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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 JUNE 30, 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)



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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 ̈No  x



As of August 8, 2003
there were 19,113,029 shares of the Registrants Common Stock outstanding.



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Primus Knowledge Solutions, Inc.

Form 10-Q

June 30, 2003



INDEX



|         |  |                                                                                       |  | PAGE                                                                                                                             
|-------- |  | ------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                                  
|         |  |                                                                                      
|ITEM 1.  |  | Condensed Consolidated Financial Statements (Unaudited)                               |  |                                                                                                                                  
|         |  |                                                                                       | 
|         |  |                                                                                      |  | Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                                                  
|         |  |                                                                                       | 
|         |  |                                                                                      |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002                        
|         |  |                                                                                       | 
|         |  |                                                                                      |  | Condensed Consolidated Statements of Shareholders Equity and Comprehensive Loss for the three and six months ended June 30, 2003
|         |  |                                                                                       | 
|         |  |                                                                                      |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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                            |  | 36                                                                                                                               
|         |  |                                                                                      
|ITEM 4.  |  | Controls and Procedures                                                               |  | 37                                                                                                                               
|         |  |                                                                                      
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                                                                  
|         |  |                                                                                      
|ITEM 1.  |  | Legal Proceedings                                                                     |  | 38                                                                                                                               
|         |  |                                                                                      
|ITEM 2.  |  | Change in Securities                                                                  |  | 38                                                                                                                               
|         |  |                                                                                      
|ITEM 5.  |  | Other Information                                                                     |  | 38                                                                                                                               
|         |  |                                                                                      
|ITEM 6.  |  | Exhibits and Reports on Form 8-K                                                      |  | 38                                                                                                                               



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PART I. FINANCIAL INFORMATION



|ITEM 1. |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- |  | -------------------------------------------



CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



|                                                                                                                                                                          |  | June 30, 2003 |          |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | -
|ASSETS                                                                                                                                                                    |  |               |          |   |                   |  
|Current assets:                                                                                                                                                           |  |               |          |   |                   |  
|Cash, cash equivalents and short-term investments                                                                                                                         |  | $             | 10,749   |   |                   | $
|Accounts receivable, net of allowance for doubtful accounts of $245 and $412 at June 30, 2003 and December 31, 2002,
respectively                                         |  |               | 2,695    |   |                   |  
|Prepaid expenses and other current assets                                                                                                                                 |  |               | 951      |   |                   |  
|                                                                                                                                                                          |  |               |          |   |                   |  
|Total current assets                                                                                                                                                      |  |               | 14,395   |   |                   |  
|                                                                                                                                                                          |  |              
|Property and equipment, net of accumulated depreciation of $6,975 and $6,127 at June 30, 2003 and December 31, 2002,
respectively                                         |  |               | 1,435    |   |                   |  
|Note receivable from related party                                                                                                                                        |  |               | 750      |   |                   |  
|Other assets                                                                                                                                                              |  |               | 195      |   |                   |  
|                                                                                                                                                                          |  |               |          |   |                   |  
|Total assets                                                                                                                                                              |  | $             | 16,775   |   |                   | $
|                                                                                                                                                                          |  |               |          |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                      |  |               |          |   |                   |  
|                                                                                                                                                                          |  |              
|Current liabilities:                                                                                                                                                      |  |               |          |   |                   |  
|Accounts payable                                                                                                                                                          |  | $             | 1,143    |   |                   | $
|Accrued and other liabilities                                                                                                                                             |  |               | 2,041    |   |                   |  
|Compensation-related accruals                                                                                                                                             |  |               | 908      |   |                   |  
|Deferred revenue, including related party amounts of $92 and $248 at June 30, 2003 and December 31, 2002,
respectively                                                    |  |               | 5,600    |   |                   |  
|                                                                                                                                                                          |  |               |          |   |                   |  
|Total current liabilities                                                                                                                                                 |  |               | 9,692    |   |                   |  
|                                                                                                                                                                          |  |               |          |   |                   |  
|                                                                                                                                                                          |  |              
|Commitments                                                                                                                                                               |  |               |          |   |                   |  
|                                                                                                                                                                          |  |              
|Shareholders equity:                                                                                                                                                     |  |               |          |   |                   |  
|Common stock, $.025 par value, 50,000,000 shares authorized; issued and outstanding 19,109,583 and 19,053,821 shares at June 30,
2003 and December 31, 2002, respectively |  |               | 477      |   |                   |  
|Additional paid-in-capital                                                                                                                                                |  |               | 110,208  |   |                   |  
|Accumulated other comprehensive income                                                                                                                                    |  |               | 112      |   |                   |  
|Accumulated deficit                                                                                                                                                       |  |               | (103,714 | ) |                   |  
|                                                                                                                                                                          |  |               |          |   |                   |  
|Total shareholders equity                                                                                                                                                |  |               | 7,083    |   |                   |  
|                                                                                                                                                                          |  |               |          |   |                   |  
|Total liabilities and shareholders equity                                                                                                                                |  | $             | 16,775   |   |                   | $
|                                                                                                                                                                          |  |               |          |   |                   |  



