<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 JUNE 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 August 8, 2001 there were 18,892,890 shares of the Registrant's
Common Stock outstanding.
<PAGE>

                       Primus Knowledge Solutions, Inc.
                                   Form 10-Q
                                 June 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 June 30, 2001 and December 31, 2000......     3

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

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

          .  Condensed Consolidated Statements of Cash Flows for the six months
             ended June 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...    12

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk..............................    25

PART II.  OTHER INFORMATION

ITEM 2.   Change in Securities....................................................................    26

ITEM 6.   Exhibits and Reports on Form 8-K........................................................    26
</TABLE>

                                 Page 2 of 27
<PAGE>

PART I.   FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)

<TABLE>
<CAPTION>
                                                                            June 30, 2001     December 31, 2000
                                                                            -------------     -----------------
<S>                                                                         <C>               <C>
                                        ASSETS
Current assets:
  Cash, cash equivalents and short-term investments                            $ 30,273            $ 39,959
  Accounts receivable, net, including related party amounts of
     $439 and $14 at June 30, 2001 and December 31, 2000, respectively            7,466              10,745
  Prepaid expenses and other current assets                                       1,169                 785
                                                                               --------            --------
       Total current assets                                                      38,908              51,489

Property and equipment, net                                                       6,229               5,090
Note receivable from related party                                                  750                  --
Goodwill                                                                          2,752                  --
Other assets                                                                        284                 359
                                                                               --------            --------
       Total assets                                                            $ 48,923            $ 56,938
                                                                               ========            ========

                         LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                             $  2,888            $  4,071
  Accrued and other liabilities                                                   1,784               2,224
  Compensation-related accruals                                                   2,025               3,245
  Obligations due under credit facility                                             756                  --
  Deferred revenue, including related-party amounts of $624
     and $401 at June 30, 2001 and December 31, 2000, respectively                7,038               7,551
                                                                               --------            --------
       Total current liabilities                                                 14,491              17,091
                                                                               --------            --------

Shareholders' equity:
  Common stock                                                                      473                 452
  Additional paid-in-capital                                                    110,163             106,876
  Deferred stock-based compensation                                                 (39)                (54)
  Accumulated other comprehensive loss                                              (66)                (44)
  Accumulated deficit                                                           (76,099)            (67,383)
                                                                               --------            --------
       Total shareholders' equity                                                34,432              39,847
                                                                               --------            --------
       Total liabilities and shareholders' equity                              $ 48,923            $ 56,938
                                                                               ========            ========
</TABLE>

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

                                  Page 3 of 27
<PAGE>

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

<TABLE>
<CAPTION>
                                                 Three Months Ended June 30,    Six Months Ended June 30
                                                 ---------------------------    ------------------------
                                                     2001            2000          2001          2000
                                                 -----------     -----------   -----------   -----------
<S>                                              <C>             <C>           <C>           <C>
Revenues:
  License:
     Third party                                       2,129           9,497         6,806        15,744
     Related party - Primus KK                           247             412         1,537         1,345
                                                 -----------     -----------   -----------   -----------
                                                 $     2,376     $     9,909   $     8,343   $    17,089
  Services:
     Third party                                       3,861           3,122         7,686         6,295
     Related party - Primus KK                           280              30           566           135
                                                 -----------     -----------   -----------   -----------
                                                       4,141           3,152         8,252         6,430
                                                 -----------     -----------   -----------   -----------

     Total revenues                                    6,517          13,061        16,595        23,519
                                                 -----------     -----------   -----------   -----------

Cost of revenues:
  License                                                 68             330           202           653
  Services                                             2,206           2,439         4,592         5,047
                                                 -----------     -----------   -----------   -----------

     Total cost of revenues                            2,274           2,769         4,794         5,700
                                                 -----------     -----------   -----------   -----------

         Gross profit                                  4,243          10,292        11,801        17,819

Operating expenses:
  Sales and marketing                                  4,966           6,936        11,239        13,762
  Research and development                             3,323           3,717         6,298         7,728
  General and administrative                           1,657           2,714         3,547         5,014
  Amortization of goodwill                                79               -            79             -
  Merger related costs                                     -               -             -           505
                                                 -----------     -----------   -----------   -----------

