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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



FOR THE QUARTER ENDED MARCH 31, 2003



COMMISSION FILE NUMBER: 000-26273



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PRIMUS KNOWLEDGE SOLUTIONS, INC.

(Exact name of Registrant as specified in its charter)



|WASHINGTON                                                     |  | 91-1350484                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1601
Fifth Avenue, Suite 1900

Seattle, Washington 98101

(Address of principal executive offices)



(206) 834-8100

(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 ̈No  x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes ̈Nox



As of May 9, 2003 there were 19,053,821 shares of the
Registrants Common Stock outstanding.



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Primus
Knowledge Solutions, Inc.

Form 10-Q

March 31, 2003



INDEX



|PART I.  |  | FINANCIAL INFORMATION                                                                 |  | PAGE                                                                                                                      
|-------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------
|        
|ITEM 1.  |  | Condensed Consolidated Financial Statements (Unaudited)                               |  |                                                                                                                           
|        
|         |  |                                                                                      |  | Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002                                          
|        
|         |  |                                                                                      |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002                        
|        
|         |  |                                                                                      |  | Condensed Consolidated Statements of Shareholders Equity and Comprehensive Loss for the three months ended March 31, 2003
|        
|         |  |                                                                                      |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002                        
|        
|         |  |                                                                                      |  | Notes to Condensed Consolidated Financial Statements                                                                      
|        
|ITEM 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15                                                                                                                        
|        
|ITEM 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 38                                                                                                                        
|        
|ITEM 4.  |  | Controls and Procedures                                                               |  | 39                                                                                                                        
|        
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                                                           
|        
|ITEM 1.  |  | Legal Proceedings                                                                     |  | 39                                                                                                                        
|        
|ITEM 2.  |  | Change in Securities                                                                  |  | 40                                                                                                                        
|        
|ITEM 5.  |  | Other Information                                                                     |  | 40                                                                                                                        
|        
|ITEM 6.  |  | Exhibits and Reports on Form 8-K                                                      |  | 40                                                                                                                        



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PART I. FINANCIAL INFORMATION



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)



|                                                                                                                                                    |  | March 31, 2003 |          |   | December 31, 2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | -
|ASSETS                                                                                                                                              |  |                |          |   |                   |  
|Current assets:                                                                                                                                     |  |                |          |   |                   |  
|Cash, cash equivalents and short-term investments                                                                                                   |  | $              | 13,090   |   |                   | $
|Accounts receivable, net of allowance for doubtful accounts of $462 and $412 at March
31, 2003 and December 31, 2002, respectively                  |  |                | 3,844    |   |                   |  
|Prepaid expenses and other current assets                                                                                                           |  |                | 933      |   |                   |  
|                                                                                                                                                    |  |                |          |   |                   |  
|Total current assets                                                                                                                                |  |                | 17,867   |   |                   |  
|Property and equipment, net of accumulated depreciation and amortization of $6,533 and
$6,127 at March 31, 2003 and December 31, 2002, respectively |  |                | 1,816    |   |                   |  
|Note receivable from related party                                                                                                                  |  |                | 750      |   |                   |  
|Other assets                                                                                                                                        |  |                | 192      |   |                   |  
|                                                                                                                                                    |  |                |          |   |                   |  
|Total assets                                                                                                                                        |  | $              | 20,625   |   |                   | $
|                                                                                                                                                    |  |                |          |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                |  |                |          |   |                   |  
|Current liabilities:                                                                                                                                |  |                |          |   |                   |  
|Accounts payable                                                                                                                                    |  | $              | 1,092    |   |                   | $
|Accrued and other liabilities                                                                                                                       |  |                | 2,403    |   |                   |  
|Compensation-related accruals                                                                                                                       |  |                | 1,066    |   |                   |  
|Deferred revenue, including related party amounts of $193 and $248 at March 31, 2003 and
December 31, 2002, respectively                            |  |                | 6,358    |   |                   |  
|                                                                                                                                                    |  |                |          |   |                   |  
|Total current liabilities                                                                                                                           |  |                | 10,919   |   |                   |  
|                                                                                                                                                    |  |                |          |   |                   |  
|Commitments, contingencies and subsequent event                                                                                                     |  |                |          |   |                   |  
|Shareholders equity:                                                                                                                               |  |                |          |   |                   |  
|Common stock, $.025 par value, 50,000,000 shares authorized, issued and outstanding
19,053,821 shares at March 31, 2003 and December 31, 2002       |  |                | 476      |   |                   |  
|Additional paid-in-capital                                                                                                                          |  |                | 110,187  |   |                   |  
|Accumulated other comprehensive income                                                                                                              |  |                | 53       |   |                   |  
|Accumulated deficit                                                                                                                                 |  |                | (101,010 | ) |                   |  
|                                                                                                                                                    |  |                |          |   |                   |  
|Total shareholders equity                                                                                                                          |  |                | 9,706    |   |                   |  
|                                                                                                                                                    |  |                |          |   |                   |  
|Total liabilities and shareholders equity                                                                                                          |  | $              | 20,625   |   |                   | $
|                                                                                                                                                    |  |                |          |   |                   |  



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



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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)



|                                                                                      |  | Three Months Ended March 31, |           
|------------------------------------------------------------------------------------- |  | ---------------------------- | ----------
|                                                                                      |  | 2003                         |           
|Revenue:                                                                              |  |                              |           
|License:                                                                              |  |                              |           
|Third party                                                                           |  | $                            | 2,086     
|Related partyPrimus KK                                                               |  |                              | 289       
|                                                                                      |  |                              |           
|                                                                                      |  |                              | 2,375     
|Service:                                                                              |  |                              |           
|Third party                                                                           |  |                              | 2,982     
|Related partyPrimus KK                                                               |  |                              | 131       
|                                                                                      |  |                              |           
|                                                                                      |  |                              | 3,113     
|                                                                                      |  |                              |           
|Total revenue                                                                         |  |                              | 5,488     
|                                                                                      |  |                              |           
|Cost of revenue:                                                                      |  |                              |           
|License                                                                               |  |                              | 97        
|Service                                                                               |  |                              | 1,139     
|                                                                                      |  |                              |           
|Total cost of revenue                                                                 |  |                              | 1,236     
|                                                                                      |  |                              |           
|Gross profit                                                                          |  |                              | 4,252     
|Operating expenses:                                                                   |  |                              |           
|Sales and marketing                                                                   |  |                              | 2,598     
|Research and development                                                              |  |                              | 1,816     
|General and administrative                                                            |  |                              | 973       
|Restructuring charges                                                                 |  |                              |          
|                                                                                      |  |                              |           
|Total operating expenses                                                              |  |                              | 5,387     
|                                                                                      |  |                              |           
|Loss from operations                                                                  |  |                              | (1,135    
|Other income, net                                                                     |  |                              | 55        
|                                                                                      |  |                              |           
|Loss before income taxes and cumulative effect of change in accounting
principle      |  |                              | (1,080    
|Income tax expense                                                                    |  |                              | (50       
|                                                                                      |  |                              |           
|Loss before cumulative effect of change in accounting principle                       |  |                              | (1,130    
|Cumulative effect of change in accounting principle                                   |  |                              |          
|                                                                                      |  |                              |           
|Net loss                                                                              |  | $                            | (1,130    
|                                                                                      |  |                              |           
|Basic and diluted net loss per common share:                                          |  |                              |           
|Loss before cumulative effect of change in accounting principle                       |  | $                            | (0.06     
|Cumulative effect of change in accounting principle                                   |  |                              |          
|                                                                                      |  |                              |           
|                                                                                      |  | $                            | (0.06     
|                                                                                      |  |                              |           
|Weighted average shares used in computing basic and diluted net loss per common
share |  |                              | 19,053,821
|                                                                                      |  |                              |           



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



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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS

(In thousands, except
share data)

(Unaudited)



|                                                 |  | Common stock |  | Additional paid-in capital |     | Accumulated other comprehensive (loss)
income |   |         | Accumulated deficit |   |     | Total shareholders equity | 
|------------------------------------------------ |  | ------------ |  | -------------------------- | --- | --------------------------------------------- | - | ------- | ------------------- | - | --- | -------------------------- | 
|                                                 |  | Shares       |  | Par value                  |     |                                               |   |        
|Balance at December 31, 2002                     |  | 19,053,821   |  | $                          | 476 |                                               | $ | 110,187 |                     | $ | 75  |                            | 
|Comprehensive loss:                              |  |              |  |                            |     |                                               |   |         |                     |   |     |                            | 
|Foreign currency translation loss                |  |             |  |                            |    |                                               |   |        |                     |   | (17 | )                          | 
|Unrealized loss on securities available for sale |  |             |  |                            |    |                                               |   |        |                     |   | (5  | )                          | 
|Net loss                                         |  |             |  |                            |    |                                               |   |        |                     |   |    |                            | 
|                                                 |  |              |  |                            |     |                                               |   |         |                     |   |     |                            | 
|Total comprehensive loss                         |  |             |  |                            |    |                                               |   |        |                     |   | (22 | )                          | 
|                                                 |  |              |  |                            |     |                                               |   |         |                     |   |     |                            | 
|Balance at March 31, 2003                        |  | 19,053,821   |  | $                          | 476 |                                               | $ | 110,187 |                     | $ | 53  |                            | 
|                                                 |  |              |  |                            |     |                                               |   |         |                     |   |     |                            | 



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



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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                          |  | Three Months Ended March 31, |       
|----------------------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                                          |  | 2003                         |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                              |       
|Net loss                                                                                  |  | $                            | (1,130
|Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |  |                              |       
|Cumulative effect of change in accounting principle                                       |  |                              |      
|Depreciation and amortization                                                             |  |                              | 481   
|Changes in assets and liabilities:                                                        |  |                              |       
|Accounts receivable                                                                       |  |                              | 349   
|Prepaid expenses and other current assets                                                 |  |                              | (112  
|Other assets                                                                              |  |                              | 44    
|Accounts payable and accrued liabilities                                                  |  |                              | 306   
|Compensation-related accruals                                                             |  |                              | 156   
|Deferred revenue                                                                          |  |                              | 130   
|                                                                                          |  |                              |       
|Net cash provided by (used in) operating activities                                       |  |                              | 224   
|                                                                                          |  |                              |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                              |       
|Purchases of short-term investments                                                       |  |                              | (394  
|Proceeds from maturities of short-term investments                                        |  |                              | 1,000 
|Purchases of property and equipment                                                       |  |                              | (29   
|                                                                                          |  |                              |       
|Net cash provided by (used in) investing activities                                       |  |                              | 577   
|                                                                                          |  |                              |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                              |       
|Net cash provided by financing activities                                                 |  |                              |      
|                                                                                          |  |                              |       
|Effect of exchange rate changes on cash                                                   |  |                              | (52   
|Net increase (decrease) in cash and cash equivalents                                      |  |                              | 749   
|Cash and cash equivalents at beginning of period                                          |  |                              | 11,948
|                                                                                          |  |                              |       
|Cash and cash equivalents at end of period                                                |  | $                            | 12,697
|                                                                                          |  |                              |       



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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(In thousands, except share and per share data)

(Unaudited)



Note 1. Description of
the Business and Basis of Presentation



Description of the Business and Basis of Presentation



We provide application software that enables companies to improve customer service by accessing, analyzing and improving information. Primus®software provides an application that captures and shares knowledge, increasing the efficiency and effectiveness of customer service. Our software
is easily implemented, and can be deployed as a suite, as individual products, or as an integrated solution with other leading eService applications, depending on the customers preference and/or the immediacy of their need. Our solutions can
be used in combination with leading eService and IT Helpdesk applications, including those from Amdocs/Clarify, Kana, Onyx, Oracle, PeopleSoft, Remedy, Siebel and others. Our products are also used in Portal environments in combination with products
from BEA and IBM. In addition to software applications, we offer professional services to assist customers with software implementation, integration, hosting, training and support.



To compete in todays business environment, companies must maximize their relationships with their
existing customers. The need to develop and sell more deeply into their existing customer base has led many companies to implement eService initiatives and software. eService software is designed to enable companies to interact with their customers
using both traditional and eBusiness communication channelsincluding the phone, web, email, chat, and voice over IP (VOIP)and to manage customer information in a way that helps companies maximize the value of each customer interaction.
Facilitating more efficient communications with customers can help to improve the level and quality of customer service companies deliver and, in turn, increase customer satisfaction and retention and cross-sell and up-sell opportunities.



The Primus software suite consists of
Primus®eServer, Primus®eSupport, Primus®Answer Engine, Primus®iView and Primus®Quick Resolve. Product license revenue and related services from Primus eServer and Primus eSupport products accounted for 90% or more of total revenue for the three month periods ended March 31, 2003
and 2002. License fees for our software vary with each application, but our products are typically licensed on a per-processor basis, per-user basis or based on the number of users authorized to access our software at any given time. Our typical
license agreement provides the licensee a perpetual, nontransferable license to use its software.