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 June 30, |            |   | Six Months Ended June 30, |  
|------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | -
|                                                                                      |  | 2003                        |            |   | 2002                      |  
|Revenue:                                                                              |  |                             |            |   |                           |  
|License:                                                                              |  |                             |            |   |                           |  
|Third party                                                                           |  | $                           | 455        |   |                           | $
|Related partyPrimus KK                                                               |  |                             | 11         |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|                                                                                      |  |                             | 466        |   |                           |  
|Service:                                                                              |  |                             |            |   |                           |  
|Third party                                                                           |  |                             | 3,142      |   |                           |  
|Related partyPrimus KK                                                               |  |                             | 109        |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|                                                                                      |  |                             | 3,251      |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Total revenue                                                                         |  |                             | 3,717      |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Cost of revenue:                                                                      |  |                             |            |   |                           |  
|License                                                                               |  |                             | 57         |   |                           |  
|Service                                                                               |  |                             | 1,242      |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Total cost of revenue                                                                 |  |                             | 1,299      |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Gross profit                                                                          |  |                             | 2,418      |   |                           |  
|                                                                                      |  |                             |            |  
|Operating expenses:                                                                   |  |                             |            |   |                           |  
|Sales and marketing                                                                   |  |                             | 2,527      |   |                           |  
|Research and development                                                              |  |                             | 1,874      |   |                           |  
|General and administrative                                                            |  |                             | 702        |   |                           |  
|Restructuring charges                                                                 |  |                             |           |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Total operating expenses                                                              |  |                             | 5,103      |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Loss from operations                                                                  |  |                             | (2,685     | ) |                           |  
|Other income, net                                                                     |  |                             | 12         |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Loss before income taxes and cumulative effect of change in accounting principle      |  |                             | (2,673     | ) |                           |  
|Income tax expense                                                                    |  |                             | (31        | ) |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Loss before cumulative effect of change in accounting principle                       |  |                             | (2,704     | ) |                           |  
|Cumulative effect of change in accounting principle                                   |  |                             |           |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|Net loss                                                                              |  | $                           | (2,704     | ) |                           | $
|                                                                                      |  |                             |            |   |                           |  
|Basic and diluted net loss per common share:                                          |  |                             |            |   |                           |  
|Loss before cumulative effect of change in accounting principle                       |  | $                           | (0.14      | ) |                           | $
|Cumulative effect of change in accounting principle                                   |  |                             |           |   |                           |  
|                                                                                      |  |                             |            |   |                           |  
|                                                                                      |  | $                           | (0.14      | ) |                           | $
|                                                                                      |  |                             |            |   |                           |  
|Weighted average shares used in computing basic and diluted net loss per common share |  |                             | 19,053,898 |   |                           |  
|                                                                                      |  |                             |            |   |                           |  



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  |                            | 
|Exercise of stock options                        |  | 1,416        |  |                            | 0   |                                               |   | 1       |                     |   |    |                            | 
|Stock issued from employee stock purchase plan   |  | 54,346       |  |                            | 1   |                                               |   | 20      |                     |   |    |                            | 
|Comprehensive loss:                              |  |              |  |                            |     |                                               |   |         |                     |   |     |                            | 
|Foreign currency translation gain                |  |             |  |                            |    |                                               |   |        |                     |   | 58  |                            | 
|Unrealized gain on securities available-for-sale |  |             |  |                            |    |                                               |   |        |                     |   | 1   |                            | 
|Net loss                                         |  |             |  |                            |    |                                               |   |        |                     |   |    |                            | 
|                                                 |  |              |  |                            |     |                                               |   |         |                     |   |     |                            | 
|Total comprehensive loss                         |  |             |  |                            |    |                                               |   |        |                     |   | 59  |                            | 
|                                                 |  |              |  |                            |     |                                               |   |         |                     |   |     |                            | 
|Balance at June 30, 2003                         |  | 19,109,583   |  | $                          | 477 |                                               | $ | 110,208 |                     | $ | 112 |                            | 
|                                                 |  |              |  |                            |     |                                               |   |         |                     |   |     |                            | 



