<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, 2001       COMMISSION FILE NUMBER: 000-26273



                        PRIMUS KNOWLEDGE SOLUTIONS, INC.

             (Exact name of Registrant as specified in its charter)

           WASHINGTON                                   91-1350484

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

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

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

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

                                 Yes [X] No [ ]

     As of November 9, 2001 there were 18,895,706 shares of the Registrant's
Common Stock outstanding.

<PAGE>

                        Primus Knowledge Solutions, Inc.
                                    Form 10-Q
                               September 30, 2001

                                      INDEX
<TABLE>
<CAPTION>

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

          .    Condensed Consolidated Balance Sheets as of September
               30, 2001 and December 31, 2000 .............................   3

          .    Condensed Consolidated Statements of Operations for the
               three and nine months ended September 30, 2001 and 2000 ....   4

          .    Condensed Consolidated Statements of Shareholders' Equity
               for the three months ended March 31, 2001, June 30, 2001
               and September 30, 2001 .....................................   5

          .    Condensed Consolidated Statements of Cash Flows for the nine
               months ended September 30, 2001 and 2000 ...................   6

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

ITEM 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations .......................................  13

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk ......  28


PART II. OTHER INFORMATION

ITEM 1.   Legal Proceedings ...............................................  29

ITEM 2.   Change in Securities ............................................  29

ITEM 6.   Exhibits and Reports on Form 8-K ................................  29
</TABLE>


                                  Page 2 of 29

<PAGE>

PART I.   FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>

                                                            September 30, 2001        December 31, 2000
                                                            ------------------        -----------------
<S>                                                         <C>                       <C>

                                         ASSETS

Current assets:
     Cash, cash equivalents and short-term investments          $  23,076                 $  39,959
     Accounts receivable, net, including related party
       amounts of $413 and $862 at September 30, 2001 and
       December 31, 2000, respectively                              6,231                    10,745
     Prepaid expenses and other current assets                      1,076                       785
                                                                ---------                 ---------

              Total current assets                                 30,383                    51,489

Property and equipment, net                                         5,832                     5,090
Goodwill                                                            2,517                       --
Note receivable from related party                                    750                       --
Other assets                                                          241                       359
                                                                ---------                 ---------

              Total assets                                      $  39,723                 $  56,938
                                                                =========                 =========

                          LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                           $   2,460                 $   4,071
     Accrued and other liabilities                                  1,560                     2,224
     Compensation-related accruals                                  1,319                     3,245
     Deferred revenue, including related party amounts
       of $531 and $401 at September 30, 2001 and December
       31, 2000, respectively                                       6,816                     7,551
                                                                ---------                 ---------

              Total current liabilities                            12,155                    17,091
                                                                ---------                 ---------

Shareholders' equity:
     Common stock                                                     473                       452
     Additional paid-in-capital                                   110,141                   106,876
     Deferred stock-based compensation                                --                        (54)
     Accumulated other comprehensive income (loss)                     21                       (44)
     Accumulated deficit                                          (83,067)                  (67,383)
                                                                ---------                 ---------
              Total shareholders' equity                           27,568                    39,847
                                                                ---------                 ---------

              Total liabilities and shareholders' equity        $  39,723                 $  56,938
                                                                =========                 =========
</TABLE>

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

                                  Page 3 of 29

<PAGE>

CONDENSED 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,
                                                    --------------------------------       -------------------------------
                                                        2001               2000                 2001               2000
                                                    ------------       -------------       -------------       -----------
<S>                                                <C>                 <C>                 <C>                 <C>
Revenues:
     License:
         Third party                                         730              6,045               7,536             21,789
         Related party-Primus KK                             280                209               1,817              1,554
                                                    ------------        -----------         -----------        -----------
                                                    $      1,010        $     6,254         $     9,353        $    23,343
     Services:
         Third party                                       3,524              3,781              11,210             10,076
         Related party-Primus KK                             196                 99                 762                234
                                                    ------------        -----------         -----------        -----------
                                                           3,720              3,880              11,972             10,310
                                                    ------------        -----------         -----------        -----------

         Total revenues                                    4,730             10,134              21,325             33,653
                                                    ------------        -----------         -----------        -----------

Cost of revenues:
     License                                                  53                212                 255                865
     Services                                              1,591              2,414               6,183              7,461
                                                    ------------        -----------         -----------        -----------

         Total cost of revenues                            1,644              2,626               6,438              8,326
                                                    ------------        -----------         -----------        -----------

                Gross profit                               3,086              7,508              14,887             25,327

Operating expenses:
     Sales and marketing                                   4,863              6,350              16,102             20,112
     Research and development                              3,742              3,704              10,040             11,432
     General and administrative                            1,840              1,862               5,387              6,876
     Amortization of goodwill                                235                --                  314                --
     Merger related costs                                    --                 --                  --                 505
                                                    ------------       ------------        ------------       ------------

         Total operating expenses                         10,680             11,916              31,843             38,925
                                                    ------------       ------------        ------------       ------------

                Loss from operations                      (7,594)            (4,408)            (16,956)           (13,598)
Other income                                                 242                674               1,185              2,153
Other expense                                               (107)               --                 (135)              (114)
                                                    ------------       ------------        ------------       ------------
         Loss before income taxes and
           extraordinary item                             (7,459)            (3,734)            (15,906)           (11,559)
Income tax expense                                            75                 39                 344                121
                                                    ------------       ------------        ------------       ------------

         Net loss before extraordinary item               (7,534)            (3,773)            (16,250)           (11,680)

         Extraordinary gain on disposal of assets            566                --                  566                --
                                                    ------------       ------------        ------------       ------------
                Net loss                                  (6,968)            (3,773)            (15,684)           (11,680)
Preferred stock accretion                                    --                 --                  --                 (43)
                                                    ------------       ------------        ------------       ------------
         Net loss available to common
           shareholders                             $     (6,968)      $     (3,773)       $    (15,684)      $    (11,723)
                                                    ============       ============        ============       ============
Basic and diluted net loss per common share:

         Net loss before extraordinary item         $      (0.40)      $      (0.21)       $      (0.88)      $      (0.67)
         Extraordinary gain on disposal of assets           0.03                --                 0.03                --
                                                    ------------       ------------        ------------       ------------
                                                    $      (0.37)      $      (0.21)       $      (0.85)      $      (0.67)
                                                    ============       ============        ============       ============
Shares used in computing basic and diluted
  net loss per common share                           18,893,353         17,895,590          18,439,226         17,605,953
                                                    ============       ============        ============       ============
</TABLE>

