<PAGE>

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


                                   FORM 10-Q


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

                  FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997

                                       OR

/ /  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:  0-2222209

                              PEREGRINE SYSTEMS, INC.

               (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


            DELAWARE                                     95-3773312
  (STATE OR OTHER JURISDICTION                        (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NUMBER)


                               12670 HIGH BLUFF DRIVE
                            SAN DIEGO, CALIFORNIA  92130
            (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)


                                   (619) 481-5000
                (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


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

                               YES   X         NO
                                   ------         ----

      The number of issued and outstanding shares of the Registrant's Common 
Stock, $0.001 par value, as of December 31, 1997 was 18,039,030.

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                                       1


<PAGE>

                              PEREGRINE SYSTEMS, INC.

                                 TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION

  ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

           CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997
           AND MARCH 31, 1997..............................................    3

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
           THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996...................    4

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE
           MONTHS ENDED DECEMBER 31, 1997 AND 1996.........................    5

           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 
           NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996....................    6

           NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............    8

  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS.......................................   10


PART II.  OTHER INFORMATION

  ITEM  2. CHANGES IN SECURITIES...........................................   20

  ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............   20

  ITEM  6. EXHIBITS AND REPORTS ON FORM 8-K................................   20

SIGNATURES.................................................................   21


                                       2


<PAGE>


                                    PART I

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                 PEREGRINE SYSTEMS, INC.
                          CONDENSED CONSOLIDATED BALANCE SHEETS
                                      (in thousands)

<TABLE>
<CAPTION>
                                                             MARCH 31,     DECEMBER 31,
                                                               1997            1997
                                                             --------      ------------
                                                             (AUDITED)     (UNAUDITED) 
<S>                                                           <C>           <C>
                                         ASSETS
Current Assets:
  Cash and cash equivalents...............................    $   305       $  15,503
  Accounts receivable, net of allowance for doubtful
   accounts of $220 and $462, respectively................     10,191          17,325
  Financed receivables....................................      1,182             968
  Deferred tax assets.....................................      1,752              - 
  Other current assets....................................        924           2,109
                                                              -------         -------
      Total current assets................................     14,354          35,905
Property and equipment, net...............................      4,364           4,855
Goodwill..................................................         -            3,650
Other assets..............................................      1,020             552
                                                              -------         -------
                                                              $19,738         $44,962
                                                              -------         -------
                                                              -------         -------

                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Accounts payable........................................     $  916        $  2,368
  Accrued expenses........................................      6,079          12,024
  Bank line of credit.....................................      1,974              - 
  Deferred revenue........................................      8,419           8,954
  Current portion of long-term debt.......................        497             197
  Current portion of capital lease obligation.............        364              32
  Net liabilities of discontinued operation...............        170              - 
                                                              -------         -------
  Total current liabilities...............................     18,419          23,575
Long-term debt, net of current portion....................      1,395             921
Deferred revenue, net of current portion..................      2,773           2,691
                                                              -------         -------
      Total liabilities...................................     22,587          27,187
                                                              -------         -------

Stockholders' Equity (Deficit):
  Preferred stock.........................................         -               - 
  Common stock............................................         13              18
  Additional paid-in capital..............................     15,081          64,642
  Accumulated deficit.....................................    (15,807)        (44,605)
  Unearned portion of deferred compensation...............     (1,748)         (1,482)
  Cumulative translation adjustment.......................       (388)           (536)
  Treasury stock, at cost.................................         -             (262)
                                                              -------         -------
      Total stockholders' equity (deficit)................     (2,849)         17,775
                                                              -------         -------
                                                              $19,738         $44,962
                                                              -------         -------
                                                              -------         -------

</TABLE>

                      THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                         CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                              3

<PAGE>

                                PEREGRINE SYSTEMS, INC.
                    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                       (UNAUDITED)
                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED DECEMBER 31,
                                                         -------------------------------
                                                                1996         1997
                                                              --------    ----------
<S>                                                           <C>        <C>
Revenues:
  Licenses................................................    $ 6,076    $ 12,374
  Maintenance and services................................      3,451       6,135
                                                              -------    --------
     Total revenues.......................................      9,527      18,509
                                                              -------    --------
Costs and Expenses:
  Cost of licenses........................................         50          98
  Cost of maintenance and services........................      1,144       2,839
  Sales and marketing.....................................      3,895       6,797
  Research and development................................      1,568       2,467
  General and administrative..............................      1,095       2,101
                                                              -------    --------
     Total costs and expenses.............................      7,752      14,302
                                                              -------    --------
     Operating income.....................................      1,775       4,207
Interest and other income (expense), net..................       (137)        204
                                                              -------    --------
Income before income taxes................................      1,638       4,411
Income tax expense........................................         -        1,632
                                                              -------    --------
Net income................................................   $  1,638    $  2,779
                                                              -------    --------
                                                              -------    --------

Earnings per share:  diluted
Net earnings per share....................................    $  0.11     $  0.14
                                                              -------    --------
                                                              -------    --------
Weighted average common and common equivalent 
 shares outstanding.......................................     14,519      20,110
                                                              -------    --------
                                                              -------    --------

Earnings per share:  basic
Net earnings per share....................................    $  0.13     $  0.15
                                                              -------    --------
                                                              -------    --------
Weighted average common and common equivalent
 shares outstanding.......................................     12,904      18,039
                                                              -------    --------
                                                              -------    --------
</TABLE>

               THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                         4


