Sample Business Contracts


Share Purchase Agreement [Amendment No. 1] - eLoyalty Corp., Technology Crossover Ventures and Sutter Hill Ventures

Stock Purchase Forms



                   AMENDMENT NO. 1 TO SHARE PURCHASE AGREEMENT

      THIS AMENDMENT NO. 1 TO SHARE PURCHASE AGREEMENT (this "Amendment") is
made as of December 19, 2001, by and among eLOYALTY CORPORATION, a Delaware
corporation (the "Company"), and the investors listed on Exhibit A hereto, each
of which is herein referred to as an "Investor" and all of which are
collectively referred to herein as the "Investors."

                                    RECITALS

      WHEREAS, the Company has entered into that certain Share Purchase
Agreement, dated as of September 24, 2001, with the Investors (the "Share
Purchase Agreement"); and

      WHEREAS, the Company and the Investors desire to amend the Share Purchase
Agreement to revise the allocation of Shares (as such term is defined in the
Share Purchase Agreement) to be purchased by certain of the Investors pursuant
to the Share Purchase Agreement and to reflect certain other agreements among
them.

                                    AGREEMENT

      NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto, intending to be
legally bound, hereby agree as follows:

      1. Amendment of Exhibit A. Exhibit A to the Share Purchase Agreement is
hereby amended and restated in its entirety to read as is set forth as Exhibit A
to this Amendment.

      2. Amendment of Exhibit B. Exhibit B to the Share Purchase Agreement is
hereby amended and restated in its entirety to read as is set forth as Exhibit B
to this Amendment.

      3. Amendment of Section 7.6. Each reference to "December 31, 2002" in
Section 7.6 of the Share Purchase Agreement is hereby replaced in its entirety
by "December 15, 2002."

      4. No Other Amendments. Except as amended hereby, the Share Purchase
Agreement shall remain in full force and effect.

      5. Governing Law. This Amendment shall be governed in all respects by the
laws of the State of Illinois without regard to choice of laws or conflict of
laws provisions thereof.

      6. Counterparts. This Amendment may be executed in any number of
counterparts and signatures may be delivered by facsimile, each of which may be
executed by less than all Investors, each of which shall be enforceable against
the parties actually executing such counterparts, and all of which together
shall constitute one instrument.


                                       1
<PAGE>

      IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.

                                THE COMPANY:

                                eLOYALTY CORPORATION


                                By:    /s/ Timothy J. Cunningham
                                   ---------------------------------------------
                                Name:  Timothy J. Cunningham
                                Title: Senior Vice President and Chief Financial
                                       Officer

                                Address: 150 Field Drive, Suite 250
                                         Lake Forest, IL 60045


                                       2
<PAGE>

THE INVESTORS:

      TCV IV, L.P., a Delaware limited partnership
      By: Technology Crossover Management IV, L.L.C.
      Its: General Partner

      By:       /s/ Carla S. Newell
         -----------------------------------------
         Name:  Carla S. Newell
         Title: Attorney in Fact


      TCV IV STRATEGIC PARTNERS, L.P., a Delaware limited partnership
      By:  Technology Crossover Management IV, L.L.C.
      Its: General Partner

      By:       /s/ Carla S. Newell
         -----------------------------------------
         Name:  Carla S. Newell
         Title: Attorney in Fact


      TCV III (GP), a Delaware general partnership
      By:  Technology Crossover Management III, L.L.C.
      Its: General Partner

      By:       /s/ Carla S. Newell
         -----------------------------------------
         Name:  Carla S. Newell
         Title: Attorney in Fact


      TCV III, L.P., a Delaware limited partnership
      By:  Technology Crossover Management III, L.L.C.
      Its: General Partner

      By:       /s/ Carla S. Newell
         -----------------------------------------
         Name:  Carla S. Newell
         Title: Attorney in Fact


      TCV III (Q), L.P., a Delaware limited partnership
      By:  Technology Crossover Management III, L.L.C.
      Its: General Partner

      By:       /s/ Carla S. Newell
         -----------------------------------------
         Name:  Carla S. Newell
         Title: Attorney in Fact


                                       3
<PAGE>

      TCV III STRATEGIC PARTNERS, L.P., a Delaware limited partnership
      By:  Technology Crossover Management III, L.L.C.
      Its: General Partner

      By:       /s/ Carla S. Newell
         -----------------------------------------
         Name:  Carla S. Newell
         Title: Attorney in Fact


      SUTTER HILL VENTURES, a California limited partnership
      By:  Sutter Hill Ventures, LLC
      Its: General Partner

      By:       /s/ Tench Coxe
         -----------------------------------------
         Name:  Tench Coxe
         Title: Managing Director


      SUTTER HILL ENTREPRENEURS FUND (AI), L.P.,
      a California limited partnership
      By:  Sutter Hill Ventures, LLC
      Its: General Partner

      By:       /s/ Tench Coxe
         -----------------------------------------
         Name:  Tench Coxe
         Title: Managing Director


      SUTTER HILL ENTREPRENEURS FUND (QP), L.P.,
      a California limited partnership
      By:  Sutter Hill Ventures, LLC
      Its: General Partner

      By:       /s/ Tench Coxe
         -----------------------------------------
         Name:  Tench Coxe
         Title: Managing Director


      SUTTER HILL ASSOCIATES, L.P., a California limited partnership

              /s/ Tench Coxe
         -----------------------------------------
         By:  Tench Coxe
         Its: General Partner


