<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549



                                   FORM 10-Q



               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

 FOR THE QUARTER ENDED MARCH 31, 2001         COMMISSION FILE NUMBER: 000-26273



                       PRIMUS KNOWLEDGE SOLUTIONS, INC.

            (Exact name of Registrant as specified in its charter)

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

                         1601 Fifth Avenue, Suite 1900
                           Seattle, Washington 98101
                   (Address of principal executive offices)

                                (206) 292-1000
             (Registrant's telephone number, including area code)

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

                                Yes [X] No [_]

 As of April 26, 2001 there were 18,093,701 shares of the Registrant's Common
                              Stock outstanding.
<PAGE>

                       Primus Knowledge Solutions, Inc.
                                   Form 10-Q
                                March 31, 2001

                                     INDEX

<TABLE>
<CAPTION>
PART I.   FINANCIAL INFORMATION                                                                          PAGE
                                                                                                         ----
<S>                                                                                                      <C>
ITEM 1.   Condensed Consolidated Financial Statements (Unaudited)

          .    Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000.........   3

          .    Condensed Consolidated Statements of Operations for the three months
               ended March 31, 2001 and 2000............................................................   4

          .    Condensed Consolidated Statement of Shareholders' Equity for the three months
               ended March 31, 2001.....................................................................   5

          .    Condensed Consolidated Statements of Cash Flows for the three months
               ended March 31, 2001 and 2000............................................................   6

          .    Notes to Condensed Consolidated Financial Statements.....................................   7

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

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk....................................  22


PART II.  OTHER INFORMATION

ITEM 2.   Change in Securities..........................................................................  22

ITEM 6.   Exhibits and Reports on Form 8-K..............................................................  22
</TABLE>

                                       2
<PAGE>

PART I. FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)

<TABLE>
<CAPTION>
                                                                          March 31, 2001   December 31, 2000
                                                                          --------------   -----------------

                              ASSETS
<S>                                                                       <C>              <C>
Current assets:
  Cash and cash equivalents                                                     $ 16,962            $ 10,502
  Short-term investments                                                          17,353              29,457
  Accounts receivable, net, including related party amounts of
     $2,000 and $14 at March 31, 2001 and December, 2000, respectively            10,831              10,745
  Prepaid expenses and other current assets                                        1,067                 785
                                                                                --------            --------
       Total current assets                                                       46,213              51,489

Property and equipment, net                                                        5,251               5,090
Other assets                                                                         356                 359
                                                                                --------            --------

       Total assets                                                             $ 51,820            $ 56,938
                                                                                ========            ========

                         LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                              $  3,333            $  4,071
  Accrued and other liabilities                                                    2,304               2,224
  Compensation-related accruals                                                    1,949               3,245
  Deferred revenue, including related-party amounts of $573
     and $401 at March 31, 2001 and December 31, 2000, respectively                7,519               7,551
                                                                                --------            --------

       Total current liabilities                                                  15,105              17,091
                                                                                --------            --------

Shareholders' equity:
  Common stock                                                                       453                 452
  Additional paid-in-capital                                                     107,019             106,876
  Deferred stock-based compensation                                                  (46)                (54)
  Accumulated other comprehensive loss                                               (49)                (44)
  Accumulated deficit                                                            (70,662)            (67,383)
                                                                                --------            --------
       Total shareholders' equity                                                 36,715              39,847
                                                                                --------            --------

       Total liabilities and shareholders' equity                               $ 51,820            $ 56,938
                                                                                ========            ========
</TABLE>

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

                                       3
<PAGE>

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

                                             Three Months Ended March 31,
                                             ----------------------------
                                                 2001            2000
                                             ------------    ------------
Revenues:
  License, including amounts from
     related parties of $1,290 and $933
     for the three months ended March 31,
     2001 and 2000, respectively              $     5,967     $     7,180
  Services                                          4,111           3,278
                                              -----------     -----------

     Total revenues                                10,078          10,458
                                              -----------     -----------
Cost of revenues:
  License                                             134             323
  Services                                          2,386           2,608
                                              -----------     -----------

     Total cost of revenues                         2,520           2,931
                                              -----------     -----------

         Gross profit                               7,558           7,527
Operating expenses:
  Sales and marketing                               6,273           6,826
  Research and development                          2,975           4,011
  General and administrative                        1,890           2,300
  Merger related costs                                  -             505
                                              -----------     -----------

     Total operating expenses                      11,138          13,642
                                              -----------     -----------

         Loss from operations                      (3,580)         (6,115)
Other income                                          550             786
Other expense                                         (23)           (131)
                                              -----------     -----------