<PAGE>

                               PEREGRINE SYSTEMS, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                     (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                         NINE MONTHS ENDED DECEMBER 31,
                                                         ------------------------------
                                                               1996          1997
                                                             --------     ----------
<S>                                                          <C>          <C>
Revenues:
  Licenses...............................................    $ 13,932      $ 25,741
  Maintenance and services...............................      10,595        15,986
                                                             --------      --------

     Total revenues......................................      24,527        41,727
                                                             --------      --------

Costs and Expenses:
  Cost of licenses........................................        155           226
  Cost of maintenance and services........................      3,423         6,715
  Sales and marketing.....................................     11,217        15,722
  Research and development................................      4,368         5,770
  General and administrative..............................      2,780         4,413
  Acquired research and development costs.................         -         34,775
                                                             --------      --------
     Total costs and expenses.............................     21,943        67,621
                                                             --------      --------
     Operating income (loss)..............................      2,584       (25,894)
Interest and other income (expense), net..................       (366)          608
                                                             --------      --------
Income before income taxes................................      2,218       (25,286)
Income tax expense........................................         -          3,512
                                                             --------      --------
Net income (loss).........................................   $  2,218      $(28,798)
                                                             --------      --------
                                                             --------      --------

Earnings (loss) per share:  diluted
Net earnings (loss) per share.............................   $   0.15      $  (1.86)
                                                             --------      --------
                                                             --------      --------
Weighted average common and common equivalent
 shares outstanding.......................................     14,438        15,510
                                                             --------      --------
                                                             --------      --------
Earnings (loss) per share:  basic
Net earnings (loss) per share.............................    $  0.17      $  (1.86)
                                                             --------      --------
                                                             --------      --------
Weighted average common and common
 equivalent shares outstanding............................     12,901        15,510
                                                             --------      --------
                                                             --------      --------

</TABLE>


                THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                        5



<PAGE>


                                 PEREGRINE SYSTEMS, INC.
                     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       (UNAUDITED)
                                     (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED DECEMBER 31,
                                                          ------------------------------
                                                                1996          1997
                                                              --------     ----------
<S>                                                           <C>          <C>
Cash flow from operating activities:
  Net income.............................................     $  2,218     $  (28,798)
  Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
  Depreciation and amortization..........................        1,373          1,594
  Charge for acquired in process research
   and development.......................................           -          34,775
  Increase (decrease) in cash resulting
   from changes, net of business acquired, in:
    Accounts receivable..................................       (5,407)        (7,728)
    Financed receivables.................................           -             214
    Deferred tax asset...................................           -           1,752
    Other current assets.................................           74           (320)
    Other long-term assets...............................         (641)           468
    Accounts payable.....................................         (397)           705
    Accrued expenses.....................................        1,605          1,228
    Deferred revenue.....................................        1,854           (366)
                                                              --------     ----------
                                                                   679          3,524
                                                              --------     ----------
    Net cash used by discontinued business...............         (973)          (170)
                                                              --------     ----------
      Net cash provided by (used in) operating activities         (294)         3,354
                                                              --------     ----------
Cash flows from investing activities:
  Purchases of property and equipment....................         (382)        (1,291)
  Proceeds from sale of product line.....................          700             - 
  Cash acquired in acquisition...........................           -             582
                                                              --------     ----------
      Net cash provided by (used in) investing
       activities........................................          318           (709)
                                                              --------     ----------
Cash flows from financing activities:
  Proceeds (repayment) on bank line of credit, net.......        1,485         (3,387)
  Repayments of long-term debt, net......................          (96)        (2,336)
  Issuance of common stock...............................           15         19,060
  Treasury stock purchased...............................           -            (262)
  Principal payments under capital lease obligation......         (269)          (374)
                                                              --------     ----------
     Net cash provided by (used in) financing
      activities.........................................        1,135         12,701
                                                              --------     ----------
Effect of exchange rate changes on cash..................         (325)          (148)
                                                              --------     ----------
Net increase in cash.....................................          834         15,198
Cash and equivalents, beginning of period................          437            305
                                                              --------     ----------
Cash and equivalents, end of period......................     $  1,271     $   15,503
                                                              --------     ----------
                                                              --------     ----------

</TABLE>

                                          6


<PAGE>
<TABLE>
<CAPTION>

<S>                                                           <C>          <C>
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Interest.............................................     $    337     $       34
    Income taxes.........................................     $     -      $      567

Supplemental disclosures of noncash investing and
 financing activities:
  Stock issued and other noncash consideration for
   acquisition...........................................     $     -      $   38,617

</TABLE>

                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                          7


<PAGE>

                              PEREGRINE SYSTEMS, INC.
                                          
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  BASIS OF PRESENTATION

   The accompanying interim condensed consolidated financial statements have 
been prepared by Peregrine Systems, Inc. (the "Company") and have not been 
audited.  These financial statements, in the opinion of management, include 
all adjustments (consisting only of normal recurring accruals) necessary for 
a fair presentation of the financial position, results of operations and cash 
flows for all periods presented.  These financial statements should be read 
in conjunction with the financial statements and notes thereto included in 
the Company's Annual Report on Form 10-K filed for the year ended March 31, 
1997, which provides further information regarding the Company's significant 
accounting policies and other financial and operating information.  Interim 
operating results are not necessarily indicative of operating results for the 
full year.  The consolidated condensed financial statements include the 
accounts of the Company and its wholly owned subsidiaries.  All significant 
intercompany transactions and balances have been eliminated.

NOTE 2.  USE OF ESTIMATES

   The preparation of financial statements, in conformity with generally 
accepted accounting principles, requires management to make estimates and 
assumptions that affect the reported amounts of assets and liabilities and 
disclosure of contingent assets and liabilities at the date of the financial 
statements and the reported amounts of revenues and expenses during the 
reporting period.  Actual results could differ from those estimates.