                                       4
<PAGE>

                                   EXHIBIT A

                             SCHEDULE OF INVESTORS

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
The following are the "TCV                    Maximum Aggregate Investment:      Percentage of TCV
Investors" for the purposes of                                                   Shares:
the Agreement (list continues
on multiple pages):
-------------------------------------------------------------------------------------------------------------
<S>                                           <C>                                <C>
TCV IV, L.P., a Delaware                      $12,027,468.00                     80.18312%
limited partnership
528 Ramona Street
Palo Alto, California 94301
Fax: 650-614-8222
(principal address)

56 Main Street, Suite 210
Millburn, New Jersey 07041
(copy)
-------------------------------------------------------------------------------------------------------------
TCV IV STRATEGIC                              $452,658.00                        3.01772%
PARTNERS, L.P., a Delaware
limited partnership
528 Ramona Street
Palo Alto, California 94301
Fax: 650-614-8222
(principal address)

56 Main Street, Suite 210
Millburn, New Jersey 07041
(copy)
-------------------------------------------------------------------------------------------------------------
TCV III (GP), a Delaware                      $18,298.50                         .12199%
general partnership
528 Ramona Street
Palo Alto, California 94301
Fax: 650-614-8222
(principal address)

56 Main Street, Suite 210
Millburn, New Jersey 07041
(copy)
-------------------------------------------------------------------------------------------------------------
</TABLE>


                                       5
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
The following are the "TCV                    Maximum Aggregate Investment:      Percentage of TCV
Investors" for the purposes of                                                   Shares:
the Agreement (list continues
on multiple pages):
-------------------------------------------------------------------------------------------------------------
<S>                                           <C>                                <C>
TCV III, L.P., a Delaware                     $86,916.00                         .57944%
limited partnership
528 Ramona Street
Palo Alto, California 94301
Fax: 650-614-8222
(principal address)

56 Main Street, Suite 210
Millburn, New Jersey 07041
(copy)
-------------------------------------------------------------------------------------------------------------
TCV III (Q), L.P., a Delaware                 $2,310,078.00                      15.40052%
limited partnership
528 Ramona Street
Palo Alto, California 94301
Fax: 650-614-8222
(principal address)

56 Main Street, Suite 210
Millburn, New Jersey 07041
(copy)
-------------------------------------------------------------------------------------------------------------
TCV III STRATEGIC                             $104,581.50                        .69721%
PARTNERS, L.P., a Delaware
limited partnership
528 Ramona Street
Palo Alto, California 94301
Fax: 650-614-8222
(principal address)

56 Main Street, Suite 210
Millburn, New Jersey 07041
(copy)
-------------------------------------------------------------------------------------------------------------
</TABLE>


                                       6
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
The following are the "SH                     Maximum Aggregate Investment:      Percentage of SH
Investors" for the purposes of                                                   Shares:
the Agreement (list continues
on multiple pages):
-------------------------------------------------------------------------------------------------------------
<S>                                           <C>                                <C>
SUTTER HILL VENTURES,                         $7,169,888.00                      71.69888%
a California limited
partnership
755 Page Mill Road
Suite A-200
Palo Alto, California 94304
Fax: 650-858-1854
-------------------------------------------------------------------------------------------------------------
SUTTER HILL                                   $70,913.00                         .70913%
ENTREPRENEURS FUND
(AI), L.P., a California limited
partnership
755 Page Mill Road
Suite A-200
Palo Alto, California 94304
Fax: 650-858-1854
-------------------------------------------------------------------------------------------------------------
SUTTER HILL                                   $179,551.00                        1.79551%
ENTREPRENEURS FUND
(QP), L.P., a California limited
partnership
755 Page Mill Road
Suite A-200
Palo Alto, California 94304
Fax: 650-858-1854
-------------------------------------------------------------------------------------------------------------
SUTTER HILL                                   $2,579,648.00                      25.79648%
ASSOCIATES, L.P., a
California limited partnership
755 Page Mill Road
Suite A-200
Palo Alto, California 94304
Fax: 650-858-1854
-------------------------------------------------------------------------------------------------------------
</TABLE>


                                       7
<PAGE>

                                    EXHIBIT B

                           CERTIFICATE OF DESIGNATIONS

                                       OF

                     7% SERIES B CONVERTIBLE PREFERRED STOCK

                             OF ELOYALTY CORPORATION

                         Pursuant to Section 151 of the

                General Corporation Law of the State of Delaware

      The undersigned do hereby certify that the following resolution was duly
adopted by the Board of Directors of eLoyalty Corporation, a Delaware
corporation, on December 19th, 2001:

      WHEREAS, the Certificate of Incorporation of eLoyalty Corporation, a
Delaware corporation (the "Corporation"), authorizes the Corporation to issue a
total of [___________] shares of preferred stock, par value $.01 per share
("Preferred Stock"), which may be divided into one or more series as the Board
of Directors may determine;

      WHEREAS, the Certificate of Incorporation of the Corporation expressly
vests in the Board of Directors the authority to fix and determine the
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions, of the Preferred Stock;

      WHEREAS, the Board of Directors deems it advisable to designate a series
of the Preferred Stock consisting of [__________] shares designated as 7% Series
B Convertible Preferred Stock; and

      WHEREAS, immediately prior to the filing of this Certificate of
Designation with the Secretary of State of the State of Delaware, the
Corporation filed an amendment to its Certificate of Incorporation which, among
other things, gave effect to a one-for-ten reverse stock split of the
Corporation's common stock, $.01 par value per share.