We target mid- to large-sized organizations, and our products are used by call centers, IT helpdesks, field service organizations, human
resources organizations, marketing organizations, and eService businesses. In addition to our traditional markets of technology and telecommunications, we touch vertical markets that include aerospace, financial services, manufacturing, outsourced
services, eCommerce and retail. We develop our products and market and sell our software and services primarily through a direct sales force and a minority owned Japanese entity. We have offices throughout the United States, and in the United
Kingdom and France. Our principal executive offices are located at 1601 Fifth Avenue, Suite 1900, Seattle, WA 98101.



We market our software and services on a worldwide basis through our direct sales organization in the United States and Europe and our
international revenue constituted 33% and 22% of our total revenue for the three-month periods ended March 31, 2003 and 2002, respectively. Primus KK, a Japanese joint venture in which we hold a minority interest, has exclusive distribution rights
to distribute our Primus eServer and Primus eSupport products in Japan. We have not guaranteed any obligations of the joint venture nor do we have any commitment or intent to provide any funding.



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We are subject
to certain business risks that could affect future operations and financial performance. These risks include, but are not limited to, changing computing environments, rapid technological change, development of new products, limited protection of
proprietary technology, claims of intellectual property infringement and competitive products and pricing.



The condensed consolidated financial statements include the accounts of Primus and its wholly owned subsidiaries, including its foreign
subsidiaries, Primus Knowledge Solutions (UK) Limited and Primus Knowledge Solutions France. All significant intercompany balances and transactions have been eliminated.



We do not have any relationships with unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed
any obligations of unconsolidated entities nor do we have any commitment or intent to provide any funding to any such entity. As such we are not exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such
relationships.



We incorporated in Washington
State in 1986 and our common shares were originally listed on the Nasdaq National Market®on June 30, 1999, and
were transferred to the Nasdaq Small Cap Market on or about November 1, 2002, and publicly trade under the symbol PKSI.



Available Information



We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (SEC)
under the Securities Exchange Act of 1934 as amended (Exchange Act). You can inspect and copy our reports, proxy statements, and other information filed with the SEC at the offices of the SECs Public Reference Rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Rooms. The SEC maintains an Internet Website at <http://www.sec.gov/> where you can obtain most of our SEC filings. In
addition, you can inspect our reports, proxy materials and other information at the offices of the Nasdaq Stock Market at 1735 K Street NW, Washington D.C. 20006. We also make available free of charge on our website at www.primus.com our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed
electronically with the SEC. You can also obtain copies of these reports by contacting Investor Relations at investor.relations@primus.com or by phone at 206-834-8100.



Unaudited Interim Financial Information



The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). In our opinion, the unaudited condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These
unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2002 included in our Form 10-K filed with the SEC in March of 2003. The results of
operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.



Reclassifications



Certain balances have been reclassified to conform to the current period presentation.



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Cash, Cash
Equivalents and Short-Term Investments



Cash, cash equivalents and short-term investments are comprised of the following:



|                                                        |  | March 31, 2003 |        | December 31, 2002
|------------------------------------------------------- |  | -------------- | ------ | -----------------
|Cash and cash equivalents                               |  | $              | 12,697 |                  
|Short-term investments                                  |  |                | 393    |                  
|                                                        |  |                |        |                  
|Total cash, cash equivalents and short-term investments |  | $              | 13,090 |                  
|                                                        |  |                |        |                  



Stock-Based Compensation



We apply the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock Based Compensation, established accounting and disclosure requirements using a fair value based method of accounting for stock
based employee compensation plans. As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value based method of accounting described above, and have adopted only the disclosure requirements of SFAS No. 123. The following
table illustrates the effect on net income if the fair value based method had been applied to all outstanding and unvested awards in each period.



|                                                                                                             |  | Quarter Ended March 31,              
|------------------------------------------------------------------------------------------------------------ |  | -------------------------------------
|                                                                                                             |  | 2003                                 
|                                                                                                             |  | (In thousands, except per share data)
|Net loss, as reported                                                                                        |  | $                                    
|Add total stock-based employee compensation expense determined under fair value-based
method for all rewards |  |                                      
|                                                                                                             |  |                                      
|Pro forma net loss                                                                                           |  | $                                    
|Basic and diluted net loss per share:                                                                        |  |                                      
|As reported                                                                                                  |  | $                                    
|SFAS No. 123 pro forma                                                                                       |  | $                                    



Investment in Primus Knowledge Solutions, K.K.



In December 1995, Primus invested $50,000 for a 50% interest in Primus Knowledge Solutions, KK (Primus KK), a Japanese distributor, with Trans Cosmos, Inc., a Japanese company (TCI), a significant shareholder of the Company.
We accounted for our investment using the equity method and wrote down our investment to zero in March 1997 as a result of recognizing our portion of the investees losses to date. In September 1997, we renegotiated our agreement with TCI,
reducing our ownership to 14.3%. In August 2000, the arrangement was further amended and our ownership percentage in Primus KK was increased to 19.6%. Primus KK is accounted for using the cost method, as we do not have significant influence over the
operations of Primus KK, have not guaranteed any of its obligations and do not have any commitment or intent to provide any funding. The carrying value of our investment in Primus KK is zero at March 31, 2003 and December 31, 2002.



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Recently
Issued Accounting Pronouncements



In June
2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long lived assets that result from the acquisition, construction, development, and/or normal use of the assets. We also record a corresponding asset that is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. We adopted SFAS No. 143 on
January 1, 2003 and the adoption did not have a material effect on our financial statements.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. We adopted SFAS No. 146 on January 1, 2003 and the adoption did not
have a material effect on our financial statements.



In November 2002, the FASB issued Interpretation No.45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5,
57, and 107 and a rescission of FASB Interpretation No. 34 (FIN 45). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also
clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN 45 is applicable to guarantees issued or
modified after December 31, 2002 and have not had a material effect on our financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002 and are discussed in
Note 11.



In November 2002, the EITF reached a
consensus on Issue No. 00-21 (EITF 00-21), Revenue Arrangements With Multiple Deliverables. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating
activities. EITF 00-21 will be effective for fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 is not expected to have a material effect on our financial statements.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation  Transition and
Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for
stock based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51 (FIN 46). FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in FIN 46. FIN 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and to
variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, FIN 46 applies to that enterprise no later than the
beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of FIN 46 is not expected to have a material effect on our financial statements. FIN 46 requires certain disclosures in financial statements
issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when FIN 46 becomes effective.



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Note 2. Cumulative Effect
of Change in Accounting Principle



In July
2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which required that goodwill no longer be amortized to earnings, but instead
be tested at least annually for impairment. The amortization of goodwill ceased upon the required adoption date of the Statement, which for us was January 1, 2002. At the date of adoption, we had unamortized goodwill of $2,281,000, and the implied
fair value of the goodwill as of the date of adoption was zero. The implied fair value of goodwill was calculated based upon a comparison of the book value of the Company to its fair value. Fair value was determined based upon the market
capitalization of the Company as of January 1, 2002. Accordingly, we recognized a $2,281,000 transitional impairment loss as the cumulative effect of a change in accounting principle as a result of the adoption of SFAS No. 142.



Note 3. Loss Per Common Share



In accordance with SFAS No. 128, Earnings Per
Share, we have reported both basic and diluted net loss per common share for each period presented. Basic net loss per common share is computed on the basis of the weighted-average number of common shares outstanding for the period. Diluted
net loss per common share is computed on the basis of the weighted-average number of common shares plus dilutive potential common shares outstanding. Dilutive potential common shares are calculated under the treasury stock method. Securities that
could potentially dilute basic income per share consist of outstanding stock options and warrants. As we had a net loss applicable to common shareholders in each of the periods presented, basic and diluted net loss per common share are the same.
Dilutive potential securities outstanding were not included in the computation of diluted net loss per common share, because to do so would have been anti-dilutive. Dilutive potential securities for the quarters ended March 31, 2003 and 2002
included options and warrants to purchase approximately 6,899,000 and 7,899,000, common shares, respectively.



Note 4. Other Comprehensive Loss



SFAS No. 130, Reporting Comprehensive Income establishes standards for the reporting and presentation of comprehensive income (loss) and its components in a full set of financial
statements. Comprehensive loss consists of net loss, foreign currency translation adjustments and net unrealized losses from securities available-for-sale and is presented in the accompanying statements of stockholders equity and comprehensive
loss. SFAS No. 130 requires only additional disclosures in the financial statements; it does not affect our financial position or operations. The following table reconciles net loss as reported to total comprehensive loss for the three months ended
March 31, 2003 and 2002:



|                                                 |  | Three Months Ended March 31,
|------------------------------------------------ |  | ----------------------------
|                                                 |  | 2003                        
|Net loss                                         |  | $                           
|Other comprehensive loss:                        |  |                             
|Foreign currency translation loss                |  |                             
|Unrealized loss on securities available-for-sale |  |                             
|                                                 |  |                             
|Total comprehensive loss                         |  | $                           
|                                                 |  |                             



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Note 5. Related Party
Transactions



In 1997, Primus Knowledge
Solutions, K.K. (Primus KK), a distributor whose majority shareholder is also a significant shareholder of ours, became a reseller of certain of our products and a provider of support services in Japan. In July 2002 and again in January 2003, we
amended our distribution agreement with Primus KK, and they have assumed a more significant role in product localization and support for the Japanese market. We also agreed to a new royalty fee structure with guaranteed minimum payments from Primus
KK of $1,000,000 per year, to be measured quarterly per the terms of the agreement. In January 2003, we committed to invest one-half of the minimum royalty payments in Japanese product version development and support or Primus KK may withhold the
underinvested amount from its guaranteed minimums until such deficit investment is made up. The amended distribution agreement provides for sublicense fees based on a percentage of net fees collected by Primus KK from its customers (subject to
certain minimums). The guaranteed minimum payments from Primus KK could result in an adjustment to the sublicense fee due each quarter, but such payments do not constitute an advance inventory purchase nor can such payments be credited or carried
over from one year to another. Guaranteed minimum royalty payments, to the extent they exceed sublicense fees due, are recognized in the period earned. For the six month period ending September 30, 2003, Primus and Primus KK have agreed in principle
to suspend the required $250,000 quarterly guaranteed minimum license fee payments to Primus and Primus is under no obligation to allocate any level of resources towards Japanese language product development. Our agreement with Primus KK does not
contain product return rights. We recognized revenue from sublicense fees and guaranteed minimum payments of approximately $289,000 and $221,000 in 2003 and 2002, respectively, and revenue deferred at March 31, 2003 and December 31, 2002 was
approximately $193,000 and $248,000, respectively, and accounts receivable at March 31, 2003 and December 31, 2002 were approximately $308,000 and $471,000.



Note 6. Note Receivable From Related Party



In April 2001, the Companys Board of Directors approved an unsecured loan to Michael A. Brochu, the Companys President and
Chief Executive Officer, for $750,000 bearing interest at 4.9%. The maturity date of the loan is April 16, 2007 with principal and accrued interest payments due annually starting on April 16, 2005. Accrued interest receivable at March 31, 2003 and
December 31, 2002 of $74,000 and $65,000, respectively, is included in other assets. This note is subject to full forgiveness in the event of Mr. Brochus termination of employment without cause or for good reason following a change of control.



Note 7. Business Segment Information



We are principally engaged in the design, development,
marketing, sale and support of Primus®eServer, Primus®eSupport, Primus®Answer Engine, Primus®iView and Primus®Quick Resolve software products. Substantially all revenue results from the licensing of our software products and related consulting, hosting and
customer support (maintenance) services. Our chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated revenue information.



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The majority
of our revenue is derived from customers in the United States. Our international sales are principally in Europe and Japan. The following geographic information is presented for the three months ended March 31, 2003 and 2002:



|                         |  | Three Months Ended March 31,
|------------------------ |  | ----------------------------
|                         |  | 2003                        
|United States of America |  | $                           
|Japan                    |  |                             
|Other                    |  |                             
|                         |  |                             
|Total revenues           |  | $                           
|                         |  |                             



Revenues
from Japan were principally derived from sales through our Japanese joint venture, Primus KK, in which we hold a 19.6% minority interest. We recognize software license revenues for sales to this distributor in accordance with our revenue recognition
policy as described in Item 2.