NOTE 3. CASH AND CASH EQUIVALENTS

   The Company considers all highly liquid instruments purchased with an 
original maturity of three months or less to be cash equivalents.  The 
Company's cash management and investment policies restrict investments to 
investment quality, highly liquid securities.

NOTE 4.  COMPUTATION OF NET INCOME PER SHARE

   In December 1997, the Company adopted Statement of Financial Accounting 
Standards No. 128, "Earnings Per Share" (SFAS 128).  The statement specifies 
the computation, presentation, and disclosure requirements for earnings per 
share (EPS).   All prior periods have been restated to conform to current 
year presentation.  See Exhibit 11.1 for a reconciliation of the numerators 
and denominators used in the EPS calculations.

NOTE 5.  LINE OF CREDIT

   Effective July 1, 1997, the Company entered into an agreement to provide a 
line of credit facility that provides for maximum borrowings of $5.0 million 
and expires on July 31, 1998.  Borrowings under the line of credit bear 
interest at the bank's prime rate (8.5% at December 31, 1997).  The line of 
credit is collateralized by the Company's accounts receivable, equipment, and 
certain other assets.  In addition, the debt agreement contains certain 
covenants, the most significant of which places certain restrictions on 
future borrowings and acquisitions above specified levels. The Company is 
required to maintain certain financial ratios and minimum equity balances.  
The agreement also provides for a foreign exchange facility, under which the 
maximum principal amount of foreign exchange transactions which may mature 
during any two day period is $2.0 million.

NOTE 6.  ACQUISITION

   In September 1997, the Company completed the acquisition of all of the 
outstanding stock of United Software, Inc., a developer of decision software 
solutions designed for asset management.  The consideration for the stock of 
United Software included 1,916,220 shares of Peregrine Systems common stock 
valued at $15.92 per share or 


                                       8


<PAGE>

$30,506,000 plus an additional $8,111,000 of expenses directly related to the 
acquisition and assumption of  net liabilities of United Software.

   The acquisition was accounted for as a purchase.  Accordingly, the purchase
price was allocated to the net assets acquired based on their estimated fair
market values.  The excess of the purchase price over the estimated fair values
of net assets acquired amounted to approximately $3.8 million, which has been
accounted for as goodwill and is being amortized over five years using the
straight line method.  The acquisition accounting included a charge against
earnings of $34.8 million for acquired research and development costs.


                                       9


<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

   THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF 
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES 
EXCHANGE ACT OF 1934.  THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO 
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER 
MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE 
SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS 
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS," IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE 
SECURITIES AND EXCHANGE COMMISSION, AND ELSEWHERE IN, OR INCORPORATED BY 
REFERENCE INTO, THIS REPORT.  THE FOLLOWING DISCUSSION SHOULD BE READ IN 
CONJUNCTION WITH THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.

OVERVIEW

   The Company develops, markets and supports SERVICECENTER, a suite of 
software applications for managing the Enterprise Service Desk.  The Company 
was founded in 1981 primarily to provide consulting services for IT 
management software. In 1987, the Company launched its first software 
product, PNMS, a product designed to manage and monitor complex mainframe 
computer networks.  In 1995, the Company commenced sales of SERVICECENTER, 
the Company's solution for the Enterprise Service Desk.  SERVICECENTER is 
currently available for the Windows NT, UNIX, and MVS platforms.  Since the 
release of SERVICECENTER in July 1995, SERVICECENTER has accounted for 
substantially all of the Company's license revenues.  In addition, for the 
year ended March 31, 1997, over 80% of the Company's license sales of 
SERVICECENTER were attributable to UNIX and Windows NT platforms.  

   In September 1997, the Company acquired United Software, Inc., including 
its operating subsidiary Apsylog S.A. of France ("Apsylog").  Apsylog 
develops, markets, and supports an asset management software product which 
the Company has renamed ASSETCENTER.  The Company's result of operations for 
the quarter ended December 31, 1997 reflect the first full quarter to include 
the operations (revenue and expenses) of Apsylog.  The Company's results of 
operations for the nine month period ended December 31, 1997 include results 
of operations for Apsylog subsequent to September 19, 1997.

   The Company's revenues are derived from product licensing, maintenance and 
services. License fees are generally due upon the granting of the license and 
typically include a one-year maintenance period as part of the license 
agreement. The Company also provides ongoing maintenance services, which 
include technical support and product enhancements, for an annual fee based 
upon the current price of the product. 

   Revenues from license agreements are recognized currently, provided that 
all of the following conditions are met: a noncancelable license agreement or 
other legally binding agreement has been signed, the product has been 
delivered, there are no material uncertainties regarding customer acceptance, 
collection of the resulting receivable is deemed probable, and no other 
significant vendor obligations exist. Revenues from post-contract support 
services are recognized ratably over the term of the support period, 
generally one year. Maintenance revenues which are bundled in license fees 
are unbundled and recognized using vendor-specific evidence. Consulting 
revenues are primarily related to implementation services most often 
performed on a time and material basis under separate service agreements for 
the installation of the Company's products. Revenues from consulting and 
training services are recognized as the respective services are performed. 

   The Company currently derives substantially all of its license revenues 
from the sale of SERVICECENTER and expects SERVICECENTER to account for a 
significant portion of the Company's revenues for the foreseeable future. The 
Company's future operating results are dependent upon continued market 
acceptance of SERVICECENTER, including future enhancements, as well as 
acceptance of ASSETCENTER, Apsylog's asset management product. Factors 
adversely affecting the pricing of, demand for or market acceptance of 
SERVICECENTER or ASSETCENTER, such as competition or technological change, 
could have a material adverse effect on the Company's business, operating 
results and financial condition.