     Total operating expenses                         10,025          13,367        21,163        27,009
                                                 -----------     -----------   -----------   -----------

         Loss from operations                         (5,782)         (3,075)       (9,362)       (9,190)
Other income                                             393             710           943         1,468
Other expense                                             (5)              -           (28)         (103)
                                                 -----------     -----------   -----------   -----------

     Loss before income taxes                         (5,394)         (2,365)       (8,447)       (7,825)
Income tax expense                                        43              50           269            82
                                                 -----------     -----------   -----------   -----------

         Net loss                                     (5,437)         (2,415)       (8,716)       (7,907)

Preferred stock accretion                                  -               -             -           (43)
                                                 -----------     -----------   -----------   -----------
     Net loss available to common
     shareholders                                $    (5,437)    $    (2,415)  $    (8,716)  $    (7,950)
                                                 ===========     ===========   ===========   ===========

Basic and diluted net loss per common share           $(0.30)         $(0.14)       $(0.48)       $(0.45)
                                                 ===========     ===========   ===========   ===========

Shares used in computing basic and diluted
net loss per common share                         18,356,093      17,657,822    18,210,908    17,488,959
                                                 ===========     ===========   ===========   ===========
</TABLE>

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

                                  Page 4 of 27
<PAGE>

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

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

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

                                  Page 5 of 27
<PAGE>

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

<TABLE>
<CAPTION>
                                                                          Six Months Ended June 30,
                                                                          -------------------------
                                                                             2001           2000
                                                                          ----------     ----------
<S>                                                                       <C>            <C>
Cash flows from operating activities:
  Net loss                                                                $   (8,716)    $   (7,907)
     Adjustments to reconcile net loss to net cash used in
       operating activities:
          Option and warrant expense                                              15            210
          Depreciation and amortization                                        1,199          1,528
          Changes in assets and liabilities:
            Accounts receivable                                                2,614         (3,898)
            Prepaid expenses and other current assets                           (129)           297
            Other assets                                                           6             89
            Accounts payable and accrued liabilities                          (1,783)        (1,982)
            Compensation-related accruals                                     (1,406)         1,025
            Deferred revenue                                                    (513)        (2,711)
                                                                          ----------     ----------
              Net cash used in operating activities                           (8,713)       (13,349)
                                                                          ----------     ----------
Cash flows from investing activities:
  Purchases of short-term investments                                         (9,179)        (6,780)
  Proceeds from maturity of short-term investments                            31,782         19,143
  Purchases of property and equipment                                           (967)        (2,297)
  Issuance of note receivable from related party                                (750)             -
  Cash paid in acquisition, net of cash assumed                                  237              -
                                                                          ----------     ----------
              Net cash provided by investing activities                       21,123         10,066
                                                                          ----------     ----------
Cash flows from financing activities:
  Repayments on long-term debt                                                   (25)          (379)
  Proceeds from the issuance of common stock                                     353          2,765
  Payments made on lease obligations                                             (93)             -
                                                                          ----------     ----------

              Net cash provided by financing activities                          235          2,386

Effect of exchange rate changes on cash                                          253            (23)
                                                                          ----------     ----------
              Net increase (decrease) in cash and cash equivalents            12,898           (920)

Cash and cash equivalents at beginning of period                              10,502         17,602
                                                                          ----------     ----------
Cash and cash equivalents at end of period                                $   23,400     $   16,682
                                                                          ==========     ==========

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 due under credit facility                                   781,000              -
</TABLE>

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

                                  Page 6 of 27
<PAGE>

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(In thousands, except share data)
(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 more than 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 its 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).

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

                                  Page 7 of 27
<PAGE>

for any interim period are not necessarily indicative of the results of
operations for any other interim period or for a full fiscal year.

Reclassifications

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

Cash, Cash Equivalents and Short-term Investments

Cash, cash equivalents and short-term investments are comprised of the
following:

                                   June 30, 2001   December 31, 2000
                                   -------------   -----------------

Cash and cash equivalents             $23,400            $10,502
Short-term investments                  6,873             29,457
                                      -------            -------

Total cash, cash equivalents
 and short-term investments           $30,273            $39,959
                                      =======            =======


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 shipped the software, license revenue recognition depends on whether we
have begun core implementation. For license agreements under which we have no
implementation responsibility, or where implementation is not considered to be
essential to the functionality of the software, we recognize revenue upon
shipment 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 sub

                                  Page 8 of 27
<PAGE>

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.

