<PAGE>

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



                                   FORM 10-Q



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

 FOR THE QUARTER ENDED MARCH 31, 2000         COMMISSION FILE NUMBER: 000-26273



                        PRIMUS KNOWLEDGE SOLUTIONS, INC.

             (Exact name of Registrant as specified in its charter)

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

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

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

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

                               Yes [X]   No [ ]

As of May 9, 2000 there were 17,652,574 shares of the Registrant's Common Stock
                                 outstanding.
<PAGE>

                        Primus Knowledge Solutions, Inc.
                                   Form 10-Q
                                 March 31, 2000

                                     INDEX

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

           .  Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999.....     3

           .  Condensed Consolidated Statements of Operations for the three months
              ended March 31, 2000 and March 31, 1999..............................................     4

           .  Condensed Consolidated Statement of Shareholders' Equity for the three months
              ended March 31, 2000.................................................................     5

           .  Condensed Consolidated Statements of Cash Flows for the three months
              ended March 31, 2000 and March 31, 1999..............................................     6

           .  Notes to Condensed 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..............................    24


PART II.   OTHER INFORMATION

ITEM 2.    Change in Securities and Use of Proceeds................................................    25

ITEM 6.    Exhibits and Reports on Form 8-K........................................................    26

</TABLE>

                                 Page 2 of 27
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
                                                                            March 31, 2000   December 31, 1999
                                                                            --------------   -----------------
                                                                             (unaudited)
<S>                                                                         <C>              <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents                                                    $ 14,737            $ 17,602
  Short-term investments                                                         31,477              37,055
  Accounts receivable, net                                                        9,088               8,479
  Note receivable                                                                 2,099                   -
  Prepaid expenses and other current assets                                         940                 993
                                                                               --------            --------
       Total current assets                                                      58,341              64,129

Property and equipment, net                                                       3,257               2,853
Other assets                                                                        373                 424
                                                                               --------            --------
       Total assets                                                            $ 61,971            $ 67,406
                                                                               ========            ========

                         LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                             $  2,690            $  1,415
  Accrued and other liabilities                                                   2,624               4,190
  Compensation-related accruals                                                   3,261               3,249
  Current portion of long-term debt                                                   -                 319
  Deferred revenue, including related-party amounts of $572
     and $1,516 at March 31, 2000 and December 31, 1999, respectively             9,544              10,418
                                                                               --------            --------
       Total current liabilities                                                 18,119              19,591
                                                                               --------            --------

Long-term debt, net of current portion                                                -                  60
Redeemable convertible preferred stock                                                -               9,054

Shareholders' equity:
  Common stock                                                                      441                 404
  Additional paid-in-capital                                                    103,546              92,891
  Deferred stock-based compensation                                                 (95)               (114)
  Accumulated other comprehensive loss                                             (178)               (110)
  Accumulated deficit                                                           (59,862)            (54,370)
                                                                               --------            --------
       Total shareholders' equity                                                43,852              38,701
                                                                               --------            --------
       Total liabilities and shareholders' equity                              $ 61,971            $ 67,406
                                                                               ========            ========
</TABLE>

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

                                 Page 3 of 27
<PAGE>

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

<TABLE>
<CAPTION>
                                               Three Months Ended March 31,
                                               ----------------------------
                                                   2000          1999
                                               -----------   --------------
<S>                                            <C>           <C>
Revenues:
  License, including amounts from
     related parties of $1,038 and $695
     for the three months ended March 31,
     2000 and 1999, respectively               $     7,180   $    3,259
  Services                                           3,278        1,319
                                               -----------   ----------
     Total revenues                                 10,458        4,578
                                               -----------   ----------
Cost of revenues:
  License                                              323          160
  Services                                           2,608        1,335
                                               -----------   ----------
     Total cost of revenues                          2,931        1,495
                                               -----------   ----------
         Gross profit                                7,527        3,083

Operating expenses:
  Sales and marketing                                6,826        3,728
  Research and development                           4,011        2,065
  General and administrative                         2,300        1,320
  Merger related costs                                 505            -
                                               -----------   ----------
     Total operating expenses                       13,642        7,113
                                               -----------   ----------
         Loss from operations                       (6,115)      (4,030)

Other income                                           786           34
Other expense                                         (131)          (7)
                                               -----------   ----------
     Loss before income taxes                       (5,460)      (4,003)
Income tax expense                                      32           27
                                               -----------   ----------
         Net loss                                   (5,492)      (4,030)

Preferred stock accretion                              (43)        (388)
                                               -----------   ----------
     Net loss available to common
     shareholders                              $    (5,535)  $   (4,418)
                                               ===========   ==========

Basic and diluted net loss per common share         $(0.32)      $(0.88)
                                               ===========   ==========

Shares used in computing basic and diluted
   net loss per common share                    17,273,710    5,022,225
                                               ===========   ==========
</TABLE>