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)



|                                                                                                                 |  | Six Months Ended June 30, |       
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                                 |  | 2003                      |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                            |  |                           |       
|Net loss                                                                                                         |  | $                         | (3,834
|Adjustments to reconcile net loss to net cash used in operating activities:                                      |  |                           |       
|Cumulative effect of change in accounting principle                                                              |  |                           |      
|Depreciation and amortization                                                                                    |  |                           | 909   
|Changes in assets and liabilities:                                                                               |  |                           |       
|Accounts receivable                                                                                              |  |                           | 1,498 
|Prepaid expenses and other current assets                                                                        |  |                           | (107  
|Other assets                                                                                                     |  |                           | 44    
|Accounts payable and accrued liabilities                                                                         |  |                           | 6     
|Compensation-related accruals                                                                                    |  |                           | (21   
|Deferred revenue                                                                                                 |  |                           | (628  
|                                                                                                                 |  |                           |       
|Net cash used in operating activities                                                                            |  |                           | (2,133
|                                                                                                                 |  |                           |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                            |  |                           |       
|Purchases of short-term investments                                                                              |  |                           | (394  
|Proceeds from maturities of short-term investments                                                               |  |                           | 1,395 
|Purchases of property and equipment                                                                              |  |                           | (75   
|                                                                                                                 |  |                           |       
|Net cash provided by investing activities                                                                        |  |                           | 926   
|                                                                                                                 |  |                           |       
|                                                                                                                 |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                            |  |                           |       
|Proceeds from the exercise of stock options and purchases of common stock under the employee stock purchase plan |  |                           | 22    
|                                                                                                                 |  |                           |       
|Net cash provided by financing activities                                                                        |  |                           | 22    
|                                                                                                                 |  |                           |       
|Effect of exchange rate changes on cash                                                                          |  |                           | (14   
|                                                                                                                 |  |                          
|Net decrease in cash and cash equivalents                                                                        |  |                           | (1,199
|                                                                                                                 |  |                          
|Cash and cash equivalents at beginning of period                                                                 |  |                           | 11,948
|                                                                                                                 |  |                           |       
|Cash and cash equivalents at end of period                                                                       |  | $                         | 10,749
|                                                                                                                 |  |                           |       



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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(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 that 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 and six month periods ended June 30, 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 19% and 15% of our total revenue for the quarters ended June 30, 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 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 (in thousands):



|                                                        |  | June 30, 2003 |        | December 31, 2002
|------------------------------------------------------- |  | ------------- | ------ | -----------------
|Cash and cash equivalents                               |  | $             | 10,749 |                  
|Short-term investments                                  |  |               |       |                  
|                                                        |  |               |        |                  
|Total cash, cash equivalents and short-term investments |  | $             | 10,749 |                  
|                                                        |  |               |        |                  



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 Financial Accounting Standards Board (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. Statement of Financial Accounting Standards (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 loss if the fair value based method had been applied to all outstanding and unvested awards in each period (in thousands, except per share data).



|                                                                                                             |  | Three Months Ended June 30, |       | Six Months Ended June 30,
|------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ----- | -------------------------
|                                                                                                             |  | 2003                        |       | 2002                     
|Net loss, as reported                                                                                        |  | $                           | 2,704 |                          
|Add total stock-based employee compensation expense determined under fair value-based method for all rewards |  |                             | 2,893 |                          
|                                                                                                             |  |                             |       |                          
|Pro forma net loss                                                                                           |  | $                           | 5,597 |                          
|                                                                                                             |  |                             |       |                          
|Basic and diluted net loss per share:                                                                        |  |                             |       |                          
|As reported                                                                                                  |  | $                           | 0.14  |                          
|SFAS No. 123 pro forma                                                                                       |  | $                           | 0.29  |                          



Investment in
Primus Knowledge Solutions, K.K.



In December 1995, Primus
invested $50,000 for a 50% interest in Primus Knowledge Solutions, K.K. (Primus KK), a Japanese distributor, with Trans Cosmos, Inc., a Japanese company (TCI), a significant shareholder of Primus. 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 was zero at June 30, 2003 and December 31, 2002.



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Recently Issued Accounting Pronouncements



In November 2002, the Emerging Issues Task Force (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 became effective in our third quarter beginning July 1, 2003. The adoption of EITF 00-21 did not have a material effect on our financial statements.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin (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 in our third quarter beginning July 1, 2003, did not have a material effect on our
financial statements.