      NOW, THEREFORE, IT IS HEREBY RESOLVED, that pursuant to Article IV of the
Certificate of Incorporation of the Corporation, there be and hereby is
authorized and created a series of Preferred Stock hereby designated as 7%
Series B Convertible Preferred Stock, to consist of [_____________] shares,
having a par value of $.01 per share, which series shall have the voting rights,
designations, powers, preferences, relative and other special rights, and the
qualifications, limitations and restrictions set forth below:

      Series B Convertible Preferred Stock. [______________] of the authorized
shares of Preferred Stock are hereby designated "7% Series B Convertible
Preferred Stock" (the "Series B


                                       8
<PAGE>

Preferred Stock"). The rights, preferences, privileges, restrictions and other
matters relating to the Series B Preferred Stock are as follows:

      (a)   Dividend Rights.

            (i) Subject to the right of any other series of Preferred Stock that
      may from time to time come into existence and which is expressly senior to
      the rights of the Series B Preferred Stock, the holders of Series B
      Preferred Stock, in preference to the holders of common stock, par value
      $.01 per share, of the Corporation (the "Common Stock"), the Series A
      Junior Participating Preferred Stock, par value $.01 per share, of the
      Corporation and any other stock of the Corporation hereafter created which
      shall be junior to the Series B Preferred Stock (together, "Series B
      Junior Stock"), shall be entitled to receive dividends, when, as and if
      declared by the Board of Directors, but only out of funds that are legally
      available therefor, at the rate of 7% of the Series B Original Issue Price
      (as defined below) per annum (the "Series B Dividend Rate") on each
      outstanding share of Series B Preferred Stock (as adjusted for any stock
      dividends, combinations, splits, recapitalizations and the like with
      respect to such shares). For any share of Series B Preferred Stock, such
      dividends shall begin to accrue commencing upon the first date such share
      is issued and becomes outstanding and shall be payable semi-annually in
      cash on January 1 and July 1 of each year, beginning on July 1, 2002
      (each, a "Dividend Payment Date"), provided, that, (i) if any such
      Dividend Payment Date is not a Business Day, then any such dividend shall
      be payable on the next Business Day, and (ii) any such dividend shall be
      payable only as the Board of Directors may from time to time determine,
      and only when, as and if declared by the Board of Directors. Subject to
      the foregoing, any such dividend shall be paid to the holders of record at
      the close of business on the date specified by the Board of Directors at
      the time such dividend is declared, provided, however, that such date may
      not be more than 60 days nor less than 10 days prior to the applicable
      dividend payment date. Such dividends shall accrue day by day and shall be
      cumulative, whether or not declared by the Board of Directors and whether
      or not there shall be funds legally available for the payment of
      dividends. The original issue price of the Series B Preferred Stock shall
      be $5.10 (the "Series B Original Issue Price"). Dividends payable for any
      period shorter or longer than a semi-annual dividend period shall be
      computed on the basis of a 360-day year of twelve 30-day months. Dividends
      in arrears may be declared by the Board of Directors and paid on any date
      fixed by the Board of Directors, without reference to any regular Dividend
      Payment Date. Any dividend paid upon the Series B Preferred Stock at a
      time when any accrued dividends for any prior periods are delinquent shall
      be expressly declared as a dividend in whole or partial payment of the
      accrued dividend for the earliest period or periods for which dividends
      are then delinquent, and shall be so designated to each holder to whom
      payment is made thereof. The term "Business Day" means any day other than
      a Saturday, a Sunday or a day on which banking institutions in the City of
      Chicago, Illinois are authorized or required by law to be closed.

            (ii) So long as any shares of Series B Preferred Stock shall be
      outstanding, without the prior written consent of the holders of a
      majority of the then issued and


                                       9
<PAGE>

      outstanding shares of Series B Preferred Stock, no dividend (other than a
      Common Stock dividend paid pro rata to the Corporation's stockholders),
      whether in cash, securities or other property, shall be paid or declared,
      nor shall any other distribution (other than a Common Stock dividend paid
      pro rata to the Corporation's stockholders) be made, on any Series B
      Junior Stock, nor shall any shares of any Series B Junior Stock of the
      Corporation be purchased, redeemed or otherwise acquired for value by the
      Corporation or any of its subsidiaries (except (A) for acquisitions of
      Common Stock by the Corporation or its subsidiaries pursuant to
      stock-based compensation arrangements or agreements that permit the
      Corporation to repurchase such shares upon termination of services to the
      Corporation or its subsidiaries for a price not greater than the cost
      thereof to the applicable service provider, (B) for acquisitions by the
      Corporation or its subsidiaries in whole or partial satisfaction of the
      exercise price or applicable tax withholding requirements in respect of
      any option, restricted stock or similar award made pursuant to any
      compensation or benefit plan, agreement or arrangement maintained or
      assumed by the Corporation or its subsidiaries and (C) by conversion into
      or exchange for Series B Junior Stock or any security convertible into or
      exchangeable for Series B Junior Stock) until all dividends (set forth in
      Section (a)(i) above) then accrued on the Series B Preferred Stock shall
      have been paid or declared and set apart. In the event that the
      Corporation shall declare a dividend or distribution payable in securities
      of the Corporation or of other persons (other than a dividend paid solely
      in shares of Common Stock), evidences of indebtedness issued by the
      Corporation or other persons, or options or rights to purchase any such
      securities or evidences of indebtedness or other assets (including cash)
      to the holders of the Common Stock, then the holders of the Series B
      Preferred Stock shall be entitled to a proportionate share of any such
      dividend or distribution as though the holders of the Series B Preferred
      Stock were the holders of the number of shares of Common Stock into which
      their respective shares of Series B Preferred Stock are convertible as of
      the record date fixed for the determination of the holders of the Common
      Stock entitled to receive such dividend or distribution (calculated as if
      the Series B Preferred Stock were convertible upon the Series B Original
      Issue Date and without consideration of the restriction on conversion
      contained in Section (d)(i) hereof).