     Loss before income taxes                      (3,053)         (5,460)
Income tax expense                                    226              32
                                              -----------     -----------

         Net loss                                  (3,279)         (5,492)

Preferred stock accretion                               -             (43)
                                              -----------     -----------
     Net loss available to common
     shareholders                             $    (3,279)    $    (5,535)
                                              ===========     ===========

Basic and diluted net loss per common share        $(0.18)         $(0.32)
                                              ===========     ===========

Shares used in computing basic and diluted
net loss per common share                      18,063,922      17,273,710
                                              ===========     ===========




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

                                       4
<PAGE>

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)

<TABLE>
<CAPTION>
                                                                                            Accumulated
                                                                  Additional   Deferred        other                       Total
                                                                    paid-in   stock-based  comprehensive  Accumulated  shareholder's
                                                Common stock        capital   compensation      loss        deficit        equity
                                                ------------        -------   ------------      ----        -------        ------
                                              Shares    Par value
                                              ------    ---------
<S>                                         <C>         <C>        <C>         <C>            <C>          <C>           <C>
Balance at December 31, 2000..............  18,045,376       $452   $106,876       $(54)         $(44)      $(67,383)      $39,847
Exercise of stock options and warrants....      48,183          1        143         --            --             --           144
Amortization of deferred stock-based
 compensation.............................          --         --         --          8            --             --             8
Comprehensive loss:
 Foreign currency translation loss........          --         --         --         --           (34)            --
 Unrealized gain on short-term
  investments.............................          --         --         --         --            29             --
 Net loss.................................          --         --         --         --                       (3,279)
                                                                                           ----------       --------
    Total comprehensive loss..............          --         --         --         --            (5)        (3,279)       (3,284)
                                            --------------------------------------------------------------------------------------
Balance at March 31,  2001................  18,093,559       $453   $107,019       $(46)         $(49)      $(70,662)      $36,715
                                            ======================================================================================
</TABLE>

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

                                       5
<PAGE>

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>

                                                                                       Three Months Ended March 31,
                                                                                      ------------------------------
                                                                                         2001                  2000
                                                                                      --------               -------
<S>                                                                                  <C>                     <C>
Cash flows from operating activities:
  Net loss                                                                            $(3,279)               $(5,492)
     Adjustments to reconcile net loss to net cash used in
       operating activities:
          Option and warrant expense                                                        8                    197
          Depreciation and amortization                                                   524                    373
          Changes in assets and liabilities:
            Accounts receivable                                                           (81)                  (609)
            Prepaid expenses and other current assets                                    (207)                    53
            Note receivable                                                                 -                 (2,099)
            Other assets                                                                   (2)                    51
            Accounts payable and accrued liabilities                                     (989)                  (291)
            Compensation-related accruals                                              (1,193)                    12
            Deferred revenue                                                              (32)                  (874)
                                                                                      -------                -------
              Net cash used in operating activities                                    (5,251)                (8,679)
                                                                                      -------                -------
Cash flows from investing activities:
  Purchases of short-term investments                                                  (4,280)                (5,080)
  Proceeds from maturity of short-term investments                                     16,413                 10,596
  Purchases of property and equipment                                                    (692)                  (777)
                                                                                      -------                -------
              Net cash provided by investing activities                                11,441                  4,739
                                                                                      -------                -------
Cash flows from financing activities:
  Repayments on long-term debt                                                              -                   (379)
  Proceeds from the issuance of common stock                                              144                  1,460
                                                                                      -------                -------

              Net cash provided by financing activities                                   144                  1,081

Effect of exchange rate changes on cash                                                   126                     (6)
                                                                                      -------                -------
              Net increase (decrease) in cash and cash equivalents                      6,460                 (2,865)

Cash and cash equivalents at beginning of period                                       10,502                 17,602
                                                                                      -------                -------
Cash and cash equivalents at end of period                                            $16,962                $14,737
                                                                                      =======                =======
</TABLE>

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

                                       6
<PAGE>

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(In thousands, except share data)
(Unaudited)


NOTE 1.   DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

Primus Knowledge Solutions, Inc. is a leading provider of knowledge-enabling
software that empowers customer relationship management (CRM) implementations
and helps drive customer satisfaction for Global 2000 companies. Primus software
is designed to give customers fast access to the information they need--via
self-and assisted service--and to enable businesses to share valuable customer
and product knowledge across the enterprise. Primus(R) software products can be
implemented as a suite or as individual products, depending on the company's
preference and/or immediate need.