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


                                  Page 4 of 29

<PAGE>

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
                                                                                            Accumulated
                                                                 Additional    Deferred        other                       Total
                                                                   paid-in   stock-based   comprehensive  Accumulated  shareholders'
                                              Common stock         capital   compensation  (loss) income    deficit       equity
                                              ------------       ----------  ------------  -------------  -----------  -------------
                                          Shares      Par value
                                        ----------    ---------
<S>                                      <C>          <C>        <C>          <C>            <C>          <C>            <C>
Balance at December 31, 2000........... 18,045,376     $   452   $  106,876    $    (54)      $    (44)   $  (67,383)    $  39,847

Exercise of stock options and warrants.     48,183           1          143         --             --            --            144
Amortization of deferred stock-based
  compensation.........................        --          --           --            8            --            --              8
Comprehensive loss:
  Foreign currency translation loss....        --          --           --          --             (34)          --            --
  Unrealized gain on short-term
    investments........................        --          --           --          --              29           --            --
  Net loss.............................        --          --           --          --             --         (3,279)
                                                                                              --------     ---------
        Total comprehensive loss.......        --          --           --          --              (5)       (3,279)       (3,284)
                                        ------------------------------------------------------------------------------------------
Balance at March 31, 2001.............. 18,093,559     $   453   $  107,019    $    (46)      $    (49)    $ (70,662)    $  36,715
                                        ------------------------------------------------------------------------------------------
Exercise of stock options and warrants.      2,461         --             7         --             --            --              7
Amortization of deferred stock-based
  compensation.........................        --          --           --            7            --            --              7
Stock issued for acquisition of
  AnswerLogic..........................    750,000          19        2,936         --             --            --          2,955
Stock issued for employee stock
  purchase plan........................     43,545           1          201         --             --            --            202

Comprehensive loss:
  Foreign currency translation loss....        --          --           --          --              (7)          --            --
  Unrealized loss on short-term
    investments........................        --          --           --          --             (10)          --            --
  Net loss.............................        --          --           --          --             --         (5,437)
                                                                                             ---------     ---------
        Total comprehensive loss.......        --          --           --          --             (17)       (5,437)       (5,454)
                                        ------------------------------------------------------------------------------------------
Balance at June 30, 2001............... 18,889,565     $   473    $ 110,163    $    (39)     $     (66)    $ (76,099)    $  34,432
                                        ------------------------------------------------------------------------------------------
Exercise of stock options and warrants.      4,299         --            11         --             --            --             11
Amortization of deferred stock-based
  compensation.........................        --          --           --            6            --            --              6
Forfeiture of non-vested deferred
  stock based compensation.............        --          --           (33)         33            --            --            --
Comprehensive loss:
  Foreign currency translation gain....        --          --           --          --              35           --            --
  Unrealized gain on short-term
    investments........................        --          --           --          --              52           --            --
  Net loss.............................        --          --           --          --             --         (6,968)
                                                                                             ---------     ---------
Total comprehensive loss...............        --          --           --          --              87        (6,968)       (6,881)
                                        ------------------------------------------------------------------------------------------
Balance at September 30, 2001.......... 18,893,864     $   473    $ 110,141    $    --       $      21     $ (83,067)    $  27,568
                                        ==========================================================================================
</TABLE>

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


                                  Page 5 of 29

<PAGE>

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>

                                                                        Nine Months Ended September 30,
                                                                        -------------------------------
                                                                          2001                   2000
                                                                        --------              ---------
<S>                                                                     <C>                   <C>
Cash flows from operating activities:

     Net loss                                                           $(15,684)             $ (11,680)
          Adjustments to reconcile net loss to net cash used
            in operating activities:
               Extraordinary gain on disposal of assets                     (566)                     -
               Option and warrant expense                                     21                    227
               Depreciation and amortization                               2,155                  1,998
               Changes in assets and liabilities:
                    Accounts receivable                                    4,604                  1,221
                    Prepaid expenses and other current assets               (249)                   237
                    Other assets                                             118                     64
                    Accounts payable and accrued liabilities              (3,202)                (1,278)
                    Compensation-related accruals                         (2,146)                  (302)
                    Deferred revenue                                        (735)                (3,019)
                                                                        --------              ---------

                         Net cash used in operating activities           (15,684)               (12,532)
                                                                        --------              ---------

Cash flows from investing activities:

     Purchases of short-term investments                                 (11,260)                (6,780)
     Proceeds from maturity of short-term investments                     35,641                 25,516
     Purchases of property and equipment                                  (1,405)                (3,392)
     Proceeds from sale of assets                                            685                      -
     Issuance of note receivable from related party                         (750)                     -
     Cash paid in acquisition, net of cash assumed                           237                      -
                                                                        --------              ---------

                         Net cash provided by investing
                           activities                                     23,148                 15,344
                                                                        --------              ---------

Cash flows from financing activities:

     Repayments on long-term debt                                           (781)                  (379)
     Proceeds from the issuance of common stock                              364                  4,325
                                                                        --------              ---------

                         Net cash (used in) provided by
                           financing activities                             (417)                 3,946
Effect of exchange rate changes on cash                                      380                    (33)
                                                                        --------              ---------

                         Net increase in cash and cash
                           equivalents                                     7,427                  6,725
Cash and cash equivalents at beginning of period                          10,502                 17,602
                                                                        --------              ---------

Cash and cash equivalents at end of period                              $ 17,929               $ 24,327
                                                                        ========               ========


Non-cash investing and financing activities:

Shares issued for acquisition of AnswerLogic, Inc.                   $ 2,955,000                      -
Assets and liabilities assumed in acquisition:
         Current assets                                                  144,000                      -
         Property and equipment                                        1,300,000                      -
         Goodwill                                                      2,831,000                      -
         Accounts payable and accrued liabilities                        490,000                      -
         Compensation-related accruals                                   287,000                      -
         Obligations under credit facility                               781,000                      -

</TABLE>

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

                                  Page 6 of 29

<PAGE>

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)

NOTE 1.   DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business and Basis of Presentation

Primus Knowledge Solutions, Inc. provides application software that enables
companies and their customers to access the information they need, easily and on
demand. Our software delivers the ability to capture and share knowledge to
optimize employee productivity, improve the customer service experience, and
enable a rapid return on investment (ROI). Primus(R) software products can be
implemented as a suite or as individual products, depending on the customer's
preference and/or immediate need.

Primus has approximately 180 customers worldwide. In addition to our traditional
markets of technology and telecommunications, we touch vertical markets that
include aerospace, financial services, manufacturing and retail. Sales are
primarily generated through a domestic and European field sales organization as
well as through our minority owned distributor in Japan. We develop our
products, which are sold domestically and internationally, at our Seattle,
Washington headquarters.

On May 31, 2001, Primus acquired AnswerLogic Inc. ("AnswerLogic"). AnswerLogic's
technology provides Primus with natural language programming and semantic
understanding capabilities that is a natural extension to our product suite.
These new capabilities will allow Primus customers to provide direct answers to
customer questions from unstructured data sources --HTML, PDF and text formats
-- as well as structured information contained in the Primus knowledgebase.
Primus has included AnswerLogic's operating results in its consolidated
operating results beginning on June 1, 2001 (see Note 3).