Note 8. Restructuring Charges



During the first and third quarters of
2002, we executed restructuring plans to reduce headcount and infrastructure, and to eliminate excess leased facilities. During the year ended December 31, 2002 we recorded $1,227,000 in restructuring and other related charges. There were no
restructuring charges for the three months ended March 31, 2003, and restructuring charges for the three months ended March 31, 2002 totaled $435,000.



Restructuring Rollforward



The components of the charge for and a quarterly rollforward of the related liability included within accrued and other liabilities
follows (in 000s):



|                                        |  | Balance at December 31, 2002 |     | Charge for the three months ended March 31, 2003 |   | Net Cash Payments & Impairments |  |   | Balance at March 31, 2003
|--------------------------------------- |  | ---------------------------- | --- | ------------------------------------------------ | - | ------------------------------- |  | - | -------------------------
|Excess facilities and asset impairments |  | $                            | 526 |                                                  | $ |                                |  | $ | (243                     
|                                        |  |                              |     |                                                  |   |                                 |  |   |                          



The
excess facilities and asset impairment charges recorded in 2002 and 2001 were the result of our decision to exit certain domestic and international facilities and were estimated based on our evaluation of then current market conditions relative to
our existing excess facilities accrual. The estimated facilities costs are based on current comparable rates for leases and subleases of a comparable term or termination fees. The asset impairment charges were primarily for leasehold improvements,
computer equipment and related software, office equipment and furniture and fixtures disposed of or removed from operations as a direct result of the restructuring plans. If estimates and/or assumptions change, the actual loss may differ from this
estimate. The March 31, 2003 liability has been reduced by estimated future sublease receipts of $37,000. Future cash outlays are anticipated through June 2004 unless we are able to negotiate to exit the leases at an earlier date.



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Note 9. Liquidity



Our operations have historically been
financed through issuances of common and preferred stock. For the quarter ended March 31, 2003, we incurred a net loss of approximately $1,130,000 and operating activities provided cash of approximately $224,000. At March 31, 2003, we have working
capital of approximately $6.9 million. We believe we have sufficient resources to continue as a going concern through at least March 31, 2004. To reduce our cash used in operations, we put in place cost containment efforts during 2001 and
restructured our operations during 2001 and 2002 by reducing headcount, exclusive of attrition, by 104 employees and eliminating excess facilities. Our plan to address our liquidity issues is to generate sufficient revenue from customer contracts or
further reduce costs to provide positive cash flows from operations. There can be no assurance that we will be able to generate sufficient revenue from customer contracts, or further reduce costs sufficiently, to provide positive cash flows from
operations. If we are not able to generate positive cash flows from operations, we will need to consider alternative financing sources. Alternative financing sources may not be available when and if needed by us or on favorable terms.



As of August 2, 2002 our common stock had traded under a
minimum $1.00 for the previous 30 trading days. As a result our common stock is out of compliance with the minimum bid price listing requirements for Nasdaq National Market. On October 29, 2002, we announced that the Nasdaq Stock Market, Inc.
approved our application to transfer the listing of our shares of common stock from the Nasdaq National Market to the Nasdaq Small Cap Market. Our common stock commenced trading on the Nasdaq Small Cap Market on November 1, 2002 and our trading
symbol continued to be PKSI. Nasdaq granted us a grace period concerning the $1.00 minimum price bid through July 28, 2003. In March 2003, Nasdaq provided for an additional two 180 day grace periods concerning the $1.00 minimum price
bid. Provided we continue to meet the core initial listing requirements and Nasdaq grants us these additional grace periods, the final grace period will expire July of 2004. In order to remain listed on the Nasdaq Small Cap Market under current
Nasdaq rules, before the grace periods expire, the bid price of our common stock must close at $1.00 per share or more for a minimum of 10 consecutive trading days. If market trading does not result in the increase of the trading price of our common
stock, we may comply with this listing requirement by implementing a board-approved reverse stock split, assuming we meet all the other continued listing requirements at that time.



Note 10. Legal Proceedings



The Company, an officer, former officer and FleetBoston Robertson Stephens, Inc., J.P. Morgan Securities Inc., U.S. Bancorp Piper Jaffray
Inc., CIBC World Markets, Dain Rauscher, Inc. and Salomon Smith Barney Holdings Inc., the underwriters of our initial public offering, have been named as defendants in an action filed during December 2001 in the United States District Court for the
Southern District of New York on behalf of persons who purchased Primus common stock during the period from June 30, 1999 through December 6, 2000, which was issued pursuant to the June 30, 1999 registration statement and prospectus for our initial
public offering. The complaint alleges that we and the individual defendants violated the Securities Act of 1933 by failing to disclose excessive commissions allegedly obtained by our underwriters pursuant to a secret arrangement whereby the
underwriters allocated IPO shares to certain investors in exchange for the excessive commissions, referred to as laddering. The complaint also asserts claims against the underwriters under the 1933 Act and the Securities Exchange Act of 1934 in
connection with the allegedly undisclosed commissions. In October of 2002, the officer and former officer of Primus who were named as defendants in the action were dismissed without prejudice. We intend to vigorously defend ourselves against this
action. The results of any litigation matter are inherently uncertain and litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. Accordingly, while we do not believe
it is probable that the outcome of this litigation matter will be unfavorable to us, we cannot provide assurances that this action will not materially and adversely affect our business, our results of operations or our stock price.



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Note 11. Commitments,
Contingencies and Subsequent Event



We lease
office space under operating leases with various expiration dates through 2006. In January 2003, we engaged an offshore development team to accelerate our development efforts. Our commitment under this agreement is to pay approximately $125,000 per
month for development work through January 2005. During the quarter ended March 31, 2003, we incurred development expenses of approximately $175,000 related to this agreement. We have no material long-term commitments or obligations other than those
under these agreements.



For the six month period
ending September 30, 2003, Primus and Primus KK have agreed in principle to suspend the required $250,000 quarterly guaranteed minimum license fee payments to Primus and Primus is under no obligation to allocate any level of resources towards
Japanese language product development.



Note 12. Guarantees



In November 2002, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 provides expanded
accounting guidance surrounding liability recognition and disclosure requirements related to guarantees, as defined by this Interpretation. We adopted FIN No. 45 during the quarter ended December 31, 2002. In the ordinary course of business, we are
not subject to potential obligations under guarantees that fall within the scope of FIN No. 45 except for standard indemnification and warranty provisions that are contained within many of our customer license and service agreements, and give rise
only to the disclosure requirements prescribed by FIN No. 45. Indemnification and warranty provisions contained within our customer license and service agreements are generally consistent with those prevalent in our industry. The duration of our
product warranties generally does not exceed 90 days following delivery of our products. We have not incurred significant obligations under customer indemnification or warranty provisions historically and do not expect to incur significant
obligations in the future. Accordingly, we do not maintain accruals for potential customer indemnification or warranty-related obligations.



ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS



Forward-Looking Statements



This report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. These forward-looking statements involve risks and uncertainties, including, but not limited to, those identified in the section of this Form 10-Q entitled Factors That May Affect Results Of
Operations and Financial Condition, which may cause actual results to differ materially from those discussed in such forward-looking statements. When used in this document, the words believes, expects,
anticipates, intends, plans and similar expressions, are intended to identify certain of these forward-looking statements. However, these words are not the exclusive means of identifying such statements. In
addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this report should be read as being applicable to all
related forward-looking statements wherever they appear in this report. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed in our Annual Report on Form 10-K, a copy of which is on
file at the Securities and Exchange Commission. We undertake no obligation to release publicly the results of any revision to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of
this Form 10-Q with the SEC. Readers are urged to review and carefully consider the various disclosures made by us in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risk and factors that may
affect our business.



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Overview



We provide application software that enables companies to
improve customer service by accessing, analyzing and improving information. Primus®software provides an
application that captures and shares knowledge, increasing the efficiency and effectiveness of customer service. Our software can be deployed as a suite, as individual products, or as an integrated solution with other leading eService applications,
depending on the customers preference and/or the immediacy of their need. Our software is flexible and easily implemented. Our solutions can be used in combination with leading eService and IT Helpdesk applications, including those from
Amdocs/Clarify, Kana, Onyx, Oracle, PeopleSoft, Remedy, Siebel and others. Our products are also used in Portal environments in combination with products from BEA and IBM. In addition to software applications, we offer professional services to
assist customers with software implementation, integration, hosting, training and support.



To compete in todays business environment, companies must maximize their relationships with their existing customers. The need to develop and sell more deeply into their existing customer base
has led many companies to implement eService initiatives and software. eService software is designed to enable companies to interact with their customers using both traditional and eBusiness communication channelsincluding the phone, web,
email, chat, and voice over IP (VOIP)and to manage customer information in a way that helps companies maximize the value of each customer interaction. Facilitating more efficient communications with customers can help to improve the level and
quality of customer service companies deliver and, in turn, increase customer satisfaction and retention and cross-sell and up-sell opportunities.



Our software suite consists of Primus eServer, Primus eSupport, Primus Answer Engine, Primus iView and Primus Quick Resolve. Product
license revenue and related services from Primus eServer and Primus eSupport products accounted for 90% or more of total revenue for each of the quarters ended March 31, 2003 and 2002, and we expect these products to continue to account for a
substantial portion of our revenue for the remainder of 2003. License fees for our software vary with each application, but our products are typically licensed on a per-processor basis, per-user basis or based on the number of users authorized to
access our software at any given time. Our typical license agreement provides the licensee a perpetual, nontransferable license to use our software.



As a result, factors adversely affecting the demand for these products and our products in general, such as competition, pricing or
technological change, could materially and adversely affect our business, financial condition, operating results and stock price. Our future financial performance will substantially depend on our ability to sell current versions of our entire suite
of products, including products based on the technology acquired from AnswerLogic, and our ability to develop and sell enhanced versions of our products.



We target mid- to large-sized organizations, and our products are used by call centers, IT helpdesks, field service organizations, human
resources organizations, marketing organizations, and eService businesses. In addition to our traditional markets of technology and telecommunications, we touch vertical markets that include aerospace, financial services, manufacturing, outsourced
services, eCommerce and retail. We develop our products and market and sell our software and services primarily through a direct sales force and a minority owned Japanese entity. We have offices throughout the United States, and in the United
Kingdom and France. Our principal executive offices are located at 1601 Fifth Avenue, Suite 1900, Seattle, WA 98101.



We market our software and services on a worldwide basis through our direct sales organization in the United States and Europe. Primus KK,
a Japanese joint venture in which we hold a minority interest, has exclusive distribution rights to distribute our Primus eServer and Primus eSupport products in Japan. Our international revenue constituted 33% and 22% of our total revenue for the
three month periods ended March 31, 2003 and 2002, respectively. We believe that international revenue, as a percentage of our total revenue, will continue to fluctuate in the future. We have not guaranteed any obligations of the joint venture nor
do we have any commitment or intent to provide any funding.



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To help us
execute our long-term growth strategy, we have invested heavily in product development and in building our sales, marketing, finance, administrative and professional services organizations. We have incurred quarterly net losses since inception, and
as of March 31, 2003, had an accumulated deficit of approximately $101 million. We anticipate that our operating expenses will continue to be substantial for the foreseeable future as we continue to invest in product development and sales and
marketing.



We are subject to certain business
risks that could affect future operations and financial performance. These risks include, but are not limited to, changing computing environments, rapid technological change, development of new products, limited protection of proprietary technology,
claims of intellectual property infringement and competitive products and pricing.



Significant Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



Management believes the following critical accounting
policies, among others, affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.



Restructuring



During 2001 and 2002, we recorded significant write-offs and accruals in connection with our restructuring program under Emerging Issues
Task Force, or EITF, Issue No. 94-3. These write-offs and accruals include estimates pertaining to employee separation costs and the settlements of contractual obligations related to excess leased facilities and other contracts. Although we believe
that we have made reasonable estimates of our restructuring costs in calculating these write-offs and accruals, the actual costs could differ from these estimates.



In June 2002, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting
Standards, or SFAS, No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies 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). This Statement requires that a liability for a cost associated with an exit
or disposal activity be recognized at fair value when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 in 2003 did not
have a material effect on our financial statements.



Revenue Recognition



We
recognize revenue in accordance with accounting standards established for software companies. These include Statement of Position No. 97-2, Software Revenue Recognition, as amended by Statement of Position No. 98-9, Software
Revenue Recognition with Respect to Certain Arrangements and Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). Revenue is recognized when persuasive evidence of an arrangement exists,
collection is probable, the fee is fixed or determinable and there is vendor-specific objective evidence to allocate the total fee to the elements of the arrangement.



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Vendor-specific objective evidence (VSOE) is typically based on the price charged when an element is sold separately, or, in the case of an element not yet sold separately, the price established by authorized management, if it is
probable that the price, once established, will not change before market introduction. In multiple element arrangements in which VSOE exists only for undelivered elements, the fair value of the undelivered elements are deferred and the residual
arrangement fee is assigned to the delivered elements. If evidence of fair value for any of the undelivered elements does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all
elements of the arrangement are delivered.