The Company's primary market is comprised largely of technology companies. Sales
are primarily generated through a domestic and European field sales
organization. The Company develops their products, which are sold domestically
and internationally, at its Seattle, Washington headquarters.

Basis of Presentation

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

In January 2000, pursuant to an Agreement and Plan of Merger, Primus acquired
ownership of 2order.com, Inc. (2order.com), in a combination accounted for as
pooling-of-interests. The condensed consolidated financial statements and notes
thereto for all periods prior to the combination are restated to include the
accounts and results of operations of 2order.com.

Reclassifications

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

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles 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 generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). In our
opinion, the 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 financial statements should be read in
conjunction with our audited financial statements for the year ended December
31, 2000 included in our Form 10-K filed with the SEC on March 26, 2001. 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.


NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                                       7
<PAGE>

Revenue Recognition

We have recognized software license revenue in accordance with AICPA Statement
of Position 97-2, "Software Revenue Recognition," which provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair value of the elements. Under SOP 97-2, the determination of fair
value is based on objective evidence that is specific to the vendor. If such
evidence of fair value for each element of the arrangement 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 have been delivered.
The AICPA subsequently issued its Statement of Position 98-9, which provides
certain amendments to its Statement of Position 97-2 and is effective for
transactions entered into beginning January 1, 2000. The implementation of this
latest AICPA pronouncement did not materially impact our revenue recognition
practices. In June 2000, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101) "Revenue Recognition in Financial Statements". SAB 101 provides guidance on
revenue recognition and the SEC staff's views on the application of accounting
principles to selected revenue recognition issues. The adoption of SAB 101 did
not have a material effect on revenue recognition or the Company's results of
operations.

We currently recognize license revenue over the core implementation period if
implementation services are included in the original license arrangement and are
considered to be essential to the functionality of the software. As a result,
even where we have a signed license agreement for the purchase of our software
and have shipped the software, license revenue recognition depends on whether we
have begun core implementation. For license agreements under which we have no
implementation responsibility, or where implementation is not considered to be
essential to the functionality of the software, we recognize revenue upon
shipping the software. Examples of situations under which we have no
implementation responsibility include additional license sales to existing
customers or customers who elect to use internal or third party resources to
implement the software.

Our services revenue consists of consulting, training and maintenance and
support fees. We provide consulting and training services relating to our
products on a time-and-materials basis under installation services agreements
with our customers. We provide maintenance and support services to our customers
under renewable one-year maintenance and support agreements, which we price as a
percentage of our license fees.

For new customers, we generally enter into services agreements to implement our
software. Most of our new customers typically begin implementation within 30
days of signing a license agreement. Once commenced, implementation of our
products can typically be completed within 30 days, although both implementation
and deployment can vary significantly by customer. We can not, however,
guarantee that customers will begin implementation or that we will always be
able to implement our software within those time periods. Thus, all of our
deferred license revenue may not be recognized within the originally expected
time period.

NOTE 3.   EARNINGS PER SHARE

In accordance with SFAS No. 128, "Earnings Per Share," we report 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 year. 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.
Net loss available to common shareholders includes net loss and preferred stock
accretion. As we had a net loss available to common shareholders in each of the
periods presented, basic and diluted net loss per common share are the same. All
outstanding warrants, stock options, and convertible preferred stock to acquire
common shares were excluded from the computation of diluted earnings per share
at March 31, 2001 and 2000 because the effect was anti-dilutive.

                                       8
<PAGE>

Potential common shares consisted of options and warrants to purchase 5,180,118
and 4,263,385 common shares at March 31, 2001 and 2000, respectively.



NOTE 4.   COMPREHENSIVE LOSS

The following table reconciles net loss as reported to total comprehensive loss
for the three months ended March 31, 2001 and 2000:

<TABLE>
<CAPTION>

                                            Three Months Ended
                                                 March 31,
                                            -------------------
                                               2001      2000
                                            --------  ---------
<S>                                         <C>       <C>
Net loss                                    $ (3,279) $  (5,492)
Other comprehensive income (loss):
    Foreign currency translation                 (34)        (6)
    Unrealized gain (loss) on securities
      available-for-sale                          29        (62)
                                            --------  ---------
Total comprehensive loss                    $ (3,284) $  (5,560)
                                            ========  =========