In May 2003, the FASB issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The adoption of
SFAS No. 150 in our third quarter beginning July 1, 2003 did not have a significant impact on our financial position or results of operations.



|Note 2. |  | Cumulative Effect of Change in Accounting Principle
|------- |  | ---------------------------------------------------



In July 2001, the FASB issued 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 as of June 30, 2003 and 2002 included options and warrants to purchase approximately 6,892,341 and 7,827,015, common shares, respectively.



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|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 gains and 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 and six months ended June 30, 2003 and 2002 (in thousands):



|                                                        |  | Three MonthsEnded June 30, |        |   | Six Months Ended June 30, |  
|------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | -
|                                                        |  | 2003                       |        |   | 2002                      |  
|Net loss                                                |  | $                          | (2,704 | ) |                           | $
|Other comprehensive income (loss):                      |  |                            |        |   |                           |  
|Foreign currency translation gain                       |  |                            | 58     |   |                           |  
|Unrealized gain (loss) on securities available-for-sale |  |                            | 1      |   |                           |  
|                                                        |  |                            |        |   |                           |  
|Total comprehensive loss                                |  | $                          | (2,645 | ) |                           | $
|                                                        |  |                            |        |   |                           |  



|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 had 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 $11,000 and $0 for the three months ended June 30, 2003 and 2002, respectively, and $300,000 and $221,000 for the six months ended June 30, 2003 and 2002, respectively. Revenue deferred at June 30, 2003 and December 31, 2002 was
approximately $92,000 and $248,000, respectively, and accounts receivable at June 30, 2003 and December 31, 2002 were approximately $0 and $471,000, respectively.



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|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 June 30, 2003 and December 31, 2002
of $84,000 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 operate in one business segment and 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.



The majority of our revenue is derived from customers in the United States of
America. Our international sales are principally in Europe and Japan. The following geographic information is presented for the three and six months ended June 30, 2003 and 2002 (in thousands):



|                         |  | Three Months Ended June 30, |       | Six Months Ended June 30,
|------------------------ |  | --------------------------- | ----- | -------------------------
|                         |  | 2003                        |       | 2002                     
|United States of America |  | $                           | 2,994 |                          
|Japan                    |  |                             | 120   |                          
|Other                    |  |                             | 603   |                          
|                         |  |                             |       |                          
|Total revenue            |  | $                           | 3,717 |                          
|                         |  |                             |       |                          



Revenue from Japan was
principally derived from sales through our Japanese joint venture, Primus KK, in which we hold a 19.6% minority interest. We recognize software license revenue 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. Restructuring charges for the three months ended June 30, 2003 and 2002, were $0, and charges for the six months ended June 30,
2003 and 2002 were $0 and $435,000, respectively.



Restructuring Rollforward



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



|                                        |  | 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                     
|                                        |  |                              |     |                                                  |   |                                 |  |   |                          



|                                        |  | Balance at March 31, 2003 |     | Charge for the three months ended June 30, 2003 |   | Net Cash Payments & Impairments |  |   | Balance at June 30, 2003
|--------------------------------------- |  | ------------------------- | --- | ----------------------------------------------- | - | ------------------------------- |  | - | ------------------------
|Excess facilities and asset impairments |  | $                         | 283 |                                                 | $ |                                |  | $ | (98                     
|                                        |  |                           |     |                                                 |   |                                 |  |   |                         



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The excess facilities and asset impairment charges recorded in 2002 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 June 30, 2003 liability has been reduced by estimated future sublease receipts of $21,000.
Future cash outlays are anticipated through June 2004, unless we are able to negotiate to exit the leases at an earlier date.



|Note 9. |  | Liquidity
|------- |  | ---------



Our operations have historically been financed through issuances of common and preferred stock. For the six-month period ended June 30, 2003, we incurred
a net loss of approximately $3,834,000 and we utilized cash operating activities of approximately $2,133,000. At June 30, 2003, we have working capital of approximately $4,703,000. We believe we have sufficient resources to continue as a going
concern through at least June 30, 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.



In June 2003, we received notification from the Nasdaq Stock Market that we had regained compliance with Nasdaqs minimum bid price rule for Nasdaq
Small Cap Market. Primus is currently in full compliance with all listing requirements of the Nasdaq Small Cap Market, and Nasdaqs delisting matter, commenced in August 2002, has been closed.



|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 2002, the officer and former officer of Primus who were named as defendants in the action were dismissed without prejudice. In June 2003, the plaintiffs in this action announced a proposed settlement
with the



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issuer defendants and their insurance carriers. Independent members of our Board of Directors have approved of the proposed settlement. Whether or not the
settlement is concluded, we do not expect any material adverse impact to our business from this matter. If the settlement is not concluded, 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.



