<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 SEPTEMBER 30, 1999         COMMISSION FILE NUMBER: 0-26273


                        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 November 10, 1999, there were 14,318,999 shares
                 of the Registrant's Common Stock outstanding.
<PAGE>

                        Primus Knowledge Solutions, Inc.
                                   Form 10-Q
                               September, 30 1999

                                     INDEX

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

           . Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999...........................     3

           . Consolidated Statements of Operations for the three and nine months
             ended September 30, 1998 and 1999....................................................................     4

           . Consolidated Statement of Shareholders' Equity (Deficit) for the three month periods
             ended March 31, 1999, June 30, 1999 and September 30, 1999...........................................     5

           . Consolidated Statement of Cash Flows for the nine months
             ended September 30, 1998 and September 30, 1999......................................................     6

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

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations..................    11

ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk.............................................    26

PART II.   OTHER INFORMATION

ITEM 2.    Changes in Securities and Use of Proceeds..............................................................    26

ITEM 5.    Other Information......................................................................................    27

ITEM 6.    Exhibits and Reports on Form 8-K.......................................................................    27
</TABLE>

                                  Page 2 of 27
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements
<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
<S>                                                                        <C>                 <C>
(In thousands, except share data)
                                                                           December 31, 1998   September 30, 1999
                                                                           -----------------   ------------------
                                                                                                   (unaudited)
                           ASSETS
CURRENT ASSETS
Cash and cash equivalents                                                      $  2,583             $ 12,597
Securities available-for-sale                                                     2,833               35,050
Accounts receivable, net of reserves of $371 at December 31, 1998
  and September 30, 1999                                                          4,999                6,972
Prepaid royalties and other current assets                                          473                1,100
                                                                               --------             --------
  Total current assets                                                           10,888               55,719
Property and equipment, net                                                       1,914                2,202
Deferred charges and other assets                                                   885                  423
                                                                               --------             --------
TOTAL ASSETS                                                                   $ 13,687             $ 58,344
                                                                               ========             ========

         LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable, trade                                                        $  1,143             $  2,095
Accrued liabilities                                                               1,096                1,543
Compensation-related accruals                                                     1,388                1,956
Long-term debt, current                                                             444                  219
Obligations under capital leases, current                                            28                   30
Deferred revenue                                                                  7,605                7,781
                                                                               --------             --------
  Total current liabilities                                                      11,704               13,624
                                                                               --------             --------
NONCURRENT LIABILITIES
Obligations under capital leases, net of current                                     54                   31
Long-term debt, net of current                                                    1,019                   --
Redeemable convertible preferred stock                                           23,157                   --
Commitments                                                                          --                   --

SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value                                                     1                   --
Common stock, $0.025 par value                                                      107                  356
Additional paid-in-capital                                                        9,184               80,655
Accumulated deficit                                                             (31,538)             (36,275)
Accumulated other comprehensive loss                                                 (1)                 (47)
                                                                               --------             --------
  Total shareholders' equity (deficit)                                          (22,247)              44,689
                                                                               --------             --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                           $ 13,687             $ 58.344
                                                                               ========             ========
</TABLE>

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

                                  Page 3 of 27
<PAGE>

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

<TABLE>
<CAPTION>
                                                      Three Months Ended September 30,    Nine Months Ended September 30,
                                                     ----------------------------------  ---------------------------------
                                                           1998              1999             1998              1999
                                                     ----------------  ----------------  ---------------  ----------------
<S>                                                  <C>               <C>               <C>              <C>
Revenues, net:
  License                                               $    1,419       $     4,407       $    3,598       $    11,576
  Services                                                     790             1,905            1,799             4,279
                                                        ----------       -----------       ----------       -----------
     Total revenues                                          2,209             6,312            5,397            15,855
                                                        ----------       -----------       ----------       -----------
Cost of revenues:
  License                                                       58               246              114               684
  Services                                                     710             1,026            1,711             2,814
                                                        ----------       -----------       ----------       -----------
  Total cost of revenues                                       768             1,272            1,825             3,498
                                                        ----------       -----------       ----------       -----------
Gross profit                                                 1,441             5,040            3,572            12,357
Operating expenses:
  Sales and marketing                                        3,069             4,225            6,393            10,726
  Research and development                                     885             1,395            2,532             3,566
  General and administrative                                   709             1,113            1,738             3,040
                                                        ----------       -----------       ----------       -----------
  Total operating expenses                                   4,663             6,733           10,663            17,332
                                                        ----------       -----------       ----------       -----------
Loss from operations                                        (3,222)           (1,693)          (7,091)           (4,975)
Interest income                                                 --               537               --               656
Interest expense                                               (26)              (55)             (79)             (191)
                                                        ----------       -----------       ----------       -----------
Loss before income taxes                                    (3,248)           (1,211)          (7,170)           (4,510)
Income tax provision                                            --               (27)              --              (227)
                                                        ----------       -----------       ----------       -----------
Net loss                                                    (3,248)           (1,238)          (7,170)           (4,737)
Preferred stock accretion                                     (170)               --             (329)             (432)
                                                        ----------       -----------       ----------       -----------
Loss available to common shareholders                   $   (3,418)      $    (1,238)      $   (7,499)      $    (5,169)
                                                        ==========       ===========       ==========       ===========

Loss per share:
  Basic and diluted                                         $(0.87)           $(0.09)          $(1.92)            $(.67)
                                                        ==========       ===========       ==========       ===========

  Pro forma basic and diluted                               $(0.38)           $(0.09)           $(.93)            $(.43)
                                                        ==========       ===========       ==========       ===========

Shares used in the calculation of loss per share:
  Basic and diluted                                      3,922,730        14,238,784        3,912,947         7,675,454
                                                        ==========       ===========       ==========       ===========

  Pro forma basic and diluted                            8,544,581        14,238,784        7,675,786        10,986,564
                                                        ==========       ===========       ==========       ===========
</TABLE>