Revenue from software license arrangements is recognized upon the delivery of the software, regardless of whether installation services are sold, provided all of the other revenue recognition requirements of Statement of Position No.
97-2 have been met.



If a customer requires an
acceptance period, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Revenue for license arrangements with payment terms extending beyond 120 days is recognized periodically as payments become
due, provided all other conditions for revenue recognition are met.



Service revenue consists of maintenance and support fees and consulting, training and hosting fees. Maintenance and support and ongoing hosting fees are recognized ratably over the term of the contract, typically one year.
Consulting revenue is primarily related to implementation and integration services performed on a time-and-materials basis under separate service arrangements related to the use of our software products. Revenue from consulting and training services
is recognized as services are performed. If a transaction includes both license and service elements, license fees are recognized separately upon delivery of the software, provided services do not include significant customization or modification of
the base product, and the licenses are not subject to acceptance criteria.



From time to time we enter into distribution agreements with resellers that typically provide for sublicense fees based on a percentage of list prices. Our distribution agreement with Primus KK, a
related party, provides for sublicense fees based on a percentage of net fees collected by Primus KK from its customers, subject to certain guaranteed minimum royalty payments. Sublicense fees are recognized upon delivery of software to Primus KK if
pervasive evidence of an arrangement between the distributor and their customer exists, collection is probable, the fee is fixed or determinable, and vendor-specific objective evidence exists for the undelivered elements. Guaranteed minimum royalty
payments, to the extent they exceed sublicense fees due, are recognized in the period earned. Our agreements with our customers and resellers, including Primus KK, do not contain product return rights.



Accounts Receivable



We perform a quarterly analysis to determine the appropriate
allowance for doubtful accounts. This analysis includes various analytical procedures and a review of factors, including specific individual balances selected from a cross-section of the accounts that comprise total accounts receivable, our history
of collections, as well as the overall economic environment. At March 31, 2003 and December 31, 2002, the allowance for doubtful accounts was $462,000 and $412,000, respectively.



Goodwill



SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill no longer be amortized to earnings, but instead be
tested at least annually for impairment. The amortization of goodwill ceases upon the required adoption date of the Statement, which for us was January 1, 2002. At the date of adoption, we had unamortized goodwill of approximately $2.3 million, and
the implied fair value of the goodwill as of the date of adoption was zero. The implied fair value of goodwill was calculated based upon a comparison of the book value of the Company to its fair value. Fair value was determined based upon the market
capitalization of the Company as of January 1, 2002. Accordingly, we recognized a $2.3 million transitional impairment loss as the cumulative effect of a change in accounting principle as a result of the adoption of SFAS No. 142.



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Results of Operations for
the Three Months Ended March 31, 2003 and 2002



The following table sets forth certain financial data, derived from our unaudited condensed consolidated statements of operations, as a percentage of total revenues for the periods indicated. The operating results for the three
months ended March 31, 2003 and 2002 are not necessarily indicative of the results that may be expected for any future period.



|                                                                                 |  | Three Months Ended March 31, |   
|-------------------------------------------------------------------------------- |  | ---------------------------- | --
|                                                                                 |  | 2003                         |   
|Revenue:                                                                         |  |                              |   
|License:                                                                         |  |                              |   
|Third party                                                                      |  | 38.0                         | % 
|Related partyPrimus KK                                                          |  | 5.3                          |   
|                                                                                 |  |                              |   
|                                                                                 |  | 43.3                         |   
|Service:                                                                         |  |                              |   
|Third party                                                                      |  | 54.3                         |   
|Related partyPrimus KK                                                          |  | 2.4                          |   
|                                                                                 |  |                              |   
|                                                                                 |  | 56.7                         |   
|                                                                                 |  |                              |   
|Total revenue                                                                    |  | 100.0                        |   
|                                                                                 |  |                              |   
|Cost of revenue:                                                                 |  |                              |   
|License                                                                          |  | 1.8                          |   
|Service                                                                          |  | 20.7                         |   
|                                                                                 |  |                              |   
|Total cost of revenue                                                            |  | 22.5                         |   
|                                                                                 |  |                              |   
|Gross profit                                                                     |  | 77.5                         |   
|Operating expenses:                                                              |  |                              |   
|Sales and marketing                                                              |  | 47.4                         |   
|Research and development                                                         |  | 33.1                         |   
|General and administrative                                                       |  | 17.7                         |   
|Restructuring charges                                                            |  |                             |   
|                                                                                 |  |                              |   
|Total operating expenses                                                         |  | 98.2                         |   
|                                                                                 |  |                              |   
|Loss from operations                                                             |  | (20.7                        | ) 
|Other income, net                                                                |  | 1.0                          |   
|                                                                                 |  |                              |   
|Loss before income taxes and cumulative effect of change in accounting
principle |  | (19.7                        | ) 
|Income tax expense                                                               |  | (0.9                         | ) 
|                                                                                 |  |                              |   
|Loss before cumulative effect of change in accounting principle                  |  | (20.6                        | ) 
|Cumulative effect of change in accounting principle                              |  |                             |   
|                                                                                 |  |                              |   
|Net loss                                                                         |  | (20.6                        | )%
|                                                                                 |  |                              |   



Revenue



Total revenue was $5.5 million and $6.0
million for the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $540,000, or 9%. During the three months ended March 31, 2003, revenue from an enterprise sale to one customer represented approximately 17% of
total revenue. No single other customer accounted for 10% or more of total revenue in the quarters ended March 31, 2003 or 2002. International revenue was $1.8 million and $1.3 million for the three months ended March 31, 2003 and 2002,
respectively, representing an increase of $530,000 or 41%. We believe that international revenue as a percentage of our total revenue will continue to fluctuate in the future.



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License
Revenue.Total license revenue was $2.4 million and $2.5 million for the three months ended March 31, 2003 and 2002, respectively, representing a decrease of approximately $80,000, or 3%. License revenue as a percentage of total revenue was
43% and 41% for the three months ended March 31, 2003 and 2002, respectively. During the quarter ended March 31, 2003, we recognized revenue from sublicense fees and guaranteed minimum payments of approximately $289,000 related to our distribution
agreement with Primus KK. For the six month period ending September 30, 2003, Primus and Primus KK have agreed in principle to suspend the required $250,000 quarterly guaranteed minimum license fee payments to Primus. Macroeconomic conditions were
extremely challenging during 2002 and the first quarter of 2003, and we expect them to continue to affect capital-spending initiatives of our targeted new and existing customer base. As a result, we continue to experience unpredictable selling
cycles. Our license revenues depend on the overall demand for customer relationship management products, and the overall demand for our software depends in large part on the general economic and business conditions. Additionally, our
competitors inconsistency in delivering successful CRM solutions has also resulted in more cautious buying behavior of prospective customers. We believe that the depth and duration of the current economic slowdown will continue to have an
impact on our operating results.



Service
Revenue. Total service revenue was $3.1 million and $3.6 million for the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $460,000, or 13%, and was the result of a decrease in maintenance and support contract
revenue of $220,000 and a decrease in consulting fees of $240,000 over the same period. Service revenue as a percentage of total revenue was 57% and 59% for the three months ended March 31, 2003 and 2002, respectively. The decreases in maintenance
and support contract revenue and consulting fees are by-products of continued pricing pressures, the termination of certain low margin maintenance and support contracts and the declines in both license revenue and information technology spending
experienced during the last twelve to eighteen months. We expect the amount of and proportion of service revenue to total revenue to fluctuate in the future, depending primarily on the dollar amounts of software license revenue, maintenance and
support contract revenue, consulting fees and our customers use of third-party consulting and implementation services providers.



Cost of Revenue



Total cost of revenue was $1.2 million and $1.4 million for the three months ended March 31, 2003 and 2002, respectively, representing a
decrease of $130,000, or 10%.



Cost of License
Revenue. Cost of license revenue consists primarily of media, product packaging and shipping, third party software purchased and resold, documentation and other production costs, and third party royalties. Cost of license revenue was $97,000 and
$73,000 for the three months ended March 31, 2003 and 2002, respectively. This increase in the cost of license revenue is primarily due to a slight increase in the cost of third party software purchased and resold. Cost of license revenue as a
percentage of license revenue was 4% and 3% for the three months ended March 31, 2003 and 2002, respectively. We anticipate that our cost of license revenue will vary in absolute dollars and as a percent of license revenue due to increases or
decreases in the volume of software product sales, the sales mix and the costs of third party technology resold or integrated with our solutions.



Cost of Service Revenue. Cost of service revenue consists primarily of salaries, benefits and allocated overhead costs related to
customer support, consulting, training and global services personnel, including the cost of service provided by third-party consultants engaged by Primus. Cost of service revenue was $1.1 million and $1.3 million for the three months ended March 31,
2003 and 2002, respectively, representing a decrease of $160,000 or 12%. Cost of service revenue as a percentage of service revenue was 36% during both quarters, or a gross margin of 64%. The decrease in cost of service revenue as an absolute dollar
amount was primarily due to reductions in overhead expenses, higher utilization rates for our professional services staff, continued cost containment efforts and the cost savings realized from workforce reductions during 2002 within the professional
services and customer support organizations. Cost of service revenue will vary depending on the mix of services that we provide between support and maintenance, training, implementation and consulting services, as well as staffing levels,
utilization rates, overhead costs and customer needs. Gross profit margins are generally higher for support and maintenance services, which include the delivery of software enhancements and upgrades, than for training, implementation and consulting
services. We anticipate that cost of service, both as an absolute dollar amount and as a percentage of service revenue, will fluctuate in the future.



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Operating Expenses



Sales and Marketing. Sales and
marketing expenses consist primarily of salaries, bonuses, commissions and benefits earned by sales and marketing personnel, allocated overhead costs, direct expenditures such as travel, communication and occupancy for direct sales offices and
marketing expenditures related to direct mail, online marketing, advertising, trade shows, public relations and new product launches. Sales and marketing expenses were approximately $2.6 million and $3.1 million for the three months ended March 31,
2003 and 2002, respectively, a decrease of $470,000, or 15%. This decrease is primarily the result of reductions in sales and marketing headcount, travel and entertainment costs, recruiting expenses, and consulting and marketing expenditures (e.g.
advertising, public relations, tradeshows and collateral materials) as part of our overall cost containment efforts. Sales and marketing expenses as a percentage of total revenue were 47% and 51% for the three months ended March 31, 2003 and 2002,
respectively. This decrease as a percentage of total revenue is primarily due to the 15% decrease in total sales and marketing expenses from 2002 to 2003, partially offset by a smaller percentage decline in total revenue over the same period. We
believe that a significant sales and marketing effort is essential for us to maintain market position and further increase market acceptance of our products, and we anticipate that we will continue to invest significantly in sales and marketing for
the foreseeable future. We anticipate in 2003 that sales and marketing expense, as an absolute dollar amount will continue to fluctuate, depending primarily on the volume of future revenues, staffing levels, overhead costs and our assessment of
market opportunities and sales channels.



Research and Development. Research and development expenses include development costs associated with new products, enhancements and upgrades of existing products and quality assurance activities, and consist primarily of
salaries, benefits, and contractors fees for software engineers, program and product managers, technical writers, linguistic specialists, quality assurance personnel, allocated overhead costs, as well as costs related to the use of third party
development firms. Research and development expenses were approximately $1.8 million and $2.4 million for the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $570,000 or 24%. The decrease was primarily due to
reductions in overhead expenses, research and development headcount since July of 2001 and our continued cost containment efforts, partially offset by increases in research and development related to the engagement in January of 2003 of an offshore
development team to accelerate our development efforts. Our commitment under this offshore development agreement is to pay approximately $125,000 per month for development work through January 2005. During the quarter ended March 31, 2003, we
incurred development expenses of approximately $175,000 related to this agreement. When required we use third-party development firms to expand the capacity and technological expertise of our internal research and development teams. During the
quarter ended March 31, 2003, we also incurred approximately $125,000 in expenses related to Japanese language product development, as per our distribution agreement with Primus KK. For the six month period ending September 30, 2003, Primus and
Primus KK have agreed in principle to suspend the required $250,000 quarterly guaranteed minimum license fee payments to Primus and Primus is under no obligation to allocate any level of resources towards Japanese language product development.
Research and development expenses as a percentage of total revenue were 33% and 40% for the three months ended March 31, 2003 and 2002, respectively. This decrease as a percentage of total revenue is primarily due to the significant decrease in
total research and development spending in the first quarter of 2003 compared to the first quarter of 2002, partially offset by a smaller percentage decline in total revenue over the same period. We believe that a significant research and
development investment is essential for us to maintain our market position, to continue to expand our knowledge application software and to develop additional applications. Accordingly, we anticipate that we will continue to invest in product
research and development for the foreseeable future. We anticipate that research and development costs, as an absolute dollar amount will fluctuate, depending primarily on the volume of future revenues, customer needs, staffing levels, outsourced
development commitments, overhead costs and our assessment of market demand.



