---

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

________________

FORM 10-Q



|(Mark One)
|----------
|x         

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM           
                TO
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                      

COMMISSION FILE NUMBER 000-22647

PERITUS SOFTWARE SERVICES, INC.(Exact Name of Registrant as Specified in Its Charter)



|Massachusetts                                                  | 04-3126919                          
|-------------------------------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.)
|                                                               |                                     
|112 Turnpike Road, Suite 111, Westborough, Massachusetts       | 01581-2860                          
|(Address of Principal Executive Offices)                       | (Zip Code)                          

(508) 870-0963(Registrant's Telephone Number, Including Area Code)

Not Applicable(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

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. Yesx     No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:



|                             | Shares outstanding
|---------------------------- | ------------------
|Title of Class               | at May 10, 2001   
|                             |                   
|Common Stock, $.01 par value | 27,319,903        
|                             |                   

---



PERITUS SOFTWARE SERVICESINC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

TABLE OF CONTENTS

|Part I. Financial Information                                                                 | Page
|--------------------------------------------------------------------------------------------- | ----
|                                                                                              |     
|                                                                                              |     
|Item 1. Financial Statements
--Unaudited                                                      | 3   
|Consolidated Balance Sheet as of March 31, 2001 and December 31, 2000                         | 3   
|Consolidated Statement of Operations for the Three Months Ended March 31, 2001 and 2000       | 4   
|Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2001 and 2000       | 5   
|Notes to Unaudited Consolidated Financial Statements                                          | 6   
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 8   
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            | 17  
|                                                                                              |     
|                                                                                              |     
|Part II. Other Information                                                                    |     
|                                                                                              |     
|                                                                                              |     
|Item 1. Legal Proceedings                                                                     | 18  
|                                                                                              |     
|                                                                                              |     
|Item 6. Exhibits and Reports on Form 8-K                                                      | 18  
|Signatures                                                                                    | 19  

From time to time, information provided by the Company or statements made by its employees may contain ''forward-looking'' statements, as that term is defined
in the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words
''believes'', ''anticipates'', ''plans'', ''expects'', and similar expressions are intended to identify forward-looking statements.

This Quarterly Report on Form 10-Q may contain forward looking statements which involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in such statements. Certain factors that could cause such a difference include, without limitation, the risks specifically described in the Company's Annual Report on Form 10-K for the year ended December 31,
2000 and other public documents, filed by the Company with the Securities and Exchange Commission (the ''Commission''), which factors are incorporated herein by reference and the factors listed below in "Factors That May Affect Future
Results." The Companys forward looking statements generally do not reflect the impact of any future transactions or strategic alliances. From time to time, the Company may also provide oral or written forward-looking statements in other
materials it releases to the public. The Company does not assume any obligation to update any of the forward-looking statements it makes.



PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

PERITUS SOFTWARE SERVICES, INC.CONSOLIDATED BALANCE SHEET(In thousands, except share-related data)

(Unaudited)

|ASSETS                                                                              |  | March 31,

2001 |          | December 31,

2000
|----------------------------------------------------------------------------------- |  | --------------- | -------- | ------------------
|                                                                                    |  |                
|                                                                                    |  |                 |          |                   
|Current assets:                                                                     |  |                 |          |                   
|Cash and cash equivalents                                                           |  | $               | 3,652    |                   
|Short-term investments                                                              |  |                 | 1,411    |                   
|Accounts receivable, net of allowance for doubtful accounts of $25                  |  |                 | 108      |                   
|Costs and estimated earnings in excess of billings on uncompleted contracts         |  |                 |         |                   
|Prepaid expenses and other current assets                                           |  |                 | 206      |                   
|                                                                                    |  |                 |          |                   
|Total current assets                                                                |  |                 | 5,377    |                   
|Long-term investments                                                               |  |                 | 1,000    |                   
|Property and equipment, net                                                         |  |                 | 139      |                   
|                                                                                    |  |                 |          |                   
|                                                                                    |  | $               | 6,516    |                   
|                                                                                    |  |                 |          |                   
|                                                                                    |  |                 |          |                   
|Current liabilities:                                                                |  |                 |          |                   
|Current portion of capital lease obligations                                        |  | $               | 13       |                   
|Accounts payable                                                                    |  |                 | 6        |                   
|Customer advances                                                                   |  |                 | 289      |                   
|Billings in excess of costs and estimated earnings on uncompleted contracts         |  |                 | 33       |                   
|Other accrued expenses and current liabilities                                      |  |                 | 360      |                   
|                                                                                    |  |                 |          |                   
|Total current liabilities                                                           |  |                 | 701      |                   
|Capital lease obligations                                                           |  |                 | 9        |                   
|                                                                                    |  |                 |          |                   
|Total liabilities                                                                   |  |                 | 710      |                   
|                                                                                    |  |                 |          |                   
|Commitments and contingencies                                                       |  |                 |         |                   
|Stockholders' equity:                                                               |  |                 |          |                   
|Common stock, $.01 par value; 50,000,000 shares authorized; 27,319,903              |  |                 |          |                   
|shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively |  |                 | 273      |                   
|Additional paid-in capital                                                          |  |                 | 113,208  |                   
|Accumulated deficit                                                                 |  |                 | (107,661 | )                 
|Accumulated other comprehensive loss                                                |  |                 | (14      | )                 
|                                                                                    |  |                 |          |                   
|Total stockholders' equity                                                          |  |                 | 5,806    |                   
|                                                                                    |  |                 |          |                   
|                                                                                    |  | $               | 6,516    |                   
|                                                                                    |  |                 |          |                   

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





PERITUS SOFTWARE SERVICES, INC.CONSOLIDATED STATEMENT OF OPERATIONS(In thousands, except per share related data)