</TABLE>

NOTE 5.   BUSINESS SEGMENT INFORMATION

Primus and our subsidiaries are principally engaged in the design, development,
marketing and support of our eService family of eProducts: eSupport, eSales and
eMarketing. Substantially all revenues result from the licensing of our software
products and related consulting 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 revenues are derived from customers in the United States.
Our international sales are principally in Europe and Japan. The following
geographic information is presented for quarters ended March 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                             Three Months Ended March 31,
                                                           --------------------------------
<S>                                                       <C>                      <C>
                                                             2001                   2000
                                                           --------                --------
     United States                                         $  7,816                $  8,703
     Japan                                                    1,576                   1,038
     Other                                                      686                     717
                                                           --------                 -------
        Total revenues                                     $ 10,078                $ 10,458
                                                           ========                 =======
</TABLE>

                                       9
<PAGE>

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


FORWARD-LOOKING STATEMENTS

This document 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 document should be read as
being applicable to all related forward-looking statements wherever they appear
in this document. 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

Primus Knowledge Solutions, Inc. is a leading provider of knowledge-enabling
software that empowers customer relationship management (CRM) implementations
and helps drive customer satisfaction for Global 2000 companies. Primus software
is designed to give customers fast access to the information they need--via
self-and assisted service--and to enable businesses to share valuable customer
and product knowledge across the enterprise. Primus(R) software products can be
implemented as a suite or as individual products, depending on the company's
preference and/or immediate need.

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 CRM
initiatives and software. CRM 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.

                                       10
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE  MONTHS ENDED MARCH 31, 2001 AND 2000

     The following table sets forth certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three months ended March 31,
2001 and 2000 are not necessarily indicative of the results that may be expected
for any future period.

<TABLE>
<CAPTION>
                                             Three Months Ended March 31,
                                             ----------------------------
                                                2001              2000
                                             ----------         ---------
<S>                                          <C>                <C>
Revenues:
 License                                           59.2%             68.7%
 Services                                          40.8              31.3
                                             ----------         ---------
 Total revenues                                   100.0             100.0
                                             ----------         ---------
Cost of revenues:
 License                                            1.3               3.1
 Services                                          23.7              24.9
                                             ----------         ---------
 Total cost of revenues                            25.0              28.0
                                             ----------         ---------
Gross profit                                       75.0              72.0
                                             ----------         ---------
Operating expenses:
 Sales and marketing                               62.2              65.3
 Research and development                          29.5              38.4
 General and administrative                        18.8              22.0
 Merger related costs                                --               4.8
                                             ----------         ---------
 Total operating expenses                         110.5             130.5
                                             ----------         ---------
Loss from operations                              (35.5)            (58.5)
Other income                                        5.5               7.5
Other expense                                      ( .2)             (1.3)
                                             ----------         ---------
Loss before income taxes                          (30.2)            (52.3)
Income tax expense                                  2.2                .3
                                             ----------         ---------
Net loss                                          (32.4)%           (52.6)%
                                             ==========         =========
</TABLE>

Revenues

We derive our revenue from the sale of software licenses and related services
including support and maintenance contracts.  Revenue was approximately $10.1
million and $10.5 million for the three months ended March 31, 2001 and 2000,
respectively, representing a decrease in the first quarter of 2001 of
approximately $400,000, or 4%, over the comparable quarter of the prior year.

License Revenue. License revenue was approximately $6.0 million and $7.2 million
for the three months ended March 31, 2001 and 2000, respectively, representing a
decrease in the first quarter of 2001 of approximately $1.2 million, or 17%,
over the comparable quarter of the prior year.  The decrease was primarily
attributed to the overall downturn in the current economic climate in both the
United States and Europe.  Like numerous other companies, we encountered delays
by customers whom remain cautious about capital spending in the face of this
uncertain economy.  International license revenues remained flat at
approximately $1.4 million for both the three months ended March 31, 2001 and
2000, respectively.

Services Revenue. Services revenue was approximately $4.1 million and $3.3
million for the three months ended March 31, 2001 and 2000, respectively,
representing an increase in the first quarter of 2001 of approximately $800,000,
or 25%, over the comparable quarter of the prior year. Maintenance and support
contract revenues

                                       11
<PAGE>

increased approximately $1.4 million in the first quarter of 2001 over the
comparable quarter of the prior year. Consulting fees decreased approximately
$563,000 in the first quarter of 2001 over the comparable quarter of the prior
year.

Services revenue represented 40.8% and 31.3% of our total revenue for the three
months ended March 31, 2001 and 2000, respectively.  The increase is
representative of the decrease in license revenue and the installed base of our
products growing with a corresponding increase in maintenance revenues.  We
expect the proportion of services revenue to total revenue to fluctuate in the
future, depending primarily on the dollar amount of software license sales and
our customers' use of third-party consulting and implementation services
providers.