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

                                 Page 4 of 27
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                           Accumulated
                                          Common stock       Additional     Deferred          other                       Total
                                      ---------------------    paid-in     stock-based    comprehensive   Accumulated  shareholders'
                                        Shares    Par value    capital    compensation        loss          deficit       equity
                                      ----------  ---------  -----------  -------------  --------------  ------------  -------------
<S>                                   <C>         <C>        <C>          <C>            <C>                 <C>       <C>
Balance at December 31,
  1999..............................  16,180,886       $404    $ 92,891          $(114)           $(110)   $(54,370)       $38,701
Preferred stock accretion...........          --         --         (43)            --               --          --            (43)
Exercise of stock options
  and warrants......................     515,497         14       1,446             --               --          --          1,460
Stock options and warrants
  issued in exchange
  for services......................          --         --         178             --               --          --            178
Deferred stock-based
  compensation......................          --         --          --             19               --          --             19
Conversion of 2order.com
  redeemable convertible
  preferred stock...................     916,918         23       9,074             --               --          --          9,097
Comprehensive loss:
 Foreign currency
   translation loss.................          --         --          --             --               (6)         --             --
 Unrealized loss on
   short-term investments...........          --         --          --             --              (62)         --             --
 Net loss...........................          --         --          --             --               --      (5,492)
    Total comprehensive
      loss..........................          --         --          --             --               --          --         (5,560)
                                    ----------------------------------------------------------------------------------------------
Balance at March 31,
  2000..............................  17,613,301       $441    $103,546          $ (95)           $(178)   $(59,862)       $43,852
                                    ==============================================================================================
</TABLE>

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

                                 Page 5 of 27
<PAGE>

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

<TABLE>
<CAPTION>
                                                                Three Months Ended March 31,
                                                                ----------------------------
                                                                    2000            1999
                                                                ------------    ------------
<S>                                                             <C>             <C>
Cash flows from operating activities:
  Net loss                                                       $(5,492)        $(4,030)
     Adjustments to reconcile net loss to net cash used in
       operating activities:
          Option and warrant expense                                 197               -
          Depreciation and amortization                            1,110             235
          Changes in assets and liabilities:
            Accounts receivable                                     (609)            914
            Prepaid expenses and other current assets                 53              56
            Note receivable                                       (2,099)              -
            Other assets                                              51               2
            Accounts payable and accrued liabilities                (291)           (277)
            Compensation-related accruals                             12            (342)
            Deferred revenue                                        (874)           (795)
                                                                 -------         -------
              Net cash used in operating activities               (7,942)         (4,237)
                                                                 -------         -------
Cash flows from investing activities:
  Purchases of short-term investments                             (5,080)         (1,773)
  Proceeds from maturity of short-term investments                10,596           2,833
  Purchases of property and equipment                             (1,514)           (220)
                                                                 -------         -------
              Net cash provided by investing activities            4,002             840
                                                                 -------         -------
Cash flows from financing activities:
  Proceeds from issuance of long-term debt                                           600
  Repayments on long-term debt                                      (379)            (92)
  Proceeds from the issuance of common stock, net                  1,460           1,478
  Repurchase of common stock                                                        (103)
  Proceeds from issuance of preferred stock                            -           1,200
                                                                 -------         -------

              Net cash provided by financing activities            1,081           3,083

Effect of exchange rate changes on cash                               (6)             (4)
                                                                 -------         -------
              Net decrease in cash and cash equivalents           (2,865)           (318)

Cash and cash equivalents at beginning of period                  17,602           7,708
                                                                 -------         -------
Cash and cash equivalents at end of period                       $14,737         $ 7,390
                                                                 =======         =======
</TABLE>

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

                                 Page 6 of 27
<PAGE>

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)

NOTE 1.   DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of the Company

Primus Knowledge Solutions, Inc. (Primus) is a leading provider of eCRM software
that enables companies to maximize the value of customer interactions across
multiple communication channels and business processes thereby enhancing
customer relationships. Our solution addresses the unique challenges faced by
companies implementing an e-business strategy. Sales are primarily generated
through a domestic and European field sales organization.  Products sold
domestically and internationally are developed by us at our Seattle
headquarters.  We were incorporated in the state of Washington in 1986.

Basis of Presentation

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

In December 1999 and January 2000, Primus merged with Imparto Software
Corporation (Imparto) and 2order.com, Inc. (2order.com), respectively, in
combinations accounted for as pooling-of-interests.  The condensed consolidated
financial statements and notes thereto for all periods prior to the combinations
are restated to include the accounts and results of operations of Imparto and
2order.com.

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 (SEC).  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, 1999
included in our Annual Report on Form 10-K filed with the SEC.  The results of
operations for any interim period are not necessarily indicative of the results
of operations for any other interim period or for a full fiscal year.

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

We have recognized software license revenue in accordance with AICPA Statement
of Position 97-2, "Software Revenue Recognition," which provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair value of the elements. 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.
The implementation of this latest AICPA pronouncement did not materially impact
our revenue recognition practices.

                                 Page 7 of 27
<PAGE>

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. For license agreements under which we have
no implementation responsibility, or where implementation is not considered to
be essential to the functionality of the software, we generally recognize
revenue from the agreement upon shipping the software.

In addition, there may be arrangements where we are contractually restricted
from invoicing a customer until a later date.  In these cases, we will record
the accounts receivable and recognize the revenue when we invoice the customer,
which is generally 30-60 days prior to the due date.

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

For new customers, we generally enter into services agreements to implement our
software. Most of our new customers begin implementation within 30 to 60 days of
signing a license agreement. Once commenced, implementation of our products
typically ranges from 30 to 45 days, an improvement from prior years when
installations took 60 to 90 days. Examples of situations under which we have no
implementation responsibility include additional license sales to existing
customers or customers who elect to use internal or third party resources to
implement the software.