(unaudited)

|                                                       |   |        |     |        | ThreeMonths |    
|------------------------------------------------------ | - | ------ | --- | ------ | ----------- | ---
|                                                       |   |        |     |        | Ended       |    
|                                                       |   |        |     |        | March 31,   |    
|                                                       |   |        |     |        |             |    
|                                                       |   |        |     |        | 2001        |    
|                                                       |   |        |     |        |             |    
|Revenue:                                               |   |        |     |        |             |    
|Outsourcing services                                   |   | $      | 541 |        | $           | 809
|License                                                |   |        |     |        |            |    
|Other services                                         |   |        |     | 37     |             |    
|                                                       |   |        |     |        |             |    
|Total revenue                                          |   |        |     | 578    |             |    
|                                                       |   |        |     |        |             |    
|Cost of revenue:                                       |   |        |     |        |             |    
|Cost of outsourcing services                           |   |        | 319 |        |             | 510
|Cost of license                                        |   |        |     |       |             |    
|Cost of other services                                 |   | 14     |     |        | 70          |    
|                                                       |   |        |     |        |             |    
|Total cost of revenue                                  |   | 333    |     |        | 580         |    
|                                                       |   |        |     |        |             |    
|Gross profit                                           |   |        |     | 245    |             |    
|                                                       |   |        |     |        |             |    
|Operating expenses:                                    |   |        |     |        |             |    
|Sales and marketing                                    |   |        | 82  |        |             | 57 
|Research and development                               |   | 265    |     |        | 325         |    
|General and administrative                             |   | 415    |     |        | 472         |    
|Gain on sale of assets                                 |  |        |     | (24    | )          
|                                                       |   |        |     |        |             |    
|Total operating expenses                               |   | 762    |     |        | 830         |    
|                                                       |   |        |     |        |             |    
|Profit (Loss) from operations                          |   | (517   | )   |        | 155         |    
|Interest income, net                                   |   |        |     | 93     |             |    
|Cost of strategic investment                           |  |        |     | 4,000  |            
|                                                       |   |        |     |        |             |    
|Net loss                                               |   |        |     | $      | (424        | )  
|                                                       |   |        |     |        |             |    
|Basic and Diluted Loss per share                       | $ | (0.02  | )   | $      | (0.21       | )  
|                                                       |   |        |     |        |             |    
|Weighted average shares outstanding -basic and diluted |   | 27,320 |     | 17,746 |            
|                                                       |   |        |     |        |             |    

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



PERITUS SOFTWARE SERVICES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                           |                                                                             |                                                    |       |      |       |     | Three Months Ended |      
|------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | -------------------------------------------------- | ----- | ---- | ----- | --- | ------------------ | -----
|                                                                                           |                                                                             |                                                    |       |      |       |     | March31,           |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|Increase (Decrease) in Cash andCash Equivalents                                            |                                                                             |                                                    |       |      |       |     |                    |      
|Cash flows from operating activities:                                                      |                                                                             |                                                    |       |      |       |     |                    |      
|Net loss                                                                                   |                                                                             |                                                    |       |      |       |     | $                  | (424 
|Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |                                                                             |                                                    |       |      |       |     |                    |      
|Depreciation and amortization                                                              |                                                                             |                                                    |       |      |       | 79  |                    |      
|Gain on asset sale                                                                         |                                                                             |                                                    |       |      |       |     |                   |      
|Cost of strategic investment                                                               |                                                                             |                                                    |       |      |       |     |                   |      
|Changes in assets and liabilities:                                                         |                                                                             |                                                    |       |      |       |     |                    |      
|                                                                                           | Accounts receivable                                                         |                                                    |       |      |       |     |                    | 457  
|                                                                                           | Costs and estimated earnings in excess of billings on uncompleted contracts |                                                    | 8     |      |       |     | 91                 |      
|                                                                                           | Prepaid expenses and other current assets                                   |                                                    |       | (10  | )     |     |                    | 72   
|                                                                                           | Other assets                                                                |                                                    |       |      |       |     |                    |     
|                                                                                           | Accounts payable                                                            |                                                    |       |      |       |     |                    | (28  
|                                                                                           | Billings in excess of costs and estimatedearnings on uncompleted contracts  |                                                    |       | (125 | )     |     |                    | (56  
|                                                                                           | Deferred revenue                                                            |                                                    |       |      |       |     |                    |     
|                                                                                           | Other accrued expenses and current liabilities                              |                                                    |       |      |       | (17 | )                  |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|                                                                                           |                                                                             | Net cashprovided by (usedfor) operating activities |       |      | (60   | )   |                    |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|Cash flows from investing activities:                                                      |                                                                             |                                                    |       |      |       |     |                    |      
|Proceeds from sale of property and equipment                                               |                                                                             |                                                    |       |     |       |     |                    | 57   
|Purchases of property and equipment                                                        |                                                                             |                                                    | (1    | )    |       |     |                   |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|                                                                                           | Net cash provided by (used for) investing activities                        |                                                    | (1    | )    |       |     | 57                 |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|Cash flows fromfinancing activities:                                                       |                                                                             |                                                    |       |      |       |     |                    |      
|Principal payments on capital lease obligations                                            |                                                                             |                                                    | (3    | )    |       |     | (4                 | )    
|Proceeds from exercise of stockoptions                                                     |                                                                             |                                                    |      |      |       |     | 28                 |      
|Proceeds from issuance of common stock, net of issuance costs                              |                                                                             |                                                    |      |      |       |     | 4,000              |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|                                                                                           | Net cash providedby (used for) financing activities                         |                                                    |       | (3   | )     |     |                    | 4,024
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|Effects of exchangerates on cash and cash equivalents                                      |                                                                             |                                                    |      |      |       |     |                   |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|Net increase (decrease) in cash and cash equivalents                                       |                                                                             |                                                    | (64   | )    |       |     | 4,391              |      
|Cashand cash equivalents,beginning of period                                               |                                                                             |                                                    |       |      | 3,716 |     |                    |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|Cash and cashequivalents, end of period                                                    |                                                                             | $                                                  | 3,652 |      |       | $   | 6,866              |      
|                                                                                           |                                                                             |                                                    |       |      |       |     |                    |      
|Supplemental disclosure of cash flows:                                                     |                                                                             |                                                    |       |      |       |     |                    |      
|Cash paid for income taxes                                                                 |                                                                             | $                                                  |      |      |       | $   |                   |      
|Cash paid for interest                                                                     |                                                                             |                                                    |      |      |       |     |                   |      

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





PERITUS SOFTWARE SERVICES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation and Current Financial Condition

The accompanying unaudited consolidated financial statements include the accounts of Peritus Software Services, Inc. and its subsidiaries
("Peritus" or the ''Company'') and have been prepared by the Company without audit in accordance with the Company's accounting policies, as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as
filed with the Securities and Exchange Commission (''SEC''). In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a
fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. While the Company believes that the disclosures presented are adequate to make the information not misleading,
these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2000 Annual Report on Form 10-K. The operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year ending December 31, 2001.

The Company's consolidated financial statements have been presented on the basis that it is a going concern, which contemplates continuity of
operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company experienced net losses of $424,000 for the quarter ended March 31, 2001 and net losses of $4,166,000 and $2,583,000 in the years
ended December 31, 2000 and 1999, respectively. Based on the Company's current forecasted cash expenditures and its cash on hand, the Company expects to have sufficient cash to finance its operations through the year 2001. The Company's future
beyond the year 2001 is dependent upon its ability to execute some form of organizational transaction, achieve break-even cash flow, or raise additional financing. There can be no assurances that the Company will be able to do so.

