the event
of any  errors in this  software.  Furthermore,  it may be  difficult  for us to
replace any  third-party  software if a vendor seeks to terminate our license to
the software.

Our  success  depends  in part upon our  ability  to  protect  our  intellectual
property and we may not be able to do so adequately.

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

         Despite  our efforts to protect our  proprietary  rights,  unauthorized
parties  may  attempt  to copy  aspects  of our  products  or to obtain  and use
information  that we regard as  proprietary.  Policing  unauthorized  use of our
products is difficult,  and while we are unable to determine the extent to which
piracy of our software products exists,  software piracy can be expected to be a
persistent  problem.  In  addition,  the laws of some  foreign  countries do not
protect  our  proprietary  rights  to as great an  extent  as do the laws of the
United States of America. Our means of protecting our proprietary rights may not
be adequate and our competitors may  independently  develop similar  technology,
duplicate our products, or design around our proprietary intellectual property.

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

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

                                       21
<PAGE>


breaches  affecting  the  Internet  in  general,  could  significantly  harm our
business, operating results and financial condition.

We may face costly  damages or litigation  costs if a third party claims that we
infringe its intellectual property.

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

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

         In November 2001, the Company and certain of its officers and directors
were named as defendants in a class action  shareholder  complaint  filed in the
United States District Court for the Southern District of New York now captioned
In re Extensity,  Inc.  Initial Public Offering  Securities  Litigation.  In the
complaint,  the plaintiffs allege that the Company,  certain of its officers and
directors and the  underwriters of its initial public offering  ("IPO") violated
the federal securities laws because the Company's IPO registration statement and
prospectus  contained  untrue  statements of material  fact or omitted  material
facts  regarding the  compensation  to be received by, and the stock  allocation
practices of, the IPO  underwriters.  The plaintiffs seek  unspecified  monetary
damages  and other  relief.  Similar  complaints  were  filed in the same  court
against  hundreds of public  companies that conducted IPOs of their common stock
since the  mid-1990s.  This  action may  divert the  efforts  and  attention  of
management  and, if determined  adversely to the Company,  could have a material
impact on our business.

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.

                                       22
<PAGE>


We have anti-takeover  provisions in our charter and in our contracts that could
delay or prevent an  acquisition  of our  company,  even if such an  acquisition
would be beneficial to our stockholders.

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

Our business may face additional risks and  uncertainties not presently known to
us, which would cause our business to suffer.

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


                          RISKS RELATED TO OUR INDUSTRY

Our success will depend upon the growth and  acceptance of the market we address
and  our  ability  to  meet  the  needs  of the  emerging  market  for  employee
relationship management software applications.

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

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

         The stock market has experienced  significant  price and trading volume
fluctuations  and the  market  prices of  technology  companies  generally,  and
Internet-related software companies particularly,  have been extremely volatile.
Investors may not be able to resell their shares at or above the price they paid
for the stock. In the past,  following periods of volatility in the market price
of a public company's  securities,  securities class action litigation has often
been instituted  against that company.  Such  litigation  would likely result in
substantial costs and diversion of management's attention and resources.

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

                                       23
<PAGE>


usage and decrease its acceptance as a communications  and commercial medium. If
enacted,  these  laws,  rules or  regulations  could  limit the  market  for our
products and services.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

         We develop  products  in the United  States and market our  products in
North America and, to a lesser extent, in Europe and the rest of the world. As a
result,  our  financial  results could be affected by factors such as changes in
foreign currency rates or weak economic  conditions in foreign markets.  Because
the  majority of our revenues  are  currently  denominated  in U.S.  dollars,  a
strengthening  of the dollar could make our products less competitive in foreign
markets.

INTEREST RATE RISK

         We have an investment  portfolio of money market funds and fixed income
certificates  of deposit.  The fixed income  certificates  of deposit,  like all
fixed  income  securities,  are subject to  interest  rate risk and will fall in
value if market  interest rates  increase.  We attempt to limit this exposure by
investing primarily in short-term  securities.  In view of the nature and mix of
our total  portfolio,  a 10% movement in market  interest rates would not have a
significant impact on the total value of our portfolio as of June 30, 2002.