NOTE 3.   BUSINESS COMBINATION

On January 21, 2000, pursuant to an Agreement and Plan of Merger, dated as of
January 8, 2000, we merged with 2order.com, Inc., a Georgia corporation
(2order.com). As a result of the merger, we issued 1,506,127 shares of  our
common stock, $.025 par value per share, in exchange for all issued and
outstanding capital stock of 2order.com and assumed all outstanding options and
warrants of 2order.com, which represents, on a converted basis, 150,378 shares
of our common stock. The Merger was accounted for as a pooling-of-interests
business combination, and accordingly, our historical consolidated financial
statements are presented in this report as restated to include the accounts and
results of operations of 2order.com. 2order.com had the same fiscal year-end as
Primus and there were no adjustments to conform accounting methods or eliminate
intercompany transactions.  In connection with the merger, we incurred
approximately $505,000 in merger-related costs primarily for investment banking,
legal and other professional fees during the three months ended March 31, 2000.

Results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying condensed consolidated financial
statements are as follows:

<TABLE>
<CAPTION>
                                Three Month Ended March 31,
                              --------------------------------
                               2000                     1999
                              -------                  -------
                                       (In thousands)
<S>                           <C>                      <C>
     Revenues:
          Primus              $ 9,720                  $ 3,973
          2order                  738                      605
                              -------                  -------
                              $10,458                  $ 4,578
                              =======                  =======
   Net loss:
          Primus              $(4,402)                 $(3,037)
          2order               (1,090)                    (993)
                              -------                  -------
                              $(5,492)                 $(4,030)
                              =======                  =======
</TABLE>

                                 Page 8 of 27
<PAGE>

NOTE 4.   EARNINGS PER SHARE

In accordance with SFAS No. 128, "Earnings Per Share," we reported both basic
and diluted net loss per common share for each period presented. Basic net loss
per common share is computed on the basis of the weighted-average number of
common shares outstanding for the year. Diluted net loss per common share is
computed on the basis of the weighted-average number of common shares plus
dilutive potential common shares outstanding. Dilutive potential common shares
are calculated under the treasury stock method. Securities that could
potentially dilute basic income per share consist of outstanding stock options
and warrants and for certain periods, convertible preferred stock. Net loss
available to common shareholders includes net loss and preferred stock
accretion. As we had a net loss available to common shareholders in each of the
periods presented, basic and diluted net loss per common share are the same. All
outstanding warrants, stock options, and convertible preferred stock to acquire
common shares were excluded from the computation of diluted earnings per share
at March 31, 2000 and March 31, 1999 because the effect was anti-dilutive.

Potential common shares consisted of options and warrants to purchase 4,263,385
and 3,240,375, and preferred stock convertible into zero and 6,175,244 common
shares at March 31, 2000 and 1999, respectively.

NOTE 5.   COMPREHENSIVE LOSS

The following table reconciles net loss as reported to total comprehensive loss
for the three months ended March 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                     Three Months Ended
                                          March 31,
                                     ------------------
                                       2000      1999
                                     -------   --------
                                       (In thousands)
<S>                                  <C>       <C>
Net loss                             $(5,492)  $(4,030)
Other comprehensive income:
    Unrealized currency loss              (6)       (4)
    Unrealized loss on securities
      available-for-sale                 (62)       --
                                     -------   -------
Total comprehensive loss             $(5,560)  $(4,034)
                                     =======   =======
</TABLE>

NOTE 6.   BUSINESS SEGMENT INFORMATION

Primus and our subsidiaries are principally engaged in the design, development,
marketing and support of our eService family of eProducts: eSupport, eSales and
eMarketing. Substantially all revenues result from the licensing of our software
products and related consulting and customer support (maintenance) services.
Our chief operating decision-maker reviews financial information presented on a
consolidated basis, accompanied by disaggregated revenue information.

The majority of our revenues are derived from customers in the United States.
Our international sales are principally in Europe and Japan. The following
geographic information is presented for quarters ended March 31, 2000 and 1999:

                                 Page 9 of 27
<PAGE>

<TABLE>
<CAPTION>
                                                                 Three Months Ended March 31,
                                                           ---------------------------------------
                                                                        2000                  1999
                                                           -----------------      ----------------
                                                                        (In thousands)
<S>                                                          <C>                    <C>
     United States                                                   $ 8,703                $3,157
     International                                                     1,755                 1,421
                                                           -----------------      ----------------
        Total revenues                                               $10,458                $4,578
                                                           =================      ================
</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, but not limited to, those identified in the section of
this Form 10-Q entitled "Factors That May Affect Results Of Operations and
Financial Condition," which may cause actual results to differ materially from
those discussed in such forward-looking statements.  When used in this document,
the words "believes," "expects," "anticipates," "intends," "plans" and similar
expressions, are intended to identify certain of these forward-looking
statements.  However, these words are not the exclusive means of identifying
such statements.  In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements.  The cautionary statements made in this document
should be read as being applicable to all related forward-looking statements
wherever they appear in this document.  Factors that could cause or contribute
to such differences include those discussed below, as well as those discussed in
our Annual Report on Form 10-K, a copy of which is on file at the Securities and
Exchange Commission.  We undertake no obligation to release publicly the results
of any revision to these forward-looking statements that may be made to reflect
events or circumstances occurring subsequent to the filing of this Form 10-Q
with the SEC.  Readers are urged to review and carefully consider the various
disclosures made by us in this report and in our other reports filed with the
SEC that attempt to advise interested parties of the risk and factors that may
affect our business.