|Note 11. |  | Commitments
|-------- |  | -----------



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 incur approximately $125,000 per month for development work through January 2005. During the six-month period ended June 30, 2003, we incurred development expenses of
approximately $315,000 related to this agreement. We have no material long-term commitments or obligations other than those under these agreements.



|Note 12. |  | Guarantees
|-------- |  | ----------



In November 2002, the FASB issued FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 provides expanded accounting guidance surrounding liability recognition and disclosure requirements related to guarantees, as defined by this Interpretation. We adopted FIN 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 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 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.



|Note 13. |  | Subsequent Events
|-------- |  | -----------------



On August 12, 2003, Primus announced the signing of a definitive agreement to acquire all of the issued and outstanding shares of Broad Daylight, Inc.
Under the terms of the agreement, Primus will purchase Broad Daylight, Inc for 2,090,000 shares of Primus common stock, plus a cash payout equal to the value of 110,000 shares of Primus common stock valued at the average closing price for the five
trading days beginning August 13, 2003. The acquisition will be accounted for as a purchase transaction, is subject to customary closing conditions and expected to close in September 2003.



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|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.



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 the three and six month periods ended June 30, 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 and our
ability to develop and sell enhanced versions of our products.



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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 19% and 15% of our total revenue for the quarters
ended June 30, 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.



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 June 30, 2003, had an accumulated deficit of approximately $104 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 unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these unaudited condensed 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 unaudited condensed consolidated financial statements.



Restructuring



During 2001 and 2002, we recorded significant write-offs and accruals in connection with our restructuring program under EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). 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.



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In June 2002, the FASB issued 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 No. 94-3. SFAS No. 146 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 SFAS No. 146 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. 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 (VSOE) to allocate the total fee to the elements of the arrangement.



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, 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, provided for sublicense fees based on a percentage of net fees
collected by Primus KK from its customers, subject to certain guaranteed minimum royalty payments. 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. 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.



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##### Table of Contents

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
June 30, 2003 and December 31, 2002, the allowance for doubtful accounts was $245,000 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.



Results of Operations for the Three and Six Months Ended June 30, 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 and six months ended June 30, 2003 and 2002 are not necessarily indicative
of the results that may be expected for any future period.



|                                                                                 |  | Three Months Ended June 30, |    |  | Six Months Ended June 30, |   
|-------------------------------------------------------------------------------- |  | --------------------------- | -- |  | ------------------------- | --
|                                                                                 |  | 2003                        |    |  | 2002                      |   
|Revenue:                                                                         |  |                             |    |  |                           |   
|License:                                                                         |  |                             |    |  |                           |   
|Third party                                                                      |  | 12.2                        | %  |  | 26.1                      | % 
|Related partyPrimus KK                                                          |  | 0.3                         |    |  |                          |   
|                                                                                 |  |                             |    |  |                           |   
|                                                                                 |  | 12.5                        |    |  | 26.1                      |   
|Service:                                                                         |  |                             |    |  |                           |   
|Third party                                                                      |  | 84.6                        |    |  | 70.4                      |   
|Related partyPrimus KK                                                          |  | 2.9                         |    |  | 3.5                       |   
|                                                                                 |  |                             |    |  |                           |   
|                                                                                 |  | 87.5                        |    |  | 73.9                      |   
|                                                                                 |  |                             |    |  |                           |   
|Total revenue                                                                    |  | 100.0                       |    |  | 100.0                     |   
|                                                                                 |  |                             |    |  |                           |   
|Cost of revenue:                                                                 |  |                             |    |  |                           |   
|License                                                                          |  | 1.5                         |    |  | 1.0                       |   
|Service                                                                          |  | 33.4                        |    |  | 27.1                      |   
|                                                                                 |  |                             |    |  |                           |   
|Total cost of revenue                                                            |  | 34.9                        |    |  | 28.1                      |   
|                                                                                 |  |                             |    |  |                           |   
|Gross profit                                                                     |  | 65.0                        |    |  | 71.9                      |   
|                                                                                 |  |                             |    |  |                           |   
|Operating expenses                                                               |  |                             |    |  |                           |   
|Sales and marketing                                                              |  | 68.0                        |    |  | 69.0                      |   
|Research and development                                                         |  | 50.4                        |    |  | 49.5                      |   
|General and administrative                                                       |  | 18.9                        |    |  | 30.2                      |   
|Restructuring charges                                                            |  |                            |    |  |                          |   
|                                                                                 |  |                             |    |  |                           |   
|Total operating expenses                                                         |  | 137.3                       |    |  | 148.7                     |   
|                                                                                 |  |                             |    |  |                           |   
|Loss from operations                                                             |  | (72.3                       | )  |  | (76.8                     | ) 
|Other income, net                                                                |  | 0.3                         |    |  | 2.2                       |   
|                                                                                 |  |                             |    |  |                           |   
|Loss before income taxes and cumulative effect of change in accounting principle |  | (71.9                       | )  |  | (74.6                     | ) 
|Income tax expense                                                               |  | (0.8                        | )  |  |                          |   
|                                                                                 |  |                             |    |  |                           |   
|Loss before cumulative effect of change in accounting principle                  |  | (72.7                       | )  |  | (74.6                     | ) 
|Cumulative effect of change in accounting principle                              |  |                            |    |  |                          |   
|                                                                                 |  |                             |    |  |                           |   
|Net loss                                                                         |  | (72.7                       | )% |  | (74.6                     | )%
|                                                                                 |  |                             |    |  |                           |   



