<PAGE>

                                                                    EXHIBIT 10.1

                              SETTLEMENT AGREEMENT

      THIS SETTLEMENT AGREEMENT ("Agreement") is made as of September 15, 1999,
by and between PERITUS SOFTWARE SERVICES, INC., a Massachusetts corporation with
an address at Two Federal Street, Billerica, Massachusetts 01821 ("Peritus") and
BCIA NEW ENGLAND HOLDINGS LLC, a Delaware limited liability company with an
address c/o Boston Capital Institutional Advisors LLC, One Boston Place, Boston,
Massachusetts 02108 ("BCIA").

      WHEREAS, Peritus, as Tenant, and MGI Two Federal Street, Inc. ("MGI"), as
Landlord, entered into a certain lease, dated December 11, 1997 (the "Lease")
with respect to certain property known as Two Federal Street, Billerica,
Massachusetts (the "Premises"); and

      WHEREAS, BCIA purchased the Premises from MGI and succeeded to MGI's
interest as Landlord under the Lease; and

      WHEREAS, Peritus is in default under the Lease for failing to pay Rent and
other sums due and owing under the Lease in the amount of Two Hundred Thirty Two
Thousand One Hundred Ninety Seven and 34/100 Dollars ($232,197.34) as of the
date hereof; and

      WHEREAS, on the basis of said default by Peritus, BCIA has terminated the
Lease by letter dated August 23, 1999; and

      WHEREAS, BCIA and Peritus desire to settle all claims that could be raised
in a lawsuit between the parties and to avoid the expense and inconvenience of
litigation between them, by compromising their respective rights and obligations
in accordance with and subject to the terms of this Agreement; and

      WHEREAS, Peritus believes that the Rent payable under the Lease is at
least equal to the fair market rent for the Premises; and

      WHEREAS, Peritus furthermore has determined that it shall benefit by
settling all of its outstanding and future liabilities under the Lease at this
time in accordance with the terms of this Agreement and terminating its
obligations to make future Rent (as such term is defined in the Lease) payments
under the Lease.

      NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and which consideration includes
but is not limited to the mutual covenants expressed herein, the parties hereto
agree as follows:
<PAGE>

      1. All of the foregoing recitals of the respective parties hereto are true
and correct and are hereby incorporated in and made a part of this Agreement to
the same extent as if herein set forth in full. Capitalized terms not otherwise
defined herein shall have the meaning ascribed thereto in the Lease.

      2. BCIA and Peritus hereby acknowledge and agree that the Lease has been
heretofore validly, effectively and finally terminated and that Peritus has no
further rights thereunder. Upon the execution of this Agreement and full
compliance with the terms and conditions hereof, all of the parties' respective
rights, liabilities and obligations under the Lease shall be terminated with
finality and without recourse as if such document had never been executed, and
the same shall be deemed null and void ab initio and of no further force and
effect.

      3. Peritus shall vacate the Premises no later than 5:00 p.m. on October
15, 1999 (the "Effective Date"). In yielding-up the Premises, Peritus shall
comply with the terms and conditions of Section 6.1 of the Lease; provided,
however, that all of the equipment and furnishings set forth on Exhibit A
attached hereto and incorporated herein (the "Furnishings") and all
improvements, additions and alterations made by Peritus at the Premises (the
"Improvements") other than those listed on Exhibit B attached hereto and
incorporated herein shall remain at the Premises and become the property of
BCIA. Peritus hereby represents and warrants that all such Furnishings and
Improvements are free and clear of any and all liens, security interests or
encumbrances of any kind whatsoever, and Peritus hereby indemnifies BCIA against
any such liens, security interests or encumbrances as may be asserted.
Simultaneously with the execution hereof, Peritus shall convey the Furnishings
to Buyer by a warranty bill of sale in the form of Exhibit C attached hereto and
incorporated herein, free and clear of any and all liens, security interests or
encumbrances of any kind whatsoever.

      4. Simultaneously with the execution hereof, Peritus shall pay to BCIA the
sum of Two Hundred Thousand Dollars ($200,000.00) by wire transfer of
immediately available federal Funds, or by cashier's, treasurer's, or certified
check.

      5. BCIA and Peritus hereby acknowledge and agree that BCIA is holding the
Security Deposit in the sum of Three Hundred Thousand Dollars ($300,000.00)
pursuant to Section 2.5 of the Lease. Peritus hereby agrees that BCIA may retain
the Security Deposit plus any and all interest accrued thereon.