OVERVIEW

We are a leading provider of eCRM software that enables companies to maximize
the value of customer interactions across multiple communication channels and
business processes thereby enhancing customer relationships. Our solution
addresses the unique challenges faced by companies implementing an e-business
strategy. Our product suite is designed to be a comprehensive software solution
that enables companies to effectively manage all major points of customer
contact, from marketing to sales to customer support, and create value for both
Primus and the customer with every interaction. Our software solutions can be
deployed as a suite or as individual products, depending on our preference
and/or immediate need.

To remain competitive in today's business environment, companies are
implementing e-business initiatives to enable them to interact with their
customers using both traditional and e-business communication channels,
including the Internet, in a way that will maximize the value of each customer
interaction. More specifically, these initiatives allow companies to market
their products, transact sales, manage customer service, and interact and
communicate with customers, partners and suppliers using the Internet and other
electronic means. Ultimately, each customer interaction must be maximized for
purposes of customer retention, cross-sell and up-sell opportunities, and
customer satisfaction to enhance customer relationships.

RECENT DEVELOPMENTS

In April 2000, we announced the release of our latest product, Primus eServer
4.0.  This is a significant upgrade to our software suite that provides
enhancements to our solution offerings in the areas of security, customization
and database support.  The Primus eServer product supports the relational
database systems by Oracle and Microsoft SQL Server.

                                 Page 11 of 27
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE  MONTHS ENDED MARCH 31, 2000 AND 1999

     The following table sets forth certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated.  The operating results for the three months ended March 31,
2000 and 1999 are not necessarily indicative of the results that may be expected
for any future period.

<TABLE>
<CAPTION>
                               Three Months Ended March 31,
                               ----------------------------
                                 2000                1999
                               --------            --------
<S>                            <C>                 <C>
Revenues:
 License                         68.7%              71.2%
 Services                        31.3               28.8
                               ------             ------
 Total revenues                 100.0              100.0
                               ------             ------
Cost of revenues:
 License                          3.1                3.5
 Services                        24.9               29.2
                               ------             ------
 Total cost of revenues          28.0               32.7
                               ------             ------
Gross profit                     72.0               67.3
                               ------             ------
Operating expenses:
 Sales and marketing             65.3               81.4
 Research and development        38.4               45.1
 General and administrative      22.0               28.8
 Merger related costs             4.8                 --
                               ------             ------
 Total operating expenses       130.5              155.3
                               ------             ------
Loss from operations            (58.5)             (88.0)
Other income                      7.5                 .7
Other expense                    (1.3)               (.1)
                               ------             ------
Loss before income taxes        (52.3)             (87.4)
Income tax expense                 .3                 .6
                               ------             ------
Net loss                       (52.6)%             (88.0)%
                               ======             ======
</TABLE>

Revenues

We derive our revenue from the sale of software licenses and related services
including support and maintenance contracts.  Revenue was approximately $10.5
million and $4.6 million for the three months ended March 31, 2000 and 1999,
respectively, representing an increase in the first quarter of 2000 of
approximately $5.9 million, or 128%, over the comparable quarter of the prior
year.

License Revenue. License revenue was approximately $7.2 million and $3.3 million
for the three months ended March 31, 2000 and 1999, respectively, representing
an increase in the first quarter of 2000 of approximately $3.9 million, or 120%,
over the comparable quarter of the prior year.  The increase was due to
increased sales of our eCRM products and increases in both the size and
productivity of our sales force.  International license revenues were
approximately $1.4 million and $1.2 million for the three months ended March 31,
2000 and 1999, respectively.  Sales personnel totaled 72 and 59 as of March 31,
2000 and 1999, respectively.

Services Revenue. Services revenue was approximately $3.3 million and $1.3
million for the three months ended March 31, 2000 and 1999, respectively,
representing an increase in the first quarter of 2000 of approximately $2.0
million, or 149%, over the comparable quarter of the prior year. Maintenance and
support contract revenues

                                 Page 12 of 27
<PAGE>

increased approximately $1.1 million in the first quarter of 2000 over the
comparable quarter of the prior year. Consulting fees increased approximately
$891,000 in the first quarter of 2000 over the comparable quarter of the prior
year.

Services revenue represented 31.3% and 28.8% of our total revenue for the three
months ended March 31, 2000 and March 31, 1999, respectively.  We expect the
proportion of services revenue to total revenue to fluctuate in the future,
depending in part on our customers' use of third-party consulting and
implementation services providers.

Cost of Revenue

Cost of License Revenue. Cost of license revenue includes royalties and fees
paid to third parties under license arrangements and costs related to media and
duplication of our products and manuals. Cost of license revenue was
approximately $323,000 and $160,000 for the three months ended March 31, 2000
and 1999, respectively.  Cost of license revenue as a percentage of license
revenue was 4.5% and 4.9% for the three months ended March 31, 2000 and 1999,
respectively.  We anticipate that our cost of license revenue will continue to
fluctuate in absolute dollars and as a percent of license revenue, which has
varied in the past due to the expected increase in the volume of software
product sales and the type of royalty agreements in place at the time.

Cost of Services Revenue. Cost of services revenue includes personnel and other
costs related to professional services and customer support.  Cost of services
revenue was approximately $2.6 million and $1.3 million for the three months
ended March 31, 2000 and 1999, respectively.   While cost of services revenue
increased approximately $1.3 million, or 95%, for the three months ended March
31, 2000 compared to the same period in 1999, cost of services as a percentage
of service revenues decreased from 101% to 80% for the same period. The decrease
in cost of services revenue as a percentage of services revenue was primarily
due to higher utilization of consulting-services personnel and growth of
maintenance revenue.  Professional services and customer support personnel
totaled 61 and 45 for the three months ended March 31, 2000 and 1999,
respectively.