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Revenue



Total revenue was $3.7 million and $4.2 million for the three months ended June 30, 2003 and 2002, respectively, representing a decrease of $523,000, or
12%. During the six months ended June 30, 2003, revenue from an enterprise sale to one international customer represented approximately 13% of total revenue. No single other customer accounted for 10% or more of total revenue in the three or six
months ended June 30, 2003 or 2002. International revenue was $723,000 and $623,000 for the three months ended June 30, 2003 and 2002, respectively, representing an increase of $100,000 or 16%. International revenue was $2.6 million and $1.9 million
for the six months ended June 30, 2003 and 2002, respectively, representing an increase of $629,000 or 33%. Total revenue was $9.2 million and $10.3 million for the six months ended June 30, 2003 and 2002, respectively, representing a decrease of
$1.1 million, or 10%. We believe that international revenue as a percentage of our total revenue will continue to fluctuate in the future. We believe that the depth and duration of the current economic slowdown will continue to have an impact on our
revenue.



License Revenue.Total license
revenue was $466,000 and $1.1 million for the three months ended June 30, 2003 and 2002, respectively, representing a decrease of approximately $642,000, or 58%. Total license revenue was $2.8 million and $3.6 million for the six months ended June
30, 2003 and 2002, respectively, representing a decrease of $724,000, or 20%. License revenue as a percentage of total revenue was 13% and 26% for the three months ended June 30, 2003 and 2002, respectively and 31% and 35% for the six months ended
June 30, 2003 and 2002, respectively.During the quarter ended June 30, 2003, we recognized revenue from sublicense fees and guaranteed minimum payments of approximately $11,000 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 half 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.



Service Revenue. Total service revenue was $3.2 million and $3.1 million for the three months ended June 30, 2003 and
2002, respectively, representing an increase of $119,000, or 4%, and was the result of an increase in maintenance and support contract revenue of $104,000 and an increase in consulting fees of $15,000 over the same period. Service revenue as a
percentage of total revenue was 87% and 74% for the three months ended June 30, 2003 and 2002, respectively. Total service revenue was $6.4 million and $6.7 million for the six months ended June 30, 2003 and 2002, respectively, representing a
decrease of approximately $338,000, or 5%, and was the result of a decrease in maintenance and support contract revenue of $110,000 and a decrease in consulting fees of approximately $228,000 over the same period. Service revenue as a percentage of
total revenue was 69% and 65% for the six months ended June 30, 2003 and 2002, respectively. The fluctuations 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 couple of years. We expect maintenance and support revenue to decline by approximately 10% in the
next quarter, due to the termination of certain support and maintenance contracts at or near June 30, 2003. We expect the amount of and proportion of total 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.



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Cost of Revenue



Total cost of revenue was $1.3 million and $1.2 million for the three months ended June 30, 2003 and 2002, respectively, representing an increase of
$107,000, or 9%. Total cost of revenue was $2.5 million and $2.6 million for the six months ended June 30, 2003 and 2002, respectively, representing a decrease of $25,000, or 1%.



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 $57,000 and $44,000 for the three months ended June 30, 2003 and 2002, respectively. Cost of license revenue as a
percentage of license revenue was 12% and 4% for the three months ended June 30, 2003 and 2002, respectively. Cost of license revenue was $154,000 and $117,000 for the six months ended June 30, 2003 and 2002, respectively. These increases in the
cost of license revenue are primarily due to fees related to certain OEM contracts not in place at June 30, 2002, and to a slight increase in the cost of third party software purchased and resold. 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 $1.2
million and $1.1 million for the three months ended June 30, 2003 and 2002, respectively, representing an increase of approximately $94,000, or 8%. Cost of service revenue as a percentage of service revenue was 38% and 37%, or a gross margin of 62%
and 63%, for the three months ended June 30, 2003 and 2002, respectively. Cost of service revenue was $2,381,000 and $2,443,000 for the six months ended June 30, 2003 and 2002, respectively, representing a decrease of approximately $62,000, or 3%.
Cost of service revenue as a percentage of service revenue was 37% and 36%, or a gross margin of 63% and 64%, for the six months ended June 30, 2003 and 2002, respectively. 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.