On March 27, 2000, Rocket Software, Inc. ("Rocket"), a privately held company, invested $4,000,000 in the Company in exchange for 10,000,000
shares ($.40 per share) of restricted common stock (37% of outstanding stock after the investment). The Company granted Rocket certain registration rights with respect to the shares. The Company recorded a $4,000,000 non-cash charge related to the
investment in the quarter ended March 31, 2000. The charge represented the difference between the quoted market price on the commitment date and the price paid by Rocket. Under certain sections of the Internal Revenue Code, a change in ownership of
greater than 50% within a three-year period places an annual limitation on the Company's ability to utilize its existing net operating loss and research and development tax credit carry-forwards. The investment by Rocket triggered the
limitation.

On October 16, 2000, the Company announced that it retained The Catalyst Group, LLC to render financial advisory and investment banking services in
connection with exploring strategic alternatives, including the potential sale of the Company.

On March 28, 2001, the Company announced that it had received a non-binding offer from Rocket to acquire the Company. Rocket currently owns 10,000,000
shares of the Company's common stock representing 36.6% of the total outstanding shares of 27,319,903.

On April 18, 2001, the Company announced it had executed an Agreement and Plan of Merger with Rocket and Rocket Acquisition Company, Inc. Under the
terms of the Agreement, Rocket Acquisition Company, Inc., a subsidiary of Rocket, would be merged into Peritus with Peritus as the surviving corporation. If the merger is completed, all Peritus shareholders other than Rocket, certain affiliates of
Rocket and dissenting stockholders would be paid $0.19 per share in cash in exchange for their Peritus shares. Outstanding options to purchase Peritus' common stock, with a per share exercise price less than $0.19, unless exercised, will be
converted into the right to receive, upon the surrender of the instrument evidencing the stock option, a cash payment equal to the product of (1) the number of shares underlying the option and (2) the difference between $0.19 and the per share
exercise price of the options. Such options will then be cancelled. All other outstanding options to purchase Peritus' common stock will be cancelled. In general, each of the parties has the right to terminate the agreement of merger, if the merger
is not completed on or before June 30, 2001. The Agreement also provides that the Company must have at least $4,810,000 in cash at closing after subtraction of the lesser of $840,000 or the actual transaction costs. Completion of the transaction is
subject to approval by the holders of a majority of Peritus' outstanding common stock, obtaining the requisite third party and governmental consents and other customary closing conditions. The Company filed a preliminary proxy statement relating to
the proposed merger with the SEC on April 27, 2001.

2.    Legal Proceedings

The Company is from time to time subject to legal proceedings and claims which arise in the normal course of its business. In the opinion of management,
the amount of ultimate liability with respect to these actions, currently known, will not have a material adverse effect on the Company's financial position or results of operations.

3.    Comprehensive Income (Loss)

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

PERITUS SOFTWARE SERVICES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended March 31, 2001 and 2000, the Company's comprehensive loss was equal to its net loss.

4.  Segment, Geographic, and Product Information

The Company operates in one reportable segment under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," due to its centralized structure and single industry segment: software maintenance, tools and services. The Company currently derives its revenue from software maintenance outsourcing services, software and methodology licensing
and other services.

Information by geographic area for the three months ended March 31, 2001 and 2000 is summarized below (in thousands):

|               |  | Outsourcing Services |     | License Revenue |   | Other Services Revenue |  | Longlived
|-------------- |  | -------------------- | --- | --------------- | - | ---------------------- |  | ----------
|
|March 31, 2001 |  |                      |     |                 |   |                        |  |           
|United States  |  | $                    | 541 |                 |   |                       |  | $         
|Foreign        |  |                      |    |                 |   |                       |  |           
|               |  |                      |     |                 |   |                        |  |           
|               |  | $                    | 541 |                 |   |                       |  | $         
|               |  |                      |     |                 |   |                        |  |           
|March 31, 2000 |  |                      |     |                 |   |                        |  |           
|United States  |  | $                    | 809 |                 |   |                       |  | $         
|Foreign        |  |                      |    |                 |   |                       |  |           
|               |  |                      |     |                 |   |                        |  |           
|               |  | $                    | 809 |                 | $ |                       |  | $         
|               |  |                      |     |                 |   |                        |  |           

Thegeographic classification of revenue is determined based on the country in
which the legal entity providing the services is located. Revenue from no single foreign country was greater than 10% of the consolidated revenues of the Company in quarters ended March 31,
2001 and 2000.

5.   Employment Agreement

Under the terms ofan employment agreement with Mr. John Giordano, President, Chief Executive
Officer, and Chief Financial Officer of Peritus, if



Mr. Giordano's employment is terminated by Peritus without cause (as defined) or terminates upon a change of control of Peritus, he will be entitled to receive:

| |  |  | a severance payment of approximately $200,000; and                                                                                                                                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |  |                                                                                                                                                                                                                    
| |  |  | benefits in accordance with Peritus' then current policies until the earlier of the date of one year following the termination date or the date Mr. Giordano commences employment or
consulting with a third party.



On February 26, 2001, Peritus provided Mr. Giordano with a letter agreement establishing the goals for his bonus for the year 2001. Pursuant to this
letter agreement, Mr. Giordano will receive a bonus equal to approximately $100,000 for the year 2001 if certain financial results for Peritus are achieved. In addition, the letter agreement provides that Mr. Giordano will receive a bonus of
$100,000 in lieu of the above bonus if a merger, or any sale of substantially all of the assets, of Peritus occurs on or prior to June 30, 2001. If such change of control occurs after July 1, 2001 through and including December 31, 2001, the letter
agreement provides that Mr. Giordano will be paid a bonus of $50,000 in lieu of the above bonuses.

6.    Catalyst Agreement

On October 16, 2000, the Company announced that it retained The Catalyst Group, LLC to render financial advisory and investment banking services in connection
with exploring strategic alternatives, including the potential sale of the Company. The Catalyst Agreement, dated October 16, 2000 and amended on April 9, 2001, provides for the Company to pay Catalyst a fixed fee of $50,000 for a fairness opinion
on the merger contemplated by the Agreement and Plan of Merger dated April 18, 2001 entered into by and among Peritus, Rocket and Rocket Acquistion Company, Inc.