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

                                  Page 4 of 27
<PAGE>

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

<TABLE>
<CAPTION>

                                                                             Accumulated                                   Total
                               Preferred Stock           Common Stock         Additional       Other                   Shareholders'
                             --------------------    ---------------------     Paid-in      Comprehen-   Accumulated      Equity
                              Shares    Par Value      Shares    Par Value     Capital     sive Income     Deficit       (Deficit)
                             ---------  ---------    ----------  ---------   ----------   ------------   -----------  --------------
<S>                          <C>        <C>        <C>             <C>      <C>           <C>           <C>           <C>
Balance at December 31,
 1998                         500,000        $ 1      4,283,141       $107      $ 9,184          $ (1)     $(31,538)       $(22,247)
Exercise of stock options          --         --        105,378          3          833            --            --             836
Repurchase of common stock         --         --        (12,500)        --         (103)           --            --            (103)
Sale of common stock               --         --         92,728          2          276            --            --             278
Preferred stock accretion          --         --             --         --         (215)           --            --            (215)
Comprehensive loss:
 Foreign currency
   translation loss                --         --             --         --           --            (4)           --              --
 Net loss                          --         --             --         --           --            --        (1,863)             --
Total comprehensive loss           --         --             --         --           --            --            --          (1,867)
                             --------   --------     ----------       ----      -------   -----------   -----------        --------
Balance at March 31, 1999     500,000          1      4,468,747        112        9,975            (5)      (33,401)        (23,318)
Exercise of stock options          --         --         10,276         --           30            --            --              30
Exercise of stock warrants         --         --         47,719          1          131            --            --             132
Stock, stock options and
 warrants issued in
   exchange for services           --         --         19,700         --          367            --            --             367
Preferred stock accretion          --         --             --         --         (216)           --            --            (216)
Comprehensive loss:
 Foreign currency
   translation loss                --         --             --         --           --            (7)           --              --
 Net loss                          --         --             --         --           --            --        (1,636)             --
Total comprehensive loss           --         --             --         --           --            --            --          (1,643)
                             --------   --------     ----------       ----      -------   -----------   -----------        --------
Balance at June 30, 1999      500,000          1      4,546,442        113       10,287           (12)      (35,037)        (24,648)
Proceeds from initial
 public offering, net of
 offering costs                    --         --      4,622,500        116       46,251            --            --          46,367
Conversion of redeemable
  convertible preferred
   stock into common
    stock                    (500,000)        (1)     4,966,658        124       23,465            --            --          23,588
Exercise of stock options          --         --          8,558         --           26            --            --              26
Exercise of stock  warrants        --         --        163,408          3          464            --            --             467
Stock, stock options and
 warrants issued in
  exchange for services            --         --             --         --          162            --            --             162
Comprehensive loss:
 Foreign currency
   translation gain                --         --             --         --           --            11            --              --
 Unrealized loss on
   securities available
   for sale                        --         --             --         --           --           (46)            --             --
 Net loss                          --         --             --         --           --            --        (1,238)             --
Total comprehensive loss           --         --             --         --           --            --            --          (1,273)
                             --------   --------     ----------       ----      -------   -----------   -----------        --------
Balance at September 30,
 1999                              --        $--     14,307,566       $356      $80,655          $(47)      $(36,275)       $44,689
                             ========   ========     ==========       ====      =======   ===========   ===========        ========
</TABLE>


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

                                  Page 5 of 27
<PAGE>

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

<TABLE>
<CAPTION>
                                                                 Nine Months Ended September 30,
                                                                ---------------------------------
                                                                      1998             1999
                                                                ----------------  ---------------
<S>                                                             <C>               <C>
OPERATING ACTIVITIES
Net loss                                                             $(7,170)        $ (4,737)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Non-cash option and warrant expense                                     --              634
  Depreciation and amortization                                          296              483
Changes in assets and liabilities:
  Accounts receivable                                                 (2,107)          (1,373)
  Prepaid royalties and other current assets                            (346)            (627)
  Deferred charges and other assets                                      (62)            (243)
  Accounts payable, trade                                                315              952
  Accrued liabilities                                                    195              447
  Compensation-related accruals                                          477              568
  Deferred revenue                                                     1,621              176
                                                                     -------         --------
Net cash used in operating activities                                 (6,781)          (3,720)
                                                                     -------         --------
INVESTING ACTIVITIES
Purchases of securities available-for-sale                              (493)         (36,072)
Proceeds from maturity of securities available for sale                  610            3,809
Equipment purchases                                                     (782)            (771)
                                                                     -------         --------
Net cash provided by investing activities                               (665)         (33,034)
                                                                     -------         --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt                               1,417              777
Repayments on long-term debt                                          (1,492)          (2,021)
Principal payments on capital lease obligations                            4              (21)
Proceeds from the issuance of common stock, net                           95            1,769
Net proceeds from initial public offering                                 --           46,367
Proceeds from issuance of preferred stock, net                        12,221               --
Repurchase of common stock                                                --             (103)
                                                                     -------         --------
Net cash provided by financing activities                             12,245           46,768
Translation adjustment                                                     1               --
                                                                     -------         --------
Net increase in cash and cash equivalents                              4,800           10,014
Cash and cash equivalents at beginning of period                         711            2,583
                                                                     -------         --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $ 5,511         $ 12,597
                                                                     =======         ========
</TABLE>


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

                                  Page 6 of 27
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)

NOTE 1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of the Company

     Primus Knowledge Solutions, Inc. (Primus or the Company) is a leading
provider of web-based problem-resolution software for customer support and self-
service, which enables businesses to capture problem-resolution information,
solve customer problems, reuse solutions stored in the knowledge base and share
captured knowledge throughout the extended enterprise. Sales are primarily
generated through a domestic and European field sales organization.  Products
sold domestically and internationally are developed by the Company at its
Seattle headquarters.  Primus was incorporated in the state of Washington in
1986.

Unaudited Interim Financial Information

     The accompanying unaudited 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.  In our
opinion, the 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, 1998,
included in our prospectus, dated June 30, 1999, filed with the Securities and
Exchange Commission in connection with our initial public offering and our Form
10-Q filed with the Securities and Exchange Commission for the period ending
June 30, 1999.  Our 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

Revenue Recognition

     Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"),
was issued in October 1997 by the American Institute of Certified Public
Accountants (the "AICPA") and was later amended by Statement of Position 98-4
("SOP 98-4").  The Company adopted SOP 97-2 effective January 1, 1998.  The
Company believes its current revenue recognition policies and practices are
consistent with SOP 97-2 and SOP 98-4.  However, full implementation guidelines
for these standards have not yet been issued.  Once available, such
implementation guidance could lead to unanticipated changes in current revenue
accounting practices, and such changes could materially adversely affect the
timing of the Company's future revenues and earnings.  Additionally, the AICPA
recently issued SOP 98-9, which provides certain amendments to SOP 97-2, which
is effective for transactions entered into beginning January 1, 2000.  This
pronouncement is not expected to materially impact the Company's revenue
recognition practices.

     The Company generates revenues through two sources: (1) software license
revenues and (2) service revenues.  Software license revenues are generated from
licensing the rights to use the Company's products directly to end-users and
indirectly through resellers.  Service revenues are generated from sales of
maintenance services, consulting services, and training services performed for
customers that license the Company's products.