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.

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


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 its 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

                                  Page 9 of 27
<PAGE>

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):

                               Six Months Ended
                                   June 30,
                             -------------------
                               2001       2000
                             --------   --------
Total revenues               $ 16,627   $ 23,519
Net loss                      (12,561)   (12,005)
Pro forma loss per share:
  Basic and diluted             (0.67)     (0.66)


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 June 30, 2001 and
2000, as the effect was anti-dilutive.

Potential common shares consisted of options and warrants to purchase 6,933,842
and 4,577,182 common shares at June 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 six months ended June 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                    Three Months Ended           Six Months Ended
                                                          June 30,                   June 30,
                                                  ------------------------   ------------------------
                                                     2001          2000        2001           2000
                                                  ----------    ----------   ----------    ----------
<S>                                               <C>           <C>          <C>           <C>
Net loss                                          $  (5,437)    $  (2,415)   $  (8,716)    $  (7,907)
Other comprehensive loss:
 Foreign currency translation                            (7)          (17)         (41)          (23)
 Unrealized gain (loss) on securities
  available-for-sale                                    (10)           64           19             2
                                                  ---------     ---------    ---------     ---------
Total comprehensive loss                          $  (5,454)    $  (2,368)   $  (8,738)    $  (7,928)
                                                  =========     =========    =========     =========
</TABLE>

NOTE 6.   BUSINESS SEGMENT INFORMATION

                                 Page 10 of 27
<PAGE>

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 six months ended June 30, 2001
and 2000:

<TABLE>
<CAPTION>
                                    Three Months Ended June 30,                Six Months Ended June 30,
                                   -----------------------------             -----------------------------
                                     2001                2000                  2001                 2000
                                   --------           ----------             ---------           ---------
     <S>                           <C>                <C>                    <C>                 <C>
     United States                 $  5,426           $    8,570             $  13,242           $  17,273
     Japan                              527                  442                 2,103               1,480
     Other                              564                4,049                 1,250               4,766
                                   --------           ----------             ---------           ---------
         Total revenues            $  6,517           $   13,061             $  16,595           $  23,519
                                   ========           ==========             =========           =========
</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 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.   CREDIT FACILITY

In connection with the May 2001 acquisition of AnswerLogic, Primus assumed
AnswerLogic's outstanding obligation approximately $781,000 under a Loan and
Security Agreement ("Agreement") with a bank, which was comprised of a revolving
line of credit in the amount of $325,000 and an equipment financing facility for
$1,000,000. Advances under the revolving line of credit bore interest at a per
annum rate equal to the Prime rate (7.0% at the time of acquisition) plus one
percent. Any borrowings under the equipment financing facility accrued interest
at the per annum rate equal to the basic rate determined by the bank. Interest
rates for both the revolving line of credit and the equipment financing facility
ranged from 8.0% to 9.9% at the time of acquisition. All borrowings were
collateralized by the assets of the AnswerLogic. On July 5, 2001, Primus paid
the outstanding balances of both the revolving line of credit and the equipment
financing facility in full, including all accrued interest charges, and
cancelled the Agreement with the bank.

                                 Page 11 of 27
<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 (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.

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 (VOIP) --
and to manage customer information in a way that helps companies maximize the
value of each customer interaction. Facilitating more efficient communications
with customers can help to improve the level and quality of customer service
companies deliver and, in turn, increase customer satisfaction and retention and
cross-sell and up-sell opportunities.

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 its 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.

                                 Page 12 of 27
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 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 six months ended
June 30, 2001 and 2000 are not necessarily indicative of the results that may be
expected for any future period.