During the third quarter, Primus discontinued funding future product development
for 2Order.com, Inc, a wholly owned subsidiary. On September 29, 2001,
2Order.com, Inc. sold the intellectual property associated with the current
shipping versions of the eSales product line and certain other assets to its
leading reseller (see Note 8). As a result of this transaction, Primus' reseller
rights for the eSales product line were cancelled.

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

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). In our
opinion, the financial statements include all adjustments necessary (which are
of a normal and recurring nature) for the fair presentation of the results of
the interim periods presented. These financial statements should be read in
conjunction with our audited financial statements for the year ended December
31, 2000 included in our Form 10-K filed with the SEC on March 26, 2001. The
results of operations for any interim period are not necessarily indicative of
the results of operations for any other interim period or for a full fiscal
year.

                                  Page 7 of 29

<PAGE>

Reclassifications

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

Cash, Cash Equivalents and Short-term Investments

Cash, cash equivalents and short-term investments are comprised of the
following (in thousands, except per share data):
<TABLE>
<CAPTION>

                                     September 30, 2001        December 31, 2000
                                     ------------------        -----------------
<S>                                   <C>                      <C>

Cash and cash equivalents                 $  17,929                $  10,502
Short-term investments                        5,147                   29,457
                                          ---------                ---------

Total cash, cash equivalents
   and short-term investments             $  23,076                $  39,959
                                          =========                =========
</TABLE>


NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Primus generates revenue 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 distributors. Service revenues are generated from sales of maintenance
services, consulting services, and training services performed primarily for
customers that license the Company's products.

We have recognized software license revenue in accordance with AICPA Statement
of Position 97-2, "Software Revenue Recognition," and 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. SOP 97-2
provides specific industry guidance and stipulates that revenue recognized from
software arrangements is to be allocated to each element of the arrangement
based on the relative fair value of the elements. Under SOP 97-2, the
determination of fair value is based on objective evidence that is specific to
the vendor. If such evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until such time
that evidence of fair value does exist or until all elements of the arrangement
have been delivered.

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

We enter into distributor agreements that typically provide for sublicense fees
based on a percentage of list price. Sublicense fees are generally recognized
when persuasive evidence of an arrangement between the distributor and their
customer exists, the software is delivered to their customer, collection is
probable and the fee is fixed or determinable. Our agreements with our end
customers and distributors do not contain product return rights.

                                  Page 8 of 29

<PAGE>

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

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

Recently Issued Accounting Pronouncements

In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations, and FAS
No. 142, Goodwill and Other Intangible Assets. FAS No.141 requires that all
business combinations be accounted for under a single method -- the purchase
method. Use of the pooling-of-interests method no longer is permitted. FAS No.
141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. FAS No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The amortization
of goodwill ceases upon adoption of the Statement, which for calendar year-end
companies will be January 1, 2002.

As of the date of adoption, the Company expects to have unamortized goodwill of
approximately $2.2 million, which will be subject to the transition provisions
of FAS No. 141 and 142. Because of the extensive effort needed to comply with
adopting FAS No. 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether any transitional impairment losses will
be required to be recognized as the cumulative effect of a change in accounting
principle.

In August 2001, the Financial Accounting Standards Board issued Statement No.
143 (Statement No.143), Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset. Statement No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. The Company will adopt the provisions of Statement No. 143 on
January 1, 2003. The Company believes the adoption of this statement will not
have a material impact on its financial statements.

In October, 2001, the Financial Accounting Standards Board (FASB or the Board)
issued FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement No. 144 supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. Statement No. 144 also supersedes the accounting
and reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, it retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as

                                  Page 9 of 29

<PAGE>

held for sale. The Company will adopt the provisions of Statement No. 144 on
January 1, 2002. The Company believes the adoption of this statement will not
have a material impact on its financial statements.

NOTE 3.   ACQUISITION OF ANSWERLOGIC INC.

On May 31, 2001, Primus acquired AnswerLogic Inc. ("AnswerLogic"). AnswerLogic's
technology provides Primus with natural language programming and semantic
understanding capabilities that is a natural extension to our product suite.
These new capabilities will allow Primus customers to provide direct answers to
customer questions from unstructured data sources -- HTML, PDF and text formats
-- as well as structured information contained in the Primus knowledgebase. At
the closing of the acquisition, all of the outstanding equity securities and
certain outstanding convertible subordinated promissory notes of AnswerLogic
were converted into 750,000 shares of Primus common stock.

The acquisition was accounted for by the purchase method whereby the purchase
price of approximately $2.9 million was allocated to the assets acquired and
liabilities assumed based on their fair values at the acquisition date. The
excess of the purchase price over the fair value of the net identifiable assets
acquired of approximately $2.8 million has been recorded as goodwill and is
being amortized on a straight-line basis over the estimated useful life of three
years. The fair value of the common stock issued in the acquisition was $3.94
per share, based on the average market price for a three day period before and
after May 21, 2001.

The following unaudited pro forma financial information presents the results of
operations of Primus and AnswerLogic as if the acquisition had occurred on
January 1, 2001 and 2000 after giving effect to certain adjustments, primarily
amortization of goodwill. The pro forma information does not purport to be
indicative of what would have occurred had the acquisition been made as of those
dates or of results that may occur in the future. The unaudited pro forma
financial information is as follows (in thousands, except per share data):


<TABLE>
<CAPTION>
                                                      Nine Months Ended
                                                        September 30,
                                               ------------------------------
                                                   2001              2000
                                               ------------      ------------
<S>                                            <C>               <C>

Total revenues                                   $ 21,368          $ 33,653

Loss before extraordinary item                    (20,593)          (18,134)

Net loss                                          (20,027)          (18,134)
Pro forma net loss per share:

     Basic and diluted                              (1.06)            (0.99)
</TABLE>


NOTE 4.   EARNINGS PER SHARE

In accordance with Financial Accounting Standards Board (FASB) Statement No.
128, "Earnings Per Share," we report both basic and diluted net loss per common
share for each period presented. Basic net loss per common share is computed on
the basis of the weighted-average number of common shares outstanding for the
year. Diluted net loss per common share is computed on the basis of the
weighted-average number of common shares plus dilutive potential common shares
outstanding. Dilutive potential common shares are calculated under the treasury
stock method. Securities that could potentially dilute basic income per share
consist of outstanding stock options and warrants. Net loss available to common
shareholders includes net loss and preferred stock accretion. As we had a net
loss available to common shareholders in each of the periods presented, basic
and diluted net loss per common share are the same. All outstanding warrants,
stock options, and convertible preferred stock to acquire common shares were
excluded from the computation of diluted earnings per share at September 30,
2001 and 2000, as the effect was anti-dilutive.