      (b)   Voting Rights.

            (i) General Rights. Except as otherwise provided herein or as
      required by law, the Series B Preferred Stock shall be voted equally with
      the shares of the Common Stock of the Corporation and not as a separate
      class, at any annual or special meeting of stockholders of the
      Corporation, upon the following basis: each holder of shares of Series B
      Preferred Stock shall be entitled to such number of votes as shall be
      equal to the whole number of shares of Common Stock into which such
      holder's aggregate number of shares of Series B Preferred Stock are
      convertible pursuant to Section (d) hereof immediately after the close of
      business on the record date fixed for such meeting or the effective date
      of such written consent (calculated as if the Series B Preferred Stock
      were convertible upon the Series B Original Issue Date and without
      consideration of the restriction on conversion contained in Section (d)(i)
      hereof).


                                       10
<PAGE>

            (ii) Separate Vote of Series B Preferred Stock. In addition to any
      other vote or consent required herein or by law, the vote of the holders
      of at least a majority of the outstanding Series B Preferred Stock shall
      be necessary for effecting or validating the following actions:

                  (A) any action that authorizes, creates or results in the
            issuance of any class or series of stock or any other securities
            convertible into or exercisable for equity securities of the
            Corporation having rights, preferences or privileges senior to or on
            a parity with the Series B Preferred Stock;

                  (B) any increase or decrease in the authorized number of
            shares of Series B Preferred Stock; or

                  (C) any amendment, waiver, alteration or repeal of any
            provisions of the Certificate of Incorporation (including without
            limitation by merger, consolidation or otherwise) or Bylaws of the
            Corporation in a way that, directly or indirectly, adversely affects
            the rights, preferences or privileges of the Series B Preferred
            Stock.

            (iii) Special Voting Rights. During the period beginning on the
      Series B Original Issue Date (as defined below), and ending on the date
      which is six months after the Series B Original Issue Date, the
      Corporation shall not consummate any Sale Transaction to which it is a
      party unless such Sale Transaction has been approved by the affirmative
      vote of the holders of at least 85% of the Series B Preferred Stock
      present in person or by proxy and entitled to vote at a stockholder
      meeting called for the purpose of approving such Sale Transaction.

      (c)   Liquidation Rights.

            (i) Upon any liquidation, dissolution, or winding up of the
      Corporation, whether voluntary or involuntary, before any distribution or
      payment shall be made to the holders of any Series B Junior Stock, subject
      to the rights of any series of Preferred Stock that may from time to time
      come into existence and which is expressly senior to the rights of the
      Series B Preferred Stock, the holders of Series B Preferred Stock shall be
      entitled to be paid in cash out of the assets of the Corporation an amount
      per share of Series B Preferred Stock equal to 100% of the Series B
      Original Issue Price (as adjusted for any stock dividends, combinations,
      splits, recapitalizations and the like with respect to such shares), plus
      an amount equal to accrued but unpaid dividends (the "Liquidation
      Preference"), for each share of Series B Preferred Stock held by each such
      holder. If, upon any such liquidation, dissolution, or winding up, the
      assets of the Corporation shall be insufficient to make payment in full of
      the Liquidation Preference to all holders of Series B Preferred Stock,
      then such assets shall be distributed among the holders of Series B
      Preferred Stock at the time outstanding, ratably in proportion to the full
      amounts to which they would otherwise be respectively entitled. After the
      payment of the foregoing full Liquidation Preference of the Series B
      Preferred Stock and any other distribution that may be required with
      respect to any


                                       11
<PAGE>

      series of Preferred Stock that may from time to time come into existence,
      the assets of the Corporation legally available for distribution, if any,
      shall be distributed ratably to the holders of the Series B Junior Stock
      and the Series B Preferred Stock, on an as converted basis; provided,
      however, that if, in connection with a Sale Transaction (as defined
      below), the holders of a share of the Common Stock (before giving effect
      to the payment of the Liquidation Preference but after giving effect to
      the payment of the liquidation preference of any other class of Preferred
      Stock and assuming conversion in full of the outstanding shares of Series
      B Preferred Stock into Common Stock) would receive consideration with a
      value of at least four times the Series B Original Issue Price (as
      adjusted for stock splits, stock dividends, combinations,
      recapitalizations and the like), then in lieu of the Liquidation
      Preference plus participation with the Series B Junior Stock provided for
      above, the holders of the Series B Preferred Stock shall receive the
      amount that they would be entitled to receive if all shares of Series B
      Preferred Stock were converted to Common Stock immediately prior to the
      Sale Transaction. The Corporation shall not enter into any Sale
      Transaction that does not provide for the treatment of the holders of
      Series B Preferred Stock in a manner consistent (assuming in the case of a
      merger or consolidation that the assets of the Corporation legally
      available for distribution equals the aggregate consideration to be
      received by the Corporation's stockholders in such merger or
      consolidation) with the provisions of this Section (c). In the event the
      requirements of the immediately preceding sentence are not complied with
      in connection with a Sale Transaction, the Corporation shall forthwith
      either (A) cause the closing of such Sale Transaction to be postponed
      until such time as such requirements have been complied with or (B) cancel
      such Sale Transaction, in which event the rights, preferences and
      privileges of the holders of the Series B Preferred Stock shall revert to
      and be the same as such rights, preferences and privileges existing
      immediately prior to the date of the first notice referred to in Section
      (c)(iv) hereof. Upon receipt by any holder of the full amount of the
      distributions to such holder as contemplated by this Section (c)(i) in
      respect of any share of Series B Preferred Stock, such share of Series B
      Preferred Stock shall be deemed to be retired and shall no longer be
      outstanding.