                                  Page 7 of 27
<PAGE>

     Revenues from software license agreements are recognized over the software
implementation period (if sold with initial implementation services) or upon
delivery of software (if sold without implementation services) if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to elements of the arrangement.  At the current stage of the Company's
development, due to the relatively recent introduction of the Company's product
line, in an attempt to ensure customer satisfaction while building market share,
the limited number of installations of the Company's products to date and the
limited number of third-party vendors that currently provide implementation
services to the Company's users, the Company has concluded that the
implementation services are, as a practical matter, essential to the software in
initial software arrangements where we provide implementation services.  As
such, the Company recognizes revenue for these arrangements following the
percentage-of-completion method over the implementation period.  Percentage-of-
completion is measured by the percentage of implementation hours incurred to
date to estimated total implementation hours.  This method is used because
management considers expended hours to be the best measure of progress on these
engagements.

     Vendor specific objective evidence 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.
Elements included in multiple element arrangements could consist of software
products, upgrades, enhancements, customer support services, or consulting
services.  If an acceptance period is required, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period.  The
Company enters into reseller arrangements that typically provide for sublicense
fees based on a percentage of list price.  Sublicense fees are recognized when
reported by the reseller upon relicensing of the Company's product to end users.
The Company's agreements with its customers and resellers do not contain product
return rights.

     Revenues from maintenance services are recognized ratably over the term of
the contract, typically one year.  Consulting revenues are primarily related to
implementation services performed on a time-and-material basis under separate
service arrangements.  Revenues from consulting and training services are
recognized as services are performed.  In cases where license fee payments are
contingent on the acceptance of services, the Company defers recognition of
revenues from both the license and the service elements until the acceptance
criteria are met.

Marketable Securities

     The Company's marketable securities consist primarily of corporate bonds
and commercial paper. Marketable securities are stated at fair value at the
balance sheet date. By policy, the Company invests primarily in high-grade
marketable securities. Marketable securities are defined as available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."

     Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such determination
at each balance sheet date.  The Company has classified its marketable
securities as available-for-sale, which are carried at fair value, with the
unrealized gains and losses reported as a separate component of shareholders'
equity.  At September 30, 1999, the fair value of marketable securities
approximates $35.0 million, which includes an unrealized loss of $46,000
recorded as a component of comprehensive income.

                                  Page 8 of 27
<PAGE>

NOTE 3.  INITIAL PUBLIC OFFERING

     On July 7, 1999, the Company issued 4,622,500 shares of its common stock
(including 622,500 shares issued upon the exercise of the underwriters' over
allotment option) at an initial public offering price of $11.00 per share. The
net proceeds to the Company from the offering were approximately $46.4 million.
Concurrent with the IPO, all outstanding shares of preferred stock were
converted into 4,966,658 shares of common stock.

NOTE 4.  EARNINGS PER SHARE

     Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted-average number of common shares outstanding.  Pro forma
basic and diluted net loss per share is computed using the weighted-average
number of shares used for basic and diluted per share amounts and the weighted-
average convertible redeemable preferred stock outstanding as if these shares
were converted to common stock at the time of issuance.

<TABLE>
<CAPTION>
                                           Three Months Ended          Nine Months Ended
                                              September 30,              September 30,
                                        -------------------------  -------------------------
                                           1998          1999         1998          1999
                                        -----------  ------------  -----------  ------------
                                               (In thousands, except per share data)
<S>                                     <C>          <C>           <C>          <C>
Net loss (A)                            $   (3,248)  $    (1,238)  $   (7,170)  $    (4,737)
Preferred stock accretion                     (170)           --         (329)         (432)
                                        ----------   -----------   ----------   -----------
Loss available to common
 shareholders (B)                       $   (3,418)  $    (1,238)  $   (7,499)  $    (5,169)
                                        ==========   ===========   ==========   ===========
Weighted-average number
 of common shares (C)                    3,922,730    14,238,784    3,912,947     7,675,454
                                        ==========   ===========   ==========   ===========
Pro forma adjustment for
 convertible preferred stock             4,621,851            --    3,762,839     3,311,110
                                        ----------   -----------   ----------   -----------
Pro forma weighted-
 average number of shares (D)            8,544,581    14,238,784    7,675,786    10,986,564
                                        ==========   ===========   ==========   ===========
Loss per share:
 Basic and diluted (B)/(C)              $     (.87)  $      (.09)  $    (1.92)  $      (.67)
 Pro forma basic and diluted (A)/(D)    $     (.38)  $      (.09)  $     (.93)  $      (.43)
</TABLE>

     Outstanding warrant and stock options to purchase shares of common stock
were excluded from the computation of diluted earnings per share because their
effect was antidilutive.

                                  Page 9 of 27
<PAGE>

NOTE 5.  COMPREHENSIVE LOSS

     The following table reconciles net loss as reported to comprehensive loss
under the provisions of SFAS No. 130 for the three and nine months ending
September 30, 1998 and 1999:

<TABLE>
<CAPTION>
                                      Three Months Ended    Nine Months Ended
                                        September 30,         September 30,
                                     --------------------  -------------------
                                       1998       1999       1998       1999
                                     ---------  ---------  ---------  --------
                                                  (In thousands)
<S>                                  <C>        <C>        <C>        <C>
Net loss                              $(3,248)   $(1,238)   $(7,170)  $(4,737)
Other comprehensive income:
    Unrealized currency gain                1         11          1         0
    Unrealized loss on securities
      available-for-sale                   --        (46)         --      (46)

Total comprehensive loss              $(3,247)   $(1,273)   $(7,169)  $(4,783)
                                      =======    =======    =======   =======
</TABLE>

                                 Page 10 of 27
<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 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 Prospectus,
dated June 30, 1999, 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 the Company 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.

RECENT DEVELOPMENTS

     In October 1999, we announced the launch of our latest eService product,
Primus Interchange, a comprehensive application bringing together web self-
service, email management, chat and collaboration support. Primus Interchange
couples our associative search technology with the eService capabilities of web,
email and chat to provide an eBusiness the ability to offer its customers
flexible self service selections in supporting customer service needs.

OVERVIEW

     Our predecessor, Symbologic Corporation, was incorporated in October 1986
in the state of Washington and initially focused on a software development tool
for creation of systems to gather organizational expertise.  In 1993, we
licensed that product line to another company and founded the Customer Support
Consortium, a consortium of leading software and hardware companies focused on
advancing customer-support strategies, models and standards.  From 1993 to 1995,
we directed our attention to customer-support products and began developing our
SolutionSeries products.  In 1995, we changed our name to Primus and released
SolutionBuilder, our first SolutionSeries product.  We launched our first web-
based products, SolutionPublisher and SolutionExplorer, in 1996 and the end of
1997, respectively.  In 1997, we also divested our interest in the Customer
Support Consortium in conjunction with its transition to an independent
nonprofit entity.