   The Company conducts business overseas in a number of foreign currencies,
principally the British Pound, Deutsche Mark, French Franc, and Danish Krone.
These currencies have been relatively stable against the U.S. dollar 

                                       10
<PAGE>

for the past several years. As a result, foreign currency fluctuations have 
not had a significant impact on the Company's revenues or results of 
operations. Although the Company currently derives no revenues from highly 
inflationary economies, the Company is expanding its presence in 
international markets outside Europe, including the Pacific Rim and Latin 
America, whose currencies have tended to fluctuate more relative to the U.S. 
Dollar. There can be no assurance that foreign currency exchange rates will 
not prove more volatile or that future fluctuations in the value of foreign 
currencies will not have a material adverse effect on the Company's business, 
operating results and financial condition. The Company has recently 
implemented a foreign currency forward hedging program. The hedging program 
consists primarily of using 30-day forward-rate currency contracts.  Currency 
contracts are in accordance with SFAS 52 and receive hedge accounting 
treatment.  Accordingly, to the extent properly hedged by obligations 
denominated in local currencies, the Company's foreign operations remain 
subject to the risks of future foreign currency fluctuations, and there can 
be no assurances that he Company's hedging activities will adequately protect 
the Company against such risk.

   To date the Company's Pacific Rim sales activity has not been material. 
Accordingly, the Company's operations and financial condition have not been 
impacted by the recent Asian financial crisis.

RESULTS OF OPERATIONS

   The following table sets forth for the periods indicated selected 
consolidated statements of operations data as a percentage of total revenues:

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED        NINE MONTHS ENDED
                                                         DECEMBER 31,              DECEMBER 31,
                                                      ------------------        ------------------
                                                        1996       1997          1996       1997  
                                                      --------   -------        -------    -------
<S>                                                    <C>        <C>            <C>        <C>
   STATEMENT OF OPERATIONS DATA:
    Revenues:
      Licenses.....................................     63.8%      66.9%          56.8%      61.7%
      Maintenance and services.....................     36.2       33.1           43.2       38.3
                                                       -----      -----          -----      -----
        Total revenues.............................    100.0      100.0          100.0      100.0
    Costs and expenses:
      Cost of licenses.............................      0.5        0.5            0.6        0.5
      Cost of maintenance and services.............     12.0       15.3           14.0       16.1
      Sales and marketing..........................     40.9       36.7           45.7       37.7
      Research and development.....................     16.5       13.4           17.8       13.8
      General and administrative...................     11.5       11.4           11.4       10.6
      Acquired research and development costs......       -          -              -        83.3
                                                       -----      -----          -----      -----
        Total costs and expenses...................     81.4       77.3           89.5      162.0
                                                       -----      -----          -----      -----
      Operating and other income...................     18.6       22.7           10.5      (62.0)
      Interest and other income (expense), net.....     (1.4)       1.1           (1.5)       1.4
                                                       -----      -----          -----      -----
      Income before income taxes...................     17.2       23.8            9.0      (60.6)
      Income tax expense                                  -         8.8             -         8.4
                                                       -----      -----          -----      -----
         Net income................................     17.2%      15.0%           9.0%     (69.0)%
                                                       -----      -----          -----      -----
                                                       -----      -----          -----      -----
</TABLE>

THREE MONTH AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996 REVENUES

     Total revenues were $18.5 million and $9.5 million in the third quarter 
of fiscal 1998 and 1997, respectively, representing a period-to-period 
increase of 94%.  For the nine month periods ended December 31, 1997 and 
1996, total revenue increased 70% to $41.7 million.

     LICENSES.  License revenues were $12.4 million and $6.1 million in the 
third quarter of fiscal 1998 and 1997, respectively, representing 67% and 64% 
of total revenues in the respective periods and $25.7 million and $13.9 
million

                                       11
<PAGE>

for the nine months ended December 31, 1997 and 1996, respectively, 
representing 62% and 57% of total revenues for such periods.  License 
revenues increased 104% in the third quarter of the fiscal 1998 compared to 
the third quarter of fiscal 1997.  For the nine months December 31, 1997, 
license revenues increased 85% compared to the nine month period ended 
December 31, 1997.   The increases in license revenues are attributable to 
increased demand for new licenses of SERVICECENTER and the first quarterly 
effect of ASSETCENTER revenue, additional seats purchased by existing 
SERVICECENTER and ASSETCENTER customers, more effective corporate marketing 
programs, improved sales force productivity, and expansion of the Company's 
sales force.

     MAINTENANCE AND SERVICES.  Maintenance and services revenues were  $6.1 
million and $3.5 million in the third quarter of fiscal 1998 and 1997, 
respectively, representing 33% and 36% of total revenues in the respective 
periods and $16.0 million and $10.6 million for the nine months ended 
December 31, 1997 and 1996 respectively, representing 38% and 43% of the 
total revenues for such periods.  Maintenance and services revenues increased 
78% in the third quarter of the fiscal 1998 compared to the third quarter of 
fiscal 1997.  For the nine months ended December 31, 1997, maintenance and 
service revenues increased 51% compared to the nine months ended December 31, 
1996. The dollar increases are attributable to renewals of maintenance 
agreements from the Company's expanded installed base of customers and 
maintenance revenues included as part of new licenses and an increased number 
of consulting engagements related to implementation of software from initial 
license agreements. 