            (ii) The following events (each a "Sale Transaction") shall be
      considered a liquidation under this Section:

                  (A) any consolidation or merger of the Corporation with or
            into any other corporation or other entity or person, or any other
            corporate reorganization, in which the stockholders of the
            Corporation immediately prior to such consolidation, merger or
            reorganization, own less than 50% of the Corporation's voting power
            immediately after such consolidation, merger or reorganization, or
            any transaction or series of related transactions to which the
            Corporation is a direct contracting party in which in excess of 50%
            of the Corporation's voting power is transferred, excluding any
            consolidation or merger effected exclusively to change the domicile
            of the Corporation (an "Acquisition"); or

                  (B) a sale, lease or other disposition of all or substantially
            all of the assets of the Corporation (an "Asset Transfer").


                                       12
<PAGE>

            (iii) In any of the events set forth in subparagraph (ii), if the
      consideration received by the Corporation or its stockholders is other
      than cash, its value will be deemed its fair market value as determined in
      good faith by the Board of Directors. Any securities shall be valued as
      follows:

                  (A) Securities not subject to restrictions on free
            marketability covered by subparagraph (B) below:

                        (1) If traded on a securities exchange or through the
                  Nasdaq National Market (or a similar national quotation
                  system), the value shall be deemed to be the average of the
                  closing prices of the securities on such quotation system over
                  the 30 day period ending three days prior to the closing;

                        (2) If actively traded over-the-counter, the value shall
                  be deemed to be the average of the closing bid or sale prices
                  (whichever is applicable) over the 30 day period ending three
                  days prior to the closing; and

                        (3) If there is no active public market, the value shall
                  be the fair market value thereof, as determined in good faith
                  by the Board of Directors.

                  (B) The method of valuation of securities subject to
            restrictions on free marketability (other than restrictions arising
            solely by virtue of a stockholder's status as an affiliate or former
            affiliate) shall be to make an appropriate discount from the market
            value determined as above in subparagraphs (iii)(A)(1), (2) or (3)
            to reflect the approximate fair market value thereof, as determined
            in good faith by the Board of Directors.

            (iv) Written notice of any such liquidation, dissolution or winding
      up (or deemed liquidation, dissolution or winding up) of the Corporation
      within the meaning of this Section, which states the payment date, the
      place where said payments shall be made and the date on which conversion
      rights as set forth herein terminate as to such shares (which shall be not
      less than 10 days after the date of such notice), shall be given by first
      class mail, postage prepaid, or by telecopy or facsimile, not less than 20
      days prior to the payment date stated therein, to the then holders of
      record of Series B Preferred Stock, such notice to be addressed to each
      such holder at its address as shown on the records of the Corporation.

      (d) Conversion Rights. The holders of the Series B Preferred Stock shall
have the following rights with respect to the conversion of the Series B
Preferred Stock into shares of Common Stock:

            (i) Optional Conversion. Subject to and in compliance with the
      provisions of this Section (d), any shares of Series B Preferred Stock
      may, at the option of the holder, be converted at any time on and after
      the date which is six months after the Series B Original


                                       13
<PAGE>

      Issue Date into fully-paid and nonassessable shares of Common Stock. The
      number of shares of Common Stock to which a holder of Series B Preferred
      Stock shall be entitled upon conversion shall be the product obtained by
      multiplying the "Series B Preferred Conversion Rate" then in effect
      (determined as provided in subsection (ii)) by the number of shares of
      Series B Preferred Stock being converted.

            (ii) Series B Preferred Conversion Rate. The conversion rate in
      effect at any time for conversion of the Series B Preferred Stock (the
      "Series B Preferred Conversion Rate") shall be the quotient obtained by
      dividing the Series B Original Issue Price by the "Series B Preferred
      Conversion Price," calculated as provided in subsection (iii) below.

            (iii) Series B Preferred Conversion Price. The conversion price for
      the Series B Preferred Stock shall initially be the Series B Original
      Issue Price (the "Series B Preferred Conversion Price"). Such initial
      Series B Preferred Conversion Price shall be adjusted from time to time in
      accordance with this Section (d). All references to the Series B Preferred
      Conversion Price herein shall mean the Series B Preferred Conversion Price
      as so adjusted.

            (iv) Mechanics of Conversion. Each holder of Series B Preferred
      Stock who desires to convert the same into shares of Common Stock pursuant
      to this Section (d) shall surrender the certificate or certificates
      therefor, duly endorsed, at the office of the Corporation or any transfer
      agent for the Series B Preferred Stock, and shall give written notice to
      the Corporation at such office that such holder elects to convert the
      same. Such notice shall state the number of shares of Series B Preferred
      Stock being converted. Thereupon, the Corporation shall promptly issue and
      deliver at such office to such holder a certificate or certificates for
      the number of shares of Common Stock to which such holder is entitled and
      shall promptly pay in cash (at the Common Stock's fair market value
      determined by the Board of Directors as of the date of conversion) the
      value of any fractional share of Common Stock otherwise issuable to any
      holder of Series B Preferred Stock. Such conversion shall be deemed to
      have been made at the close of business on the date of such surrender of
      the certificates representing the shares of Series B Preferred Stock to be
      converted, and the person entitled to receive the shares of Common Stock
      issuable upon such conversion shall be treated for all purposes as the
      record holder of such shares of Common Stock on such date.