Item 2.    Management's Discussion And Analysis Of Financial Condition And Results Of Operations

Overview and Current Financial Condition

Peritus was incorporated in Massachusetts in August 1991. The Company provides solutions consisting of software products and services that enable
organizations to improve the productivity, quality and effectiveness of their information technology, systems maintenance, or "software evolution" functions. The Company derives its revenue from software maintenance outsourcing services,
software and methodology licensing, and other services.

In the second half of 1998 and in 1999, the overall market for the year 2000 tools and services of the Company contracted dramatically, resulting
in substantial financial losses. In response, the Company substantially reduced its workforce in September and December of 1998 and again in April of 1999. During the second and third quarters of 1999, the Company also settled its leases for its
facilities in Cincinnati, Ohio, Lisle, Illinois and Billerica, Massachusetts and took other efforts to reduce its fixed costs. As a result of the Company's degraded financial condition, the Company began encountering major obstacles in obtaining new
outsourcing business. Since most outsourcing engagements are multi-year and involve critical applications, prospective new clients, although interested in the capabilities and technology of the Company, were reluctant or unwilling to commit to
contracts. Despite the significant reduction in the overall cost structure as a result of the foregoing actions, the Company was unable to achieve a cash flow break-even position in the years ended December 31, 1999 and 2000.

On March 27, 2000, Rocket invested $4,000,000 in the Company in exchange for 10,000,000 shares ($.40 per share) of restricted common stock (37% of
outstanding stock after the investment). The Company granted Rocket certain registration rights with respect to the shares. The Company recorded a $4,000,000 non-cash charge related to the investment in the quarter ended March 31, 2000. The charge
represented the difference between the quoted market price on the commitment date and the price paid by Rocket. Under certain sections of the Internal Revenue Code, a change in ownership of greater than 50% within a three-year period places an
annual limitation on the Company's ability to utilize its existing net operating loss and research and development tax credit carry-forwards. The investment by Rocket triggered the limitation.

On October 16, 2000, the Company announced that it retained The Catalyst Group, LLC to render financial advisory and investment banking services
in connection with exploring strategic alternatives, including the potential sale of the Company.

On February 8, 2001, the Company announced that it was reducing its workforce by nine employees effective February 23, 2001.

On March 28, 2001, the Company announced that it had received a non-binding offer from Rocket to acquire the Company. Rocket currently owns
10,000,000 shares of the Company's common stock representing 36.6% of the total outstanding shares of 27,319,903.

On April 18, 2001, the Company announced it had executed an Agreement and Plan of Merger with Rocket and Rocket Acquisition Company, Inc. Under
the terms of the Agreement, Rocket Acquisition Company, Inc., a subsidiary of Rocket, would be merged into Peritus with Peritus as the surviving corporation. If the merger is completed, all Peritus shareholders other than Rocket, certain affiliates
of Rocket and dissenting stockholders would be paid $0.19 per share in cash in exchange for their Peritus shares. Outstanding options to purchase Peritus' common stock, with a per share exercise price less than $0.19, unless exercised, will be
converted into the right to receive, upon the surrender of the instrument evidencing the stock option, a cash payment equal to the product of (1) the number of shares underlying the option and (2) the difference between $0.19 and the per share
exercise price of the options. Such options will then be cancelled. All other outstanding options to purchase Peritus' common stock will be cancelled. In general, each of the parties has the right to terminate the agreement of merger, if the merger
is not completed on or before June 30, 2001. The Agreement also provides that the Company must have at least $4,810,000 in cash at closing after subtraction of the lesser of $840,000 or the actual transaction costs. Completion of the transaction is
subject to approval by the holders of a majority of Peritus' outstanding common stock, obtaining the requisite third party and governmental consents and other customary closing conditions. The Company filed a preliminary proxy statement relating to
the proposed merger with the SEC on April 27, 2001.

The Company experienced net losses of $424,000 for the quarter ended March 31, 2001, and net losses of $4,166,000 and $2,583,000 in the years
ended December 31, 2000 and 1999, respectively. Based on the Company's current forecasted cash expenditures and its cash on hand, the Company expects to have sufficient cash to finance its operations through the year 2001. The Company's future
beyond the year 2001 is dependent upon its ability to execute some form of organizational transaction, achieve break-even cash flow, or raise additional financing. There can be no assurances that the Company will be able to do so.



The Company's primary strategy is to seek some form of organizational transaction. Beyond that, the Company intends to continue to service its
existing outsourcing customer and to convince the customer to continue to purchase services after December 31, 2001. At the same time, the Company is pursuing new business through:

| |  | the licensing of, and associated consulting and training for, its software maintenance methodology (technology transfer services), its SAM Relay tool and selectively its CodeNine
tool
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                        
| |  | the provision of various service offerings including, without limitation, general software consulting.                                                                                 

Since its receipt of a non-binding offer letter from Rocket, the Company's primary focus has been the negotiation, evaluation and preparation of
the agreement of merger, and once executed, the performance of that agreement and the satisfaction of the various conditions to closing that agreement.

Three Months Ended March 31, 2001 Compared To Three Months Ended March 31, 2000

Revenue



Total revenue decreased 63.1% to $578,000 in the three months ended March 31, 2001 from $1,565,000 in the three months ended March 31, 2000. This
decrease in revenue was primarily due to a decrease in the licensing of the Company's software, products and tools, and to a lesser extent, decreases in outsourcing and other services revenue.

The Company anticipates that total revenue for the year 2001 will be substantially below the level achieved in 2000.

Outsourcing Services.Outsourcing services revenue decreased 33.1% to $541,000 in the three months ended March 31, 2001 from $809,000 in
the three months ended March 31, 2000. As a percentage of total revenue, outsourcing services revenue increased to 93.6% in the three months ended March 31, 2001 from 51.7% for the three months ended March 31, 2000. The increase in outsourcing
services revenue as a percentage of total revenue reflects the decreased contribution of license revenue to total revenue during the three months ended March 31, 2001 when compared to the same period in the prior year. The decrease in outsourcing
revenue in absolute dollars in the three months ended March 31, 2001, compared to March 31, 2000, was attributable to recording lower amounts of revenue under existing outsourcing engagements due to reduced workload or contract terminations. During
the first quarter of 2001, a contract with one client was terminated. During the first quarter of 2001, outsourcing revenue attributable to the client was $129,000. The Company did not sign any new outsourcing contracts during first quarter of 2001.
The Company's only remaining outsourcing customer is Bull HN Information Systems, Inc. ("Bull"). The Bull contract expires on December 31, 2006 but is earlier cancelable by Bull or Peritus. The Company expects Bull to cancel the contract
effective January 1, 2002. Future outsourcing revenue is dependent upon signing new customers which the Company has not been able to do in the last two years.