COSTS AND EXPENSES

     COST OF LICENSES.  Cost of license revenues was $98,000 and $50,000 in 
the third quarter of fiscal 1998 and 1997, respectively, each representing 1% 
of total license revenues in the respective periods and $226,000 and $155,000 
for the nine month periods ended December 31, 1997 and 1996, respectively, 
again representing 1% of total license revenues in the respective periods.

     COST OF MAINTENANCE AND SERVICES.  Cost of maintenance and services 
revenues was $2.8 million and $1.1 million in the third quarter of fiscal 
1998 and 1997, respectively, representing 46% and 33% of total maintenance 
and service revenues in the respective periods and $6.7 million and $3.4 
million for the nine months ended December 31, 1997 and 1996, respectively, 
representing 42% and 32% of total maintenance and services revenues for such 
periods respectively.   The dollar increase in the third quarter of fiscal 
1998 over 1997 and in the nine months ended December 31, 1997 over the same 
period in 1996 are attributable to an increase in customer support personnel 
and professional services personnel in connection with the corresponding 
increase in professional services revenue. 

     SALES AND MARKETING.  Sales and marketing expenses were $6.8 million and 
$3.9 million in the third quarter of fiscal 1998 and 1997, respectively, 
representing 37% and 41% of total revenues in the respective periods and 
$15.7 million and $11.2 million for the nine months ended December 31, 1997 
and 1996, respectively, representing 38% and 46% of the total revenues in 
such periods. The dollar increase in sales and marketing expenses is 
attributable to expansion of both the North American and international sales 
forces, the increase in personnel in the marketing department, the first 
quarterly effect of Apsylog sales and marketing expenses, and to moderate 
increases in operating expenses. If the Company experiences a decrease in 
sales force productivity or for any other reason a decline in revenues, it is 
likely that operating margins will decline as well.  The decrease in sales 
and marketing expenses as a percentage of total revenues is attributable to 
increased revenues, particularly increased license revenues, economies of 
scale, and the delayed hiring of additional sales staff.

     RESEARCH AND DEVELOPMENT.  Research and development expenses were $2.5 
million and $1.6 million in the third quarter of fiscal 1998 and 1997, 
respectively, representing 13% and 17% of total revenues in the respective 
periods and $5.8 million and $4.4 million for the nine months ended December 
31, 1997 and 1996, respectively, representing 14% and 18% of total revenues 
in such periods.  The dollar increase from fiscal 1997 to fiscal 1998 is due 
primarily to the hiring of additional software developers and the first 
quarterly effect of Apsylog research and development expenses.  The decrease 
as a percentage of total revenues is due to increased revenues. 

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses were 
$2.1 million and $1.1 million in the third quarter of fiscal 1998 and 1997, 
respectively, representing 11% and 12% of total revenues in the respective 
periods and $4.4 million and $2.8 million for the nine months ended December 
31, 1997 and 1996, respectively,

                                       12
<PAGE>

representing 11% of the total revenues in each period. The dollar increase 
from fiscal 1997 to 1998 are attributable primarily to administrative 
personnel additions to support the Company's growth, including Apsylog, and 
the additional administrative expenses associated with becoming a publicly 
traded company.

     ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS.  Acquired in-process 
research and development costs of $34.8 million were incurred in the second 
quarter of the fiscal 1998 in connection with the Apsylog Acquisition and are 
therefore reflected in the nine months ended December 31, 1997. 

     INCOME TAX EXPENSE. Income tax expense for the third fiscal quarter of 
1998 amounted to $1.6 million compared with zero in the comparable quarter of 
1997. This increase results from the $2.8 million dollar increase in 
operating profits, before taxes and recognition of the acquired research and 
development costs during the period.  Excluding the effect of expensing the 
acquired research and development costs, the effective tax rate for the third 
quarter of fiscal 1998 and for the nine months ended December 31, 1997 was 
37%.

LIQUIDITY AND CAPITAL RESOURCES

     The Company had $15.5 million in cash and cash equivalents at December 
31, 1997 compared to $0.3 million at March 31, 1997.  The increase is 
primarily attributable to the Company's completion of its initial public 
offering in April 1997.  The Company offered and sold 2.3 million shares of 
its common stock at an initial public offering price of $9.00 per share, 
raising $19.3 million after underwriting discounts and commissions.

     At March 31, 1997, the Company had a $4.5 million revolving bank credit 
scheduled to expire by its own terms November 30, 1997, and a term loan from 
the same bank.  The term loan was secured by trade receivables and fixed 
assets of the Company and the revolving credit line secured by accounts 
receivable, equipment and certain other assets of the Company. Both 
facilities were personally guaranteed by the Company's majority stockholder.  
Both the credit line and term loan were repaid from proceeds of the Company's 
April 1997 initial public offering.

     Effective July 1, 1997, the Company entered into a new agreement to 
replace the above line of credit.  The new agreement allows up to $5.0 
million in borrowing and is generally secured by the same collateral as the 
old line. There is no personal guarantee associated with the new line.  There 
are however, certain covenants, the most significant of which places cetain 
restrictions on future borrowings and acquisitions above specified levels.  
In addition, the Company is required to maintain certain financial ratios and 
minimum equity balances.  The agreement also provides for a foreign exchange 
facility of up to $2.0 million in any two day period.

     The Company believes that its current cash balances, cash available 
under its bank facilities, and cash flow from operations will be sufficient 
to meet its working capital requirements for at least the next 12 months. 
Although operating activities may provide cash in certain periods, to the 
extent the Company experiences growth in the future, the Company anticipates 
that its operating and investing activities may use cash. Consequently, any 
such future growth may require the Company to obtain additional equity or 
debt financing, which may not be available on commercially reasonable terms 
or which may be dilutive. 