Cost of Revenue

Cost of License Revenue. Cost of license revenue includes royalties and fees
paid to third parties under license arrangements and costs related to
duplication of our products and manuals. Cost of license revenue was
approximately $134,000 and $323,000 for the three months ended March 31, 2001
and 2000, respectively.  Cost of license revenue as a percentage of license
revenue was 2.2% and 4.5% for the three months ended March 31, 2001 and 2000,
respectively.  We anticipate that our cost of license revenue will continue to
fluctuate in absolute dollars and as a percent of license revenue.  License
revenue as a percentage of sales varies primarily due to the volume of software
product sales and the type of royalty agreements in place at the time.

Cost of Services Revenue. Cost of services revenue includes personnel and other
costs related to professional services and customer support. Cost of services
revenue was approximately $2.4 million and $2.6 million for the three months
ended March 31, 2001 and 2000, respectively. Cost of services revenue decreased
approximately $200,000 or 8%, for the three months ended March 31, 2001 compared
to the same period in 2000, while cost of services as a percentage of service
revenues decreased from 80% to 58% for the same period. The decrease in cost of
services revenue as a percentage of services revenue was primarily due to the
increase in the installed base of our products and the related growth of
maintenance revenue.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
bonuses and commissions earned by sales and marketing personnel, travel and
costs associated with marketing programs, such as trade shows, advertising,
public relations and new product launches. Sales and marketing expenses were
approximately $6.3 million and $6.8 million for the three months ended March 31,
2001 and 2000, respectively. Sales and marketing expenses decreased
approximately $500,000, or 8% for the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000. This decrease is primarily
due to the reduction in the variable component of total compensation related
costs (i.e. bonuses, commissions and related payroll taxes) which are related to
revenues and operating results during the first quarter of 2001. This decrease
was partially offset by an increase in overall product advertising. Sales and
marketing expenses as a percentage of total revenue was 62.2% and 65.3% for the
three months ended March 31, 2001 and 2000, respectively. 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. Accordingly, we
anticipate that we will continue to invest in sales and marketing for the
foreseeable future, and sales and marketing expenses as a percentage of total
revenue will fluctuate.

Research and Development. Research and development expenses consist primarily of
salaries and benefits for software developers, program managers and quality
assurance personnel and payments to outside contractors. Research and
development expenses were approximately $3.0 million and $4.0 million for the
three months ended March 31, 2001 and 2000, respectively. Research and
development expenses decreased approximately $1.0 million, or 26%, for the three
months ended March 31, 2001 compared to the three months ended March 31, 2000.
The decrease was primarily due to the reduction in the variable component of
total compensation related costs combined with a significant decrease in the use
of third party consultants within our research and development group.

                                       12
<PAGE>

Research and development expenses as a percentage of total revenue was 29% and
38% for the three months ending March 31, 2001 and 2000, respectively. We
believe that a significant research and development investment is essential for
us to maintain our market position, to continue to expand our knowledge-enabling
software and to develop additional applications. Accordingly, we anticipate that
we will continue to invest in product research and development for the
foreseeable future. As such, we expect research and development costs as a
percentage of total revenue to fluctuate. In the development of our new products
and enhancements of existing products, the technological feasibility of our
software is not established until substantially all product development is
complete. Accordingly, software development costs eligible for capitalization
were insignificant, and all costs related to internal research and development
have been expensed as incurred.

General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative and information services personnel. General and administrative
expenses were approximately $1.9 million and $2.3 million for the three months
ended March 31, 2001 and 2000, respectively. General and administrative expenses
decreased approximately $400,000, or 18%, for the three months ended March 31,
2001 compared to the three months ended March 31, 2000. This decrease is
primarily due to the reduction in the variable component of total compensation
related costs. General and administrative expenses as a percentage of total
revenue were 19% and 22% for the three months ended March 31, 2001 and 2000,
respectively. The decrease of general and administrative expense as a percentage
of total revenue also reflects the impact of the overall cost containment
measures taken by the company over the last few quarters. We believe that our
general and administrative expenses will fluctuate both as an absolute dollar
amount and as a percentage of total revenue in future periods.

Merger Related Costs. Merger related costs were approximately $505,000 for the
three months ended March 31, 2000. These costs were recorded in connection with
the January 2000 merger with 2order.com that was accounted for under the
pooling-of-interests method of accounting.

Other Income, Net. Other income, net of other expense, was $527,000 and $655,000
for the three months ended March 31, 2001 and 2000, respectively. The variances
from period to period were due to fluctuations in the average combined cash and
cash equivalents and short-term investment balances. We expect to continue to
yield investment income on our average balance of combined cash and cash
equivalents and short-term investments at an average rate comparable to that
experienced in 2000 and the first quarter of 2001.