            (v) Adjustment Upon Common Stock Event. Upon the happening of a
      Common Stock Event (as hereinafter defined) at any time or from time to
      time after the date that the first share of Series B Preferred Stock is
      issued (the "Series B Original Issue Date"), the Series B Preferred
      Conversion Price shall, simultaneously with the happening of such Common
      Stock Event, be adjusted by multiplying the Series B Preferred Conversion
      Price in effect immediately prior to such Common Stock Event by a
      fraction, (i) the numerator of which shall be the number of shares of
      Common Stock issued and outstanding immediately prior to such Common Stock
      Event, and (ii) the denominator of which shall be the number of shares of
      Common Stock issued and outstanding immediately after such Common Stock
      Event, and the product so obtained shall thereafter be the Series B
      Preferred Conversion


                                       14
<PAGE>

      Price. The Series B Preferred Conversion Price shall be readjusted in the
      same manner upon the happening of each subsequent Common Stock Event. As
      used in this Section (d), the term "Common Stock Event" shall mean (i) the
      issue by the Corporation of additional shares of Common Stock as a
      dividend or other distribution on outstanding Common Stock, (ii) a
      subdivision of the outstanding shares of Common Stock into a greater
      number of shares of Common Stock (by stock split, reclassification or
      otherwise), or (iii) a combination or consolidation, by reclassification
      or otherwise, of the outstanding shares of Common Stock into a smaller
      number of shares of Common Stock (unless the Series B Preferred Stock is
      combined, consolidated or reclassified on an equal basis).

            (vi) Adjustment for Other Dividends and Distributions. If at any
      time or from time to time after the Series B Original Issue Date the
      Corporation pays a dividend or makes another distribution to the holders
      of the Common Stock (or fixes a record date for the determination of
      holders of Common Stock entitled to receive such dividend or other
      distribution) payable in securities of the Corporation or any of its
      subsidiaries other than shares of Common Stock, then in each such event
      provision shall be made so that the holders of Series B Preferred Stock
      shall receive upon conversion thereof, in addition to the number of shares
      of Common Stock receivable upon conversion thereof, the amount of
      securities of the Corporation or such subsidiary which they would have
      received had their Series B Preferred Stock been converted into Common
      Stock (determined as if the Series B Preferred Stock were convertible upon
      the Series B Original Issue Date and without consideration of the
      restriction on conversion contained in Section (d)(i) hereof) on the date
      of such event (or such record date, as applicable) and had they
      thereafter, during the period from the date of such event (or such record
      date, as applicable) to and including the conversion date, retained such
      securities receivable by them as aforesaid during such period, subject to
      all other adjustments called for during such period under this Section (d)
      with respect to the rights of the holders of the Series B Preferred Stock
      or with respect to such other securities by their terms. Notwithstanding
      the foregoing, the adjustment provided by this Section (d)(vi) shall not
      be made if the holders of the Series B Preferred Stock shall have received
      a proportionate dividend as provided in Section (a)(ii).

            (vii) Adjustment for Reclassification, Exchange and Substitution. If
      at any time or from time to time after the Series B Original Issue Date,
      the Common Stock issuable upon the conversion of the Series B Preferred
      Stock is changed into the same or a different number of shares of any
      class or classes of stock, whether by recapitalization, reclassification
      or otherwise (other than an Acquisition or Asset Transfer as defined in
      Section (c) or a subdivision or combination of shares or stock dividend or
      a reorganization, merger, consolidation or sale of assets provided for
      elsewhere in this Section (d)), in any such event each holder of Series B
      Preferred Stock shall have the right thereafter (to the extent such Series
      B Preferred Stock is convertible as otherwise provided herein) to convert
      such Series B Preferred Stock into the kind and amount of stock and other
      securities and property receivable upon such recapitalization,
      reclassification or other change by holders of the maximum number of
      shares of Common Stock into which such shares of Series B Preferred Stock
      could have been converted immediately prior to such recapitalization,


                                       15
<PAGE>

      reclassification or change (determined as if the Series B Preferred Stock
      were convertible upon the Series B Original Issue Date and without
      consideration of the restriction on conversion contained in Section (d)(i)
      hereof), all subject to further adjustment as provided herein or with
      respect to such other securities or property by the terms thereof. In any
      such case, appropriate adjustment shall be made in the application of the
      provisions of this Section (d) with respect to the rights of the holders
      of Series B Preferred Stock after such recapitalization, reclassification
      or other change (including adjustment of the Series B Preferred Conversion
      Price then in effect and the number of shares issuable upon conversion of
      the Series B Preferred Stock), to the end that the provisions of this
      Section (d) shall be applicable after that event and be as nearly
      equivalent as practicable.