                                  Page 10 of 29

<PAGE>

Potential common shares consisted of options and warrants to purchase 6,191,959
and 4,141,360 common shares at September 30, 2001 and 2000, respectively.

NOTE 5.  COMPREHENSIVE LOSS

The following table reconciles net loss as reported to total comprehensive loss
for the three and nine months ended September 30, 2001 and 2000 (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                        Three Months Ended                     Nine Months Ended
                                                          September 30,                          September 30,
                                                   -----------------------------        ------------------------------
                                                      2001               2000                2001             2000
                                                   -----------       -----------        -------------     ------------
<S>                                                <C>               <C>                <C>               <C>
Net loss                                           $    (6,968)      $    (3,773)        $   (15,684)      $   (11,680)

Other comprehensive income (loss):
    Foreign currency translation gain (loss)                35               (10)                 (6)              (33)
    Unrealized gain on securities
      available-for-sale                                    52                53                  71                55
                                                   -----------       -----------         -----------       -----------
Total comprehensive loss                           $    (6,881)      $    (3,730)        $   (15,619)      $   (11,658)
                                                   ===========       ===========         ===========       ===========
</TABLE>


NOTE 6.  BUSINESS SEGMENT INFORMATION

Primus and our subsidiaries are principally engaged in the design, development,
marketing, sale and support of our knowledge enabling software products:
eServer, eSupport, Interchange and Answer Engine. 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 three and nine months ended September
30, 2001 and 2000 (in thousands, except per share data):

<TABLE>
<CAPTION>
                           Three Months Ended            Nine Months Ended
                              September 30,                September 30,
                          ----------------------------------------------------
                            2001         2000            2001           2000
                          -------       -------       ---------       --------
<S>                       <C>           <C>           <C>             <C>
  United States           $ 3,755       $ 8,508        $ 16,997       $ 25,781
  Japan                       476           308           2,579          1,788
  Other                       499         1,318           1,749          6,084
                          -------       -------        --------       --------
     Total revenues       $ 4,730       $10,134        $ 21,325       $ 33,653
                          =======       =======        ========       ========
</TABLE>

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

NOTE 7.   NOTE RECEIVABLE FROM RELATED PARTY

On April 12, 2001, the Company's Board of Directors approved an unsecured loan
to Michael Brochu, the Company's President and Chief Executive Officer, for
$750,000 bearing interest at 4.9%. The maturity date of

                                  Page 11 of 29

<PAGE>

the loan is April 16, 2007 with principal and accrued interest payments due
annually starting on April 16, 2005. This note is subject to full forgiveness in
the event of Mr. Brochu's termination of employment without cause or for good
reason following a change of control.

NOTE 8.   EXTRAORDINARY ITEM

In September 2001, the Company, on a consolidated basis, recognized an
extraordinary gain of $566,000 on the sale of certain assets and intellectual
property of its wholly owned subsidiary 2Order.com, Inc ("2Order"), in exchange
for cash of $685,000. 2Order was acquired in January 2000 through a business
combination accounted for using the pooling-of-interests method of accounting.
The decision to dispose of these assets was not contemplated at the time 2Order
was acquired, but was made in the ordinary course of business based on the
change in the Company's marketing strategy, the poor operating results of
2Order's product lines and the significant funding burden on the Company to
continue supporting 2Order.

NOTE 9.   SUBSEQUENT EVENT

During the fourth quarter of 2001, the Company anticipates it will take a
restructuring charge related to a cost reduction initiative. As part of this
initiative the Company will continue focusing its efforts on its core business.
This will result in the reduction of worldwide staffing levels by approximately
30% by December 31, 2001. The Company is working on finalizing other components
of this cost reduction initiative including reductions in facilities and
associated overhead. The restructuring charge for the fourth quarter will
include severance, as well as a charge for reduction of excess facilities and
overhead, the majority of which are in Seattle, Washington and Atlanta, Georgia.

                                  Page 12 of 29

<PAGE>

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

FORWARD-LOOKING STATEMENTS

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

OVERVIEW

Primus Knowledge Solutions, Inc. provides application software that enables
companies and their customers to access the information they need, easily and on
demand. Our software delivers the ability to capture and share knowledge to
optimize employee productivity, improve the customer service experience, and
enable a rapid return on investment. Primus(R) software products can be
implemented as a suite or as individual products, depending on the customer's
preference and/or immediate need.

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

On May 31, 2001, Primus acquired AnswerLogic Inc.("AnswerLogic"). AnswerLogic's
technology provides Primus with natural language programming and semantic
understanding capabilities that is a natural extension to our product suite.
These new capabilities will allow Primus customers to provide direct answers to
customer questions from unstructured data sources -- HTML, PDF and text formats
-- as well as structured information contained in the Primus knowledgebase.

During the third quarter, Primus discontinued funding future product development
for 2Order.com, Inc, a wholly owned subsidiary. On September 29, 2001,
2Order.com, Inc. sold the intellectual property associated with the current
shipping versions of the eSales product line and certain other assets to its
leading reseller. As a result of this transaction, Primus' reseller rights for
the eSales product line were cancelled.

                                  Page 13 of 29

<PAGE>

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000

     The following table sets forth certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three and nine months ended
September 30, 2001 and 2000 are not necessarily indicative of the results that
may be expected for any future period.

<TABLE>
<CAPTION>

                                      Three Months Ended          Nine Months Ended
                                         September 30,              September 30,
                                     ---------------------     ----------------------
                                      2001          2000         2001          2000
                                     -------      -------      --------      --------
<S>                                  <C>          <C>          <C>           <C>

Revenues:
   License                              21.4%       61.7%        43.9%         69.4%
   Services                             78.6        38.3         56.1          30.6
                                      ------       -----        -----         -----
   Total revenues                      100.0       100.0        100.0         100.0
                                      ------       -----        -----         -----

Cost of revenues:
   License                               1.2         2.1          1.2           2.5
   Services                             33.6        23.8         29.0          22.2
                                      ------       -----        -----         -----

   Total cost of revenues               34.8        25.9         30.2          24.7
                                      ------       -----        -----         -----

Gross profit                            65.2        74.1         69.8          75.3
                                      ------       -----        -----         -----

Operating expenses:
   Sales and marketing                 102.8        62.6         75.5          59.8
   Research and development             79.1        36.6         47.1          34.0
   General and administrative           38.9        18.4         25.3          20.4
   Goodwill                              5.0         --           1.5           --
   Merger related costs                  --          --           --            1.5
                                      ------       -----        -----         -----

   Total operating expenses            225.8       117.6        149.4         115.7
                                      ------       -----        -----         -----

Loss from operations                  (160.6)      (43.5)       (79.6)        (40.4)