License.License revenue was zero dollars in the three months ended March 31, 2001 compared to $644,000, or 41.2% of total revenue, in the
three months ended March 31, 2000. The $644,000 of license revenue in the quarter ended March 31, 2000 was attributable to paid-up license revenue for two customers. The Company will continue to pursue licenses of its software maintenance
methodology and SAM Relay product and selectively pursue licenses for its CodeNine tool. Future revenue is dependent on the success of such efforts. The Company has not recorded any license revenue since the third quarter of 2000.

Other Services.Other services revenue decreased 67.0% to $37,000in the three months ended March 31, 2001 from $112,000 in the
three months ended March 31, 2000. As a percentage of total revenue, other services revenue decreased to 6.4% in the three months ended March 31, 2001 from 7.2% in the three months ended March 31, 2000. The decrease in other services revenue in
absolute dollars was primarily attributable to the cessation of maintenance revenue associated with the Company's year 2000 products. Future revenue from other services is dependent on the Company's success in licensing its methodolgy, and its SAM
Relay and CodeNine products which would generate maintenance, consulting and training revenue.

Cost of Revenue



Cost of Outsourcing Services Revenue.Cost of outsourcing services revenue consists primarily of salaries, benefits and overhead costs
associated with delivering outsourcing services to clients. The cost of outsourcing services revenue



decreased 37.5% to $319,000 in the three months ended March 31, 2001 from $510,000 for the three months ended March 31, 2000. Cost of outsourcing services revenue as a percentage of outsourcing
services revenue decreased to 59.0% in the three months ended March 31, 2001 from 63.0% in the three months ended March 31, 2000. The decrease in cost of outsourcing revenue both in percentage of outsourcing revenue and in absolute dollars was
primarily due a reduction in staffing expenses.

Cost of License Revenue.Cost of license revenue consists primarily of salaries, benefits and related overhead costs associated with
license-related materials packaging and freight. Cost of license revenue was zero dollars in both the three months ended March 31, 2001 and the three months ended March 31, 2000.

Cost of Other Services Revenue.Cost of other services revenue consists primarily of salaries, benefits, subcontracting costs and related
overhead costs associated with delivering other services to clients. Cost of other services revenue decreased 80.0% to $14,000 in the three months ended March 31, 2001 from $70,000 in the three months ended March 31, 2000. Cost of other services
revenue as a percentage of other services revenue decreased to 37.8% in the three months ended March 31, 2001 from 62.5% in the three months ended March 31, 2000. The reduction in the cost of other services revenue in absolute dollars was primarily
the result of a reduction in the Company's warranty reserve.

Operating Expenses



Sales and Marketing.Sales and marketing expenses consist primarily of salaries, commissions and related overhead costs for sales and
marketing personnel; sales agent fees; and other promotional activities. Sales and marketing expenses increased 43.9% to $82,000 in the three months ended March 31, 2001 from $57,000 in the three months ended March 31, 2000. As a percentage of total
revenue, sales and marketing expenses increased to 14.2% in the three months ended March 31, 2001 from 3.6% in the three months ended March 31, 2000. The increase in expenses in both absolute dollars and as a percentage of revenue was primarily
attributable to an increase in staffing expense associated with one sales representative in 2001 and additional sales agent fees.

Research and Development. Research and development expenses consist primarily of salaries, benefits and related overhead costs for
engineering and technical personnel associated with developing new products and enhancing existing products. Research and development expenses decreased 18.5% to $265,000 in the three months ended March 31, 2001 from $325,000 in the three months
ended March 31, 2000. As a percentage of total revenue, research and development expenses increased to 45.8% in the three months ended March 31, 2001 from 20.8% in the three months ended March 31, 2000. The decrease in research and development
expenses in absolute dollars was primarily attributable to a reduction in staffing expenses. The Company plans to continue limited maintenance of and enhancements to its existing products.

General and Administrative. General and administrative expenses consist primarily of salaries and related costs for the finance and
accounting, human resources, legal services, information systems, excess space charges, and other administrative departments of the Company, as well as contracted legal and accounting services. General and administrative expenses decreased 12.1% to
$415,000 in the three months ended March 31, 2001 from $472,000 in the three months ended March 31, 2000. As a percentage of total revenue, general and administrative expenses increased to 71.8% in the three months ended March 31, 2001 from 30.2% in
the three months ended March 31, 2000. The decrease in general and administrative expenses in absolute dollars was primarily due to the reduction in bonus expense in the three months ended March 31, 2001.

Cost of Strategic Investment

On March 27, 2000, Rocket invested $4,000,000 in the Company in exchange for 10,000,000 shares ($0.40 per share) of restricted common stock (37%
of outstanding stock after the investment). The Company recorded a non-cash charge of $4,000,000 for the cost of this strategic investment equal to the difference between the purchase price per share of $0.40 and the market price per share of $0.80
on March 27, 2000.

Interest Income (Expense), Net



Interest income and expense is primarily comprised of interest income from cash balances, partially offset by interest expense on debt.
The Company had interest income, net, of $93,000 in the three months ended March 31, 2001 compared to interest income, net, of $35,000 in the three months ended March 31, 2000. This change in interest income (expense), net, was primarily
attributable to increased interest income from interest bearing investments as a result of the Rocket investment.



Liquidity and Capital Resources

The Company has financed its operations and capital expenditures primarily with the proceeds from sales of the Company's convertible preferred
stock and common stock, borrowings, advance payments for services from clients, and internally generated cash flows. The Company's cash balances were $3,652,000 and $3,716,000 at March 31, 2001 and December 31, 2000, respectively. The Company's
working capital was $4,676,000 and $5,025,000 at March 31, 2001 and December 31, 2000, respectively.

The Company's operating activities used cash of $60,000 and provided cash of $310,000 during the three months ended March 31, 2001 and 2000,
respectively. The cash used during the three months ended March 31, 2001 was primarily caused by a net loss of $424,000 less the non-cash depreciation and amortization expense of $79,000. Other uses were a decrease in billings in excess of costs and
estimated earnings on uncompleted contracts of $125,000, a decrease in accounts payable of $28,000, a decrease in other accrued liabilities of $17,000 and a increase in prepaid and other assets of $10,000. These amounts were partially offset by a
decrease in accounts receivable of $457,000 and a decrease in costs and estimated earnings in excess of billings on uncompleted contracts of $8,000.