Income Taxes. We have not recorded income tax benefits related to the net
operating losses in 2000 and the first quarter of 2001 as a result of the
uncertainties regarding the realization of the net operating losses. Tax expense
recorded in both the first quarter of 2001 and 2000 primarily relates to tax
expense from our foreign operations.

Liquidity and Capital Resources

As of March 31, 2001, we had cash and cash equivalents of approximately $17.0
million, an increase from $10.5 million of cash and cash equivalents held as of
December 31, 2000. As of March 31, 2001, we had short-term investments of
approximately $17.4 million, representing a decrease of approximately $12.1
million from investments held as of December 31, 2000. As of March 31, 2001, our
working capital was approximately $31.1 million compared to approximately $34.4
million at December 31, 2000.

Our operating activities resulted in net cash outflows of approximately $5.1
million for the three months ended March 31, 2001. Adjustments to the $3.3
million net loss to reconcile to cash used in operating activities includes
approximately $1.9 million for the decrease in compensation-related accruals,
account payable and accrued liabilities offset by approximately $500,000 for
depreciation and amortization. Net cash used in operating activities was
approximately $7.9 million for the three months ended March 31, 2000.

Investing activities provided cash of approximately $11.4 million for the three
months ended March 31, 2001.

                                       13
<PAGE>

Investing activities for this period consisted primarily of approximately $16.4
million in proceeds from the maturity of short-term investments offset by
approximately $4.3 million in purchases of short-term investments. Further
activities included the purchase of approximately $700,000 in capital equipment.
Net cash provided by investing activities was approximately $4.0 million for the
three months ended March 31, 2000.

Financing activities provided cash of $144,000 for the three months ended March
31, 2001. Financing activities for this period solely included $144,000 in
proceeds from the exercise of stock options. Net cash provided by financing
activities was approximately $1.1 million for the three months ended March 31,
2000.

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

         .  enter new markets for our products and services

         .  increase research and development spending

         .  increase sales and marketing activities

         .  develop new distribution channels

         .  improve our operational and financial systems

         .  broaden our professional services capabilities

Such operating expenses will consume a material amount of our cash resources,
including a portion of the net proceeds from our initial public offering. We
believe that our existing cash and cash equivalents and available line of credit
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next twelve months. Thereafter, we may
require additional funds to support our working capital requirements or for
other purposes and may seek to raise such additional funds through public or
private equity financing or from other sources. We may not be able to obtain
adequate or favorable financing at that time. Any financing we obtain may dilute
our current shareholders' ownership interest in Primus.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities in June 1998. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of this statement on
January 1, 2001 did not have a material impact on our consolidated financial
statements.

Factors Affecting Our Future Operating Results

     You should carefully consider the risks and uncertainties described below
and the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we currently
deem immaterial also may impair our business. 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.

                                       14
<PAGE>

We have incurred operating losses and we may not be profitable in the future.

  We have incurred net losses in each quarter since inception and we could
continue to incur net losses for the foreseeable future. As of March 31, 2001,
we had an accumulated deficit of $70.7 million. We expect to continue to devote
substantial resources to our product development, sales and marketing and our
customer support and professional service groups. As a result, we will need to
generate significant revenues to achieve and maintain profitability. We may not
be profitable in any future period.

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

  Our license revenues have fluctuated substantially from quarter to quarter in
the past and are likely to continue to fluctuate substantially in the future. In
addition, the fiscal or quarterly budget cycles of our users or customer order
deferrals in anticipation of new products or product enhancements introduced by
us or our competitors can cause our revenues to fluctuate from quarter to
quarter and applicable accounting policies may cause us to report new license
agreements as deferred revenue until implementation begins.   Furthermore,
general economic conditions may affect our customers' capital investment levels
in CRM systems.  As a result, we believe that period-to-period comparisons of
our operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. We will continue to base our
decisions regarding our operating expenses on anticipated revenue trends. To the
extent these expenses are not followed by increased revenues, our operating
results will suffer. Fluctuations in our operating results, particularly
compared to the expectations of market analysts or investors, could cause severe
volatility in the price of our common stock.

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

  We derive a significant portion of our product license revenues 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 or implementations
planned for that quarter.