     Our revenues, which consist of software license revenues and related client
services revenues, totaled $5.4 million and $15.9 million for the nine months
ended September 30, 1998 and 1999, respectively.  Through at least the first
half of fiscal 2000, we expect that substantially all of our revenues will
continue to be derived from our SolutionSeries product family and related
services.  Our customers generally license a full suite of our products.  We
have not experienced a decline in revenues with respect to any one product as a
result of product upgrades provided under our support and maintenance
agreements.  We market our software and services through our direct sales
organization in the United States and the United Kingdom.  In Japan, Primus KK,
a Japanese joint venture in which we hold a 14.3% minority interest, distributes
our products.  Our international sales constituted 11% and 15% of our revenues
for the nine months ended September, 1998 and 1999, respectively.  We believe
that international revenues, as a percentage of our total revenues, will vary
substantially on a quarterly basis for

                                 Page 11 of 27
<PAGE>

the foreseeable future. We price our software licenses based on the number of
servers, users and/or concurrent users.

     Our service revenues consist 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.

     Before 1998, we recognized software license revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1.
Beginning in 1998, we have recognized software license revenue in accordance
with AICPA Statement of Position 97-2, "Software Revenue Recognition," and
related amendment and interpretations contained in the AICPA's Statement of
Position 98-4.  We typically recognize software license revenues over the
software implementation period if:

  .  we have signed a noncancellable license agreement with a customer

  .  we have shipped the software

  .  the fee is fixed and determinable

  .  there is sufficient vendor-specific objective evidence to support
     allocation of the total fee to all elements of multiple-element
     arrangements

  .  the fee is collectible

     We currently recognize license revenue over the implementation period if
implementation services are included in the original license arrangement.  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 implementation.  At the current stage of our development,
due to the relatively recent introduction of our product line, our desire to
ensure customer satisfaction while we seek to build market share, the limited
number of installations of our products to date and the limited number of third-
party vendors that currently provide implementation services to our users, we
have concluded that the implementation services are, as a practical matter,
essential to the software in initial software arrangements where we provide
implementation services.  As such, we recognize revenue for these arrangements
following the percentage-of-completion method over the implementation period.
Once our recently introduced product line has a greater number of completed
installations and we have established a network of third party vendors providing
implementation services we will reassess our revenue recognition policy to
determine if our policy should be changed to begin recognizing revenue from
initial license arrangements upon shipping the software.  On the other hand, for
license agreements under which we have no implementation responsibility, we
generally recognize revenue from the agreement upon shipping the software, which
we typically accomplish shortly after signing a license agreement.

     For new users, we typically agree to implement our software.  Conversely,
examples of situations under which we have no implementation responsibility
would include a license agreement to add users for an existing customer or a
license agreement with a new customer who is using an outside implementation
service provider or is relying on its own internal implementation services.
Most of our new customers begin implementation within 30 to 60 days of signing a
license agreement.  Once commenced, implementation of our products typically
ranges from 60 to 90 days.  We can't, however, guarantee that customers will
begin implementation or that we will always be able to implement our software
within those time periods.

     We enter into reseller arrangements that typically provide for sublicense
fees payable to us based on a percentage of our list price.  We recognize
sublicense fees as they are reported by the reseller when it relicenses our
products to users of our products.

                                 Page 12 of 27
<PAGE>

     We believe our current revenue-recognition policies and practices are
consistent with applicable AICPA accounting pronouncements; however, the AICPA
has not issued full interpretation guidelines for its latest standards yet.  We
might find it necessary to change our current revenue accounting practices once
the AICPA issues its interpretation guidance.  Any changes in revenue-
recognition policies could result in substantial changes in the timing of our
future revenues and earnings.  The AICPA recently 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.
We do not expect implementation of this latest AICPA pronouncement to materially
impact our revenue recognition practices.

     Since 1992, we have invested heavily in product development and in building
our sales, marketing and client services organizations.  From November 1997
through September 1999, we made a strategic investment in building our executive
management team to help us execute our long-term growth strategy.  The number of
our full-time employees increased from 128 as of September 30, 1998, to 157 as
of September 30, 1999, representing an increase of 23%.  We have incurred
quarterly net losses since inception, and as of September 30, 1999, had an
accumulated deficit of $36.3 million.  We anticipate that our operating expenses
will continue to increase substantially for the foreseeable future as we
continue to expand our product development, sales and marketing and consulting
staff.

     We believe that period-to-period comparisons of our operating results are
not meaningful and should not be relied upon as indicative of future
performance.  Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets.  There
can be no assurance we will be successful in addressing such risks and
difficulties.  In addition, although we have experienced significant revenue
growth recently, this trend may not continue.  In addition, we may not achieve
or maintain profitability in the future.

                                 Page 13 of 27
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1999

     The following table sets forth certain financial data, derived from the
Company's unaudited statements of operations, as a percentage of total revenues
for the periods indicated.  The operating results for the three and nine months
ended September 30, 1998 and 1999 are not necessarily indicative of the results
that may be expected for any future period.

<TABLE>
<CAPTION>
                                Three Months Ended September 30,    Nine Months Ended September 30,
                               ----------------------------------  ---------------------------------
                                     1998              1999              1998             1999
                               -----------------  ---------------  ----------------  ---------------
<S>                            <C>                <C>              <C>               <C>
Revenues, net:
 Licenses                               64.2%            69.8%             66.7%            73.0%
 Services                               35.8             30.2              33.3             27.0
                                     -------           ------           -------           ------
 Total revenues                        100.0            100.0             100.0            100.0
                                     -------           ------           -------           ------
Cost of revenues:
 Licenses                                2.6              3.9               2.1              4.3
 Services                               32.2             16.3              31.7             17.7
                                     -------           ------           -------           ------
 Total cost of revenues                 34.8             20.2              33.8             22.0
                                     -------           ------           -------           ------
Gross margin                            65.2             79.8              66.2             78.0
                                     -------           ------           -------           ------
Operating expenses:
 Sales and marketing                   138.9             66.9             118.5             67.7
 Research and development               40.1             22.1              46.9             22.5
 General and administrative             32.1             17.6              32.2             19.2
                                     -------           ------           -------           ------
 Total operating expenses              211.1            106.6             197.6            109.4
                                     -------           ------           -------           ------
Loss from operations                  (145.9)           (26.8)           (131.4)           (31.4)
Interest income                           --              8.5                --              4.1
Interest expense                        (1.2)             (.9)             (1.5)            (1.2)
                                     -------           ------           -------           ------
Loss before income taxes              (147.1)           (19.2)           (132.9)           (28.5)
Income tax provision                      --              (.4)               --             (1.4)
                                     -------           ------           -------           ------
Net loss                              (147.1)%          (19.6)%          (132.9)%          (29.9)%
                                     =======           ======           =======           ======
</TABLE>

                                 Page 14 of 27
<PAGE>

Revenues

     We derive our revenues from the sale of software products and related
services including support and maintenance contracts.  Revenues were $2.2
million and $6.3 million for the three months ended September 30, 1998 and 1999,
respectively, representing an increase in the third quarter of 1999 of $4.1
million or 186% over the comparable quarter of the prior year.  Revenues were
$5.4 million and $15.9 million for the nine months ended September 30, 1998 and
1999, respectively, representing an increase of $10.5 million or 194% over the
comparable prior year period.  We had two customers, Compaq and Lucent, which
represented greater than 10% of revenues in the third quarter of 1999 as
compared to four customers in the third quarter of 1998.  For the nine months
ended September 1999, one customer, RCN, represented greater than 10% of
revenues as well as one customer, EMC, in the nine months ended September 1998.