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 approximately $6.8
million and $3.7 million for the three months ended March 31, 2000 and 1999,
respectively. Sales and marketing expenses increased approximately $3.1 million,
or 83% for the three months ended March 31, 2000 as compared to the three months
ended March 31, 1999.  This increase is primarily due to the continued growth in
the number of our sales and marketing personnel as well as an increase in
commissions as a result of revenue growth. Sales and marketing employees totaled
89 and 76 for the three months ended March 31, 2000 and 1999, respectively.
Sales and marketing expenses as a percentage of total revenue was 65.3% and
81.4% for the three months ended March 31, 2000 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 revenue.

Research and Development. Research and development expenses consist primarily of
salaries and benefits for software developers, program managers and quality
assurance personnel and payments to outside contractors.  Research and
development expenses were approximately $4.0 million and $2.1 million for the
three months ended March 31, 2000 and 1999, respectively.  Research and
development expenses increased approximately $1.9 million, or 94%, for the three
months ended March 31, 2000 compared to the three months ended March 31, 1999.
The increase was primarily due to 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

                                 Page 13 of 27
<PAGE>

compensation levels for development and quality-assurance personnel. Research
and development personnel totaled 99 and 73 for the three months ended March 31,
2000 and 1999, respectively. Research and development expenses as a percentage
of total revenue was 38.4% and 45.1% for the three months ending March 31, 2000
and March 31, 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 eCRM software and to develop additional
applications. 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.
As such, we expect research and development costs as a percentage of total
revenue to fluctuate. In the development of our new products and enhancements of
existing products, the technological feasibility of our software was not
established until substantially all product development was complete.
Accordingly, software development costs eligible for capitalization were
insignificant, and all costs related to internal research and development have
been expensed as incurred.

General and Administrative.  General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative and information services personnel. General and administrative
expenses were approximately $2.3 million and $1.3 million for the three months
ended March 31, 2000 and 1999, respectively.  General and administrative
expenses increased approximately $980,000, or 74%, for the three months ended
March 31, 2000 compared to the three months ended March 31, 1999.  The increase
in general and administrative expenses was primarily the result of our hiring
additional executive, finance, and administrative personnel to support the
growth of our business during these periods as well as an increase in legal and
professional fees associated with becoming a public company. General and
administrative employees totaled 33 and 28 for the three months ended March 31,
2000 and 1999.   General and administrative expenses as a percentage of total
revenue were 22.0% and 28.8% for the three months ended March 31, 2000 and 1999,
respectively.  The fluctuation of general and administrative expense as a
percentage of total revenue reflects the building of our infrastructure during
these periods.  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 being a public company,
including, but not limited to, annual and other public-reporting costs,
directors' and officers' liability insurance, investor-relations programs and
professional-services fees.

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

Other Income, Net. Other income (expense) was $655,000 and $27,000 for the three
months ended March 31, 2000 and 1999, respectively. The variances from period to
period were due to fluctuations in the average combined cash and cash
equivalents and short-term investment balances. We expect to continue to yield
investment income on our average balance of combined cash and cash equivalents
and short-term and long-term investments at an average rate comparable to that
experienced in 1999 and the first quarter of 2000.

Income Taxes. We have not recorded income tax benefits related to the net
operating losses in 1999 and the first quarter of 2000 as a result of the
uncertainties regarding the realization of the net operating losses.  Tax
expense recorded in both the first quarter of 2000 and 1999 primarily relates to
tax expense from our foreign operations.

Liquidity and Capital Resources

As of March 31, 2000, we had cash and cash equivalents of approximately $14.7
million, a decrease from $17.6 million of cash and cash equivalents held as of
December 31, 1999.  As of March 31, 2000, we had short-term investments of
approximately $31.5 million, representing a decrease of approximately $5.6
million from investments held as of December 31, 1999.  As of March 31, 2000,
our working capital was approximately $40.2 million compared to approximately
$44.5 million at December 31, 1999.

Our accounts receivable was approximately $9.1 million and $8.5 million as of
March 31, 2000 and December

                                 Page 14 of 27
<PAGE>

31, 1999, respectively, representing an increase of approximately $600,000, or
7.2%. This increase was principally a result of an increase in revenues during
the recent quarter, offset in part by cash collections during the three months
ended March 31, 2000. Days' sales outstanding ("DSO") in accounts receivable was
78 days and 85 days as of March 31, 2000 and December 31, 1999, respectively. We
expect that DSO will fluctuate significantly in future quarters.

Our total liabilities were approximately $18.1 million as of March 31, 2000 and
$28.7 million as of December 31, 1999, including our redeemable preferred stock,
representing a decrease of $10.6 million, or 37%.  This decrease was principally
the result of the conversion of approximately $9.1 million in redeemable
convertible preferred stock to common stock in connection with the merger of
2order.com in the first quarter of 2000.

Our operating activities resulted in net cash outflows of approximately $7.9
million for the three months ended March 31, 2000.  Adjustments to the $5.5
million net loss to reconcile to cash used in operating activities includes
approximately $1.1 million for depreciation and amortization, approximately $2.1
million related to the transfer of an accounts receivable balance to a note
receivable and approximately $900,000 for the decrease in deferred revenue.  Net
cash used in operating activities was approximately $4.2 million for the three
months ended March 31, 1999.