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

  Under applicable accounting rules, we may experience further variability in
our license revenues from quarter to quarter due to factors outside our control,
including:

 . whether we are providing implementation services
 . whether implementation is delayed or takes longer than expected
 . variability in the mix of new and existing customers

  Where we are implementing the software, we will account for the agreement as
an item of deferred revenue and will recognize the license revenue over the
period of core implementation. Most of our new customers typically begin
implementation within 30 days of signing a license agreement. Once commenced,
implementation of our products can typically be completed within 30 days.
Although both implementation and deployment can vary significantly by customer.
We cannot, however, guarantee that customers will begin implementation or that
we will always be able to implement our software within those time periods.
Thus, all of our deferred license revenue may not be recognized within the
originally expected time period.

Seasonality may adversely affect our quarterly operating results.

  We expect to experience seasonality in our license revenue. To date, we
believe that seasonality has been masked by other factors, such as large orders
and the timing of personnel changes in our sales staff. 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. As a result, business in the
last quarter of a year could be greater than new

                                      15
<PAGE>

business in the first quarter of the following year.

The limited sales history of our products makes it difficult to evaluate our
business and prospects.

  We released our first knowledge-enabling software product in August 1996.
Accordingly, the basis upon which you can evaluate our prospects in general, and
market acceptance of our products in particular, is limited. 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.

If e-business sales and marketing solutions are not widely adopted, we may not
be successful.

  We are broadening our current product suite to integrate with various aspects
of e-business solutions. These products address a new and emerging market for e-
business sales and marketing solutions. The failure of this market to develop,
or a delay in the development of this market, would seriously harm our business.
The success of e-business sales and marketing solutions depends substantially
upon the continued growth and the widespread adoption of the Internet as a
primary medium for commerce and business applications. The Internet
infrastructure may not be able to support the demands placed on it by the
continued growth upon which our success depends. Moreover, reliability, cost,
accessibility, security and quality of service remain unresolved and may
negatively affect the growth of Internet use or the attractiveness of commerce
and business communication over the Internet.

We rely on sales of only one product family.

  Product license revenues and related services from our Primus eServer and
Primus eSupport products accounted for over 90% of our total revenues through
March 31, 2001, and we expect these products to continue to account for a
substantial portion of our revenues in 2001. 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 and operating results. 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.

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 dependent upon a current
database. If customer-support personnel do not adopt and effectively use our
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 software to our users will be
impaired. Thus, successful deployment and broad acceptance of our products will
depend in part on the quality of the users' existing database of solutions,
which is outside our control.

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 new and rapidly evolving, and is expected to
become 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 CRM processes, including Internet
communications, esupport, knowledge management, and web-based customer self-
service. We also face competition from in-house designed products and third-
party custom development efforts.

  In addition, some of the companies providing e-commerce and traditional
customer relationship management solutions that may compete with us include
Broadbase, Kana, Nortel Networks/Clarify, Oracle, Peoplesoft,

                                      16
<PAGE>

ServiceWare and Siebel.

  The principal competitive factors in our industry include:

<TABLE>
<S>                                                        <C>
 .  vendor and product reputation                           .  product ease-of-use
 .  the availability of products on the Internet and        .  the quality of customer support services,
   multiple operating platforms                               documentation and training
 .  measurable economic return                              .  the quality, speed and effectiveness of
 .  customer referenceability                                  application development services
 .  product quality, performance and price                  .  the effectiveness of sales and marketing efforts
 .  breadth of product functionality and features           .  product integration with other enterprise
 .  product scalability                                        applications
</TABLE>

  As the market for CRM software matures, it is possible that new and 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.

The loss of access to, or a problem with, Versant's database could adversely
affect our business.

  Historically, we incorporated a database licensed from Versant into our
products. Presently, our products support Microsoft SQL Server, Oracle and
Versant databases. Because most of the products we have shipped historically,
however, rely on Versant's database, we continue to depend on Versant's ability
to support the database in a timely and effective manner.

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

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

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

  If sales of new licenses increased rapidly or if we were to sign a license
agreement for a particularly large or complex implementation, our customer
support and professional services personnel may be unable to meet the demand for
implementation 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 implementation and educational services
related to our products.

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

  Qualified technical personnel are in great demand throughout the software
industry. The demand for qualified technical personnel is particularly acute in
the Pacific Northwest, due to the large number of software companies and the low
unemployment in the region. Our success depends in large part upon our continued
ability

                                      17
<PAGE>

to attract and retain highly skilled technical employees, particularly software
architects and engineers. Our failure to attract and retain the highly-trained
technical personnel that are integral to our direct sales, product development
and customer support teams may limit the rate at which we can generate sales and
develop new products or product enhancements. This could have a material adverse
effect on our business, financial condition and operating results.

  The market price of our common stock has been volatile since our initial
public offering in July 1999. Consequently, potential employees may perceive our
equity incentives such as stock options as less attractive. In that case, our
ability to attract and retain employees may be adversely affected.