     License Revenue.  License revenues were $1.4 million and $4.4 million for
the three months ended September 30, 1998 and 1999, respectively, representing
an increase in the third quarter of 1999 of $3.0 million or 211% over the
comparable quarter of the prior year.  The increase was due to increases in both
the size and productivity of the sales force and increased sales of our web-
based products, SolutionPublisher and SolutionExplorer.  Sales personnel totaled
35 and 47 as of September 30, 1998 and 1999, respectively.  License revenues
derived from our web-based products were $658,500 and $2.4 million for the third
quarters of 1998 and 1999, respectively. License revenues were $3.6 million and
$11.6 million for the nine months ended September 30, 1998 and 1999,
respectively, representing an increase of $8.0 million or 222% over the
comparable prior year period.  The year-over-year increase was primarily a
result of increased sales of our web-based products.  The increase in license
revenue from these products was approximately $4.7 million during this period.
The remaining license revenue increase was as a result of increased
SolutionBuilder sales and increased sales personnel headcount.

     Service Revenue.  Service revenues were $790,000 and $1.9 million for the
three months ended September 30, 1998 and 1999, respectively, representing an
increase in the third quarter of 1999 of $1.1 million, or 141%, over the
comparable quarter of the prior year.  Maintenance and support contract revenues
increased $721,000 in the third quarter of 1999 over the comparable quarter of
the prior year.  Consulting fees increased $394,000 in the third quarter of 1999
over the comparable quarter of the prior year.  Service revenues were $1.8
million and $4.3 million for the nine months ended September 30, 1998 and 1999,
respectively, representing an increase of $2.5 million or 138% over the
comparable prior year period.  Maintenance and support contract revenues
increased $1.6 million during this period and consulting fees increased $873,000
over the same period.  Service revenues represented 33% and 27% of our total
revenues for the nine months ended September 30, 1998 and 1999, respectively.
We expect the proportion of service revenues to total revenues to fluctuate in
the future, depending in part on the use of third-party consulting and
implementation service providers.

Cost of Revenues

     Cost of License Revenue. Cost of license revenue includes royalties and
fees paid to third parties under license arrangements and costs related to media
and duplication for our products and manuals. Cost of license revenues were
$58,000 and $246,000 for the three months ended September 30, 1998 and 1999,
respectively, and $114,000 and $684,000 for the nine months ended September 30,
1998 and 1999, respectively. The cost of licenses increased $188,000 and
$570,000 in the three and nine month periods ended September 30, 1999 over the
comparable prior year periods, respectively. Cost of licenses as a percentage of
license revenues were 4.1% and 5.6% for the three months ended September 30,
1998 and 1999, respectively, and 3.2% and 5.9% for the nine months ended
September 30, 1998 and 1999, respectively. Our cost of license revenue as a
percent of license revenue has varied in the past due to the volume of product
sales and the type of royalty agreements in place at the time.

     Cost of Service Revenue. Cost of service revenue includes personnel and
other costs related to professional services and customer support. Cost of
service revenues were $710,000 and $1.0 million for the

                                 Page 15 of 27
<PAGE>

three months ended September 30, 1998 and 1999, respectively, and $1.7 million
and $2.8 million for the nine months ended September 30, 1998 and 1999,
respectively. Cost of service revenue increased $316,000, or 45% from the three
months ended September 30, 1998 to the three months ended September 30, 1999,
and $1.1 million, or 64%, from the nine months ended September 30, 1998 to the
comparable period in 1999. The increases in cost of service revenue for the
comparable three and nine month periods ended September 30, 1999 were primarily
a result of hiring and training a consulting organization to successfully
implement our SolutionSeries products. Professional services and customer
support personnel totaled 22 and 35 as of September 30, 1998 and 1999,
respectively. Cost of service revenue as a percentage of service revenues were
90% and 54% for the three months ended September 30, 1998 and 1999,
respectively, and 95% and 66% for the nine months ended September 30, 1998 and
1999, respectively. The decrease in cost of service revenues as a percentage of
services revenues for the three and nine month periods ended September 30, 1998
to the comparable periods of 1999 was primarily due to higher utilization rates
as a result of higher levels of consulting-services activity and increased
experience of the customer-support personnel.

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, public
relations and new product launches. Sales and marketing expenses were $3.1
million and $4.2 million for the three months ended September 30, 1998 and 1999,
respectively, and $6.4 million and $10.7 million for the nine months ended
September 30, 1998 and 1999, respectively. Sales and marketing expenses
increased $1.2 million, or 38%, and $4.3 million, or 68%, for the three and nine
months ended September 30, 1999 as compared to the three and nine month
comparable periods of 1998. The increases in sales and marketing expenses for
the comparable three and nine month periods ended September 30, 1999 resulted
primarily from the increase in commissions paid as a result of revenue growth.
Sales and marketing employees totaled 54 and 58 as of September 30, 1998 and
1999, respectively. Sales and marketing expenses as a percentage of total
revenues were 139% and 67% for the three months ended September 30, 1998 and
1999, respectively, and 119% and 68% for the nine months ended September 30,
1998 and 1999, respectively. We believe that a significant increase in our sales
and marketing efforts 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 significantly in sales and marketing for the
foreseeable future, and the dollar amount of sales and marketing expenses will
increase in future periods, although they may decline as a percentage of total
revenues.

     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 $885,000 and $1.4 million for the three months ended
September 30, 1998 and 1999, respectively, and $2.5 million and $3.6 million for
the nine months ended September 30, 1998 and 1999, respectively. Research and
development expenses increased $510,000, or 58%, from the three months ended
September 30, 1998 to the three months ended September 30, 1999 and $1.0
million, or 41%, from the nine months ended September 30, 1998 to the comparable
period of 1999. The increases in research and development expenses for the
comparable three and nine month periods ended September 30, 1999 resulted
primarily from increased hiring of software developers and quality-assurance
staff to support development of our new products, enhancements to our existing
products and an increase in compensation levels for development and quality-
assurance personnel. Research and development personnel totaled 32 and 44 as of
September 30, 1998 and 1999, respectively. Research and development expenses as
a percentage of total revenues were 40% and 22% for the three months ended
September 30, 1998 and 1999, respectively, and 47% and 23% for the nine months
ended September 30, 1998 and 1999, respectively. We believe that a significant
increase in our research and development investment is essential for us to
maintain our market position, to continue to expand our product line and to
develop additional applications for our associative-based technology.
Accordingly, we anticipate that we will continue to invest significantly in
product research and development for the foreseeable future, and research and
development expenses are likely to increase in future periods.