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General and
Administrative. General and administrative expenses consist primarily of salaries, benefits and related costs for executive, finance, human resource, legal, administrative and information services personnel, allocated overhead costs, bad debt
expense and costs associated with being a public company, including, but not limited to, annual and other public-reporting costs, directors and officers liability insurance, investor-relations programs and professional-services fees.
General and administrative expenses were $1.0 million and $1.4 million for the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $380,000 or 28%. This decrease is primarily due to reductions in overhead expenses,
general and administrative headcount since July of 2001 and current quarter reductions in occupancy costs and legal expenses, partially offset by increases in bad debt expenses. The decrease in total general and administrative expenses reflects the
continued impact of the overall cost containment measures taken by us during the last two years. General and administrative expenses as a percentage of total revenue were 18% for the three months ended March 31, 2003 and 22% for the three months
ended March 31, 2002. The decrease in general and administrative expense as a percentage of total revenue is primarily attributable to the significant decrease in general and administrative expenses in the current period, partially offset by a
smaller percentage decline in total revenue over the same period. We believe that our general and administrative expenses will fluctuate as an absolute dollar amount in future periods, depending primarily on the volume of future revenues, staffing
levels, overhead costs and corporate infrastructure requirements including insurance, professional services, bad debt expense, legal expense and other administrative costs.



Restructuring Charges. There were no restructuring charges in the three months ended March 31, 2003.
During the three months ended March 31, 2002, we executed a restructuring of our workforce and as a result recorded restructuring charges of approximately $435,000 for severance, benefits and associated costs due to a total workforce reduction of 24
people, or 12% of our employee base in March 2002.



As we continue to evaluate our underlying cost structure to improve our operating results and better position ourselves for growth, we may incur further restructuring charges, including severance, benefits and related costs due to a
reduction in workforce and/or charges for assets disposed of or removed from operations as a direct result of a reduction in workforce.



Other Income, Net. Other income decreased approximately $55,000, or 50%, from $110,000 for the three months ended March 31, 2002 to
$55,000 for the three months ended March 31, 2003. The decrease from period to period is primarily due to decreases in the average combined cash, cash equivalents and short-term investment balances as well as declining investment yields. We expect
to continue to yield investment income on our cash and cash equivalents and short-term investments at an average rate that is less than that experienced in 2002.



Income Taxes. We have not recorded federal and state income tax benefits related to the net operating
losses for the three months ended March 31, 2003 or 2002 as a result of the uncertainties regarding the realization of the net operating losses. Income tax expense recorded for the three months ended March 31, 2003 and 2002 primarily relates to our
foreign operations.



Cumulative Effect of
Change in Accounting Principle. We recognized a $2.3 million transitional impairment loss as the cumulative effect of a change in accounting principle as a result of the adoption of SFAS No. 142 on January 1, 2002. In July 2001, the FASB issued
SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill no longer be amortized to earnings, but instead be tested at least annually for impairment. The amortization of goodwill ceases upon the required adoption
date of the Statement, which for us was January 1, 2002. At the date of adoption, we had unamortized goodwill of approximately $2.3 million, and the implied fair value of the goodwill as of the date of adoption was zero. The implied fair value of
goodwill was calculated based upon a comparison of the book value of the Company to its fair value. Fair value was determined based upon the market capitalization of the Company as of January 1, 2002.



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Liquidity and Capital
Resources



Prior to our initial public
offering, we had primarily financed our operations through the private sale of our equity securities. To a lesser extent, we have financed our operations through equipment financing and traditional lending arrangements. In July 1999, we completed
our initial public offering in which we received approximately $46.2 million in cash, net of underwriting discounts, commissions, and other offering costs.



As of March 31, 2003, we had cash, cash equivalents and short-term investments of $13.1 million, representing an increase of $132,000 from
our December 31, 2002 balance of $13.0 million. As of March 31, 2003, our working capital was $6.9 million compared to $7.6 million at December 31, 2002.



Our operating activities resulted in net cash inflows of approximately $224,000 and outflows of $1,313,000 for the three months ended
March 31, 2003 and 2002, respectively. For the three months ended March 31, 2003, adjustments to the $1,130,000 net loss to reconcile to cash provided by operating activities includes cash provided by operations of approximately $985,000 for the
decrease in accounts receivable and other assets and increases in accounts payable and accrued liabilities and deferred revenue, and $481,000 in depreciation and amortization. This is offset by cash used in operations of approximately $112,000 for
the increase in prepaid expenses.



Investing activities provided cash of approximately $577,000 during the three months ended March 31, 2003 and used cash of approximately $67,000 for the three months ended March 31, 2002. Investing activities for the three months
ended March 31, 2003 consisted of $1.0 million in proceeds from the maturity of short-term investments offset by the purchases of short-term investments of $394,000 and property and equipment of $29,000.



There were no financing activities during the three-month
periods ended March 31, 2003 or 2002.



Our
principal source of liquidity at March 31, 2003 was our cash, cash equivalents and short-term investments of $13.1 million. We also have a line of credit totaling $3.0 million, which is secured by substantially all of our assets, bears interest at
the banks prime rate plus 1% (5.25% as of March 31, 2003) and expires in December 2003. There were no borrowings outstanding as of March 31, 2003. If we are unable to maintain compliance in the future, this $3.0 million line of credit may not
be available in its entirety. As of March 31, 2003, we were in compliance with our financial covenants in connection with the line of credit.



We currently anticipate that we will continue to experience fluctuations in our operating expenses for the foreseeable future as we:



| |  |  | enter new markets for our products and services, including through potential acquisitions of complementary businesses, technology or other assets
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increase or decrease research and development spending
| | - |  | ------------------------------------------------------



| |  |  | increase or decrease sales and marketing activities
| | - |  | ---------------------------------------------------



| |  |  | develop new distribution channels
| | - |  | ---------------------------------



| |  |  | improve our operational and financial systems
| | - |  | ---------------------------------------------



| |  |  | broaden our professional services capabilities
| | - |  | ----------------------------------------------



We continue to focus on maximizing the performance of our core business and controlling costs to respond to the economic environment, and
we will continue to evaluate our underlying cost structure to improve our operating results and better position ourselves for growth. As such, we may incur further restructuring charges, including severance, benefits and related costs due to a
reduction in workforce and/or charges for assets disposed of or removed from operations as a direct result of a reduction in workforce.



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In the
near-term, we believe our costs and operating expenses, excluding restructuring-related charges, will track to a level that is closer to our expected revenues while allowing us to continue to invest in accordance with our strategic priorities.
However, we may be unable to achieve these expense reductions without adversely affecting our business and results of operations. We expect to continue to experience losses and negative cash flows in the near term, even if sales of our products and
services grow.



While we will continue to
implement cost containment efforts across our business, our operating expenses, including costs to defend and/or settle legal actions that have been or may be brought against us, will consume a material amount of our cash resources. We believe that
the total amount of our cash, cash equivalents and short-term investments, along with our commercial credit facilities, will be sufficient to meet our anticipated cash needs for working capital or other purposes for at least the next twelve months.
Thereafter, depending on the development of our business, we will likely require additional funds to support our working capital requirements, unanticipated problems or expenses, opportunities for acquisitions or other business initiatives we
encounter and may seek to raise such additional funds through public or private equity or debt (including debt convertible into equity) financing or from other sources. We may not be able to obtain adequate or favorable financing at that time. Our
recent history of declining market valuation, volatility in our stock price and doubts surrounding our future eligibility to remain listed on the Nasdaq Small Cap Market could make it difficult for us to raise capital on favorable terms. Any
financing we obtain may dilute or otherwise impair our current shareholders ownership interest in the Company.



We lease office space under operating leases with various expiration dates through 2006. In January 2003, we engaged an offshore
development team to accelerate our development efforts. Our commitment under this agreement is to pay approximately $125,000 per month for development work through January 2005. During the quarter ended March 31, 2003, we incurred development
expenses of approximately $175,000 related to this agreement. We have no material long-term commitments or obligations other than those under these agreements.



We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of
unconsolidated entities nor have we any commitment or intent to provide any funding to any such entity. As such, we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such
relationships.



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Risks Associated with Our
Business and Future Operating Results



Our future operating results may vary substantially from period to period. The price of our common stock will fluctuate in the future, and an investment in our common stock is subject to a variety of risks, including but not
limited to the specific risks identified below. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may impair our business
operations. Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this report and our other public filings. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely affected and the trading price of our common stock could decline.



We have a history of losses and may not be profitable in the future and may not be able to generate sufficient revenue or funding to
continue as a going concern.



Since we began
operations, our revenue has not been sufficient to support our operations, and we have incurred operating losses in every quarter. As of March 31, 2003, our accumulated deficit was approximately $101 million. Our history of losses may cause some of
our potential customers to question our viability and hamper our ability to sell some of our products. Our revenue has been affected by the increasingly uncertain economic conditions both generally and in our market. Although we have restructured
our operations to reduce operating expenses, we will need to significantly increase our revenue and/or further reduce our operating expenses to achieve profitability and maintain positive cash flows from operations, and our revenue may decline, or
fail to grow, in future periods. Our expectations as to whether we can maintain positive cash flows from operations, and as to our future cash balances, are subject to a number of assumptions, including assumptions regarding improvements in general
economic conditions and customer purchasing and payment patterns, many of which are beyond our control. In addition we may require additional financing, which might not be available on acceptable terms, if at all.



As a result of uncertainties in our business and the general
economic slowdown, we have experienced and may continue to experience difficulties in collecting outstanding receivables from our customers and attracting new customers. As a result, we may continue to experience losses, even if sales of our
products and services grow.



Quarterly
fluctuations in our operating results may adversely affect our stock price.



Fluctuations in our operating results, particularly compared to the expectations of investors or market analysts, could cause severe volatility in the price of our common stock. Our revenue and
operating results have fluctuated substantially from quarter to quarter and are likely to continue to do so in the future. Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter
particularly because of the length of our sales cycle and delays in customer buying decisions. We believe that period-to-period comparisons of our operating results may not be meaningful and you should not rely on these comparisons as an indication
of our future performance. We will continue to base our decisions regarding operating expenses on anticipated revenue trends. Therefore, to the extent our actual revenue falls short of our expectations, our operating results will suffer and our
stock price will likely decline. If quarterly revenue or operating results fall below the expectations of investors or market analysts, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our
operating results include the factors described under the subheadings of this Risks Associated with Primus Business and Future Operating Results section as well as:



| |  |  | general economic conditions that adversely affect our customers capital investment levels in eService and knowledge management systems
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the evolving and varying demand for our software products and services
| | - |  | ----------------------------------------------------------------------



| |  |  | budget and spending decisions by information technology departments of our customers
| | - |  | ------------------------------------------------------------------------------------



| |  |  | order deferrals in anticipation of new products or product enhancements introduced by our competitors or us
| | - |  | -----------------------------------------------------------------------------------------------------------



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| |  |  | our ability to manage our expenses
| | - |  | ----------------------------------



| |  |  | the timing of new releases of our products
| | - |  | ------------------------------------------



| |  |  | changes in our pricing policies or those of our competitors
| | - |  | -----------------------------------------------------------



| |  |  | the timing of execution of large contracts that materially affect our operating results
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | uncertainty regarding the timing of delivery of our products
| | - |  | ------------------------------------------------------------



| |  |  | changes in the level of sales of professional services as compared to product licenses
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the mix of sales channels through which our products and services are sold
| | - |  | --------------------------------------------------------------------------



| |  |  | the mix of our domestic and international sales
| | - |  | -----------------------------------------------



| |  |  | costs related to the customization of our products
| | - |  | --------------------------------------------------



| |  |  | our ability to expand our operations, and the amount and timing of expenditures related to this expansion
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | decisions by customers and potential customers to delay purchasing of our products
| | - |  | ----------------------------------------------------------------------------------



| |  |  | a trend of continuing consolidation in our industry
| | - |  | ---------------------------------------------------



| |  |  | global economic and political conditions, as well as those specific to our customers or our industry
| | - |  | ----------------------------------------------------------------------------------------------------



Due to the slowdown in the national and global economy and
geopolitical uncertainties, we believe that many existing and potential customers are reducing or reassessing their planned technology and Web-related investments and deferring purchasing decisions. As a result, there is increased uncertainty with
respect to our expected revenue, and further delays or reductions in business spending for information technology could have a material adverse effect on our revenue, operating results and stock price.