Other income, net                        2.9         6.7          4.9           6.1
                                      ------       -----        -----         -----
Loss before income taxes and
   extraordinary item                 (157.7)      (36.8)       (74.7)        (34.3)
Income tax expense                       1.6          .4          1.5            .4
                                      ------       -----        -----         -----

Net loss before extraordinary item    (159.3)      (37.2)       (76.2)        (34.7)
                                      ------       -----        -----         -----
Extraordinary gain on disposal
   of assets                            12.0         --           2.6           --

Net loss                              (147.3)%     (37.2)%      (73.6)%       (34.7)%
                                      ======       =====        =====         =====
</TABLE>

Revenues

We derive our revenue from the sale of software licenses and related services
including consulting, training, and support and maintenance contracts. Revenue
was approximately $4.7 million and $10.1 million for the three months ended
September 30, 2001 and 2000, respectively, representing a decrease in the third
quarter of 2001 of approximately $5.4 million, or 53%, over the comparable
quarter of the prior year. Revenue was approximately $21.3 million and $33.7
million for the nine months ended September 30, 2001 and 2000, respectively,
representing a decrease of approximately $12.3 million, or 37%, over the
comparable period of the prior year.

License Revenue. License revenue was approximately $1.0 million and $6.3 million
for the three months ended September 30, 2001 and 2000, respectively,
representing a decrease in the third quarter of 2001 of approximately

                                  Page 14 of 29

<PAGE>

$5.3 million, or 84%, over the comparable quarter of the prior year. License
revenue was approximately $9.4 million and $23.3 million for the nine months
ended September 30, 2001 and 2000, respectively, representing a decrease of
approximately $13.9 million, or 60%, over the comparable period of the prior
year. International license revenues were approximately $300,000 and $751,000
for the three months ended September 30, 2001 and 2000, respectively and
approximately $2.0 million and $7.9 million for the nine months ended September
30, 2001 and 2000, respectively. We believe the continued global slow down in
information technology spending experienced by most software companies in our
market segment contributed to this decline. We continued to encounter purchasing
order deferrals by customers who remain cautious about capital spending in the
face of this uncertain economy.

Services Revenue. Services revenue was approximately $3.7 million and $3.9
million for the three months ended September 30, 2001 and 2000, respectively,
representing an decrease in the third quarter of 2001 of approximately $200,000,
or 5%, over the comparable quarter of the prior year. Services revenue was
approximately $12.0 million and $10.3 million for the nine months ended
September 30, 2001 and 2000, respectively, representing an increase of
approximately $1.7 million or 17%, over the comparable period of the prior year.
Maintenance and support contract revenues increased approximately $600,000 in
the third quarter of 2001 over the comparable quarter of the prior year and
increased approximately $3.4 million in the first nine months of 2001 over the
same period in the prior year. Consulting fees decreased approximately $700,000
in the third quarter of 2001 over the comparable quarter of the prior year and
decreased approximately $1.7 million in the first nine months of 2001 over the
comparable period of the prior year.

Services revenue represented 79% and 38% of our total revenue for the three
months ended September 30, 2001 and 2000, respectively and 56% and 31% of our
total revenue for the nine months ended September 30, 2001 and 2000,
respectively. Our growing installed base is the primary driver for the increase
in maintenance revenues. This coupled with the significant decrease in license
revenues resulted in the significant change in the percentage of revenue
generated from licenses and services. We expect the amount of and proportion of
services revenue to total revenue to fluctuate in the future, depending
primarily on the dollar amount of software license sales and our customers' use
of third-party consulting and implementation services providers.

Cost of Revenue

Cost of License Revenue. Cost of license revenue includes royalties and fees
paid to third parties under license arrangements and costs related to
duplication of our products and manuals. Cost of license revenue was
approximately $53,000 and $212,000 for the three months ended September 30, 2001
and 2000, respectively, and approximately $255,000 and $865,000 for the nine
months ended September 30, 2001 and 2000, respectively. Cost of license revenue
as a percentage of license revenue was 5% and 3% for the three months ended
September 30, 2001 and 2000, respectively and 3% and 4% for the nine months
ended September 30, 2001 and 2000. We anticipate that our cost of license
revenue will continue to fluctuate in absolute dollars and as a percent of
license revenue. Cost of license revenue as a percentage of sales varies
primarily due to the volume of software product sales and the type of royalty
agreements in place at the time.

Cost of Services Revenue. Cost of services revenue includes personnel and other
costs related to professional services and customer support. Cost of services
revenue was approximately $1.6 million and $2.4 million for the three months
ended September 30, 2001 and 2000, respectively and $6.2 million and $7.5
million for the nine months ended September 30, 2000 and 2001, respectively.
Cost of services revenue decreased approximately $800,000 or 33%, for the three
months ended September 30, 2001 compared to the same period in 2000, while cost
of services as a percentage of service revenues decreased to 43% from 62% for
the same period. Cost of services revenue decreased approximately $1.3 million
or 17%, for the nine months ended September 30, 2001 compared to the same period
in 2000, while cost of services as a percentage of service revenues decreased to
52% from 72% for the same period. The decrease in cost of services revenue as a
percentage of services revenue was primarily due to the continued growth of
maintenance revenue attributable to the overall growth in our installed customer
base.


                                  Page 15 of 29

<PAGE>

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
bonuses and commissions earned by sales and marketing personnel, travel and
costs associated with marketing programs, such as trade shows, advertising,
public relations and new product launches. Sales and marketing expenses were
approximately $4.9 million and $6.4 million for the three months ended September
30, 2001 and 2000, respectively, representing a decrease of approximately $1.5
million or 23%. Sales and marketing expenses were approximately $16.1 million
and $20.1 million for the nine months ended September 30, 2001 and 2000,
respectively, representing a decrease of approximately $4.0 million or 20%.
These decreases are primarily due to the reduction in the variable component of
total compensation related costs (i.e. bonuses, commissions and related payroll
taxes) which are directly related to the decrease in revenues for the periods
presented. A reduction in marketing expenditures as part of overall cost
containment efforts also contributed to the overall decrease in sales and
marketing expenses for the current year periods presented. Sales and marketing
expenses as a percentage of total revenue was 103% and 63% for the three months
ended September 30, 2001 and 2000, respectively, and 75% and 60% for the nine
months ended September 30, 2001 and 2000. We believe that a significant sales
and marketing effort is essential for us to maintain market position and further
increase market penetration of our products. Accordingly, we anticipate that we
will continue to invest in sales and marketing for the foreseeable future, and
sales and marketing expenses as a percentage of total revenue will fluctuate.