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 warranty liabilities
 . incur a one-time charge
 . amortize goodwill and other intangible assets

  We may not be able to successfully integrate any technologies, products,
personnel or operations of companies that we acquire. These difficulties could
disrupt our ongoing business, divert management resources and increase our
expenses.

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. 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 could
harm our business.

Our international operations are subject to additional risks.

  Revenues from customers outside the United States represented approximately
$2.3 million in the 3 months ended March 31, 2001, or 22% of our total revenue
for the same period. We currently customize our products for select foreign
markets. In the future, we plan to develop additional localized versions of our
products. 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
 . political and economic instability

  Our international operations also face foreign-currency-related risks. To
date, substantially all of our revenues have been denominated in U.S. dollars,
but we believe that in the future, an increasing portion of our revenues will be
denominated in foreign currencies, including the Euro and Yen.  Fluctuations in
the value of the Euro or other foreign currencies may have a material adverse
effect on our business, operating results and

                                      18
<PAGE>

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 CRM software sold by Nortel
Networks/Clarify, Kana, Onyx, Peoplsoft, Remedy, Siebel and others. Currently,
these vendors have open applications program interfaces, which facilitate our
ability to integrate with their systems. If any one of them should close their
programs' interface or if they should acquire one of our competitors, our
ability to provide a close integration of our products could become more
difficult and could delay or prevent our products' integration with future
systems.

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

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 consultants, vendors and customers. 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 confidentiality agreements and other protective contracts we have entered
into. 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. A significant portion 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
                                      19
<PAGE>

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 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 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. Parties making such claims could
secure a judgment awarding them 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 and operating results.

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 one-third 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.

Our articles of incorporation and bylaws and Washington law contain provisions
that could discourage a takeover.

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.

                                      20
<PAGE>

  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 of our common stock.

Changes in accounting standards could affect the calculation of our future
operating results.

  In October 1997, the American Institute of Certified Public Accountants issued
its Statement of Position 97-2, "Software Revenue Recognition," and later
amended its position by its Statement of Position 98-4. We adopted Statement of
Position 97-2 effective January 1, 1998. The AICPA has also issued Statement of
Position 98-9, which was effective for transactions we enter into beginning
January 1, 2000 and the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition," which was effective October
1, 2000. We adopted Statement of Position 98-9 and SAB No. 101 during 2000.
Based on our interpretation of the AICPA and SEC's positions, we believe our
current revenue recognition policies and practices are consistent with Statement
of Position 97-2, 98-4, 98-9 and SAB No. 101. Additionally, the accounting
standard setters, including the Securities and Exchange Commission and the
Financial Accounting Standards Board (FASB), are continuing to review the
accounting standards related to stock-based compensation. Any changes to these
standards or any other accounting standards could materially adversely affect
our business, financial condition and operating results.

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

  You should not rely on forward-looking statements in this document. 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 document. The forward-
looking statements contained in this document 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 document.

                                      21
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes and change in the market
values of our investments.

Interest Rate Risk. We are exposed to the impact of short-term changes in
interest rates. Our exposure primarily relates to our investment portfolio. We
invest our excess cash in high quality corporate and municipal debt instruments.
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 three months ended March 31, 2001, the effects of changes in interest
rates on the fair market value of our marketable investment securities and our
earnings were insignificant. At March 31, 2001, our investment portfolio
included approximately $3.7 million in variable rate investments, primarily all
of which are due during 2001. Fixed rate investments at March 31, 2001 of
approximately $13.7 million had a weighted average interest rate of 6.25% and
are primarily due in 2001. We believe that the impact on the fair market value
of our securities and our earnings for the remainder of 2001 from a hypothetical
10% increase in interest rates would be insignificant.

Foreign Currency Exchange Risk. We develop products in the United States and
sell them in North America, Asia and Europe. 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 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 in 2000 and 2001. If, during the remainder of 2001, the US dollar
uniformly decreases in strength by 10% relative to the currency of our foreign
sales subsidiaries, our operating results for the remainder of 2001 would likely
not be significantly effected.

PART II -- OTHER INFORMATION

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 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

     None.


(b)  Reports on Form 8-K.

     None.

                                      22
<PAGE>

SIGNATURES

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

                              PRIMUS KNOWLEDGE SOLUTIONS, INC.


Date:  May 2, 2001            By: /s/ Ronald M. Stevens
                                 ----------------------------------------------
                              Ronald M. Stevens
                              Vice President, Chief Financial Officer,
                              and Treasurer

                              (Principal financial and chief accounting officer)

                                      23