            (viii) Adjustment for Reorganizations, Mergers or Consolidations. If
      at any time or from time to time after the Series B Original Issue Date,
      there is a capital reorganization of the Common Stock or the merger or
      consolidation of the Corporation with or into another corporation or
      another entity or person (other than an Acquisition or Asset Transfer as
      defined in Section (c) or a recapitalization, subdivision, combination,
      reclassification, exchange or substitution of shares provided for
      elsewhere in this Section (d)), as a part of such capital reorganization,
      merger or consolidation, provision shall be made so that the holders of
      the Series B Preferred Stock, if any shares thereof remaining outstanding
      thereafter, shall thereafter be entitled to receive upon conversion of the
      Series B Preferred Stock the number of shares of stock or other securities
      or property which a holder of the number of shares of Common Stock
      deliverable upon conversion would have been entitled on such capital
      reorganization, merger or consolidation, subject to adjustment in respect
      of such stock or securities by the terms thereof. In any such case,
      appropriate adjustment shall be made in the application of the provisions
      of this Section (d) with respect to the rights of the holders of Series B
      Preferred Stock after the capital reorganization, merger or consolidation
      (including adjustment of the Series B Preferred Conversion Price then in
      effect and the number of shares issuable upon conversion of the Series B
      Preferred Stock), to the end that the provisions of this Section (d) shall
      be applicable after that event and be as nearly equivalent as practicable.

            (ix) Notices of Record Date. Upon (i) any taking by the Corporation
      of a record of the holders of any class of securities for the purpose of
      determining the holders thereof who are entitled to receive any dividend
      or other distribution, or (ii) any Acquisition (as defined in Section (c))
      or other capital reorganization of the Corporation, any reclassification
      or recapitalization of the capital stock of the Corporation, any merger or
      consolidation of the Corporation with or into any other entity, or any
      Asset Transfer (as defined in Section (c)), or any voluntary or
      involuntary dissolution, liquidation or winding up of the Corporation, the
      Corporation shall mail to each holder of Series B Preferred Stock at least
      10 days prior to the record date specified therein (or such shorter period
      approved by a majority of the outstanding Series B Preferred Stock) a
      notice specifying (A) the date on which any such record is to be taken for
      the purpose of such dividend or distribution and a description of such
      dividend or distribution, (B) the date on which any such Acquisition,
      reorganization, reclassification, transfer, consolidation, merger, Asset
      Transfer, dissolution, liquidation or


                                       16
<PAGE>

      winding up is expected to become effective, and (C) the date, if any, that
      is to be fixed as to when the holders of record of Common Stock (or other
      securities) shall be entitled to exchange their shares of Common Stock (or
      other securities) for securities or other property deliverable upon such
      Acquisition, reorganization, reclassification, transfer, consolidation,
      merger, Asset Transfer, dissolution, liquidation or winding up.

            (x) Automatic Conversion.

                  (A) Each share of Series B Preferred Stock shall automatically
            be converted into shares of Common Stock, based on the
            then-effective Series B Preferred Conversion Price, (i) with respect
            to holders of the Series B Preferred Stock other than the Investors
            (as defined below), if at any time after six months from the Series
            B Original Issue Date the Common Stock has a Closing Price (as
            defined below) of at least five times the Series B Original Issue
            Price (as adjusted for any stock dividends, combinations, splits,
            recapitalizations and the like with respect to such shares) for
            thirty consecutive trading days, and (ii) with respect to the
            Investors, if at any time after six months from the Series B
            Original Issue Date (y) the Common Stock has a Closing Price (as
            defined below) of at least five times the Series B Original Issue
            Price (as adjusted for any stock dividends, combinations, splits,
            recapitalizations and the like with respect to such shares) for
            thirty consecutive trading days, and (z) the Shelf Registration as
            defined in and provided for in the Amended and Restated Investor
            Rights Agreement, dated as of December 19, 2001 (as the same may be
            amended from time to time, the "Investor Agreement"), between the
            Corporation and the investors named on Exhibit A thereto
            (collectively with the Holders, as such term is defined in the
            Investor Agreement, the "Investors") has become effective under the
            Securities Act of 1933, as amended, and is available for sales of
            Common Stock by the Investors thereunder (to the extent the
            requirement to maintain such Shelf Registration effective has not at
            such time lapsed pursuant to Section 5 of such Investor Agreement).
            For purposes of this Section (d)(x), the term "Closing Price" shall
            mean (1) if the Common Stock is traded on a securities exchange or
            through the Nasdaq National Market (or a similar national quotation
            system), the closing price of the Common Stock on such exchange or
            the last sale price of the Common Stock on such quotation system,
            and (2) if clause (1) is inapplicable, the closing bid or sale price
            (whichever is applicable) in the over-the-counter market.

                  (B) Upon the occurrence of any of the events specified in
            subparagraph (A), the applicable outstanding shares of Series B
            Preferred Stock shall be converted automatically without any further
            action by the holders of such shares and whether or not the
            certificates representing such shares are surrendered to the
            Corporation or its transfer agent; provided, however, that the
            Corporation shall not be obligated to issue certificates evidencing
            the shares of Common Stock issuable upon such conversion unless the
            certificates evidencing such shares of Series B Preferred Stock are
            either delivered to the Corporation or its transfer agent as
            provided below, or the


                                       17
<PAGE>

            holder notifies the Corporation or its transfer agent that such
            certificates have been lost, stolen or destroyed and executes an
            agreement satisfactory to the Corporation to indemnify the
            Corporation from any loss incurred by it in connection with such
            certificates. Upon the occurrence of such automatic conversion of
            any of the Series B Preferred Stock, (y) the Corporation shall
            notify (the "Automatic Conversion Notice") each holder of such
            Series B Preferred Stock who is shown to be such a holder on the
            books of the Corporation as of the time immediately prior to such
            conversion, and (z) the holders of such Series B Preferred Stock
            shall surrender the certificates representing such shares at the
            office of the Corporation or any transfer agent for the Series B
            Preferred Stock, which shall be designated in the Automatic
            Conversion Notice. Thereupon, there shall be issued and delivered to
            such holder promptly at such office and in its name as shown on such
            surrendered certificate or certificates, a certificate or
            certificates for the number of shares of Common Stock into which the
            shares of Series B Preferred Stock surrendered were convertible on
            the date on which such automatic conversion occurred. Until such
            time as a holder of shares of Series B Preferred Stock shall
            surrender his or its certificates therefor as provided above, such
            certificates shall be deemed to represent the shares of Common Stock
            to which such holder shall be entitled pursuant to the terms hereof.