Investing activities provided cash of approximately $4.0 million for the three
months ended March 31, 2000.  Investing activities for this period consisted
primarily of approximately $10.6 million in proceeds from the maturity of short-
term investments offset by approximately $5.1 million in purchases of short-term
investments.  Further activities included the purchase of approximately $1.5
million in capital equipment. Net cash provided by investing activities was
approximately $840,000 for the three months ended March 31, 1999.

Financing activities provided cash of approximately $1.1 million for the three
months ended March 31, 2000.  Financing activities for this period included
approximately $1.5 million in proceeds from the exercise of stock options and
warrants offset by approximately $379,000 in repayments of debt obligations.
Net cash provided by financing activities was approximately $3.1 million for the
three months ended March 31, 1999.

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 services capabilities

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

                                 Page 15 of 27
<PAGE>

Recently Issued Accounting Pronouncements

In March 2000 the SEC issued Staff Accounting Bulletin No. 101A (SAB 101A).  SAB
101A delays the effective date of Staff Accounting Bulletin No. 101 (SAB 101)
"Revenue Recognition in Financial Statements," to the second quarter for fiscal
years beginning between December 15, 1999 and March 16, 2000.  SAB 101 provides
guidance on revenue recognition and the SEC staff's views on the application of
accounting principles to selected revenue recognition issues.  We will adopt the
provisions of SAB 101 in the second quarter of 2000 and anticipate that such
adoptions will not have a material impact on our consolidated financial
statements.

In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25.  Interpretation No. 44
clarifies the application of APB Opinion 25, Accounting for Stock Issued to
Employees, for issues, among others, regarding; (a) the definition of employees,
(b) defining non-compensatory plans, (c) modifications to previously fixed stock
option awards, and (d) accounting for an exchange of stock compensation awards
in a business combination.  We will adopt Interpretation No. 44 in the third
quarter of 2000 and do not expect the adoption of the Interpretation to have a
material impact on the consolidated financial statements.

Factors Affecting Our Future Operating Results

  You should carefully consider the risks and uncertainties described below and
the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we currently
deem immaterial also may impair our business. If any of the following risks
actually occur, our business, financial condition and operating results could be
materially adversely affected and the trading price of our common stock could
decline.

 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 March 31, 2000,
we had an accumulated deficit of $59.9 million. We expect to continue to devote
substantial resources to expand our product development, sales and marketing and
our customer support and professional service groups. As a result, we will need
to generate significant revenues to achieve and maintain profitability. We may
not be profitable in any future period.

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

  Our license revenues have fluctuated substantially from quarter to quarter in
the past and are likely to continue to fluctuate substantially in the future. In
addition, the fiscal or quarterly budget cycles of our users 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 revenues in each
quarter from a small number of relatively large orders. Our operating results
for a particular fiscal quarter could be materially adversely affected

                                 Page 16 of 27
<PAGE>

if we are unable to complete one or more substantial license sales or
implementations planned for that quarter.

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

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

     .  whether we are providing implementation services

     .  whether implementation is delayed or takes longer than expected

     .  variability in the mix of new and existing customers

  Where we are implementing the software, we will account for the agreement as
an item of deferred revenue and will recognize the 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 30 to 45 days, an improvement from prior years
when installations took 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.


 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.
Because revenue recognized in a given quarter may be primarily associated with
new business in prior quarters, revenue in the first quarter may be higher than
revenue recognized in the previous fourth quarter.

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

  We released our first eCRM product in August 1996.  Accordingly, the basis
upon which you can evaluate our prospects in general, and market acceptance of
our products in particular, is limited. For our business to succeed, the market
for eCRM software will have to grow significantly, and we will have to achieve
broad market acceptance of our products.

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

  We are broadening our current product suite to integrate with various aspects
of e-business solutions. These products address a new and emerging market for e-
business sales and marketing solutions. The failure of this market to develop,
or a delay in the development of this market, would seriously harm our business.
The success of e-business sales and marketing solutions depends substantially
upon the continued growth and the widespread adoption of the Internet as a
primary medium for commerce and business applications. The Internet
infrastructure

                                 Page 17 of 27
<PAGE>

may not be able to support the demands placed on it by the continued growth upon
which our success depends. Moreover, reliability, cost, accessibility, security
and quality of service remain unresolved and may negatively affect the growth of
Internet use or the attractiveness of commerce and business communication over
the Internet.

 We rely on sales of only one product family.

  Product license revenues and related services from our Primus eServer and
Primus eSupport products accounted for over 90% of our total revenues through
March 31, 2000, and we expect these products to continue to account for a
substantial portion of our revenues for the remainder of 2000. As a result,
factors adversely affecting the demand for these products and our eCRM products
in general, such as competition, pricing or technological change, could
materially adversely affect our business, financial condition and operating
results. Our future financial performance will substantially depend on our
ability to sell current versions of our entire suite of eCRM products and our
ability to develop and sell enhanced versions of our eCRM products.

 Factors outside our control may make our products less useful.

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

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

  The market for our products is new and rapidly evolving, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our suite of products competes
against various vendor software tools designed to address a specific or elements
of the complete set of eCRM processes, including Internet communications,
esupport, esales and emarketing. We also face competition from in-house designed
products and third-party custom development efforts.

  In addition, companies providing e-commerce and traditional customer
relationship management solutions that may compete with us include Broadvision,
Clarify, Oracle, Peoplesoft, Siebel and Vignette.