Our expenses are generally fixed and we will not be able to
reduce these expenses quickly if we fail to meet our revenue forecasts.



Most of our expenses, such as employee compensation and rent, are relatively fixed in the short term. Moreover, our budget is based, in part, on our expectations regarding future revenue levels. As a
result, if total revenue for a particular quarter is below expectations, we could not proportionately reduce operating expenses for that quarter. Accordingly, such a revenue shortfall would have a disproportionate effect on our expected operating
results for that quarter.



Our continued
Nasdaq Small Cap Market listing is not assured, which would make the trading market for our stock more illiquid and could make it more difficult to raise capital.



As of August 2, 2002 our common stock had traded under a minimum $1.00 for the previous 30 trading days. As a
result our common stock is out of compliance with the minimum bid price listing requirements for Nasdaq National Market. On October 29, 2002, we announced that the Nasdaq Stock Market, Inc. approved our application to transfer the listing of our
shares of common stock from the Nasdaq National Market to the Nasdaq Small Cap Market. Our common stock commenced trading on the Nasdaq Small Cap Market on November 1, 2002 and our trading symbol continued to be PKSI. Nasdaq granted us a
grace period concerning the $1.00 minimum price bid through July 28, 2003. In March 2003, Nasdaq provided for an additional two 180 day grace periods concerning the $1.00 minimum price bid. Provided we continue to meet the core initial listing
requirements and Nasdaq grants us these additional grace periods, the final grace period will expire July of 2004. In order to remain listed on the Nasdaq Small Cap Market under current Nasdaq rules, before the grace periods expire, the bid price of
our common stock must close at $1.00 per share or more for a minimum of 10 consecutive trading days. If market trading does not result in the increase of the trading price of our common stock, we may comply with this listing requirement by
implementing a board-approved reverse stock split, assuming we meet all the other continued listing requirements at that time.



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If our common
stock is unable to meet the minimum maintenance requirements during the applicable grace periods, then we would be subject to delisting from the Nasdaq Small Cap Market. If our common stock would be delisted by Nasdaq, our securities could still be
eligible to trade on the OTC Bulletin Board maintained by Nasdaq, another over-the-counter quotation system, or on the pink sheets where an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of the
securities. In addition, we would be subject to a Rule promulgated by the Securities and Exchange Commission that, if we fail to meet criteria set forth in such Rule, imposes various practice requirements on broker-dealers who sell securities
governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchasers
written consent to the transactions prior to sale. Consequently, the Rule may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. Delisting from Nasdaq will make trading our
shares more difficult for investors and will likely result in a significant decline in the liquidity of the trading market, potentially leading to further volatility and declines in our share price. Further, if we are delisted it would also make it
more difficult for us to raise additional capital and we would also incur additional costs under state blue sky laws in connection with any sales of our securities.



We may incur non-cash charges resulting from acquisitions, which could harm our operating results.



A new standard for accounting for goodwill
acquired in a business combination has recently been adopted. This new standard requires recognition of goodwill as an asset but does not permit amortization of goodwill. Instead goodwill must be separately tested for impairment. As a result, our
goodwill amortization charges ceased in 2002 and we recognized a $2.3 million transitional impairment loss as the cumulative effect of a change in accounting principle as a result of the adoption of this standard.



In the future, we may incur impairment charges related to
goodwill arising out of future acquisitions, if any. Current and future accounting charges like these could delay our achievement of net income.



Our quarterly operating results may depend on a small number of large orders.



We may derive a significant portion of our product license
revenue in each quarter from a small number of relatively large orders. Our operating results for a particular fiscal quarter could be materially adversely affected if we are unable to complete one or more substantial license sales forecasted for
that quarter. Additionally, we also often offer volume-based pricing, which may affect operating margins.



Factors outside our control may cause the timing of our license revenue to vary from quarter-to-quarter, possibly adversely affecting
our operating results.



Applicable accounting
policies may cause us to report new license agreements as deferred revenue. We recognize revenue from a customer sale when persuasive evidence of an agreement exists, the product has been delivered, the arrangement does not involve customization of
the software, the license fee is fixed or determinable and collection of the fee is probable. If an arrangement requires acceptance testing or software customization services from Primus, recognition of the associated license and service revenue
would be delayed. The timing of the commencement and completion of the these services is subject to factors that may be beyond our control, as this process may require access to the customers facilities and coordination with the
customers personnel after delivery of the software. In addition, customers could delay product implementations and integrations. Implementation and integration typically involves working with sophisticated software, computing and
communications systems. If we experience difficulties with implementation or integrations or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular
project. Some customers may also require us to develop customized features or capabilities. If new or existing customers have difficulty deploying our products or require significant amounts of our professional services support for customized
features, our revenue recognition could be further delayed and our costs could increase, causing increased variability in our operating results.



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The high
level of competition in our market may result in pricing pressures, reduced margins or the failure of our products to achieve market acceptance.



The market for our products is rapidly evolving, and becoming increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our suite of products competes against various vendor software tools designed to address a specific element or elements of the complete set of eService processes, including e-mail management, support,
knowledge management, and web-based customer self-service and assisted service. We also face competition from in-house designed products and third-party custom development efforts.



In addition, competition may increase as a result of software industry consolidations and formations of
alliances among industry participants or with third parties. Some current and potential competitors have longer operating histories and significantly greater financial, technical, marketing, service, support and other resources, and thus may be able
to respond more quickly to new or changing opportunities, technologies and customer requirements. Also, many current and potential competitors have wider name recognition and more extensive customer bases that they could leverage. They might be able
to undertake more extensive promotional activities, adopt more aggressive pricing strategies, and offer purchasers more attractive terms. Some of the companies providing e-commerce, advanced natural language self service and traditional customer
relationship management solutions that may compete with us include Amdocs/Clarify, Answerfriend, Ask Jeeves, Autonomy, eGain, Inquira, iPhrase Technologies, Kana, Kanisa, Oracle, Peoplesoft, Right Now Technologies, ServiceWare and Siebel.



The principal competitive factors in our
industry include:



| vendor and product reputation                                            |  |  product ease-of-use                                                     
|-------------------------------------------------------------------------- |  | --------------------------------------------------------------------------
|                                                                          
| the availability of products on the Web and multiple operating
platforms |  |  the quality of customer support services, documentation and
training    
|                                                                          
| measurable economic return on investment                                 |  |  the quality, speed and effectiveness of application development
services
|                                                                          
| ability to use customers as references                                   |  |  the effectiveness of sales and marketing efforts                        
|                                                                          
| product quality, performance and price                                   |  |  product integration with other enterprise applications                  
|                                                                          
| breadth of product functionality and features                            |  |  breadth of product application suite                                    
|                                                                          
| product scalability                                                      |  |                                                                           



As the
market for eService and knowledge management software matures, it is possible that additional and possibly larger companies will enter the market, existing competitors will form alliances or current and potential competitors could acquire, be
acquired by or establish cooperative relationships with third parties. The resulting organizations could have greater technical, marketing and other resources and improve their products to address the needs of our existing and potential users,
thereby increasing their market share. Increased competition could result in pricing pressures, reduced margins or the failure of our products to achieve or maintain market acceptance.



Seasonality may adversely affect our quarterly operating results.



We expect to experience seasonality in our revenue. To date,
we believe that other factors, such as large orders and the timing of personnel changes in our sales staff, have masked seasonality. Our customers purchase decisions are often affected by fiscal budgetary factors and by efforts of our direct
sales force to meet or exceed sales quotas.



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We rely
primarily on sales of only one product family.



Product license revenue and related service revenue from our Primus eServer and Primus eSupport products accounted for 90% or more of our total revenue for each of the three months ended March 31, 2003 and 2002, and we expect these
products to continue to account for a substantial portion of our revenue for the remainder of 2003. For our business to succeed, the market for this software will have to grow significantly, and we will have to achieve broad market acceptance of our
products. As a result, factors adversely affecting the demand for these products and our products in general, such as competition, pricing or technological change, could materially adversely affect our business, financial condition, operating
results and value of our stock price. Our future financial performance will substantially depend on our ability to sell current versions of our entire suite of products and our ability to develop and sell enhanced versions of our products.



We may not be able to forecast revenue
accurately because our products have a long and variable sales cycle.



To date, the typical sales cycles for our products have taken 3 to 12 months. The length of our sales cycles may cause license revenue and operating results to vary significantly from period to period. Our sales cycles have
required pre-purchase evaluation by a significant number of individuals in our customers organizations. Along with third parties that jointly market our software, we invest significant amounts of time and resources educating and providing
information to prospective customers regarding the use and benefits of our products. Many of our customers evaluate our software deliberately, depending on their specific technical capabilities, the size of the deployment, the complexity of their
network environment, and the quantity of hardware and the degree of hardware configuration necessary to deploy our products. In the event that the current national and global economic downturn were to continue, the sales cycle for our products may
become longer and we may require more time and resources to complete sales.



We depend on increased business from new customers, and if we fail to grow our customer base or generate repeat business, our operating results could be harmed.



Our business model generally depends on the sale of our
products to new customers as well as on expanded use of our products within our existing customers organizations. If we fail to grow our customer base or generate repeat and expanded business from our current and future customers, our business
and operating results will be seriously harmed. In some cases, our customers initially make a limited purchase of our products and services for pilot programs. These customers may not purchase additional licenses to expand their use of our products.
If these customers do not successfully develop and deploy initial applications based on our products, they may choose not to purchase deployment licenses or additional development licenses.



In addition, as we introduce new versions of our products or
new products, our current customers might not require the functionality of our new products and might not ultimately license these products. Because the total amount of maintenance and support fees we receive in any period depends in large part on
the size and number of licenses that we have previously sold, any downturn in our software license revenue would negatively affect our future services revenue. In addition, if customers elect not to renew their maintenance agreements, our services
revenue could decline significantly. Further, some of our customers are telecom or information technology companies, which have been forced to significantly reduce their operations in light of limited access to sources of financing and the current
national and global economic slowdown. If customers are unable to pay for their current products or are unwilling to purchase additional products, our revenue will decline and this will likely materially impact adversely our revenue, operating
results and stock price.



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Factors
outside our control may make our products less useful.



The effectiveness of our software depends in part on widespread adoption and effective use of our software by an enterprises personnel, partners, and customers and the value derived by each such usage. In addition, the
effectiveness of our knowledge-enabled approach is somewhat dependent upon a current database. If customer-support personnel do not adopt and effectively use our Primus eServer and Primus eSupport products, necessary solutions will not be added to
the database, and the database will be inadequate. If an enterprise deploying our software fails to maintain a current database, the value of our Primus eServer and Primus eSupport software to our users will be impaired. Successful deployment and
broad acceptance of our Primus eServer and Primus eSupport products will depend in part on the quality of the users existing database of solutions, which is outside our control.



The loss of access to, or a problem with, third party databases could adversely affect our business.



Historically, we incorporated a database
licensed from Versant into certain of our products. Presently, our products support IBM DB-2, Microsoft SQL Server and Oracle databases. Because many of the products we have shipped historically rely on these databases, we continue to depend on
these companies to support the databases in a timely and effective manner.



Failure to sufficiently expand our sales and marketing infrastructure would adversely affect our sales.



To date, we have licensed our products primarily through our direct sales force. Our future revenue growth will depend in large part on
our ability to recruit, train, manage and retain additional sales and marketing personnel and to expand our indirect distribution channels. We may experience difficulty in recruiting qualified sales and marketing personnel or in establishing
third-party relationships. We may not be able to successfully expand our direct sales force or other distribution channels and any such expansion may not result in increased revenue. Our business, financial condition, operating results and stock
price may be materially adversely affected if we fail to effectively expand our sales and marketing resources.



Our inability to sufficiently expand our consulting capabilities would limit our ability to grow.



If sales of new licenses increased rapidly or if we were to
sign an agreement for a particularly large or complex integration, our customer support and professional services personnel may be unable to meet the demand for services. In that case, if we were unable to retain or hire highly trained consulting
personnel or establish relationships with third-party systems-integrators and consultants to implement our products, we would be unable to meet customer demands for integration and support services related to our products.



We may have potential contingent liabilities under service
level agreements.



In connection with
certain hosting services agreements and consulting services arrangements, Primus has agreed to service level performance criteria. Any failure of Primus to meet the service level performance criteria could result in certain negotiated fee credits or
liquidated damage payments to any affected customers. As Primus expands its hosting services and consulting services business, the potential could exist for material, potential contingent liabilities related to negotiated fee credits or liquidated
damages for failure to meet agreed performance criteria.