The Company's investing used cash of $1,000 and provided cash of $57,000 during the three months ended March 31, 2001 and 2000, respectively.
Investing activities in the three months ended March 31, 2001 reflect investments in property and equipment.

The Company's financing activities used cash of $3,000 and provided cash of $4,024,000 during the three months ended March 31, 2001 and 2000,
respectively. Financing activities in the three months ended March 31, 2001 reflect principal payments on the Company's capital lease obligation. Financing activities for the three months ended March 31, 2000 included $4,000,000 in proceeds from the
issuance of 10,000,000 shares of common stock to Rocket in March, 2000 at a per share purchase price of $0.40 per share.

The Company had an accounts receivable purchase agreement with a lender to permit borrowing against certain acceptable receivables at a rate of
80% of the face amount of such receivables up to a maximum of $4 million. In exchange for such agreement, the Company granted the lender security interest in substantially all of its assets. There were no borrowings outstanding under the agreement
at March 31, 2001 and the Company terminated the agreement on April 18, 2001.

On March 27, 2000, Rocket invested $4,000,000 in the Company in exchange for 10,000,000 shares ($.40 per share) of restricted common stock (36.6%
of outstanding stock after the investment). The Company granted Rocket certain registration rights with respect to the shares.



To date, the Company has not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk.
Excess cash has been, and the Company contemplates that it will continue to be, invested in interest-bearing, investment grade securities.

Foreign Currency

Assets and liabilities of the Company's majority-owned foreign subsidiary are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at average exchange rates for the period. Accumulated net translation adjustments are included in stockholders' equity.

Inflation

To date, inflation has not had a material impact on the Company's results of operations.

Factors That May Affect Future Results

Rocket Merger



On March 28, 2001, the Company announced that it had received a non-binding offer from Rocket to acquire the Company and
on April 18, 2001, the Company announced it had executed an Agreement and Plan of Merger with Rocket and Rocket Acquisition Company, Inc. Completion of the transaction is subject to several conditions, including the approval of the holders of a
majority of the outstanding shares of the Company's common stock, that the Company must have at least $4,810,000 in cash at closing, after subtraction of the lesser of $810,000 or the actual transaction costs, and other customary closing conditons.
There can be no assurance that the Company will satisfy these conditions or that the Company will otherwise be able to complete the merger. Moreover, in general, each of the parties to the Agreement and Plan of Merger has the right to terminate the
Agreement and Plan of Merger if the merger is not completed on or prior to June 30, 2001. There can be no assurance that, even if all conditions to closing can be satisfied, those conditions will be satisfied prior to June 30, 2001.

Strategic Alternatives other than Rocket Merger



If the Rocket merger does not close, there can be no assurance that the Company will be able to find another viable alternative or to implement
any strategic alternative.

Failure to Achieve Cash Flow Breakeven



The Company's ability to achieve a cash flow breakeven position is critical for achieving financial stability. Since its receipt of a non-binding
offer letter from Rocket, the Company's primary focus has been the negotiation, evaluation and



preparation of the Agreement and Plan Merger, and once executed, the performance of that agreement and the satisfaction of the various conditions to closing that agreement. Moreover, the
Company's only remaining outsourcing customer is Bull. The Bull contract expires on December 31, 2006 but is earlier cancellable by Bull or the Company. The Company expects Bull to cancel the contract effective January 1, 2002. There can be no
assurance that the Company will achieve a cash flow breakeven in the future.

Financing

There can be no assurance that the Company will be able to obtain additional funds in the future through equity and/or debt financings.

Risk of Current Strategy



In the past, the Company generated significant revenues from marketing and selling products and services that addressed the year 2000 problem. The
demand for such products and services has ended and the Company no longer actively markets and sells year 2000 products and services. The Company's primary current strategy is to seek some form of organizational transaction. In addition, the Company
is continuing to service its existing outsourcing customer and attempting to convince the customer to purchase services beyond December 31, 2001. At the same time, the Company is pursuing new business through (i) the licensing of, and associated
consulting and training for, its software maintenance methodology (technology transfer services), its SAM Relay tool, and selectively it CodeNine tool, and (ii) the provision of various service offerings including, without limitation, general
software consulting.

The Company plans to continue limited maintenance of and enhancements to its existing products. The Company has explored certain extensions of its
CodeNine tool beyond the field of application understanding and has concluded that such extensions are not feasible at this time.

The failure to sell existing products or services and/or develop and sell new products and/or services would have a material adverse effect on the
Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to sign new outsourcing business or sell its products or services. There can be no assurance that the Company's current
strategy will generate revenues sufficient for the Company to achieve a cash flow breakeven position.

Over the Counter Listing



Trading of the common stock is conducted in the over-the-counter market which could make it more difficult for an investor to dispose of, or
obtain accurate quotations as to the market value of, the common stock. In addition, there are additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors.
For transactions covered by this rule, the broker-dealer must make a special suitability determination for the purchaser and must have received the purchaser's written consent to the transaction prior to sale. In addition, as the trading price of
the common stock is below $5.00 per share, trading in the common stock is also subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, which require additional disclosure by broker-dealers in connection
with any trades involving a stock defined as a penny stock (generally any non-NASDAQ equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and
accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the common stock, which could severely limit the market liquidity of the common stock and the ability of purchasers in
this offering to sell the common stock in the secondary market.

Potential Fluctuations in Quarterly Performance



The Company's revenue and operating results have varied significantly in the past and are likely to vary significantly from quarter to quarter in
the future. The Company's quarterly operating results may continue to fluctuate due to a number of factors, including the timing, size and nature of the Company's individual outsourcing, technology transfer, insourcing and licensing transactions;
unforeseen difficulties in performing such transactions; the timing of the introduction and the market acceptance of new services, products or product enhancements by the Company or its competitors; the relative



proportions of revenue derived from license fees and professional services; changes in the Company's operating expenses; personnel changes; foreign currency exchange rates and fluctuations in
economic and financial market conditions.

The timing, size and nature of individual outsourcing, technology transfer, insourcing and licensing transactions are important factors in the
Company's quarterly operating results. Many such transactions involve large dollar amounts and the sales cycle for these transactions is often lengthy and unpredictable. In addition, the sales cycle associated with these transactions is subject to a
number of uncertainties, including clients' budgetary constraints, the timing of clients' budget cycles and clients' internal approval processes. There can be no assurance that the Company will be successful in closing such large transactions on a
timely basis or at all. Most of the Company's outsourcing engagements are performed on a fixed-price basis and, therefore, the Company bears the risk of cost overruns and inflation. A significant percentage of the Company's revenue derived from
these engagements is recognized on the percentage-of-completion method, which requires revenue to be recorded over the term of a client contract. A loss is recorded at the time when current estimates of project costs exceed unrecognized revenue. The
Company's operating results may be adversely affected by inaccurate estimates of contract completion costs.