            (xi) Fractional Shares. No fractional shares of Common Stock shall
      be issued upon conversion of Series B Preferred Stock. All shares of
      Common Stock (including fractions thereof) issuable upon conversion of
      more than one share of Series B Preferred Stock by a holder thereof shall
      be aggregated for purposes of determining whether the conversion would
      result in the issuance of any fractional share. If, after the
      aforementioned aggregation, the conversion would result in the issuance of
      any fractional share, the Corporation shall, in lieu of issuing any
      fractional share, pay cash equal to the product of such fraction
      multiplied by the Common Stock's fair market value (as determined by the
      Board of Directors) on the date of conversion.

            (xii) Reservation of Stock Issuable Upon Conversion. The Corporation
      shall at all times reserve and keep available out of its authorized but
      unissued shares of Common Stock, solely for the purpose of effecting the
      conversion of the shares of the Series B Preferred Stock, such number of
      its shares of Common Stock as shall from time to time be sufficient to
      effect the conversion of all outstanding shares of the Series B Preferred
      Stock. If at any time the number of authorized but unissued shares of
      Common Stock shall not be sufficient to effect the conversion of all then
      outstanding shares of the Series B Preferred Stock, the Corporation will
      take such corporate action as may be necessary to increase its authorized
      but unissued shares of Common Stock to such number of shares as shall be
      sufficient for such purpose.

            (xiii) Notices. Any notice required by the provisions of this
      Section (d) shall be in writing and shall be deemed effectively given: (i)
      upon personal delivery to the party to be notified, (ii) when sent by
      confirmed electronic mail or facsimile if sent during normal business
      hours of the recipient; if not, then on the next business day, (iii) five
      days after


                                       18
<PAGE>

      having been sent by registered or certified mail, return receipt
      requested, postage prepaid, or (iv) one day after deposit with a
      nationally recognized overnight courier, specifying next day delivery,
      with verification of receipt. All notices shall be addressed to each
      holder of record at the address of such holder appearing on the books of
      the Corporation.

            (xiv) Payment of Taxes. The Corporation will pay all taxes (other
      than taxes based upon income) and other governmental charges that may be
      imposed with respect to the issue or delivery of shares of Common Stock
      upon conversion of shares of Series B Preferred Stock, excluding any tax
      or other charge imposed in connection with any transfer involved in the
      issue and delivery of shares of Common Stock in a name other than that in
      which the shares of Series B Preferred Stock so converted were registered.

            (xv) No Impairment. The Corporation shall not avoid or seek to avoid
      the observance or performance of any of the terms to be observed or
      performed hereunder by the Corporation, but shall at all times in good
      faith assist in carrying out all such actions as may be reasonably
      necessary or appropriate in order to protect the conversion rights of the
      holders of the Series B Preferred Stock against impairment.

            (xvi) Satisfaction of Accrued Dividends. Except as otherwise
      expressly provided, upon the conversion of any shares of Series B
      Preferred Stock into Common Stock as provided herein, the Corporation
      shall pay holders thereof all accrued but unpaid dividends out of funds
      legally available therefor.

      (e) Waiver. Any rights of the holders of Series B Preferred Stock set
forth herein, other than the voting rights set forth in Section (b)(iii), may be
waived by the affirmative vote or consent of the holders of a majority of the
shares of Series B Preferred Stock then outstanding.

      (f) Limitation on Reissuance of Shares. No share of shares of Series B
Preferred Stock acquired by the Corporation by reason of purchase, conversion or
otherwise shall be reissued, and all such shares shall be cancelled, retired and
eliminated from the shares of Series B Preferred Stock that the Corporation is
authorized to issue.

      (g) Limitation on Transfer. The Series B Preferred Stock shall not be
eligible to be transferred on the books of the Corporation prior to the one year
anniversary of the Series B Original Issue Date except for transfers: (i) in
connection with a Sale Transaction, (ii) in any transaction in which a holder
that is a partnership or limited liability company distributes Series B
Preferred Stock solely to its affiliates (including affiliated fund
partnerships), current or former partners or members thereof, or (ii) by will or
by the laws of intestate succession. Certificates issued in respect of the
Series B Preferred Stock within one year after the Series B Original Issue Date
shall bear a legend referencing the restrictions set forth in this Section (g).

      This Certificate of Designations, and the designations effected hereby,
shall become effective upon filing.


                                       19
<PAGE>

      IN WITNESS WHEREOF, eLoyalty Corporation has caused this certificate to be
signed by Kelly D. Conway, its President and Chief Executive Officer, and the
same to be attested to by Timothy J. Cunningham, its Senior Vice President and
Chief Financial Officer, this 19th day of December, 2001.

                                    eLOYALTY CORPORATION


                                    By: ________________________________________
                                    Name: Kelly D. Conway
                                    Title: President and Chief Executive Officer

Attest:


By:_______________________________
Name: Timothy J. Cunningham
Title: Senior Vice President and Chief Financial Officer


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