Our workforce reduction and financial performance may adversely affect the morale and performance of our personnel and our ability to hire new personnel.



In connection with our effort to streamline operations, and reduce costs, we have engaged in several
restructurings of our organization with substantial reductions in our workforce. There have been and may continue to be substantial costs associated with this or other workforce reductions related to severance and other employee-related costs, and
our restructuring plans may yield unanticipated consequences, such as attrition beyond our planned reductions in workforce. As a result of these reductions, our ability to respond to unexpected challenges may be impaired and we may be unable to take
advantage of new opportunities.



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In addition,
many of the employees who were terminated possessed specific knowledge or expertise that may prove to be important to our operations. In that case, their absence may create significant difficulties. Personnel reductions may also subject us to the
risk of litigation, which may adversely impact our ability to conduct our operations and may cause us to incur significant expense.



Our failure to attract and retain skilled technical personnel may adversely affect our product development, sales and customer
satisfaction.



Our reductions in work force
since July of 2001 may affect employee morale and may create concern among existing employees about job security, which may lead to increased turnover and reduce our ability to meet the needs of our current and future customers. As a result, we may
need to hire to replace personnel lost due to attrition, or to accommodate growth in specific customer needs and/or acquire new skill sets. We may be unable to hire and/or retain the skilled personnel necessary to develop and grow our business.
Although a number of technology companies have recently implemented staff reductions, there remains substantial competition for experienced personnel, particularly in the greater Seattle area, where we are headquartered, due to the limited number of
people available with the necessary technical skills.



Because our stock price has suffered a significant decline, stock-based compensation, including options to purchase our common stock, may have diminished effectiveness as employee hiring and retention devices. If employee turnover
increases, our ability to provide client service and execute our strategy would be negatively affected. We may also face difficulties in hiring and retaining qualified sales personnel to sell our products and services, which could impair our revenue
growth.



We may be adversely affected if we
lose key personnel.



Our success depends
largely on the skills, experience and performance of some key members of our management and technical staff. If we lose one or more of these key employees, our business, operating results and financial condition could be materially adversely
affected. Much of our success also depends on Michael A. Brochu, our President and Chief Executive Officer. The loss of Mr. Brochus services or his inability to repay outstanding amounts to the Company could harm our business.



We may face difficulties in hiring and retaining qualified
sales personnel to sell our products and services, which could impair our revenue growth.



Our ability to increase revenue in the future depends considerably upon our success in recruiting, training, managing and retaining additional direct sales personnel and the success of the direct sales
force. We might not be successful in these efforts. Our products and services require sophisticated sales backgrounds. There is a shortage of sales personnel with the qualifications and experience, and competition for qualified personnel is intense
in our industry. Also, it may take a new salesperson a number of months to become a productive member of our sales force. Our business will be harmed if we fail to hire or retain qualified sales personnel, or if newly hired salespeople fail to
develop the necessary sales skills or develop these skills more slowly than anticipated.



Acquisitions could disrupt our business and harm our financial condition.



In order to remain competitive, we may find it necessary to acquire additional businesses, products and technologies. In the event that we
do complete an acquisition, we could be required to do one or more of the following:



| |  |  | issue equity securities, which would dilute current shareholders percentage ownership
| | - |  | --------------------------------------------------------------------------------------



| |  |  | assume contingent, unrecorded and / or warranty liabilities
| | - |  | -----------------------------------------------------------



| |  |  | amortize other intangible assets
| | - |  | --------------------------------



| |  |  | incur future goodwill impairment charges
| | - |  | ----------------------------------------



| |  |  | restructure our business
| | - |  | ------------------------



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These
difficulties could disrupt our ongoing business, divert management resources and/or increase our expenses.



Conversely, we may believe that we need to acquire additional businesses, products and technologies to remain competitive; however we may
be unable to complete the acquisition due to constrained financial resources.



If we do not integrate acquired technology quickly and effectively, many of the potential benefits of any acquisition may not be realized.



From time to time, we evaluate various acquisition
opportunities and if we successfully complete any such acquisition transaction, we cannot assure you that we will be able to integrate the acquired technology quickly and effectively. In order to obtain the certain benefits of any such acquisition,
the acquired technology, products and services need to operate together with our technology, products and services. We may be required to spend additional time or money on integration, which would otherwise be spent on developing our business and
services or other matters. If we do not integrate the technologies effectively or if management and technical staff spend too much time on integration issues, it could harm our business, financial condition and results of operations, which may
adversely affect our stock price. In addition, the success of any such acquisition may also depend on our ability to successfully integrate and manage the acquired operations and retain or replace the key employees of the acquired business.



Our international operations are subject to
additional risks.



Revenue from customers
outside the United States represented approximately $1.8 million, or 33% of our total revenue for the quarter ended March 31, 2003. We currently customize our products for select foreign markets. In the future, we plan to develop additional
localized versions of our products and localization of our products will create additional costs and would cause delays in new product introductions. In addition, our international operations will continue to be subject to a number of other risks,
including:



| |  |  | costs and complexity of customizing products for foreign countries
| | - |  | ------------------------------------------------------------------



| |  |  | laws and business practices favoring local competition
| | - |  | ------------------------------------------------------



| |  |  | compliance with multiple, conflicting and changing laws and regulations
| | - |  | -----------------------------------------------------------------------



| |  |  | longer sales cycles
| | - |  | -------------------



| |  |  | greater difficulty or delay in accounts receivable collection
| | - |  | -------------------------------------------------------------



| |  |  | import and export restrictions and tariffs
| | - |  | ------------------------------------------



| |  |  | difficulties in staffing and managing foreign operations
| | - |  | --------------------------------------------------------



| |  |  | investing at appropriate levels in foreign operations to compete effectively
| | - |  | ----------------------------------------------------------------------------



| |  |  | political and economic instability
| | - |  | ----------------------------------



Our international operations also face foreign-currency-related risks. To date, substantially all of our revenue has been denominated in
U.S. dollars, but we believe that in the future, an increasing portion of our revenue may be denominated in foreign currencies, including the Euro, British Pound and Yen. Fluctuations in the value of foreign currencies may cause further volatility
in our operating results, reduce the accuracy of our financial forecasts and could have a material adverse effect on our business, operating results and financial condition.



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Our failure
to adapt to technology trends and evolving industry standards would hinder our competitiveness.



Our market is susceptible to rapid changes due to technology innovation, evolving industry standards, and frequent new service and product
introductions. New services and products based on new technologies or new industry standards expose us to risks of technical or product obsolescence. We will need to use leading technologies effectively, continue to develop our technical expertise
and enhance our existing products on a timely basis to compete successfully in this industry. We cannot be certain that we will be successful in using new technologies effectively, developing new products or enhancing existing products on a timely
basis or that any new technologies or enhancements used by us or offered to our customers will achieve market acceptance.



Our inability to continue integration of our products with other third-party software could adversely affect market acceptance of our
products.



Our ability to compete
successfully also depends on the continued compatibility and interoperability of our products with products and systems sold by various third parties, including traditional eService software sold by Amdocs/Clarify, BEA, Oracle, Peoplesoft, Remedy,
Siebel and others. Currently, these vendors have open applications program interfaces, which facilitate our ability to integrate with their systems. These vendors have also been open to licensing us rights to use their development tools to build
integrations to their products. If any one of them should close their programs interface, fail to grant us necessary licenses or if they should acquire one of our competitors, our ability to provide a close integration of our products could
become more difficult and could delay or prevent our products integration with future systems.



Failure to successfully develop versions and updates of our products that run on the operating systems used by our current and
prospective customers could reduce our sales.



Many of our products run on the Microsoft Windows NT, Microsoft Windows 2000 or certain versions of the Sun Solaris Unix and J2EE operating systems, and some require the use of third party software. Any change to our customers
operating systems could require us to modify our products and could cause us to delay product releases. In addition, any decline in the market acceptance of these operating systems we support may force us to ensure that all of our products and
services are compatible with other operating systems to meet the demands of our customers. If potential customers do not want to use the Microsoft, Sun Solaris or J2EE operating systems we support, we will need to develop more products that run on
other operating systems adopted by our customers. If we cannot successfully develop these products in response to customer demands, our business could be adversely impacted. The development of new products in response to these risks would require us
to commit a substantial investment of resources, and we might not be able to develop or introduce new products on a timely or cost-effective basis, or at all, which could lead potential customers to choose alternative products.



We rely on software licensed to us by third parties for
features we include in our solutions.



We
incorporate software licensed from third parties into our solutions. As we develop enhanced versions of our software, some of the additional functionality and capabilities of our solutions may be a result of additional third party applications. A
significant interruption in the availability of any of the licensed third-party software could adversely affect our sales, unless and until we can replace this software with other software that performs similar functions. Because our solutions
incorporate software developed and maintained by third parties, we depend on these third parties abilities to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis, and
respond to emerging industry standards and other technological changes. If third-party software offered now or in the future in conjunction with our solutions becomes obsolete or incompatible with future versions of our solutions, we may not be able
to continue to offer some of the features we presently include in our solutions unless we can license alternative software or develop the features ourselves.



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Our stock
price has been volatile and could fluctuate in the future.



The market price of our common stock has been highly volatile and is subject to wide fluctuations. We expect our stock price to continue to fluctuate:



| |  |  | in response to quarterly variations in operating results
| | - |  | --------------------------------------------------------



| |  |  | in response to announcements of technological innovations or new products by us or our competitors
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | because of market conditions in the enterprise software industry
| | - |  | ----------------------------------------------------------------



| |  |  | in reaction to changes in financial estimates by securities analysts, and our failure to meet or exceed the expectations of analysts or investors
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in response to our announcements of significant acquisitions, strategic relationships or joint ventures
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | in response to sales of our common stock
| | - |  | ----------------------------------------



In the past, following periods of volatility in the market price of a particular companys securities, securities class action
litigation has often been brought against that company. We are currently subject to a securities related lawsuit and the volatility of our stock price could make us a target for additional suits. Securities class action litigation could result in
substantial costs and a diversion of our managements attention and resources. See the discussion of the Companys pending legal matters in Part II, Item 1 Legal Proceedings. Volatility in our stock price could make it more
difficult for us to raise capital or complete acquisitions on favorable terms.



Our efforts to protect our proprietary rights may be inadequate.



Our success depends in part on our ability to protect our proprietary rights. To protect our proprietary rights, we rely primarily on a
combination of copyright, trade secret and trademark laws, confidentiality agreements with employees and third parties, and protective contractual provisions such as those contained in license agreements with customers, consultants and vendors. We
have not signed such agreements in every case. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Other parties may breach such
confidentiality agreements and other protective contracts. We may not become aware of, or have adequate remedies in the event of, such breaches.



We pursue the registration of some of our trademarks and service marks in the United States and in certain other countries, but we have
not secured registration of all our marks. Significant portions of our marks include the word Primus. Other companies use Primus in their marks alone or in combination with other words, and we cannot prevent all third-party
uses of the word Primus. We license certain trademark rights to third parties. Such licensees may not abide by compliance and quality control guidelines with respect to such trademark rights and may take actions that would adversely
affect our trademarks.



Other companies may
claim that we infringe their intellectual property or proprietary rights.



If any of our products are found to violate third party proprietary rights, we may be required to reengineer our products or seek to obtain licenses from third parties, and such efforts may not be
successful. We do not conduct comprehensive patent searches to determine whether the technology used in our products infringes patents held by third parties. Product development is inherently uncertain in a rapidly evolving technological environment
in which there may be numerous patent applications pending, which are confidential when filed, with regard to potentially similar technologies. In addition, other companies have filed trademark applications for marks similar to the names of our
products. Although we believe that our products do not infringe the proprietary rights of any third parties, third parties could assert infringement claims against us in the future. The defense of any such claims would require us to incur
substantial costs and would divert managements attention and resources to defend against any claims relating to proprietary rights, which could materially and adversely affect our financial condition and operations. If a party succeeded in
making such a claim we could be liable for substantial damages, as well as injunctive or equitable relief that could effectively block our ability to sell our products and services. Any such outcome could have a material adverse effect on our
business, financial condition, operating results and stock price.



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Product
liability claims by our customers could result in unexpected costs and damage to Primus reputation.



Our license agreements with customers generally contain provisions designed to limit our exposure to potential product liability claims,
such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. In addition, our license agreements cap the amounts recoverable for damages to the amounts paid by the licensee to Primus for the
product or services giving rise to the damages. However, these contractual limitations on liability may not be enforceable and we may be subject to claims based on errors in its software or mistakes in performing its services including claims
relating to damages to our customers internal systems. A product liability claim, whether or not successful, could harm our business by increasing our costs, damaging our reputation and diverting managements attention and resources to
defend any such claim, which could materially and adversely affect our financial condition, our results of operations and our stock price.