  The principal competitive factors in our industry include:

<TABLE>
<S>                                                        <C>
 .  vendor and product reputation                           .  product ease-of-use

 .  customer referenceability                               .  the quality of customer support services,
                                                              documentation and training

 .  measurable economic return                              .  the quality, speed and effectiveness of
                                                              application development services
</TABLE>

                                 Page 18 of 27
<PAGE>

<TABLE>
<S>                                                        <C>
 .  product quality, performance and price                  .  the effectiveness of sales and marketing efforts

 .  breadth of product functionality and features           .  product integration with other enterprise
                                                              applications

 .  product scalability

 .  the availability of products on the Internet and
   multiple operating platforms
</TABLE>

  As the market for eCRM 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.

 If we do not integrate Imparto's and 2order.com's technology quickly and
 effectively, many of the potential benefits of these acquisitions may not be
 realized.

  We intend to integrate Imparto's and 2order.com's technology into our own
products. We cannot assure you that we will be able to integrate Imparto's and
2order.com's technology quickly and effectively. In order to obtain the benefits
of these acquisitions, we must make Imparto's and 2order.com's technology,
products and services operate together with our technology, products and
services. We may be required to spend additional time or money on integration
which would otherwise be spent on developing our business and services or other
matters. If we do not integrate these technologies effectively or if management
and technical staff spend too much time on integration issues, it could harm our
business, financial condition and results of operations. In addition, the
success of these acquisitions will also depend on our ability to successfully
integrate and manage the acquired operations and retain or replace the key
employees of the companies we acquired.

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

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

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

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

                                 Page 19 of 27
<PAGE>

 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 customer
support and professional services personnel may be unable to meet the demand for
implementation services. In that case, if we were unable to retain or hire
highly trained consulting personnel or establish relationships with third-party
systems-integrators and consultants to implement our products, we would be
unable to meet customer demands for implementation and educational services
related to our products.

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

  Qualified technical personnel are in great demand throughout the software
industry. The demand for qualified technical personnel is particularly acute in
the Pacific Northwest, due to the large number of software companies and the low
unemployment in the region. Our success depends in large part upon our continued
ability to attract and retain highly skilled technical employees, particularly
software architects and engineers. Our failure to attract and retain the highly-
trained technical personnel that are integral to our direct sales, product
development and customer support teams may limit the rate at which we can
generate sales and develop new products or product enhancements. This could have
a material adverse effect on our business, financial condition and operating
results.

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

 Acquisitions could disrupt our business and harm our financial condition.

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

     .  issue equity securities, which would dilute current shareholders'
        percentage ownership

     .  assume contingent liabilities

     .  incur a one-time charge

     .  amortize goodwill and other intangible assets

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

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

  In the last year we added three new members to our senior management team,
none of whom worked together prior to joining Primus. Our success depends on the
performance of our senior management and their

                                 Page 20 of 27
<PAGE>

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 international operations are subject to additional risks.

  Revenues from customers outside the United States represented approximately
$1.8 million in the 3 months ended March 31, 2000, or 17% of our total revenue
for the same period. We currently customize our products for the Japanese
market. In the future, we plan to develop additional localized versions of our
products. Localization of our products will create additional costs and would
cause delays in new product introductions. In addition, our international
operations will continue to be subject to a number of other risks, including:

     .  costs of customizing products for foreign countries

     .  laws and business practices favoring local competition

     .  compliance with multiple, conflicting and changing laws and regulations

     .  longer sales cycles

     .  greater difficulty or delay in accounts receivable collection

     .  import and export restrictions and tariffs

     .  difficulties in staffing and managing foreign operations

     .  political and economic instability

  Our international operations also face foreign-currency-related risks. To
date, substantially all of our revenues have been denominated in U.S. dollars,
but we believe that in the future, an increasing portion of our revenues will be
denominated in foreign currencies, including the Euro. 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.

 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.

                                 Page 21 of 27
<PAGE>

  Our ability to compete successfully also depends on the continued
compatibility and interoperability of our products with products and systems
sold by various third parties, including traditional CRM software sold by
Clarify, Onyx, Remedy, Siebel and Peoplesoft. Currently, these vendors have open
applications program interfaces, which facilitate our ability to integrate with
their systems. If any one of them should close their programs' interface or if
they should acquire one of our competitors, our ability to provide a close
integration of our products could become more difficult and could delay or
prevent our products' integration with future systems.

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

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

     .  in response to quarterly variations in operating results

     .  in response to announcements of technological innovations or new
        products by us or our competitors

     .  because of market conditions in the enterprise software industry

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

     .  in response to our announcements of significant acquisitions, strategic
        relationships or joint ventures

     .  in response to sales of our common stock

 Our efforts to protect our proprietary rights may be inadequate.

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

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

                                 Page 22 of 27
<PAGE>

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

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

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

     .  election of directors

     .  certain amendments to our articles of incorporation

     .  merger or consolidation

     .  sale of all or substantially all our assets

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

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

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

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

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

                                 Page 23 of 27
<PAGE>

stock and the voting and other rights of the holders of common stock.

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

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

     .  termination of 5% or more of the employees of the target corporation

     .  allowing the acquiring person to receive any disproportionate benefit as
        a shareholder

  A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of Primus.

  The foregoing provisions of our charter documents and Washington law could
have the effect of making it more difficult or more expensive for a third party
to acquire, or could discourage a third party from attempting to acquire Primus.
These provisions may therefore have the effect of limiting the price that
investors might be willing to pay in the future of our common stock.