Research and Development. Research and development expenses consist primarily of
salaries and benefits for software developers, program managers and quality
assurance personnel and payments to outside contractors. Research and
development expenses were approximately $3.7 million for both the three months
ended September 30, 2001 and 2000. Research and development expenses were
approximately $10.0 million and $11.4 million for the nine months ended
September 30, 2001 and 2000, respectively, representing a decrease of
approximately $1.4 million or 12%. The decrease was primarily due to the
reduction in the variable component of total compensation related costs combined
with a significant decrease in the use of third party consultants within our
research and development group. Research and development expenses as a
percentage of total revenue was 79% and 37% for the three months ended September
30, 2001 and 2000, respectively and 47% and 34% for the nine months ended
September 30, 2001 and 2000, respectively. We believe that a significant
research and development investment is essential for us to maintain our market
position, expand functionality of our knowledge-enabling software and continue
to integrate the technology acquired as part of the acquisition of AnswerLogic.
Accordingly, we anticipate that we will continue to invest in product research
and development for the foreseeable future. As such, we expect research and
development costs as a percentage of total revenue to fluctuate. In the
development of our new products and enhancements of existing products, the
technological feasibility of our software is not established until substantially
all product development is complete. Accordingly, software development costs
eligible for capitalization were insignificant, and all costs related to
internal research and development have been expensed as incurred.

General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative and information services personnel. General and administrative
expenses were approximately $1.8 million and $1.9 million for the three months
ended September 30, 2001 and 2000, respectively, representing a decrease of
approximately $100,000 or 5%. General and administrative expenses were
approximately $5.4 million and $6.9 million for the nine months ended September
30, 2001 and 2000, respectively, representing a decrease of approximately $1.5
million or 22%. These decreases were primarily due to the reduction in the
variable component of total compensation related costs along with a decrease in
professional service fees during the current period. General and administrative
expenses as a percentage of total revenue were 39% and 18% for the three months
ended September 30, 2001 and 2000, respectively, and 25% and 20% for the nine
months ended September 30, 2001 and 2000, respectively. The decrease in total
general and administrative expenses reflects the continued impact of the overall
cost containment measures taken by us over the last few quarters. We believe
that our general and administrative expenses will fluctuate both as an absolute
dollar amount and as a percentage of total revenue in future periods.


                                  Page 16 of 29

<PAGE>

Goodwill Amortization. Amortization of goodwill was $235,000 for the three
months ended September 30, 2001 and $314,000 for the nine months ended September
30, 2001. The goodwill amortization expense is a result of the acquisition of
AnswerLogic, which was completed in May 2001 and accounted for under the
purchase method of accounting.

Merger Related Costs. Merger related costs were approximately $505,000 for the
nine months ended September 30, 2000. These costs were recorded in connection
with the January 2000 merger with 2Order.com that was accounted for under the
pooling-of-interests method of accounting.

Other Income, Net. Other income, net of other expense, was $135,000 and $674,000
for the three months ended September 30, 2001 and 2000, respectively and $1.1
million and $2.0 million for the nine months ended September 30, 2001 and 2000,
respectively. The variances from period to period were due to fluctuations in
the average combined cash and cash equivalents and short-term investment
balances and a decline in the average yield. We anticipate this trend will
continue in the near future.

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

Extraordinary Item. Extraordinary gain on the disposal of assets was $566,000
for the three and nine months ended September 30, 2001. This gain was recorded
in connection with the September 2001 sale of certain intellectual property and
assets of our wholly owned subsidiary 2Order.com, which was acquired through a
business combination in January 2000 and accounted for using the
pooling-of-interests method.

Liquidity and Capital Resources

As of September 30, 2001, we had cash, cash equivalents and short-term
investments of approximately $23.1 million, a decrease of $16.9 million from the
$40.0 million of cash, cash equivalents and short-term investments held as of
December 31, 2000. As of September 30, 2001, our working capital was
approximately $18.2 million compared to approximately $34.4 million at December
31, 2000.

Our operating activities resulted in net cash outflows of approximately $15.7
million for the nine months ended September 30, 2001. Adjustments to the $15.7
million net loss before extraordinary item to reconcile to cash used in
operating activities includes approximately $6.1 million for the decrease in
compensation-related accruals, accounts payable, accrued liabilities and
deferred revenue. This is offset by approximately $4.6 million for the decrease
in accounts receivable combined with $2.2 million in depreciation and
amortization and $566,000 in extraordinary gain on disposal of assets. Net cash
used in operating activities was approximately $12.5 million for the nine months
ended September 30, 2000.

Investing activities provided cash of approximately $23.1 million for the nine
months ended September 30, 2001. Investing activities for this period consisted
primarily of approximately $35.6 million in proceeds from the maturity of
short-term investments and $685,000 of proceeds from the sale of 2Order assets
offset by approximately $11.3 million in purchases of short-term investments.
Further activities included the purchase of approximately $1.4 million in
capital equipment along with the issuance of a $750,000 related party note. Net
cash provided by investing activities was approximately $15.3 million for the
nine months ended September 30, 2000.

Our financing activities resulted in net cash outflows of approximately $417,000
for the nine months ended September 30, 2001. Financing activities for this
period included $781,000 in payments made on long-term debt assumed in the
AnswerLogic acquisition, partially offset by $364,000 in proceeds from the
exercise of stock options. Net cash provided by financing activities was
approximately $3.9 million for the nine months ended September 30, 2000.


                                  Page 17 of 29

<PAGE>

We will continue to invest for the foreseeable future in growth opportunities
for our business, including:

     .    entering new markets for our products and services

     .    expanding distribution channels and partner relationships

     .    acquiring technology that expands product offerings

     .    spending on research and development

The Company continues to focus on maximizing the performance of our core
business and controlling costs to respond to today's economic reality. During
the fourth quarter we will be reducing worldwide staffing levels by
approximately 30%. In connection with this restructuring our executive vice
president of worldwide sales and marketing, Kim Nelson, will be leaving the
Company. The Company is working on finalizing other components of this
restructuring including reductions in facilities and associated overhead. The
restructuring charge for the fourth quarter will include severance, as well as a
charge for reduction of excess facilities and overhead, the majority of which
are in Seattle, Washington and Atlanta, Georgia.

If we are unable to successfully sublease or terminate our excess facilities at
terms acceptable to us, we will incur substantial facilities costs for which we
will receive no economic benefit. In the near-term, we believe our costs and
operating expenses, excluding restructuring-related charges, will continue to
decrease to a level that is closer to our expected revenues while allowing us to
continue to invest in accordance with our strategic priorities. However, we may
be unable to achieve these expense reductions without adversely affecting our
business and results of operations. We expect to continue to experience losses
and negative cash flows in the near term, even if sales of our products and
services grow.

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

Recently Issued Accounting Pronouncements

In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations, and FAS
No. 142, Goodwill and Other Intangible Assets. FAS No.141 requires that all
business combinations be accounted for under a single method -- the purchase
method. Use of the pooling-of-interests method no longer is permitted. FAS No.
141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. FAS No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The amortization
of goodwill ceases upon adoption of the Statement, which for calendar year-end
companies will be January 1, 2002.