Control by inside shareholders of a large percentage of our voting stock may permit them to influence us in a way that adversely
affects our stock price.



Our officers,
directors and affiliated entities together beneficially own approximately 22% of the outstanding shares of our common stock. As a result, these shareholders are able to influence all matters requiring shareholder approval and, thereby, our
management and affairs. Some matters that typically require shareholder approval include:



| |  |  | election of directors
| | - |  | ---------------------



| |  |  | certain amendments to our articles of incorporation
| | - |  | ---------------------------------------------------



| |  |  | merger or consolidation
| | - |  | -----------------------



| |  |  | sale of all or substantially all our assets
| | - |  | -------------------------------------------



This concentration of ownership may delay, deter or prevent acts that would result in a change of control, which in turn could reduce the
market price of our common stock.



Specific
provisions of our articles of incorporation and bylaws and Washington law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.



Our articles of incorporation and bylaws establish a
classified board of directors, eliminate the ability of shareholders to call special meetings, eliminate cumulative voting for directors and establish procedures for advance notification of shareholder proposals. The presence of a classified board
and the elimination of cumulative voting may make it more difficult for an acquirer to replace our board of directors. Further, the elimination of cumulative voting substantially reduces the ability of minority shareholders to obtain representation
on the board of directors.



Our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our
shareholders. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of Primus and may adversely affect the market price of the common stock and the voting and other rights of the holders of
common stock.



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Washington law
imposes restrictions on some transactions between a corporation and significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a target corporation, with some exceptions, from engaging in particular significant
business transactions with an acquiring person, which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after the acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of the target corporations board of directors prior to the acquisition. Prohibited transactions include, among other things:



| |  |  | a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | termination of 5% or more of the employees of the target corporation
| | - |  | --------------------------------------------------------------------



| |  |  | allowing the acquiring person to receive any disproportionate benefit as a shareholder
| | - |  | --------------------------------------------------------------------------------------



A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or
preventing a change in control of Primus. The foregoing provisions of our charter documents and Washington law could have the effect of making it more difficult or more expensive for a third party to acquire, or could discourage a third party from
attempting to acquire Primus. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock.



Security breaches or equipment failure could damage our reputation and deter customers from using our
services.



We must protect our computer
systems and networks from physical break-ins, security breaches and other events such as electrical disruptions, equipment failure, and fire and water damage. Computer break-ins could jeopardize the security of information stored in and transmitted
through our computer systems and network, which could adversely affect our ability to retain or attract customers, damage our reputation and subject us to litigation. We could be subject to denial of service, vandalism and other attacks on our
computer systems by individuals with malicious intentions. Although we intend to continue to implement security technology and establish operational procedures to prevent break-ins, damage and failures, these security measures may fail. Our
insurance coverage in certain circumstances may be insufficient to cover losses that may result from such events.



Future taxation or regulation of the Web may slow our growth, resulting in decreased demand for our products and services and increased
costs of doing business.



Local, state,
federal and foreign regulators could adopt additional laws and regulations that impose additional costs or other burdens on those companies that conduct business online. These laws and regulations could discourage web-based communications and
customer self-service, which could reduce demand for our products and services.



The growth and development of the market for online services may prompt calls for more stringent consumer protection laws or laws that may inhibit the use of Web-based communications or the information
contained in these communications. The adoption of any additional laws or regulations may decrease the expansion of the Web. The imposition of taxes or other charges would likewise deter the use of the Web. A decline in the growth of the Web,
particularly as it relates to online communication and customer self-service, could decrease demand for our products and services and increase our costs of doing business, or otherwise harm our business. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Web and other online services could harm our growth and increase our costs, which
could materially and adversely affect our financial condition, results of operations and our stock price.



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Terrorists attacks, other acts of war or military actions may adversely affect
the markets on which our Common Stock trades, our financial condition and our results of operations.



The September 11, 2001 terrorist attacks in the United States and recent terrorist attacks in other parts of the world, as well as
continued threats of global terrorism, current and future military response to them and the current United States military action against Iraq have created many economic and political uncertainties that make it extremely difficult for us, our
customers and our suppliers to accurately forecast and plan future business activities. This reduced predictability challenges our ability to operate profitably or to grow our business. In particular, it is difficult to develop and implement
strategies, sustainable business models and efficient operations, and effectively manage contract manufacturing and supply chain relationships. In addition, the continued threats of terrorism and the heightened security measures in response to such
threats have caused and may continue to cause significant disruption to commerce throughout the world. Disruption in transportation in response to these threats or future attacks may result in transportation and supply-chain disruptions, increase
our costs for both receipt of inventory and shipment of products to our customers, and cause customers to defer their purchasing decisions. Disruptions in commerce could also cause consumer confidence and spending to decrease or result in increased
volatility in the United States and worldwide financial markets and economy. They also could result in economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results, revenue and
costs and may result in the volatility of the market price for our common stock and on the future price of our common stock.



Certain of our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic
disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operations.



Our principal facilities are located in Seattle, Washington and are vulnerable to damage from earthquakes. We are also vulnerable to
damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our principal facilities would be seriously, or potentially
completely, impaired. In addition, the unique nature of our research activities could cause significant delays in our programs and make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses
resulting from disasters or other business interruptions. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business.



If requirements relating to accounting treatment for employee stock options are changed, we may be forced
to change our business practices.



We
currently account for the issuance of stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. If proposals currently under consideration by administrative and governmental authorities are
adopted, we may be required to treat the value of the stock options granted to employees as compensation expense. Such a change could have a negative effect on our earnings. In response to a requirement to expense the value of stock options, we
could decide to decrease the number of employee stock options granted to our employees. Such a reduction could affect our ability to retain existing employees and attract qualified candidates, and increase the cash compensation we would have to pay
to them.



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If accounting interpretations relating to revenue recognition change, our reported
revenues could decline or we could be forced to make changes in our business practices.



Over the last several years, the accounting profession has issued several standards and interpretations relating to revenue recognition. For example, the Emerging Issues Task Force reached a consensus
on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, the American Institute of Certified Public Accountants issued Statement of Position or SOP 97-2, Software Revenue Recognition, and SOP 98-9
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. These standards address software revenue recognition matters primarily from a conceptual level and do not include specific implementation
guidance. In addition, in December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB 101, which explains how the SEC staff believes existing
revenue recognition rules should be applied. We believe that our revenue recognition policies are currently in compliance with SOP 97-2, SOP 98-9 and SAB 101.



The accounting profession continues to discuss certain provisions of SOP 97-2 and SAB 101 as well as other revenue recognition standards
with the objective of providing guidance on potential interpretations. These discussions and the issuance of interpretations, once finalized, could lead to unanticipated changes in our current revenue accounting practices, which could cause us to
recognize revenues differently from present practice and these changes may also increase administrative costs and otherwise harm our business.



You should not unduly rely on forward-looking statements because they are inherently uncertain.



You should not rely on forward-looking statements in this
Report. This document contains forward-looking statements that involve risks and uncertainties. We use words such as anticipates, believes, plans, expects, future and intends,
and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Report. The forward-looking statements contained in this Report are
subject to the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons,
including the risks described above and elsewhere in this Report and in our other reports and documents on file with the U.S. Securities and Exchange Commission.



ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are exposed to the impact of interest rate changes and related change in the market values of our investments and foreign currency exchange risk.



Interest Rate Risk. We typically invest our excess cash
in money market accounts and in high quality corporate and municipal debt instruments. As a result, our related investment portfolio is exposed to the impact of short-term changes in interest rates. Investments in both fixed rate and floating rate
interest earning instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted by a rise in interest rates, while floating rate securities may produce less income than expected if
interest rates fall. As a result, changes in interest rates may cause us to suffer losses in principal if forced to sell securities that have declined in market value or may cause our future investment income to fall short of expectations. Our
investment portfolio is designated as available-for-sale, and accordingly is presented at fair value in the consolidated balance sheet.



We protect and preserve our invested funds with investment policies and procedures that limit default, market and reinvestment risk. We
have not utilized derivative financial instruments in our investment portfolio.



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During the period ended March 31, 2003, decreases in interest rates on the fair market
value of our cash, cash equivalents and marketable securities had an insignificant impact on our net loss. Fixed rate short-term investment at March 31, 2003 of approximately $393,000 had an interest rate of 1.26% and is due May 2003. We
believe that the impact on the fair market value of our securities and our earnings for 2003 from a hypothetical 10% increase or decrease in interest rates would be insignificant.



Foreign Currency Exchange Risk. We develop products in the United States and sell them in North
America, Europe, and, through Primus KK, Asia. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since our sales are predominantly
priced in U.S. dollars and translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets. We have two foreign subsidiariesPrimus Knowledge Solutions (UK) Limited and Primus
Knowledge Solutions Francewhose expenses are incurred in their local currency. As exchange rates vary, their expenses, when translated, may vary from expectations and adversely impact overall expected profitability. Our operating results have
not been significantly affected by exchange rate fluctuations during the three months ended March 31, 2003 and 2002. If, during 2003, the U.S. dollar uniformly increases or decreases in strength by 10% relative to the currency of our foreign sales
subsidiaries, our operating results for 2003 would likely not be significantly affected.



ITEM 4.
CONTROLS AND PROCEDURES



Evaluation of disclosure controls and procedures.Within 90 days prior to the date of this report (the Evaluation Date), the Companys President and Chief Executive Officer and Executive Vice President and Chief Financial
Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)-14(c)). Based on that evaluation, these officers have
concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those
entities.



Changes in internal
controls.There were no significant changes in our internal controls, or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.



PART IIOTHER INFORMATION



ITEM 1.
LEGAL PROCEEDINGS



The
Company, an officer, former officer and FleetBoston Robertson Stephens, Inc., J.P. Morgan Securities Inc., U.S. Bancorp Piper Jaffray Inc., CIBC World Markets, Dain Rauscher, Inc. and Salomon Smith Barney Holdings Inc., the underwriters of our
initial public offering, have been named as defendants in an action filed during December 2001 in the United States District Court for the Southern District of New York on behalf of persons who purchased Primus common stock during the period from
June 30, 1999 through December 6, 2000, which was issued pursuant to the June 30, 1999 registration statement and prospectus for the Companys initial public offering. The complaint alleges that the Company and the individual defendants
violated the Securities Act of 1933 by failing to disclose excessive commissions allegedly obtained by the Companys underwriters pursuant to a secret arrangement whereby the underwriters allocated IPO shares to certain investors in exchange
for the excessive commissions, referred to as laddering. The complaint also asserts claims against the underwriters under the 1933 Act and the Securities Exchange Act of 1934 in connection with the allegedly undisclosed commissions. The Company
intends to vigorously defend itself and its current and former officers against this action. The results of any litigation matter are inherently uncertain and litigation frequently involves substantial expenditures and can require significant
management attention, even if the Company ultimately prevails. Accordingly, we cannot provide assurances that this action will not materially and adversely affect our business, our results of operation or our stock price.



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##### Table of Contents

ITEM 2.
CHANGE IN SECURITIES



(c) Recent
Sales of Unregistered Securities



During the
period covered by this report on Form 10-Q, we had no issuance or sales of unregistered securities.



ITEM 5.
OTHER INFORMATION



For
the six month period ending September 30, 2003, Primus and Primus KK have agreed in principle to suspend the required $250,000 quarterly guaranteed minimum license fee payments to Primus and Primus is under no obligation to allocate any level of
resources towards Japanese language product development.



ITEM
6.
EXHIBITS AND REPORTS ON FORM 8-K



(a)
Exhibits



Exhibit 99.1 Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



(b) Reports on Form 8-K.



None



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##### Table of Contents

SIGNATURES



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



|      |  |              |  | PRIMUS KNOWLEDGE SOLUTIONS,
INC.
|----- |  | ------------ |  | --------------------------------
|     
|Date: |  | May 14, 2003 |  |                                 
|      |  |              |  |                                 
|      |  |              |  |                                 



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##### Table of Contents

CERTIFICATIONS



I, Michael A. Brochu, Chief Executive Officer, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Primus Knowledge Solutions, Inc.;
| | -- |  | ---------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|      |  |              |  | 
|----- |  | ------------ |  | 
|     
|Date: |  | May 14, 2003 |  | 
|      |  |              |  | 



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##### Table of Contents



I, Ronald M. Stevens, Chief
Financial Officer, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Primus Knowledge Solutions, Inc.;
| | -- |  | ---------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|      |  |              |  | 
|----- |  | ------------ |  | 
|     
|Date: |  | May 14, 2003 |  | 
|      |  |              |  | 



Page 43 of 43