FACTORS THAT MAY AFFECT FUTURE RESULTS

     THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING 
STATEMENT AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS.  THESE 
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS 
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM 
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:

LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES.  Through December 31, 
1997, the Company has recorded cumulative net losses of approximately $44.6 
million, including approximately $34.8 million related to the write-off of 
acquired in-process research and development in connection with the 
acquisition of United Software, Inc. including its wholly-owned operating 
subsidiary Apsylog S.A., a corporation organized under the laws of France 
("Apysylog") in September 1997 (the "Apsylog Acquisition").  In recent years, 
the product lines of both the Company and Apsylog have changed substantially. 
The Company's SERVICECENTER product, from which the

                                       13
<PAGE>


Company derived substantially all of its license revenues for the fiscal year 
ended March 31, 1997 and for the nine months ended December 31, 1997, only 
began shipping in mid-1995.  Apsylog's ASSETCENTER product only began 
shipping in mid-1996.  As a result, prediction of the Company's future 
operating results is difficult, if not impossible.  Although the Company 
achieved profitability during the year ended March 31, 1997 and for the nine 
months ended December 31, 1997 (excluding the impact of the $34.8 million 
charge related to acquired in-process research and development in connection 
with the Apsylog Acquisition), there can be no assurance that the Company 
will be able to remain profitable on a quarterly or annual basis.  In 
addition, the Company does not believe that the growth in revenues it has 
experienced in recent years is indicative of future revenue growth or future 
operating results.  See "--Product Concentration; Dependence on Market 
Acceptance of Enterprise Service Desk Software" and "--Risks Associated with 
Apsylog Acquisition and Future Acquisitions."

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY.  The Company's 
quarterly operating results have varied significantly in the past and may 
vary significantly in the future depending upon a number of factors, many of 
which are beyond the Company's control.  These factors include, among others, 
the ability of the Company to develop, introduce and market new and enhanced 
versions of its software on a timely basis; market demand for the Company's 
software; the size, timing and contractual terms of significant orders; the 
timing and significance of new software product announcements or releases by 
the Company or its competitors; changes in pricing policies by the Company or 
its competitors; changes in the Company's business strategies; budgeting 
cycles of its potential customers; changes in the mix of software products 
and services sold; changes in the mix of revenues attributable to domestic 
and international sales; the impact of acquisitions of competitors; the 
impact of acquisitions by the Company, including the Apsylog Acquisition; 
seasonal trends; the cancellations of licenses or maintenance agreements; 
product life cycles; software defects and other product quality problems; and 
personnel changes.  The Company has often recognized a substantial portion of 
its revenues in the last month or weeks of a quarter.  As a result, license 
revenues in any quarter are substantially dependent on orders booked and 
shipped in the last month or weeks of that quarter.  Due to the foregoing 
factors, quarterly revenues and operating results are not predictable with 
any significant degree of accuracy.  In particular, the timing of revenue 
recognition can be affected by many factors, including the timing of contract 
execution and delivery.  The timing between initial customer contact and 
fulfillment of criteria for revenue recognition can be lengthy and 
unpredictable, and revenues in any given quarter can be adversely affected as 
a result of such unpredictability.  In the event of any downturn in potential 
customers' businesses, or the domestic economy in general, or in 
international economies in which the Company derives substantial revenues, 
planned purchases of the Company's products may be deferred or canceled, 
which could have a material adverse effect on the Company's business, 
operating results and financial condition.

The Company's business has experienced and is expected to continue to 
experience seasonality.  The Company's revenues and operating results in its 
December quarter typically benefit from purchase decisions made by the large 
concentration of customers with calendar year-end budgeting requirements, 
while revenues and operating results in the March quarter typically benefit 
from the efforts of the Company's sales force to meet fiscal year-end sales 
quotas.  In addition, the Company is currently attempting to expand its 
presence in international markets, including Europe, the Pacific Rim and 
Latin America. International revenues comprise a significant percentage of 
the Company's total revenues, and the Company may experience additional 
variability in demand associated with seasonal buying patterns and economic 
conditions in such foreign markets.  In particular, the quarter ended 
September 30 tends to reflect the effects of summer slowing of international 
business activity, particularly in Europe.  See "--International Operations; 
Currency Fluctuations."

PRODUCT CONCENTRATION; DEPENDENCE ON MARKET ACCEPTANCE OF ENTERPRISE SERVICE 
DESK SOFTWARE.  The Company currently derives substantially all of its 
license revenues from the sale of the  SERVICECENTER suite of applications 
and expects SERVICECENTER to account for a significant portion of the 
Company's revenues for the foreseeable future.  The Company's future 
operating results are dependent upon continued market acceptance of 
SERVICECENTER, including future enhancements, as well as market acceptance of 
ASSETCENTER.  Factors adversely affecting the pricing of, demand for, or 
market acceptance of SERVICECENTER or ASSETCENTER, such as competition or 
technological change, could have a material adverse effect on the Company's 
business, operating results and financial condition.

The Company's product strategy has focused on integrating a broad array of IT 
management applications with other traditional internal help desk 
applications to create an Enterprise Service Desk.  The market for Enterprise 
Service

                                       14

<PAGE>

Desk software is relatively new and is characterized by ongoing technological 
developments, frequent new product announcements and introductions, evolving 
industry standards and changing customer requirements.  The Company's future 
financial performance will depend in part on continued growth in the number 
of organizations implementing Enterprise Service Desk solutions.