As of the date of adoption, the Company expects to have unamortized goodwill of
approximately $2.2 million, which will be subject to the transition provisions
of FAS No. 141 and 142. Because of the extensive effort needed to comply with
adopting FAS No. 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether any transitional impairment losses will
be required to be recognized as the cumulative effect of a change in accounting
principle.

In August 2001, the Financial Accounting Standards Board issued Statement No.
143 (Statement No.143), Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset. Statement No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. The Company will adopt the provisions of Statement No. 143 on
January 1, 2003. The Company believes the adoption of this statement will not
have a material impact on its financial statements.

In October, 2001, the Financial Accounting Standards Board (FASB or the Board)
issued FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement No. 144 supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. Statement No. 144 also supersedes the accounting
and reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, it retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
The Company will adopt the provisions of Statement No. 144 on January 1, 2002.
The Company believes the adoption of this statement will not have a material
impact on its financial statements.

                                  Page 18 of 29

<PAGE>

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 could
continue to incur net losses for the foreseeable future. As of September 30,
2001, we had an accumulated deficit of $83.1 million. We expect to continue to
devote substantial resources to our product development, sales and marketing and
our customer support and professional service groups. As a result, we will need
to generate significant revenues to achieve and maintain profitability. We may
not be profitable in any future period.

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

     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 license revenues have fluctuated
substantially from quarter to quarter and are likely to continue to do so in the
future. Current general economic conditions have adversely affected our
customers' capital investment levels in CRM and Knowledge Management systems. We
typically 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 quarter could be materially, adversely affected if we are
unable to complete one or more substantial license sales or implementations
planned for that quarter. Furthermore, customer budget cycles and order
deferrals in anticipation of new products or product enhancements introduced by
our competitors or us can cause our revenues to fluctuate significantly from
quarter to quarter. As a result, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful, and you should not rely on
such comparisons to predict our future performance. We will continue to base our
decisions regarding operating expenses on anticipated revenue trends. Therefore,
to the extent our actual revenues fall short of our expectations, our operating
results will suffer and our stock price will likely decline.

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

     Applicable accounting policies may cause us to report new license
agreements as deferred revenue until implementation begins. As a result, we may
experience variability in our license revenues from quarter to quarter due to
factors outside our control, including:

     .    whether we are providing implementation services

     .    whether implementation is delayed or takes longer than expected

     .    variability in the mix of new and existing customers

     Where we are implementing the software, we will account for the agreement
as an item of deferred revenue and will recognize the license revenue over the
period of core implementation. Most of our new customers typically begin
implementation within 30 days of signing a license agreement and commencing
implementation. Both implementation and deployment can vary significantly by
customer. We cannot, however, guarantee that customers will commence
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 19 of 29

<PAGE>

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

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

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

     The principal competitive factors in our industry include:

     .    vendor and product reputation

     .    the availability of products on the Internet and multiple operating
          platforms

     .    measurable economic return

     .    customer referenceability

     .    product quality, performance and price

     .    breadth of product functionality and features

     .    product scalability

     .    product ease-of-use

     .    the quality of customer support services, documentation and training

     .    the quality, speed and effectiveness of application development
          services

     .    the effectiveness of sales and marketing efforts

     .    product integration with other enterprise applications

     As the market for CRM and Knowledge Management 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.

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.

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

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


                                  Page 20 of 29

<PAGE>

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

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

We rely on sales of only one product family.

     Product license revenues and related services from our Primus eServer and
Primus eSupport products accounted for over 90% of our total revenues through
September 30, 2001, and we expect these products to continue to account for a
substantial portion of our revenues for the remainder of 2001. As a result,
factors adversely affecting the demand for these products and our products in
general, such as competition, pricing or technological change, could materially
adversely affect our business, financial condition and operating results. Our
future financial performance will substantially depend on our ability to sell
current versions of our entire suite of products, integrate and sell products
based on the technology acquired from AnswerLogic, and our ability to develop
and sell enhanced versions of our products.

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

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

Factors outside our control may make our products less useful.

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

The 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 many of the products we have shipped historically
rely on Versant's database, we continue to depend on Versant's ability to
support the database in a timely and effective manner.


                                  Page 21 of 29

<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 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 may experience difficulty in recruiting
qualified sales and marketing personnel or in establishing third-party
relationships. We may not be able to successfully expand our direct sales force
or other distribution channels and any such expansion may not result in
increased revenues. Our business, financial condition and operating results will
be materially adversely affected if we fail to effectively expand our sales and
marketing resources.

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

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

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

In connection with our effort to streamline operations, and reduce costs, Primus
has engaged in a recent restructuring of its organization with substantial
reductions in its workforce. There have been and may continue to be substantial
costs associated with the workforce reduction related to severance and other
employee-related costs, and our restructuring plan may yield unanticipated
consequences, such as attrition beyond our planned reduction in workforce. As a
result of these reductions, our ability to respond to unexpected challenges may
be impaired and we may be unable to take advantage of new opportunities. In
addition, many of the employees who were terminated possessed specific knowledge
or expertise that may prove to have been important to our operations. In that
case, their absence may create significant difficulties. This personnel
reduction may also subject us to the risk of litigation which may adversely
impact our ability to conduct our operations and may cause us to incur
significant expense. We will continue to need to hire to accommodate attrition,
growth in specific customer needs and acquire new skill sets. We may be unable
to hire and /or retain the skilled personnel necessary to develop and grow our
business. Our reduction in force may reduce employee morale and may create
concern among existing employees about job security, which may lead to increased
turnover and reduce our ability to meet the needs of our current and future
customers. Although a number of technology companies have recently implemented
lay-offs, there remains substantial competition for experienced personnel,
particularly in the Seattle area, where we are headquartered, due to the limited
number of people available with the necessary technical skills.

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


                                  Page 22 of 29

<PAGE>

We may be adversely affected if we lose key personnel.

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

Acquisitions could disrupt our business and harm our financial condition.

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

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

     .    assume contingent, unrecorded and warranty liabilities

     .    incur a one-time charge

     .    amortize goodwill and other intangible assets

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

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

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

Our international operations are subject to additional risks.