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 $2.5 million and $2.9 million for the three months ended June 30, 2003 and 2002, respectively, representing a decrease of approximately $398,000 or 14%. Sales and marketing expenses
were approximately $5.1 million and $6.0 million for the six months ended June 30, 2003 and 2002, respectively, representing a decrease of approximately $867,000 or 14%. 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 was 68% and 69% for the three months ended June 30, 2003 and 2002, respectively, and 56% and 58% for the six months ended June 30, 2003 and 2002, respectively. This decrease as a percentage of total revenue
is primarily due to the 14% decrease in total sales and marketing expenses for the six-month period ended June 30, 2003 compared to the same period



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in 2002, partially offset by a 10% 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 $1.9 million and
$2.1 million for the three months ended June 30, 2003 and 2002, respectively, representing a decrease of approximately $225,000 or 11%. Research and development expenses were approximately $3.7 million and $4.5 million for the six months ended June
30, 2003 and 2002, respectively, representing a decrease of approximately $794,000 or 18%. 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
incur approximately $125,000 per month for development work through January 2005. During the quarter ended June 30, 2003, we incurred development expenses of approximately $315,000 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. 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 was
50% for both of the three months ended June 30, 2003 and 2002, and 40% and 44% for the six months ended June 30, 2003 and 2002, respectively. This decrease as a percentage of total revenue is primarily due to the decrease in total research and
development spending in the first half of 2003 compared to the first half of 2002, partially offset by a 10% 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.



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 approximately $702,000 and $1.3 million for the three months ended June 30, 2003 and 2002, respectively, representing a decrease of approximately $580,000 or 45%. This decrease is primarily the result of the
favorable settlement of a legal matter during the current quarter, which resulted in the reversal of an accrual in the amount of $250,000, which had been recorded during the quarter ended June 30, 2002. General and administrative expenses were
approximately $1.7 million and $2.6 million for the six months ended June 30, 2003 and 2002, respectively, representing a decrease of approximately $960,000 or 36%. This decrease is primarily due to the above mentioned legal matter, as well as
reductions in overhead expenses, general and administrative headcount since July of 2001 and current quarter reductions in occupancy costs, legal expenses, and bad debt expenses partially offset by increases in consulting fees. 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 19% and 30% for the three
months ended June 30, 2003 and 2002, respectively, and 18% and 26% for the six months ended June 30, 2003 and 2002, respectively.



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The decrease in general and administrative expense as a percentage of total revenue is attributable to the significant
decrease in general and administrative expenses in the current period, partially offset by a 10% 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 for the three months ended June 30, 2003 or June 30, 2002, or for the six months ended June 30, 2003. During the six months ended June 30, 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, net of other expense,
was $12,000 and $93,000 for the three months ended June 30, 2003 and 2002, respectively and $67,000 and $203,000 for the six months ended June 30, 2003 and 2002, respectively. 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 income tax benefits related to the net operating losses for the six months ended June 30, 2003 or 2002 as a result of the uncertainties regarding the realization of the net operating losses. Income tax expense recorded in both the
second quarter of 2003 and the six months ended June 30, 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.



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 June 30, 2003, we had cash and cash equivalents of $10.7 million, representing a decrease of $2.2 million from our
December 31, 2002 balance of $13.0 million. As of June 30, 2003, our working capital was $4.7 million compared to $7.6 million at December 31, 2002.



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Our operating activities resulted in net cash outflows of approximately $2.1 million and $3.3 million for
the six months ended June 30, 2003 and 2002, respectively. For the six months ended June 30, 2003, adjustments to the $3.8 million net loss to reconcile to cash used in operating activities includes cash provided by operations of approximately $1.5
million for the decrease in accounts receivable and other assets and increases in accounts payable and accrued liabilities, and $909,000 in depreciation and amortization. This is offset by cash used in operations of approximately $756,000 for the
increase in prepaid expenses and decreases in compensation-related accruals and deferred revenue.



Investing activities provided cash of approximately $926,000 and $1.9 million during the six months ended June 30, 2003 and 2002, respectively. Investing
activities for the six months ended June 30, 2003 consisted of approximately $1.4 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 $75,000.



Financing activities provided cash of $22,000 and $66,000
during the six-month periods ended June 30, 2003 and 2002, respectively, from the issuance of common stock.