RISKS ASSOCIATED WITH APSYLOG ACQUISITION AND FUTURE ACQUISITIONS. The 
Apsylog Acquisition involves a significant amount of integration of two 
companies that have previously operated independently.  The principal 
operations of Apsylog, including most of its employees, are located in Paris, 
France.  No assurance can be given that difficulties will not be encountered 
in integrating certain products, technologies or operations of Apsylog with 
those of the Company or that the benefits expected from such integration will 
be realized or that Apsylog employee morale will not be adversely affected by 
the integration process.  Such integration could result in a diversion of 
management's time and attention, which could have a material adverse effect 
on revenues and results of operations.  The difficulties of integration may 
be increased by the necessity of coordinating geographically separated 
organizations or of integrating personnel with disparate business backgrounds 
and different corporate cultures. There can be no assurance that either 
company will retain its key personnel, that the engineering teams of Apsylog 
and the Company will successfully cooperate and realize any technological 
benefits or that Apsylog or the Company will realize any of the other 
anticipated benefits of the Apsylog Acquisition. Apsylog's ASSETCENTER 
product has traditionally been sold into an organization's finance or 
procurement departments as opposed to SERVICECENTER, which is typically 
purchased by the IT Department.  There can be no assurance that the Company 
will be successful in continuing to sell to such constituencies or that it 
can successfully persuade customers and potential customers that an 
integrated approach to managing IT assets is desirable.

The success of the Company's efforts to integrate Apsylog's products and 
technologies will depend in significant part upon the continued service of 
its key technical, development, sales and senior management personnel 
following the Apsylog Acquisition.  Only certain of these individuals 
(including Apsylog's Chief Executive Officer and seven additional employees) 
will be bound by non-competition agreements.  In addition, in connection with 
the Apsylog Acquisition, all repurchase restrictions on shares of restricted 
Apsylog Common Stock held by Apsylog stockholders lapsed, and all unvested 
options in respect to Apsylog's Common Stock vested and became immediately 
exercisable.  The loss of the services of one or more of Apsylog's 
development personnel or other key employees or the decision of one or more 
of such personnel or key employees to join a competitor or otherwise compete 
directly or indirectly with the Company could have a material adverse effect 
on the Company's business, operating results and financial condition.

In addition to the Apsylog Acquisition and as part of its business strategy, 
the Company may make acquisitions of, or significant investments in, 
businesses that offer complementary products, services and technologies.  
There can be no assurances that the Company will make any additional 
acquisitions in the future. Any such future acquisitions or investments would 
present risks commonly encountered in acquisitions of businesses.  Such risks 
include, among others, the difficulty of assimilating the technology, 
operations or personnel of the acquired businesses, the potential disruption 
of the Company's on-going business, the inability of management to maximize 
the financial and strategic position of the Company through the successful 
incorporation of acquired personnel, clients, or technologies, the 
maintenance of uniform standards, controls, procedures, and policies and the 
impairment of relationships with employees and clients as a result of any 
integration of new businesses and management personnel.  The Company expects 
that future acquisitions, if any, could provide for consideration to be paid 
in cash, shares of stock or a combination of cash and stock.  In the event of 
such an acquisition or investment, the factors described herein could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL  The Company's 
ability to achieve anticipated revenues is substantially dependent on its 
ability to attract and retain skilled personnel, especially sales, service 
and implementation personnel.  Other than certain employees of Apsylog, none 
of the Company's employees, including its senior management, is bound by an 
employment or non-competition agreement, and the Company does not maintain 
key man life insurance on any employee.  The loss of the services of one or 
more of the Company's executive officers or key employees or the decision of 
one or more of such officers or employees to join a competitor or otherwise 
compete directly or indirectly with the Company could have a material adverse 
effect on

                                       15
<PAGE>

the Company's business, operating results and financial condition.  In 
January 1998, the Company's President and Chief Executive Officer resigned.  
The Company has appointed Stephen P. Gardner, its Executive Vice President, 
to act as interim Chief Executive Officer, until such time as a permanent 
Chief Executive Officer is identified.  Although the Company believes it will 
be able to identify and retain a permanent Chief Executive Officer, any 
delays in hiring such an individual or market uncertainty concerning the 
Company's management could have an adverse effect on results of operations in 
a particular quarter or result in volatility in the Company's stock price.

In addition, the Company believes that its future success will depend in 
large part on its ability to attract and retain additional highly skilled 
technical, sales, management and marketing personnel.  Competition for such 
personnel in the computer software industry is intense, and the Company has 
at times in the past experienced difficulty in recruiting qualified 
personnel.  New employees hired by the Company generally require substantial 
training in the use and implementation of the Company's products.  In 
particular, a number of the Company's sales personnel have been with the 
Company for only a limited period of time.  There can be no assurance that 
the Company will be successful in attracting, training and retaining 
qualified personnel, and the failure to do so could have a material adverse 
effect on the Company's business, operating results and financial condition.