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

  In October 1997, the American Institute of Certified Public Accountants issued
its Statement of Position 97-2, "Software Revenue Recognition," and later
amended its position by its Statement of Position 98-4. We adopted Statement of
Position 97-2 effective January 1, 1998. 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 and the SEC
issued SAB No. 101 "Revenue Recognition in Financial Statements", which is
effective after June 15, 2000. 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 SEC and the FASB, have been reviewing the accounting standards
related to stock-based compensation and in March 2000 the FASB issued Financial
Accounting Standard Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation", an interpretation of APB Opinion No. 25.  This
interpretation is effective July 1, 2000.  We do not believe the implementation
of Interpretation No. 44 will have an effect on our employee stock-based
compensation transactions entered into already, however, the impact on future
employee stock based awards may have a significant adverse impact on us.

  Any changes to these standards or any other accounting standards could
materially adversely affect our business, financial condition and operating
results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                 Page 24 of 27
<PAGE>

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

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

During the three months ended March 31, 2000, the effects of changes in interest
rates on the fair market value of our marketable investment securities and our
earnings were insignificant. At March 31, 2000, our investment portfolio
included approximately $4.5 million in variable rate investments, primarily all
of which are due during 2000. Fixed rate investments at March 31, 2000 of
approximately $27.0 million had a weighted average interest rate of 6.29% and
are primarily due in 2000. We believe that the impact on the fair market value
of our securities and our earnings for the remainder of 2000 from a hypothetical
10% increase in interest rates would be insignificant.

Foreign Currency Exchange Risk. We develop products in the United States and
sell them in North America, Asia and Europe. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. Since our sales are 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
have one foreign subsidiary whose expenses are incurred in its local currency.
As exchange rates vary, its expenses, when translated, may vary from
expectations and adversely impact overall expected profitability.  Our operating
results have not been significantly affected by exchange rate fluctuations in
1999. If, in 2000, the US dollar uniformly decreases in strength by 10% relative
to the currency of our foreign sales subsidiary, our operating results for the
remainder of 2000 would likely not be significantly effected.

PART II -- OTHER INFORMATION

Item 2.  Change in Securities and Use of Proceeds

(c)  Recent Sales of Unregistered Securities

During the period covered by this report on Form 10-Q, we issued and sold
unregistered securities as follows:

     On January 7, 2000, we issued 1,000 shares of our common stock, valued at
$3.00 per share, pursuant to an exercise of a warrant.

     On January 7, 2000, we issued 5,000 shares of our common stock, valued at
$9.00 per share, pursuant to an exercise of a warrant.

     On January 21, 2000, we issued an aggregate of 1,506,127 shares of our
common stock for all of the issued and outstanding capital stock of 2order.com.
In addition, options and warrants to acquire capital stock of 2order.com were
converted into options and warrants to acquire 150,378 shares of our common
stock.

     On March 6, 2000, we issued a total of 2,040 shares of our common stock,
valued at $13.03 per share, pursuant to exercises of warrants.

                                 Page 25 of 27

<PAGE>

     The sales and issuances of these shares were exempt from registration under
the Securities Act pursuant to Rule 701 promulgated thereunder on the basis that
these options and warrants were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to written contracts relating to
consideration, as provided by Rule 701, or pursuant to Section 4(2) of the
Securities Act on the basis that the transactions did not involve a public
offering.

(d)  Use of Proceeds


  On June 30, 1999, the SEC declared effective our Registration Statement on
Form S-1 (Registration No. 333-77477) as filed with the SEC in connection with
our Initial Public Offering. 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 $1.0 million in other expenses were $46.2 million.

  We are using the net proceeds raised in the initial public offering for
additional working capital, repayment of short-term indebtedness, and general
corporate purposes, including increased domestic and international sales and
marketing expenditures, increased research and development expenditures and
capital expenditures made in the ordinary course of business. Pending such uses,
the net proceeds will be invested in investment-grade, interest-bearing
instruments, the majority of which are short-term.

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits

     10.17     Amended and Restated Software Marketing and Distribution
               Agreement, dated March 31, 2000, by and between registrant and
               Primus Knowledge Solutions KK.

     10.18     Lease Amendment II, dated February 11, 2000, by and between the
               registrant and Westlake Center Associates Limited Partnership.

     27.1      Financial Data Schedule.

(b)  Reports on Form 8-K.

     We filed the following reports on Form 8-K during the quarter covered by
     this Form 10-Q:

     On January 21, 2000, we filed a Form 8-K reporting the engagement of KPMG
     LLP as our certified public accountants.

     On February 4, 2000, we filed a Form 8-K reporting the acquisition of
     2order.com, Inc.

     On February 24, 2000, we filed a Form 8-K/A, amending a current report that
     we filed on February 4, 2000, reporting certain financial information
     pursuant to Item 7.


SIGNATURES

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

                                       PRIMUS KNOWLEDGE SOLUTIONS, INC.

Date:  May 11, 2000                    By: /s/ Elizabeth J. Huebner
                                           -------------------------------------
                                       Elizabeth J. Huebner
                                       Executive Vice President, Chief Financial
                                       Officer, Secretary and Treasurer
                                       (Principal financial and chief accounting
                                       officer)

                                 Page 26 of 27
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.   Description
-----------   -----------------
<C>           <S>
    10.17     Amended and Restated Software Marketing and Distribution
              Agreement, dated March 31, 2000, by and between registrant and
              Primus Knowledge Solutions KK.

    10.18     Lease Amendment II, dated February 11, 2000, by and between the
              registrant and Westlake Center Associates Limited Partnership.

    27.1      Financial Data Schedule.
</TABLE>

                                 Page 27 of 27