      6. Simultaneously with the execution hereof, Peritus shall instruct its
transfer agent to issue and deliver Five Hundred Thousand (500,000) restricted
shares of its common stock, $.0l par value per share (the "Shares") to BCIA, and
BCIA shall pay to Peritus Five Thousand Dollars ($5,000.00) for the par value
therefor. Peritus hereby represents and warrants that the Shares to be issued in
connection herewith have been, or prior to their issuance will have been, duly
authorized for issuance by Peritus to BCIA, and on the date of their issuance
pursuant to the


                                        2
<PAGE>

terms and conditions hereof will be validly issued, fully paid and
non-assessable, free and clear of any liens, pledges and encumbrances of any
kind whatsoever.

      7. BCIA hereby represents and warrants to Peritus that (i) it is an
"accredited investor" as that term is defined under Regulation D promulgated
under the Securities Act of 1933 (the "Act"): (ii) it is acquiring the Shares
for investment and not with a view to distribution or resale except as permitted
under the Act; and (iii) the Shares shall bear a restrictive legend
substantially as follows: "The securities represented by this certificate have
not been registered under the Act and may not be sold, assigned or transferred
in the absence of an effective registration statement under the Act or an
opinion of counsel satisfactory to the company that such registration is not in
the circumstances required."

      8. Peritus hereby represents and warrants, as of the date hereof, that it
is paying its obligations as they come due, that the fair saleable value of its
assets exceeds the sum of its liabilities, and that no petition has been filed
by or against it under the Federal Bankruptcy Code or any similar state or
federal law. Peritus hereby further represents and warrants that the Securities
and Exchange Commission ("SEC") Form 10-Q for the Quarterly Period Ended June
30, 1999 filed by Peritus with the SEC as of August 11, 1999 (the "Form l0-Q")
was true and correct in all material respects as of the date thereof.

      9. Upon the execution of this Agreement and full compliance with the terms
and conditions hereof, Peritus and BCIA shall unconditionally release each other
and each other's respective successors, predecessors, heirs, assigns,
affiliates, subsidiaries and parent companies from any and all claims, causes of
action, obligations and/or liabilities that the one had, has or may have had
against the other, from the beginning of the world to the date hereof, including
but not limited to any claims, causes of action, obligations or liabilities
arising under or re1ating to the Lease, but specifically excepting obligations
undertaken in connection herewith. In furtherance, but not in limitation of the
foregoing, Peritus hereby agrees that it shall not seek repayment of any amounts
from BCIA on any basis, including without limitation, on the asserted grounds
that such amounts are recoverable in any Chapter 7 or Chapter 11 bankruptcy
proceedings of Peritus which may be commenced in the future. In the event this
Agreement is set aside or declared invalid for any reason whatsoever, all of
BCIA's rights and remedies under the Lease shall be immediately reinstated as
though this Agreement had never been entered into.

      10. The execution and delivery of this Agreement, and the performance of
the parties' respective obligations hereunder have been duly authorized by all
requisite organizational action, and this Agreement has been duly executed and
delivered by a duly authorized representative of the parties. None of the
foregoing requires any action by or filing with any governmental or
quasi-governmental body having jurisdiction over any party hereto or the
Premises, or contravenes or constitutes a default under any provision of any
applicable law, any organizational document of BCIA or Peritus or any agreement,
judgment, injunction, order, decree or other instrument binding upon BCIA or
Peritus. This Agreement constitutes the valid


                                        3
<PAGE>

and binding obligations of BCIA and Peritus enforceable in accordance with its
terms, subject to bankruptcy and similar laws affecting the remedies or recourse
of creditors generally and principles of equity.

      11. This Agreement (i) contains the entire agreement by and between BCIA
and Peritus with respect to the foregoing and supersedes all previous agreements
between the parties with respect to the subject matter hereof, whether express
or implied, written or oral; (ii) shall be binding upon and inure to the benefit
of the heirs, successors and assigns of BCIA and Peritus; (iii) shall be
construed in accordance with the laws of the Commonwealth of Massachusetts; (iv)
may only be modified by a writing signed by an authorized representative of each
party; and (v) may be executed in counterparts, each of which shall be an
original and all of which counterparts taken together shall constitute one and
the same agreement.