                                 Page 16 of 27
<PAGE>

     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 $709,000 and $1.1 million for the three months ended September 30,
1998 and 1999, respectively, and $1.7 million and $3.0 million for the nine
months ended September 30, 1998 and 1999, respectively. General and
administrative expenses increased $404,000, or 57%, from the three months ended
September 30, 1998 to the three months ended September 30, 1999, and $1.3
million, or 75%, from the nine months ended September 30, 1998 to the comparable
period of 1999. The increases in general and administrative expenses for the
comparable three and nine month periods ended September 30, 1999 was primarily
due to increased payroll-related and infrastructure costs along with an increase
in legal and professional fees associated with becoming a public company.
General and administrative expenses as a percentage of total revenues were 32%
and 18% for the three months ended September 30, 1998 and 1999, respectively,
and 32% and 19% for the nine months ended September 30, 1998 and 1999,
respectively. General and administrative employees totaled 20 as of September
30, 1998 and 1999, respectively. We believe that our general and administrative
expenses will continue to increase as a result of the continued expansion of our
administrative staff and the expenses associated with becoming 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.

     Income Taxes.  We recorded no income tax provision in the first nine months
of 1998. We made no provision or benefit for federal or state income taxes in
1998 or 1999 due to operating losses incurred since inception which has resulted
in deferred tax assets. We have recorded a valuation allowance for the entire
deferred tax asset as a result of uncertainties regarding the realization of the
asset balance. We recorded income tax of $227,000 in the first nine months of
1999 in connection with our foreign operations.

FINANCIAL CONDITION

     Our total assets were $13.7 million and $58.3 million as of December 31,
1998 and September 30, 1999, respectively, representing an increase of $44.6
million, or 326%. This increase was primarily due to cash proceeds raised from
the sale of common stock in our recent initial public offering. As of December
31, 1998 we had $2.6 million of cash and cash equivalents and $2.8 million of
short-term investments. As of September 30, 1999, we had $12.6 million of cash
and cash equivalents and $35.0 million of short-term investments resulting in
total cash and investments of $47.6 million. This figure represents an increase
of $42.2 million over cash and investments balances at December 31, 1998.

     Our accounts receivable was $5.0 million and $7.0 million as of December
31, 1998 and September 30, 1999, respectively, representing an increase of $2.0
million, or 39%. This increase was principally a result of an increase in billed
revenues during the recent quarter, offset in part by cash collections during
the three months ended September 30, 1999. Days' sales outstanding ("DSO") in
accounts receivable was 157 days and 99 days as of December 31, 1998 and
September 30, 1999, respectively. We expect that DSO will fluctuate
significantly in future quarters.

     Our total liabilities were $35.9 million as of December 31, 1998 and $13.7
million as of September 30, 1999, representing a decrease of $22.3 million, or
62%. This decrease was principally the result of the conversion of $23.2 million
in redeemable convertible preferred stock to common stock in connection with our
initial public offering and the repayment of borrowings under our working
capital facility.

LIQUIDITY AND CAPITAL RESOURCES

     Prior to our initial public offering, we have primarily financed our
operations through the private sale of our equity securities, resulting in net
proceeds of $33.2 million through September 30, 1999.  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 and issued
4,622,500 shares of common stock at an initial public offering price of $11.00
per share.  We received approximately $46.4 million in cash, net of underwriting

                                 Page 17 of 27
<PAGE>

discounts, commissions, and other offering costs.

     As of September 30, 1999, we had cash and cash equivalents of $12.6 million
and short-term investments of $35.0 million, representing an increase of $42.2
million from cash and investments held as of December 31, 1998. As of September
30, 1999, our working capital excluding deferred revenue was $49.9 million
compared to $6.8 million at December 31, 1998. As of September 30, 1999,
accounts receivable of $7.0 million included $1.2 million due from one customer,
Origin. We have not experienced any delays or problems with the collection of
Origin's account.

     Our operating activities resulted in net cash outflows of $6.8 million and
$3.7 million for the nine months ended September 30, 1998 and September 30,
1999, respectively. The decrease in operating cash outflows from the nine months
ended September 30, 1998 to the nine months ended September 30, 1999 was due
primarily to a reduction in net loss.

     Investing activities used cash of $665,000 and $33.0 million for the nine
months ended September 30, 1998 and September 30, 1999, respectively. Investing
activities used cash primarily for the purchase of short-term securities
following our initial public offering and the purchase of capital equipment.

     Financing activities provided cash of $12.2 million and $46.8 million for
the nine months ended September 30, 1998 and September 30, 1999, respectively.
In the nine months ended September 30, 1999, cash provided by financing
activities was primarily due to the proceeds from our initial public offering in
July, offset in part by payments on our credit facility and capital lease
obligations.

     We currently anticipate that we will continue to experience significant
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 service capabilities

     Such operating expenses will consume a material amount of our cash
resources, including a portion of the net proceeds from our recent initial
public offering. We believe that the net proceeds from our recent initial public
offering, together with our existing cash and cash equivalents, 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.

                                 Page 18 of 27
<PAGE>

YEAR 2000 COMPLIANCE

     Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates or have been programmed with default
dates ending in "99," the common two-digit reference for 1999.  As a result, as
we transition from the 20th century to the 21st century, computer systems and
software used by many companies and organizations in a wide variety of
industries will produce erroneous results or fail unless they have been modified
or upgraded to process date information correctly.  Significant uncertainty
exists in the software industry and other industries concerning the scope and
magnitude of problems associated with the century change.  We recognize the need
to ensure our operations will not be adversely affected by Year 2000 software
failures.

     In September 1998, we established a Year 2000 compliance task force,
composed of high-level representatives from the product development, information
systems and legal departments.  The task force is responsible for formulating
and implementing our Year 2000 readiness and has applied a phased approach to
analyzing our operations and relationships as they relate to the Year 2000
problem.