The Company's expense levels are based, in part, on its expectations as to future revenue and are fixed, to a large extent, in the short term. As
a result, the Company has been and may continue to be unable to adjust spending in a timely manner to compensate for any further unexpected revenue shortfall. Accordingly, any significant shortfall in revenue, in addition to those already
experienced in relation to the Company's expectations, would have an immediate and material adverse effect on the Company's business, financial condition and results of operations.

Due to all of the foregoing factors, the Company believes that period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of future performance. There can be no assurance that future revenue and operating results will not continue to vary substantially. It is also possible that in a quarter the
Company's operating results will be below the expectations of public market analysts and investors. In either case, the price of the Company's common stock has been and could continue to be materially adversely affected.

Concentration of Clients and Revenue Risk



The Company's revenue is highly concentrated among a small number of clients. During the year ended December 31, 2000, revenue from four clients
accounted for 78.0% of the year's total revenue with one client, Bull, representing 40.3%. Total revenue in the year 2000 included license revenue of $1,045,000 (23.1% of total revenue) for paid-up licenses from two of these clients. In addition,
the contract for one of these clients (representing 12.2% of the revenue for the year ended December 31, 2000) terminated in March 2001. During the first quarter of 2001, outsourcing revenue attributable to that client was $129,000. The Company has
not signed any new outsourcing contracts during the last two years or any new license contracts since the third quarter of 2000. Moreover, the Company's only remaining outsourcing customer is Bull. The Bull contract expires on December 31, 2006 but
is earlier cancellable by Bull or the Company. The Company expects Bull to cancel the contract effective January 1, 2002. The loss of, or a significant reduction in revenue from, any of the Company's major clients would have a material adverse
impact on the Company's business, financial condition and results of operations. In addition, with such a large percentage of the Company's revenue attributable to a small number of clients, the loss of one or more major clients would have a
material adverse impact on the Company's liquidity.

Competition

The market for the Company's products and services is intensely competitive and is characterized by rapid changes in technology and user needs and
the frequent introduction of new products. In addition, the Company faces competition in the software maintenance outsourcing services market and the software maintenance tools market. A number of the Company's competitors are more established,
benefit from greater name recognition and have substantially greater financial, technical and marketing resources than those of the Company. As a result, there can be no assurance that the Company's products and services will compete effectively
with those of their respective competitors.

Competitive Market for Technical Personnel



The Company depends, to a significant extent, on its ability to attract, train, motivate and retain highly skilled software professionals,
particularly project managers, software engineers and other senior technical personnel. The Company believes that there is a shortage of, and significant competition for, software development professionals with the



skills and experience necessary to perform the services offered by the Company. The Company's ability to maintain and renew existing engagements and obtain new business depends, in large part,
on its ability to hire and retain technical personnel with the IT skills that keep pace with continuing changes in software evolution, industry standards and technologies and client preferences. The inability to hire additional qualified personnel
could impair the Company's ability to satisfy its client base, requiring an increase in the level of responsibility for both existing and new personnel. There can be no assurance that the Company will be successful in retaining current or future
employees.

Fixed-Price, Fixed-Time Contracts



Part of the Company's business is to offer its outsourcing and technology transfer services on fixed-price, fixed-time frame contracts, rather
than contracts in which payment to the Company is determined solely on a time-and-materials basis. These contracts are terminable by either party generally upon prior written notice. Although the Company uses its proprietary tools and methodologies
and its past project experience to reduce the risks associated with estimating, planning and performing the fixed-price projects, the Company's standard outsourcing and technology transfer agreements provide for a fixed-fee based on projected
reductions in a client's maintenance costs and increases in a client's maintenance productivity. The Company's failure to estimate accurately the resources, costs and time required for a project or its failure to complete its contractual obligations
within the time frame committed could have a material adverse effect on the Company's business, financial condition and results of operations.

Potential for Contract Liability



The Company's products and services relating to software maintenance involve key aspects of its clients' computer systems. A failure in a client's
system could result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. The Company attempts to limit contractually its liability for damages arising from negligent acts, errors,
mistakes or omissions in rendering its products and services. Despite this precaution, there can be no assurance that the limitations of liability set forth in its contracts would be enforceable or would otherwise protect the Company from liability
for damages. Additionally, the Company maintains general liability insurance coverage, including coverage for errors and omissions. However, there can be no assurance that such coverage will continue to be available on acceptable terms, or will be
available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against the Company that exceed available insurance
coverage or changes in the Company's insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on the Company's business, financial condition and results
of operations. Furthermore, litigation, regardless of its outcome, could result in substantial cost to the Company and divert management's attention from the Company's operations. Any contract liability claim or litigation against the Company could,
therefore, have a material adverse effect on the Company's business, financial conditions and results of operations.

Software Errors or Bugs



The Company's software products and tools are highly complex and sophisticated and could from time to time contain design defects or software
errors that could be difficult to detect and correct. Errors, bugs or viruses may result in loss of or delay in market acceptance, a failure in a client's system or loss or corruption of client data. Although the Company has not experienced material
adverse effects resulting from any software defects or errors, there can be no assurance that, despite testing by the Company and its clients, errors will not be found in new products, which errors could have a material adverse effect upon the
Company's business, financial condition and results of operations.

Limited Protection of Proprietary Rights



The Company relies on a combination of patent, copyright, trademark and trade secret laws and license agreements to establish and protect its
rights in its software products and proprietary technology. In addition, the Company currently requires its employees and consultants to enter into nondisclosure and assignment of invention agreements to limit use of, access to and distribution of
its proprietary information. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate. The laws of some foreign countries may not protect the Company's proprietary rights
as fully or in the same manner as do the laws of the United States. Also, despite the steps taken by the Company to protect its proprietary rights, it may be possible for unauthorized third parties to copy aspects of the Company's products, reverse
engineer, develop similar technology independently or obtain and use information that the Company regards as proprietary. Furthermore, there can be no assurance that others will not develop



technologies similar or superior to the Company's technology or design around the proprietary rights owned by the Company.

The Company has entered into license agreements with certain clients that allow these clients access to and use of the source code of certain of
the Company's software for certain purposes. Access to the Company's source code may increase the likelihood of misappropriation or misuse by third parties.