      12. Execution of this Agreement is the free and voluntary act of both BCIA
and Peritus and does not occur as a result of any coercion or duress, and is
being made after receipt of advice from legal counsel. Landlord and Tenant state
that the undersigned have read the Agreement, understand the contents thereof,
and execute the same as their free act and deed.

      13. BCIA hereby consents to Peritus or its agents conducting one one-day
auction at the Premises of Peritus' equipment and furnishings (other than those
set forth on Exhibit A hereto) on or before the Effective Date.

                  [Remainder of page intentionally left blank]


                                        4
<PAGE>

EXECUTED under seal as of the day and year first set forth above.


                      BCIA NEW ENGLAND HOLDINGS LLC, a Delaware
                            limited liability company

                      By: BCIA NEW ENGLAND HOLDINGS MASTER
                          LLC, a Delaware limited liability company, its
                          Manager

                          By: BCIA NEW ENGLAND HOLDINGS
                              MANAGER LLC, a Delaware limited
                              liability company, its Manager

                                   By: BCIA NEW ENGLAND
                                       HOLDINGS MANAGER CORP., a
                                       Delaware corporation, its Manager


                                       By:  /s/ Karl W. Weller
                                            --------------------------
                                            Karl W. Weller
                                            Executive Vice President

                        PERITUS SOFTWARE SERVICES, INC., a
                        Massachusetts corporation


                        By:  /s/ John D. Giordano  9/14/99
                             --------------------------------
                             John D. Giordano
                             President


                                        5
<PAGE>

                                    Exhibit A

                             Schedule of Furnishings

 .     Fifty (50) complete workstations installed on the second floor

 .     Reception desk located in main lobby

 .     Ten (10) cafeteria tables and thirty (30) cafeteria chairs

 .     Cafeteria serving table and non-commercial refrigerator

 .     Projection screens located throughout building, with exception of five (5)
      which have already been removed from second floor

 .     All building equipment and fixtures permanently attached, excluding
      whiteboards, including but not limited to:

      .     Computer room Liebert cooling units;

      .     All telephone/data wiring;

      .     Security system including computer;

      .     All remaining kitchen equipment (as of 9/1/99): refrigerators,
            ovens, racks, tables, etc.; and

      .     All remaining cable trays


                                        6
<PAGE>

                                    Exhibit B

                        Schedule of Excluded Furnishings

Five (5) ceiling projection screens from the second floor of the Premises.


                                        7
<PAGE>

                                    Exhibit C

                              Form of Bill of Sale

      For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, PERITUS SOFTWARE SERVICES1 INC., a Massachusetts
corporation with an address at Two Federal Street, Billerica, Massachusetts
01821 ("Seller"), hereby grants, bargains, conveys, sets over, transfers,
assigns and delivers unto BCIA NEW ENGLAND HOLDINGS LLC, a Delaware limited
liability company with an address c/o Boston Capital Institutional Advisors LLC,
One Boston Place, Boston, Massachusetts 02108 ("Buyer"), its successors and
assigns, all of Seller's right, title and interest in and to all of the personal
property set forth on Schedule 1 hereto, to have and to hold the same unto
Buyer, its successors and assigns forever, free and clear of any and all liens,
security interests or encumbrances of any kind whatsoever.

      EXECUTED as a sealed instrument as of the ____ day of September, 1999.

                                         PERITUS SOFTWARE SERVICES,
                                         INC., a Massachusetts corporation


                                         By:  /s/ John D. Giordano  9/14/99
                                              ---------------------------------
                                              John D. Giordano
                                              President


                                        8
<PAGE>

                                   Schedule 1

 .     Fifty (50) complete workstations installed on the second floor

 .     Reception desk located in main lobby

 .     Ten (10) cafeteria tables and thirty (30) cafeteria chairs

 .     Cafeteria serving table and non-commercial refrigerator

 .     Projection screens located throughout building, with exception of five (5)
      which have already been removed from second floor

 .     All building equipment and fixtures permanently attached, excluding
      whiteboards, including but not limited to:

      .     Computer room Liebert cooling units;

      .     All telephone/data wiring;

      .     Security system including computer;

      .     All remaining kitchen equipment (as of 9/1/99): refrigerators,
            ovens, racks, tables, etc.; and

      .     All remaining cable trays


                                        9