     We have completed our assessment of the potential overall impact of the
impending century change on our business, financial condition and operating
results.  Based on our assessment, we believe the current versions of our
software products are Year 2000 compliant.  By Year 2000 compliant, we mean that
our software products, when used with accurate date data and in accordance with
their associated documentation, are capable of properly processing date data
from, into and between the 20th and 21st centuries, including the years 1999,
2000 and leap years, provided that all other products (e.g., hardware, software
and firmware) used with our products properly exchange date data with them.
However, our products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products that we cannot adequately
evaluate for Year 2000 compliance.  We may face claims based on Year 2000
problems in other companies' products, or issues arising from the integration of
multiple products within an overall system.  Although we have not been a party
to any litigation or arbitration proceeding involving our products or services
related to Year 2000 compliance issues, we may in the future be required to
defend our products or services in such proceedings, or to negotiate resolutions
of claims based on Year 2000 issues.  The costs of defending and resolving Year
2000-related disputes, regardless of the merits of such disputes, and any
liability we have for Year 2000-related damages, including consequential
damages, could materially adversely affect our business, financial condition and
operating results.  In addition, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for Year 2000 compliance and as they delay purchase of new
systems that may not be Year 2000 compliant.  These expenditures may result in
reduced funds available to purchase software products such as those we offer.
To the extent Year 2000 issues cause a significant delay in, or cancellation of,
decisions to purchase our products or services, our business, financial
condition and operating results would be materially adversely affected.

     We have reviewed our internal management information and other critical
business systems to identify any Year 2000 problems.  We also have communicated
with the external vendors that supply us with material software and information
systems and with our significant suppliers to determine their Year 2000
readiness.  In the course of these investigations, we have not encountered any
material Year 2000 problems with these third-party products.

     We have not incurred any material costs directly associated with our Year
2000 compliance efforts, except for compensation expense associated with our
salaried employees who have devoted some of their time to our Year 2000
assessment and remediation efforts.  We do not expect the total cost of Year
2000 problems to be material to our business, financial condition and operating
results.  However, during the months prior to the century change, we will
continue to evaluate new versions of our software products, new software and
information systems provided to us by third parties and any new infrastructure
systems that we acquire to determine whether they are Year 2000 compliant.
Despite our assessment, we may not identify and correct all significant Year
2000 problems on a timely basis.  Year 2000 compliance efforts may involve
significant time and

                                 Page 19 of 27
<PAGE>

expense and unremediated problems could materially adversely affect our
business, financial condition and operating results. We are currently finalizing
our contingency plans to address the risks associated with unremediated Year
2000 problems.

FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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 expect
to continue to incur net losses for the foreseeable future.  As of September 30,
1999, we had an accumulated deficit of $36.3 million.  We expect to continue to
devote substantial resources to expand our product development, sales and
marketing and client 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 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.  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 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 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:

   . variability in the mix of new and existing customers

   . whether we are providing implementation services

   . whether implementation is delayed or takes longer than expected

     Where we are implementing the software, we will account for the agreement
as an item of deferred revenue and will recognize the revenue over the period of
implementation.  Most of our new customers begin implementation within 30 to 60
days of signing a license agreement.  Once commenced, implementation of our
products typically ranges from 60 to 90 days.  We can't, 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.

                                 Page 20 of 27
<PAGE>

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, we expect new
business in the last quarter of a year to be greater than new business in the
first quarter of the following year.  One effect of our revenue recognition
policy, however, is that revenue recognized in a quarter will typically not
reflect all of the new license agreements signed and shipped in that quarter.

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

     We released our first SolutionSeries problem resolution product in April
1995.  As of September 30, 1999, approximately 68 companies licensed our
SolutionSeries products.  Accordingly, the basis upon which you can evaluate our
prospects in general, and market acceptance of our products in particular, is
limited.  The market for problem-resolution software will have to grow
significantly, and we will have to achieve broad market acceptance of our
products, for our business to succeed.

     Moreover, we released our web-based products, SolutionPublisher and
SolutionExplorer, in August 1996 and November 1997, respectively.  The limited
sales history of our web-based products further limits your ability to evaluate
our business and prospects.  Additionally, part of our strategy is to extend our
solutions to other functional areas where knowledge captured by our products may
be useful, such as product development, sales and marketing and field service.
In October 1999, we announced the launch of Primus Interchange, a comprehensive
application bringing together web self-service, email management, and live web
interaction and collaboration. We cannot accurately predict whether there will
be significant demand for our products in these areas.

We rely on sales of only one product family.

     Product-license revenues and related services from our SolutionSeries
products accounted for substantially all of our total revenues during fiscal
1998, and we expect revenues from our SolutionSeries products to continue to
account for substantially all of our revenues at least through the first half of
fiscal 2000.  As a result, factors adversely affecting the demand for our
SolutionSeries and eService products, 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 the
SolutionSeries products and our ability to develop and sell enhanced versions of
SolutionSeries products.

Our future success depends in part on broad market acceptance of the Web as a
delivery vehicle for problem resolution.

     Part of our strategy is to continue to increase our focus on developing and
marketing web-based products.  Our web-based products, SolutionExplorer and
SolutionPublisher, accounted for approximately 51% of our software license
revenue in 1998 and 57% in the nine months ended September 1999.  In addition,
in October 1999, we announced the launch of Primus Interchange which is a
comprehensive application bringing together web self-service, email management,
and live web interaction and collaboration.  Broad market acceptance of the Web
as a delivery vehicle for problem solutions to an enterprise's customers,
resellers, channel partners and field representatives through web self-service
is critical to the success of our business.  Thus, our future success
substantially depends on continued growth in the use of the Internet and the
continued development of the Internet as a viable commercial communication
medium.  We cannot be certain that commercial Internet usage will continue to
grow as it has in the past.  If use of the Internet as a commercial
communication medium does not

                                 Page 21 of 27
<PAGE>

continue to grow or evolves in a way that we cannot address, our business,
financial condition and operating results would be materially and adversely
affected.

Factors outside our control may make our products less useful.

     The effectiveness of our SolutionSeries products depends in part on
widespread adoption and use of our software by customer-support personnel in the
extended enterprise and the quality of the solutions they generate.  The
problem-resolution database is developed by customer-support personnel that
create solutions in the workflow and, sometimes, by importing a user's legacy
solutions.  If customer-support personnel do not adopt and use our products,
necessary solutions will not be added to the database, and the database will be
inadequate.  Some of our users have found that customer-support personnel
productivity initially drops while customer-support personnel become accustomed
to using our software.  If an enterprise deploying our software has not
adequately planned for and communicated its expectations regarding that initial
productivity decline, customer-support personnel may resist adoption of our
software.  In addition, if less-than-adequate solutions are created and left
uncorrected by a user's quality-assurance processes or if the legacy solutions
are inadequate, the database will similarly be inadequate, and the value of our
SolutionSeries products to our users will be impaired.  Thus, successful
deployment and broad acceptance of our SolutionSeries products will depend in
part on whether our users effectively roll-out and use our software products and
the quality of the users' existing database of solutions, each of which are
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.  We face competition in the
problem-resolution software market primarily from:

   . other problem-resolution software vendors

   . e-commerce customer-management software vendors

   . our potential users' internal information technology departments, which may
     choose to rely upon their own proprietary problem-resolution systems or
     develop new proprietary systems.