The Company has been granted certain patents. There can be no assurance that such patents would survive a legal challenge to their validity or
provide meaningful or significant protection to the Company. In addition, the Company has abandoned its pending patent applications because, among other things, it has determined that continued prosecution of such applications would be too costly,
the technologies, processes or methodologies are not critical to the Company's business in the foreseeable future or it is unlikely that a patent will issue with regard to a particular application. Certain of the Company's technology incorporated in
some of its products may infringe on patents held by others. Any infringement claim or litigation against the Company could have a material adverse effect on the Company's business, financial condition and results of operations.

The Company maintains trademarks and service marks to identify its various service offerings, products and software. Although the Company has
registered certain trademarks and service marks with the United States Patent and Trademark Office ("PTO") and has several trademark and service mark applications pending in the United States and foreign jurisdictions, not all of the
applications have been granted and, even if granted, there can be no assurance that a particular trademark or service mark will survive a legal challenge to its validity or provide meaningful or significant protection to the Company. In addition,
the Company has abandoned the applications of certain trademarks or service marks that it believes are not critical to its business in the future. In some cases, entities other than the Company are using certain trademarks and service marks either
in a jurisdiction where the Company has not filed an application or in which the Company is using a mark in a different manner than a third party. There may be some risk of infringement claims against the Company in the event that a service or
product of the Company is too similar to that of another entity that is using a similar mark.

Dependence on Third-Party Technology

The Company's proprietary software is currently designed, and may in the future be designed, to work on or in conjunction with certain third-party
hardware and/or software products. If any of these current or future third-party vendors were to discontinue making their products available to the Company or to licensees of the Company's software or to increase materially the cost to the Company
or its licensees to acquire, license or purchase the third-party vendors' products, or if a material problem were to arise in connection with the ability of the Company to design its software to properly use or operate with third-party hardware
and/or software products, the Company would be required to redesign its software to function with or on alternative third-party products or attempt to develop internally a replacement for the third-party products. In such an event, interruptions in
the availability or functioning of the Company's software and delays in the introduction of new products and services may occur until equivalent technology is obtained. There can be no assurance that an alternative source of suitable technology
would be available or that the Company would be able to develop an alternative product in sufficient time or at a reasonable cost. The failure of the Company to obtain or develop alternative technologies or products on a timely basis and at a
reasonable cost could have a material adverse effect on the Company's business, financial condition and results of operations.

Rapid Technological Change



The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards and new product
introductions and enhancements that may render existing products obsolete. As a result, the Company's market position could erode further due to unforeseen changes in the features and functionality of competing products. The process of developing
products and services such as those offered by the Company is extremely complex and is expected to become increasingly complex and expensive in the future with the introduction of new platforms and technologies. There can be no assurance that the
Company will enhance its products or develop any new products or services at all or in a timely fashion or that the Company's current or future products will satisfy the needs of its target market.

Potential Adverse Effects of Anti-Takeover Provisions; Possible Issuance of Preferred Stock



|The Company's Amended and Restated Articles of Organization and Amended and Restated By-laws contain
provisions that may make it more difficult for a third party to acquire, or discourage acquisition bids for, the Company. For instance, the Company's Amended and Restated By-laws provide that special meetings of stockholders may be called only by
the President, the Board of Directors or the holders of at least 80% of the voting securities of the Company. In addition, the Massachusetts General Laws provide that stockholders may take action without a meeting only by the unanimous written
consent of all stockholders. The Company's Board of Directors is also divided into three classes, as nearly equal in size as possible, with staggered three-year terms. The Company is also subject to an anti-takeover provision of the Massachusetts
General Laws which prohibits, subject to certain exceptions, a holder of 5% or more of the outstanding voting stock of the Company from engaging in certain activities with the Company, including a merger, stock or asset sale. The foregoing
provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. In addition, shares of the Company's Preferred Stock may be issued in the future without further stockholder
approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of
any holders of Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Item 3.      Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|To date, the Company has not invested in derivative securities or any other financial instruments that
involve a high level of complexity or risk. As of March 31, 2001, the Company was exposed to market risks which primarily include changes in U.S. interest rates. The Company maintains a significant portion of its cash and cash equivalents in
financial instruments with purchased maturities of two years or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of these financial instruments, an
immediate increase in interest rates would not have a material effect of the Company's financial condition or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



PART II. OTHER INFORMATION

|Item 1.      Legal Proceedings                                                                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                               
|The Company is from time to time subject to legal proceedings and claims which arise in the normal course of its business. In the
opinion of management, the amount of ultimate liability with respect to these actions, currently known, will not have a material adverse effect on the Company's financial position or results of operations.
|                                                                                                                                                                                                                                                                                                                                               
|Item 6.      Exhibits And Reports On Form 8-K                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                               
|(a)     Exhibits:                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                               
|(b)Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                               
|A Current Report Form 8-K dated January 5, 2001 was filed by the Company on January 12, 2001. The Company reported under item 5
(Other Events) that the Company has reached a settlement in its litigation with Micah Technology Services, Inc and Affiliated Computer Services, Inc.                                                          
|                                                                                                                                                                                                                                                                                                                                               
|A Current Report Form 8-K dated February 8, 2001 was filed by the Company on February 12, 2001. The Company reported under item 5
(Other Events) that the Company announced a workforce reduction effective February 23, 2001.                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                               
|A Current Report Form 8-K dated March 28, 2001 was filed by the Company on April 12, 2001. The Company reported under item 5 (Other
Events) that the Company had received, on March 28, 2001, a non-binding offer from Rocket Software, Inc. for acquisition of the Company.                                                                   



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.

Dated: May 10, 2001

| | PERITUS
SOFTWARE
SERVICES,
INC.                                                                            
| | -----------------------------------------------------------------------------------------------------------
| |                                                                                                            
| | By: /s/ John D. Giordano                                                                                   
| | John D. GiordanoPresident, Chief Executive Officer and Chief Financial Officer(Principal Financial Officer)
| |                                                                                                            
| | PERITUS
SOFTWARE
SERVICES,
INC.                                                                            
| |                                                                                                            
| | By: /s/ Patrick Manning                                                                                    
| | Patrick ManningCorporate Controller(Chief Accounting Officer)                                              





Peritus Software Services, Inc.FORM 10-QFor the Quarterly Period Ended March 31, 2001Exhibit Index

|Exhibit No. |  | Description                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        |  | Agreement and Plan of Merger by and among Peritus Software Services, Inc., Rocket Software,Inc, and Rocket Acquisition Company, Inc.
dated April 18, 2001
|            |  |                                                                                                                                                          
|11          |  | Statement Re Computation of Net Income (Loss) per Common Share