     Revenues from customers outside the United States represented approximately
$4.3 million for the nine months ended September 30, 2001 or 20.3% of our total
revenue for the same period. We currently customize our products for select
foreign markets. In the future, we plan to develop additional localized versions
of our products and localization of our products will create additional costs
and would cause delays in new product introductions. In addition, our
international operations will continue to be subject to a number of other risks,
including:

     .    costs and complexity of customizing products for foreign countries

     .    laws and business practices favoring local competition

     .    compliance with multiple, conflicting and changing laws and
          regulations

     .    longer sales cycles

     .    greater difficulty or delay in accounts receivable collection

     .    import and export restrictions and tariffs

     .    difficulties in staffing and managing foreign operations

     .    investing at appropriate levels in foreign operations to compete
          effectively

     .    political and economic instability



                                  Page 23 of 29

<PAGE>


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

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

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

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

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

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

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

     .    in response to quarterly variations in operating results

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

     .    because of market conditions in the enterprise software industry

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

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

     .    in response to sales of our common stock

In the past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. In the last year there have been a number of securities
class action claims brought against companies alleging failure to properly
disclose "laddering" arrangements allegedly made by their underwriters in
connection with initial public offerings. Securities class action litigation
could result in substantial costs and a diversion of our management's attention
and resources. At this time, we are not aware of any class action lawsuits filed
against the Company.


                                  Page 24 of 29

<PAGE>

Our efforts to protect our proprietary rights may be inadequate.

     Our success depends in part on our ability to protect our proprietary
rights. To protect our proprietary rights, we rely primarily on a combination of
copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as those
contained in license agreements with customers, consultants and vendors. We have
not signed such agreements in every case. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products and
obtain and use information that we regard as proprietary. Other parties may
breach 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. Significant portions of our marks include the
word "Primus." Other companies use "Primus" in their marks alone or in
combination with other words, and we cannot prevent all third-party uses of the
word "Primus." We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would adversely
affect our trademarks.

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

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

We may face liability claims that could result in unexpected costs and damage to
Primus' reputation.

     Our licenses with customers generally contain provisions designed to limit
its exposure to potential product liability claims, such as disclaimers of
warranties and limitation son liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to Primus
for the product or services giving rise to the damages. However, these
contractual limitations on liability may not be enforceable and we may be
subject to claims based on errors in its software or mistakes in performing its
services including claims relating to damages to our customers' internal
systems. A product liability claim, whether or not successful, could harm our
business by increasing its costs, damaging its reputation and distracting its
management.

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


                                  Page 25 of 29

<PAGE>

shareholder approval include:

     .    election of directors

     .    certain amendments to our articles of incorporation

     .    merger or consolidation

     .    sale of all or substantially all our assets

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

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

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

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

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

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

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

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

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

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

     Due to the increasing popularity and use of the Internet, it is possible
that state, federal and foreign regulators could adopt laws and regulations that
impose additional burdens on those companies that conduct business online. These
laws and regulations could discourage web-based communications and customer
self-service, which could reduce demand for our products and services.


                                  Page 26 of 29

<PAGE>

     The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws for law that may inhibit the
use of Internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may decrease
the expansion of the Internet. A decline in the growth of the Internet,
particularly as it relates to online communication and customer self-service,
could decrease demand for our products and services and increase our costs of
doing business, or otherwise harm our business. Any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other online services could harm our growth
and increase our costs.

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

     On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 141, Business
Combinations, and FAS No. 142, Goodwill and Other Intangible Assets. FAS No.141
requires that all business combinations be accounted for under a single method
-- the purchase method. Use of the pooling-of-interests method no longer is
permitted. FAS No. 141 requires that the purchase method be used for business
combinations initiated after June 30, 2001. FAS No. 142 requires that goodwill
no longer be amortized to earnings, but instead be reviewed for impairment. The
amortization of goodwill ceases upon adoption of the Statement, which for
calendar year-end companies will be January 1, 2002.

     As of the date of adoption, we expect to have unamortized goodwill of
approximately $2.2 million, which will be subject to the transition provisions
of FAS No. 141 and 142. Because of the extensive effort needed to comply with
adopting FAS No. 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether any transitional impairment losses will
be required to be recognized as the cumulative effect of a change in accounting
principle.

     In August 2001, the Financial Accounting Standards Board issued Statement
No. 143 (Statement No.143), Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset. Statement No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. The Company will adopt the provisions of Statement No. 143 on
January 1, 2003. The Company believes the adoption of this statement will not
have a material impact on its financial statements.

     In October, 2001, the Financial Accounting Standards Board (FASB or the
Board) issued FASB Statement No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement No. 144 supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. Statement No. 144 also supersedes the accounting
and reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, it retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
The Company will adopt the provisions of Statement No. 144 on January 1, 2002.
The Company believes the adoption of this statement will not have a material
impact on its financial statements.


                                  Page 27 of 29

<PAGE>

Our security could be breached, which could damage our reputation and deter
customers from using our services.

     We must protect our computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the Internet or other
users. Computer break-ins could jeopardize the security of information stored in
and transmitted through our computer systems and network, which could diversely
affect our ability to retain or attract customers, damage its reputation and
subject it to litigation. We could be subject to denial of service, vandalism
and other attacks on its systems by Internet hackers. Although we intend to
continue to implement security technology and establish operational procedures
to prevent break-ins, damage and failures, these security measures may fail. Our
insurance coverage in certain circumstances may be insufficient to cover losses
that may result from such events.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

During the nine months ended September 30, 2001, the effects of changes in
interest rates on the fair market value of our marketable investment securities
and our earnings were insignificant. Fixed rate investments at September 30,
2001 of approximately $5.1 million had a weighted average interest rate of 4.39%
and are primarily due in 2002. At September 30, 2001, there were no variable
rate investments in our investment securities portfolio. We believe that the
impact on the fair market value of our securities and our earnings for the
remainder of 2001 from a hypothetical 10% increase in interest rates would be
insignificant.

Foreign Currency Exchange Risk. We develop products in the United States and
sell them in North America, Asia and Europe. As a result, our financial results
could be affected by factors such as changes in foreign


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<PAGE>

currency exchange rates or weak economic conditions in foreign markets. Since
our sales are predominantly priced in U.S. dollars and translated to local
currency amounts, a strengthening of the dollar could make our products less
competitive in foreign markets. We have two foreign subsidiaries whose expenses
are incurred in their local currency. As exchange rates vary, their expenses,
when translated, may vary from expectations and adversely impact overall
expected profitability. Our operating results have not been significantly
affected by exchange rate fluctuations in 2000 and 2001. If, during the
remainder of 2001, the U.S. dollar uniformly decreases in strength by 10%
relative to the currency of our foreign sales subsidiaries, our operating
results for the remainder of 2001 would likely not be significantly effected.

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

Primus is subject to legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.

Item 2. Change in Securities

(c)  Recent Sales of Unregistered Securities

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

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

     None

(b)  Reports on Form 8-K.

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

     On August 13, 2001, we filed a Form 8-K/A, amending a current report that
     we filed on June 15, 2001, 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: November 14, 2001                By: /s/ Ronald M. Stevens
                                           -----------------------------------
                                       Ronald M. Stevens
                                       Executive Vice President, Chief Financial
                                       Officer, and Treasurer

                                       (Principal financial and chief
                                       accounting officer)


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