                           PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

         In November 2001, the Company and certain of its officers and directors
were named as defendants in a class action  shareholder  complaint  filed in the
United  States  District  Court  for the  Southern  District  of New  York,  now
captioned, In re Extensity,  Inc. Initial Public Offering Securities Litigation.
In the  complaint,  the  plaintiffs  allege  that the  Company,  certain  of its
officers and  directors  and the  underwriters  of its initial  public  offering
("IPO")  violated  the  federal   securities  laws  because  the  Company's  IPO
registration  statement and prospectus  contained untrue  statements of material
fact or omitted material facts regarding the compensation to be received by, and
the stock  allocation  practices of, the IPO  underwriters.  The plaintiffs seek
unspecified monetary damages and other relief.  Similar complaints were filed in
the same court against hundreds of other public companies that conducted IPOs of
their common stock since the mid-1990s (collectively, the "IPO Lawsuits").

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

         In  accordance  with  Judge  Scheindlin's   orders  at  further  status
conferences  in March and April,  the appointed lead  plaintiffs'  counsel filed
amended,  consolidated  complaints  in the  IPO  Lawsuits  on  April  19,  2002.
Defendants then filed motions to dismiss the IPO lawsuits on July 1 and July 15,
2002,  as to which the Court does not expect to issue a decision  until at least
November  2002.  The Company  believes  that this  lawsuit is without  merit and
intends to defend against it vigorously.


                                       24
<PAGE>


ITEM 2. Changes in Securities and Use of Proceeds

a.       Not applicable.

b.       Not applicable.

c.       Not applicable.

d.       Not applicable.


ITEM 3. Defaults Upon Senior Securities

None.


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

The  Company's  annual  meeting of  stockholders  was held on May 31,  2002 (the
"Annual Meeting"). The following matters were voted upon at the Annual Meeting:

Proposal 1 - To elect  directors  to hold office  until 2003  Annual  Meeting of
Stockholders and until their successors are elected.

                                            For               Withheld Authority
                                            ---               ------------------

Robert A. Spinner                       21,485,121                     66,674
Sharam I. Sasson                        21,529,848                     21,947
Christopher D. Brennan                  21,483,448                     68,347
John R. Hummber                         21,431,275                    120,520
David A. Reed                           21,431,448                    120,347
Ted E. Schlein                          21,484,048                     67,747

Proposal  2  -  To  ratify  the  selection  of  PricewaterhouseCoopers   LLP  as
independent  auditors of the Company  for its fiscal  year ending  December  31,
2002.

                                            For          Against         Abstain
                                            ---          -------         -------
                                        21,483,558       61,010           7,227

                                       25
<PAGE>


ITEM 5. Other Information

In accordance with Section 10A(i)(2) of the Securities  Exchange Act of 1934, as
added by  Section  202 of the  Sarbanes-Oxley  Act of 2002 (the  "Act"),  we are
required to disclose the non-audit  services  approved by our Audit Committee to
be performed by  PricewaterhouseCoopers  LLP,  our external  auditor.  Non-audit
services  are  defined  in the Act as  services  other than  those  provided  in
connection  with an audit or a review of the financial  statements of a company.
The Audit  Committee has not approved the  engagement of  PricewaterhouseCoopers
LLP for any non-audit services.


ITEM 6. Exhibits and Reports on Form 8-K

(a)      Exhibits

Exhibits  10.11.1,  10.14 and 99.1 are filed as  updates  to the  exhibit  index
included  in the  Company's  Form 10-K filed with the SEC on April 1, 2002 (File
No. 000-28897).

Exhibit 10.11.1 Extensity,  Inc. Amended and Restated 2000  Non-statutory  Stock
Option Plan.

Exhibit 10.14  Extensity,  Inc.  Executive Change of Control  Severance  Benefit
Plan.

Exhibit 99.1 -  Certification  by Chief  Executive  Officer and Chief  Financial
Officer.

None.

(b) Reports on Form 8-K:

None.


                                       26
<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.


August 14, 2002                                   EXTENSITY, INC.


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

                                       27