<TABLE>
<CAPTION>
                                   Three Months Ended June 30,      Six Months Ended June 30,
                                   ---------------------------     --------------------------
                                      2001             2000           2001             2000
                                    --------         --------      ---------         --------
<S>                                 <C>              <C>           <C>               <C>
Revenues:
 License                                36.5%            75.9%          50.3%            72.7%
 Services                               63.5             24.1           49.7             27.3
                                    --------         --------       --------         --------
 Total revenues                        100.0            100.0          100.0            100.0
                                    --------         --------       --------         --------
Cost of revenues:
 License                                 1.0              2.5            1.2              2.8
 Services                               33.9             18.7           27.7             21.5
                                    --------         --------       --------         --------
 Total cost of revenues                 34.9             21.2           28.9             24.3
                                    --------         --------       --------         --------
Gross profit                            65.1             78.8           71.1             75.7
                                    --------         --------       --------         --------
Operating expenses:
 Sales and marketing                    76.2             53.1           67.7             58.5
 Research and development               51.0             28.5           38.0             32.9
 General and administrative             25.4             20.8           21.4             21.3
 Goodwill                                1.2               --             .5               --
 Merger related costs                     --               --             --              2.1
                                    --------         --------       --------         --------
 Total operating expenses              153.8            102.4          127.6            114.8
                                    --------         --------       --------         --------
Loss from operations                   (88.7)           (23.6)         (56.5)           (39.1)
Other income                             6.0              5.4            5.7              6.2
Other expense                           ( .1)              --            (.2)             (.4)
                                    --------         --------       --------         --------
Loss before income taxes               (82.8)           (18.2)         (51.0)           (33.3)
Income tax expense                        .6               .3            1.5               .3
                                    --------         --------       --------         --------
Net loss                               (83.4)%          (18.5)%        (52.5)%          (33.6)%
                                    ========         ========       ========         ========
</TABLE>

Revenues

We derive our revenue from the sale of software licenses and related services
including consulting and training services and support and maintenance
contracts.  Revenue was approximately $6.5 million and $13.1 million for the
three months ended June 30, 2001 and 2000, respectively, representing a decrease
in the second quarter of 2001 of approximately $6.5 million, or 50%, over the
comparable quarter of the prior year. Revenue was approximately $16.6 million
and $23.5 million for the six months ended June 30, 2001 and 2000, respectively,
representing a decrease of approximately $6.9 million, or 29%, over the
comparable period of the prior year.

License Revenue. License revenue was approximately $2.4 million and $9.9 million
for the three months ended June 30, 2001 and 2000, respectively, representing a
decrease in the second quarter of 2001 of approximately $7.5 million, or 76%,
over the comparable quarter of the prior year. License revenue was approximately
$8.3 million and $17.1 million for the six months ended June 30, 2001 and 2000,
respectively, representing a decrease of approximately $8.8 million, or 51%,
over the comparable period of the prior year. International license revenues
were approximately $300,000 and $4.0 million for the three months ended June 30,
2001 and 2000, respectively and approximately $1.7 million and $5.4 million for
the six months ended June 30, 2001 and 2000,

                                 Page 13 of 27
<PAGE>

respectively. We believe the 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 $4.1 million and $3.2
million for the three months ended June 30, 2001 and 2000, respectively,
representing an increase in the second quarter of 2001 of approximately
$900,000, or 31%, over the comparable quarter of the prior year.  Services
revenue was approximately $8.3 million and $6.4 million for the six months ended
June 30, 2001 and 2000, respectively, representing an increase of approximately
$1.9 million or 28%, over the comparable period of the prior year.  Maintenance
and support contract revenues increased approximately $1.4 million in the second
quarter of 2001 over the comparable quarter of the prior year and increased
approximately $2.8 million in the first six months of 2001 over the same period
in the prior year.  Consulting fees decreased approximately $400,000 in the
second quarter of 2001 over the comparable quarter of the prior year and
decreased approximately $1 million in the first six months of 2001 over the
comparable period of the prior year.

Service revenue represented 63.5% and 24.1% of our total revenue for the three
months ended June 30, 2001 and 2000, respectively and 49.7% and 27.3% of our
total revenue for the six months ended June 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 $68,000 and $330,000 for the three months ended June 30, 2001 and
2000, respectively, and approximately $202,000 and $653,000 for the six months
ended June 30, 2001 and 2000, respectively.  Cost of license revenue as a
percentage of license revenue was 2.9% and 3.3% for the three months ended June
30, 2001 and 2000, respectively and 2.4% and 3.8% for the six months ended June
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 $2.2 million and $2.4 million for the three months
ended June 30, 2001 and 2000, respectively and $4.6 million and $5.0 million for
the six months ended June 30, 2000 and 2001, respectively.  Cost of services
revenue decreased approximately $200,000 or 10%, for the three months ended June
30, 2001 compared to the same period in 2000, while cost of services as a
percentage of service revenues decreased to 53% from 77% for the same period.
Cost of services revenue decreased approximately $450,000 or 9%, for the six
months ended June 30, 2001 compared to the same period in 2000, while cost of
services as a percentage of service revenues decreased to 56% from 78% 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.