Our principal source of liquidity at June 30, 2003 was our cash and cash equivalents. 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% as of June 30, 2003) and expires in December 2003. There were no borrowings outstanding as of June 30, 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 the filing date of this report, 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.



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 and cash equivalents, 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 history of



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declining market valuation and volatility in our stock price 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 incur approximately $125,000 per month for development work through January 2005. During the six months ended June 30, 2003, we incurred development expenses of approximately $315,000 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.



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 June 30, 2003, our accumulated deficit was approximately $104
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.



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



Fluctuations in our operating results, particularly compared to the
expectations of investors 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, 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
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | 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 continued 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.



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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.



The Nasdaq Small Cap Market has a number of continued listing requirements. We are presently in compliance with all the continued listing requirements. If we were to fail to meet the minimum maintenance requirements
in the future, then we would be subject to a delisting process, which presently involves grace periods to regain compliance, from the Nasdaq Small Cap Market. If our common stock would be delisted by Nasdaq after expiration of any grace periods, 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
would make trading our shares more difficult for investors and would 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 were
delisted it would also make it more difficult for us to raise additional capital and we would likely 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, 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
| | - |  | -----------------------------



| |  |  | the availability of products on the Web and multiple operating platforms
| | - |  | ------------------------------------------------------------------------



| |  |  | measurable economic return on investment
| | - |  | ----------------------------------------



| |  |  | ability to use customers as references
| | - |  | --------------------------------------



| |  |  | product quality, performance and price
| | - |  | --------------------------------------



| |  |  | breadth of product functionality and features
| | - |  | ---------------------------------------------



| |  |  | product scalability
| | - |  | -------------------



| |  |  | product ease-of-use
| | - |  | -------------------



| |  |  | the quality of customer support services, documentation and training
| | - |  | --------------------------------------------------------------------



| |  |  | the quality, speed and effectiveness of application development services
| | - |  | ------------------------------------------------------------------------



| |  |  | the effectiveness of sales and marketing efforts
| | - |  | ------------------------------------------------



| |  |  | product integration with other enterprise applications
| | - |  | ------------------------------------------------------



| |  |  | breadth of product application suite
| | - |  | ------------------------------------



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.



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 six months ended June 30, 2003 and 2002, and we



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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.



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.



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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.



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.



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.



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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
| | - |  | ------------------------



| |  |  | incur additional obligations to pay the accounts payable and other liabilities of the acquired entity
| | - |  | -----------------------------------------------------------------------------------------------------



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



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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
$723,000, or 19% of our total revenue for the quarter ended June 30, 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.



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



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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.



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.



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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.



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.



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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.



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,



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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.



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



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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.



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.



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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.



During the period ended June 30, 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. 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 and six months ended June 30, 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.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-15(e) and 15(d)-15(e)) as of June 30, 2003. Based on our most recent
evaluation, these officers have concluded that as of June 30, 2003, 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.



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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. In October of 2002, the officer and former officer of Primus who were named as defendants in the action were dismissed without prejudice. In June 2003 the plaintiffs in
this action announced a proposed settlement with the issuer defendants and their insurance carriers. Independent members of the Companys board of directors have approved of the proposed settlement. Whether or not the settlement is concluded,
the Company does not expect any material adverse impact to its business from this matter. If the settlement is not concluded, 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.



|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.



On August 12, 2003, Primus announced the signing of a definitive agreement to acquire all of the issued and outstanding shares of Broad Daylight, Inc.
Under the terms of the agreement, Primus will purchase Broad Daylight, Inc. for 2,090,000 shares of Primus common stock, plus a cash payout equal to the value of 110,000 shares of Primus common stock valued at the average closing price for the five
trading days beginning August 13, 2003. The acquisition will be accounted for as a purchase transaction, is subject to customary closing conditions and expected to close in September 2003.



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



|(a) |  | Exhibits
|--- |  | --------



Exhibit   2.1    Agreement and Plan of Reorganization, dated as of August 11, 2003 by and among the
registrant, Q Merger Corp., and Broad Daylight, Inc., and solely for purposes of Article VII HEIDI ROIZEN, as Holders Representative.



Exhibit 31.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002



Exhibit
31.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



Exhibit 32.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002



Exhibit
32.2    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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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: August 14, 2003 |  |  |  | By: |  | /s/    RONALD M. STEVENS                                                         
|                      |  |  |  |     |  | Ronald M. Stevens Chief Operating Officer, Chief Financial Officer, and Treasurer
|                      |  |  | 
|                      |  |  |  |     |  | (Principal financial and chief accounting officer)                               



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