     As the market for problem-resolution 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.

     We incorporate into our products a database licensed from Versant.  We are
currently working to integrate our products with other databases; however we do
not believe that the integrations will be completed for three to five months.
Because our products currently rely on Versant's database, we depend on
Versant's ability to support the database in a timely and effective manner.
Until we finish integration of our products with other databases, losing access
to Versant's database would have a material adverse effect on our ability to
license our product to new users.

                                 Page 22 of 27
<PAGE>

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 vice president of sales began working for us in January 1999, and we
recently hired a vice president of marketing.  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 expand our sales and
marketing resources.

Our failure to 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 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.

Failure to properly integrate our management team would adversely affect our
business.

     In the last year we added four new members to our senior management team.
Our success depends on the performance of our senior management and their
ability to work together.  Failure to properly integrate them would harm our
business.  Much of our success also depends on Michael A. Brochu, our president
and chief executive officer.  The loss of Mr. Brochu's services would harm our
business.

Our inability to expand sufficiently 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 client
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.  A
failure to do so could have a material adverse effect on our business, operating
results and financial condition.

Our international operations are subject to additional risks.

     Revenues from customers outside the United States represented approximately
$2.4 million in the nine months ended September 1999, or 15% of total revenues.
A key component to our business strategy is to expand our sales and support
operations internationally.  Our international operations will continue to be
subject to a number of risks.  These risks include:

   . costs of customizing products for foreign countries

   . laws and business practices favoring local competition

   . compliance with multiple, conflicting and changing laws and regulations

                                 Page 23 of 27
<PAGE>

   . 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, which was introduced in
January 1999.  The Euro is an untested currency and may be subject to economic
risks that are not currently contemplated.  Fluctuations in the value of the
Euro or other foreign currencies may have a material adverse effect on our
business, operating results and financial condition.

     We currently customize our products for the Japanese market.  In the
future, we may develop additional localized versions of our products.
Localization of our products could create additional costs and cause delays in
new product introductions.

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, specifically including customer-relationship-
management software sold by Clarify, ONYX Software, Remedy, Siebel Systems and
Vantive.  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 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.

                                 Page 24 of 27
<PAGE>

     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 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, many of 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 services.  Any such outcome could have a material
adverse effect on our business, financial condition and operating results.

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.  Based on our interpretation of the
AICPA's position, we believe our current revenue recognition policies and
practices are consistent with Statement of Position 97-2 and Statement of
Position 98-4.  The AICPA has also issued Statement of Position 98-9, which is
effective for transactions we enter into beginning January 1, 2000.  However,
full implementation guidelines for these standards have not yet been issued.
Once available, such implementation guidelines could lead to unanticipated
changes in our current revenue accounting practices which could materially
adversely affect our business, financial condition and operating results.
Additionally, the accounting standard setters, including the Securities and
Exchange Commission and the Financial Accounting Standards Board, are reviewing
the accounting standards related to stock-based compensation.  Any changes to
this standard or any other accounting standards could materially adversely
affect our business, financial condition and operating results.

We have been public for only a short time and our stock price has been volatile.

     We completed our initial public offering in July 1999.  Prior to this there
was no trading market for our stock.  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 reaction to announcements of technological innovations or new products
     by us or our competitors;

   . because of market conditions in the enterprise software industry; and

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

                                 Page 25 of 27
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market 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 currently 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 are exposed to market risk for the impact of interest rate changes and
changes in the market values of our investments.  Our exposure to market risk
for changes in interest rates relates primarily to our investment portfolio.
Our investment portfolio is designated as available-for-sale, and accordingly is
presented at fair value on the consolidated balance sheet.  We have not utilized
derivative financial instruments in our investment portfolio.

     We employ established investment policies and procedures to manage the
market risk of our marketable securities.  The table below provides information
about our marketable securities, including principal cash flows through 2001 and
thereafter and the related weighted average interest rates.

     Principal (notional) amounts by contractual maturity, unless otherwise
stated, in U.S. dollars (thousands):

<TABLE>
<CAPTION>
                                                               After               Fair Value At
                                    1999     2000      2001     2001     Total   September 30, 1999
                                  ------   ------   -------   ------   -------   ------------------
<S>                               <C>      <C>      <C>       <C>      <C>       <C>
Commercial paper and
   short-term obligations         $7,500   $2,138   $   ---   $  ---   $ 9,638         $ 9,603

Weighted average interest rate      5.19%    5.78%      ---%     ---%     5.32%             --

Corporate notes and bonds            ---    1,000    17,250    7,000    25,250          25,447

Weighted average interest rate       ---%    5.80%     6.14%    5.54%     5.96%             --
                                  ------   ------   -------   ------   -------         -------
  Total portfolio                 $7,500   $3,138   $17,250   $7,000   $34,888         $35,050
                                  ======   ======   =======   ======   =======         =======
</TABLE>

PART II -- OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds

(d)  Use of Proceeds

     On June 30, 1999, our registration statement on Form S-1, file number
333-77477, became effective. The offering date was July 1, 1999. The offering
has terminated as a result of all of the shares offered being sold. The managing
underwriters were BancBoston Robertson Stephens, Hambrecht & Quist, U.S. Bancorp
Piper Jaffray, and FAC/Equities, a division of First Albany Corporation. The
offering consisted of 4,772,500 shares of Primus common stock, including 622,500
shares of common stock offered pursuant to the exercise of the underwriters'
over-allotment option and 150,000 shares offered by selling shareholders. The
aggregate price of the shares offered and sold by Primus was approximately $50.8
million. Proceeds to Primus, after accounting for $3.6 million in underwriting
discounts and commissions and approximately $800,000 in other expenses (as of
September 30, 1999), were $46.4 million.

                                 Page 26 of 27
<PAGE>

Item 5.  Other Information

Proposals by the Company's Shareholders

     Shareholder proposals intended to be presented at our 2000 Annual Meeting
must be received by Primus not later than March 16, 2000 for inclusion in the
proxy materials for such meeting.

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

     27.1  Financial Data Schedule.

(b)  Reports on Form 8-K.

     No reports on Form 8-K were filed during the quarter covered by this Form
     10-Q.


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.
                             (Registrant)

Date:  November 12, 1999     By: /s/ Elizabeth J. Huebner
                                -----------------------------------------------
                             Elizabeth J. Huebner
                             Executive Vice President, Chief Financial Officer,
                             Secretary and Treasurer
                             (Principal financial and chief accounting officer)


INDEX TO EXHIBITS

Exhibit No.     Description
-----------     -----------
  27.1          Financial Data Schedule.

                                 Page 27 of 27