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 $5.0 million and $6.9 million for the three months ended June 30,
2001 and 2000, respectively, representing a decrease of approximately $1.9
million or 28%. Sales and marketing expenses were approximately $11.2 million

                                 Page 14 of 27
<PAGE>

and $13.8 million for the six months ended June 30, 2001 and 2000, respectively,
representing a decrease of approximately $2.6 million or 19%.  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 76.2% and 53.1% for the three
months ended June 30, 2001 and 2000, respectively, and 67.7% and 58.5% for the
six months ended June 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 $3.3 million and $3.7 million for the
three months ended June 30, 2001 and 2000, respectively, representing a decrease
of approximately $400,000 or 11%.  Research and development expenses were
approximately $6.3 million and $7.7 million for the six months ended June 30,
2001 and 2000, respectively, representing a decrease of approximately $1.4
million or 18%.  These decreases were 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 51% and 29% for the three months ending June 30, 2001 and
2000, respectively and 38% and 33% for the six months ending June 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 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 $1.7 million and $2.7 million for the three months
ended June 30, 2001 and 2000, respectively, representing a decrease of
approximately $1 million or 37%. General and administrative expenses were
approximately $3.5 million and $5.0 million for the six months ended June 30,
2001 and 2000, respectively, representing a decrease of approximately $1.5
million or 30%.  These decreases were primarily due to the reduction in the
variable component of total compensation related costs along with a decrease in
bad debt expense and professional service fees during the current period.
General and administrative expenses as a percentage of total revenue were 25%
and 21% for the three months ended June 30, 2001 and 2000, respectively, and 21%
for both the six months ended June 30, 2001 and 2000.  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.

Goodwill Amortization.  Amortization of goodwill was $79,000 for both the three
and six months ended June 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.  The goodwill
amortization of $79,000 reflects the amortization expense for the month of June
2001.

Merger Related Costs.  Merger related costs were approximately $505,000 for the
six months ended June 30, 2000.  These costs were recorded in connection with
the January 2000 merger with 2order.com that was

                                 Page 15 of 27
<PAGE>

accounted for under the pooling-of-interests method of accounting.

Other Income, Net. Other income, net of other expense, was $388,000 and $710,000
for the three months ended June 30, 2001 and 2000, respectively and $915,000 and
$1.5 million for the six months ended June 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. We expect to
continue to yield investment income on our average balance of combined cash and
cash equivalents and short-term investments at an average rate comparable to
that experienced in the first six months of 2001.

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

Liquidity and Capital Resources

As of June 30, 2001, we had cash, cash equivalents and short-term investments of
approximately $30.3 million, a decrease of $9.7 million from the $40.0 million
of cash, cash equivalents and short-term investments held as of December 31,
2000.  As of June 30, 2001, our working capital was approximately $24.4 million
compared to approximately $34.4 million at December 31, 2000.

Our operating activities resulted in net cash outflows of approximately $8.7
million for the six months ended June 30, 2001.  Adjustments to the $8.7 million
net loss to reconcile to cash used in operating activities includes
approximately $3.7 million for the decrease in compensation-related accruals,
account payable, accrued liabilities and deferred revenue.  This is offset by
approximately $2.6 million for the decrease in accounts receivable combined with
$1.2 million in depreciation and amortization.  Net cash used in operating
activities was approximately $13.3 million for the six months ended June 30,
2000.

Investing activities provided cash of approximately $21.1 million for the six
months ended June 30, 2001.  Investing activities for this period consisted
primarily of approximately $31.8 million in proceeds from the maturity of short-
term investments offset by approximately $9.2 million in purchases of short-term
investments.  Further activities included the purchase of approximately $1
million in capital equipment along with the issuance of a $750,000 related party
note. Net cash provided by investing activities was approximately $10.1 million
for the six months ended June 30, 2000.

Financing activities provided cash of $235,000 for the six months ended June 30,
2001.  Financing activities for this period included $353,000 in proceeds from
the exercise of stock options, partially offset by $118,000 in payments made on
long-term debt and lease obligations.  Net cash provided by financing activities
was approximately $2.4 million for the six months ended June 30, 2000.

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

     .  enter new markets for our products and services

     .  expanding distribution channels and partner relationships

     .  acquiring technology that expands product offerings

     .  increasing research and development spending


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 and cash equivalents and

                                 Page 16 of 27
<PAGE>

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

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

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 June 30, 2001, we
had an accumulated deficit of $76.1 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

                                 Page 17 of 27
<PAGE>

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. Once commenced,
implementation of our products can typically be completed within 30 days. 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.

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               . product ease-of-use

  . the availability of products on             . the quality of customer
    the Internet and multiple                     support services,
    operating platforms                           documentation and training

  . measurable economic return                  . the quality, speed and
                                                  effectiveness of application
  . customer referenceability                   . development services

                                 Page 18 of 27
<PAGE>

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

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

  . product scalability
</TABLE>

     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.

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
June 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 its 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
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.

                                 Page 19 0f 27
<PAGE>

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. Thus, successful deployment and broad acceptance of our products will
depend in part on the quality of the users' existing database of solutions,
which is outside our control.

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

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

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

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

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

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

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

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

                                 Page 20 of 27
<PAGE>

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

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

Acquisitions could disrupt our business and harm our financial condition.

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

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

     .  assume contingent, unrecorded and warranty liabilities

     .  incur a one-time charge

     .  amortize goodwill and other intangible assets

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 benefits
of any such acquisition, we typically must make the acquired technology,
products and services operate together with our technology, products and
services. We may be required to spend additional time or money on integration
which would otherwise be spent on developing our business and services or other
matters. If we do not integrate 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.

We may be adversely affected if we lose key personnel.

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

Our international operations are subject to additional risks.

     Revenues from customers outside the United States represented approximately
$3.4 million for the six months ended June 30, 2001 or 20.2% 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

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     .  longer sales cycles

     .  greater difficulty or delay in accounts receivable collection

     .  import and export restrictions and tariffs

     .  difficulties in staffing and managing foreign operations

     .  political and economic instability

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

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

                                 Page 22 of 27
<PAGE>

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 shareholder approval include:

     .  election of directors

     .  certain amendments to our articles of incorporation

     .  merger or consolidation

     .  sale of all or substantially all our assets

                                 Page 23 of 27
<PAGE>

     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.

     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

                                 Page 24 of 27
<PAGE>

regulations to the Internet and other online services could harm our growth and
increaseour 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, the 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.  Any changes as required by these statements or any other accounting
standards could materially adversely affect our business, financial condition
and operating results.

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

                                 Page 25 of 27
<PAGE>

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 six months ended June 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 June 30, 2001 of
approximately $6.9 million had a weighted average interest rate of 5.94% and are
primarily due in 2001. At June 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 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

On May 31, 2001, Primus acquired AnswerLogic Inc., for purchase consideration of
750,000 shares of Primus' common stock and acquisition expenses of $140,000.
Primus recorded approximately $2.8 million for goodwill in connection with this
acquisition. Each of the recipients of the shares in the transaction was an
accredited investor (as that term is defined in Regulation D adopted under the
Securities Act of 1933, as amended (the "Securities Act") and the issuance of
the shares was exempt from registration under the Securities Act by virture of
Section 4(2) and Rule 506 thereunder.

Item 6.    Exhibits and Reports on Form 8-K

(a)   Exhibits

      10.21  Loan agreement dated April 16, 2001 between registrant and Michael
      Brochu.

                                 Page 26 of 27
<PAGE>

     10.22  Promissory note dated April 16, 2001 between registrant and Michael
     Brochu.


(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 June 15, 2001, we filed a Form 8-K reporting the acquisition of
     AnswerLogic Inc.

SIGNATURES

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

                             PRIMUS KNOWLEDGE SOLUTIONS, INC.


Date:  August 14, 2001       By: /s/ Ronald M. Stevens
                                ------------------------------------------------
                             Ronald M. Stevens
                             Vice President, Chief Financial Officer,
                             and Treasurer

                             (Principal financial and chief accounting officer)

                                 Page 27 of 27