COMPETITION.  The market for the Company's products is highly competitive, 
fragmented and subject to rapid technological change and frequent new product 
introductions and enhancements.  Competitors vary in size and in the scope 
and breadth of the products and services offered.  The Company encounters 
competition from a number of sources, including (i) providers of internal 
help desk software applications such as Remedy Corporation and Software 
Artistry, Inc. (recently acquired by Tivoli Systems, Inc. ("Tivoli")), (ii) 
customer interaction software companies such as Clarify Inc. and The Vantive 
Corporation, whose products include internal help desk applications, (iii) 
information technology and systems management companies such as International 
Business Machines Corporation ("IBM"), Computer Associates International, 
Inc. ("Computer Associates"), McAfee Associates, Inc. and Hewlett-Packard 
Company ("Hewlett-Packard") through its recent acquisition of PROLIN, (iv) 
providers of asset management software, and (v) the internal information 
technology departments of those companies with help desk requirements.  
Because barriers to entry in the software market are relatively low, the 
Company anticipates additional competition from other established and 
emerging companies as the market for Enterprise Service Desk applications 
expands.  In addition, current and potential competitors have established or 
may in the future establish cooperative relationships among themselves or 
with third parties.  The Company expects software industry consolidation to 
occur in the future, and it is possible that new competitors or alliances 
among competitors may emerge and rapidly acquire significant market share.  
For example, the Company's ability to sell its Enterprise Service Desk 
products depends in part on their compatibility with and support by providers 
of system management products, including Tivoli, Computer Associates, and 
Hewlett-Packard.  Both Tivoli and Hewlett-Packard have recently acquired 
providers of help desk software products.  The decision of one or more 
providers of system management products to close their systems to competing 
vendors like the Company could have an adverse effect on the Company's 
ability to sell its products.  Increased competition, including increased 
competition as a result of acquisitions of help desk software vendors by 
systems management companies, is likely to result in price reductions, 
reduced gross margins and loss of market share, any of which could have a 
material adverse effect on the Company's business, operating results and 
financial condition. Some of the Company's current and many of its potential 
competitors have significantly greater financial, technical, marketing and 
other resources than the Company.  As a result, they may be able to respond 
more quickly to new or emerging technologies and changes in customer 
requirements or to devote greater resources to the development, promotion and 
sale of their products than the Company.  There can be no assurance that the 
Company will be able to compete successfully against current and future 
competitors or that competitive pressures faced by the Company will not have 
a material adverse effect on the Company's business, operating results and 
financial condition.

MANAGEMENT OF GROWTH.  The Company's business has grown substantially in 
recent periods, with total revenues increasing from $19.6 million in fiscal 
1995 to $23.8 million in fiscal 1996 and to $35.0 million in fiscal 1997 and 
to $41.7 million in the first nine months of fiscal 1998.  If the Company is 
successful in achieving its growth plans, including the integration of 
Apsylog, such growth is likely to place a significant burden on the Company's 
operating and financial systems, resulting in increased responsibility for 
senior management and other personnel within the Company.  The Company's 
ability to compete effectively and to manage future growth, if any, and its 
future operating results will depend in part on the ability of its officers 
and other key employees to implement and 

                                       16
<PAGE>

expand operational, customer support and financial control systems and to 
expand, train and manage its employee base.  In particular, in connection 
with the Apsylog Acquisition, the Company will be required to integrate 
additional personnel and to augment or replace Apsylog's existing financial 
and management systems.  Such integration could result in a disruption of 
operations of the Company or Apsylog and could adversely affect the Company's 
financial results. There can be no assurance that the Company's existing 
management or any new members of management will be able to augment or 
improve existing systems and controls or implement new systems and controls 
in response to future growth, if any.  The Company's failure to do so could 
have a material adverse effect on the Company's business, operating results 
and financial condition.  See "--Dependence on Key Personnel; Ability to 
Recruit Personnel" and "--Risks Associated with Apsylog Acquisition and 
Future Acquisitions."

LENGTHY SALES CYCLES.  The license of the Company's software generally 
requires the Company to engage in a sales cycle that typically takes 
approximately six to nine months to complete.  The length of the sales cycle 
may vary depending on a number of factors over which the Company may have 
little or no control, including the size of the transaction and the level of 
competition which the Company encounters in its selling activities.  In 
addition, the sales cycle is typically extended 90 days for product sales 
through indirect channels.  During the sales cycle, the Company typically 
provides a significant level of education to prospective customers regarding 
the use and benefits of the Company's products.  Any delays in the sales 
cycles of a large license or a number of smaller licenses could have a 
material adverse effect on the Company's business, operating results and 
financial condition.  See "--Potential Fluctuations in Quarterly Results; 
Seasonality."

EXPANSION OF DISTRIBUTION CHANNELS.  The Company has historically sold its 
products through its direct sales force and a limited number of distributors 
and has provided maintenance and support services through its technical and 
customer support staff.  The Company is currently investing and intends to 
continue to invest significant resources in developing additional sales and 
marketing channels through system integrators and original equipment 
manufacturers ("OEMs") and other channel partners.  There can be no assurance 
that the Company will be able to attract channel partners that will be able 
to market the Company's products effectively and will be qualified to provide 
timely and cost-effective customer support and service.  To the extent the 
Company establishes distribution through such indirect channels, its 
agreement with channel partners may not be exclusive and such channel 
partners may also carry competing product lines.  Any failure by the Company 
to establish and maintain such distribution relationships could have a 
material adverse effect on the Company's business, operating results and 
financial condition.  See "--Management of Growth" and "--International 
Operations; Currency Fluctuations."

INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS.  International sales 
represented approximately 29% and 32% of the Company's total revenues in 
fiscal 1996 and fiscal 1997, respectively, and 36% for the nine months ended 
December 31, 1997.  The Company currently has international sales offices in 
London, Paris, Frankfurt, Amsterdam, and Copenhagen.  Apsylog currently has 
international offices in Paris and Munich.  The Company believes that its 
continued growth and profitability will require continued expansion of its 
international operations, particularly in Europe, Latin America and the 
Pacific Rim.  Accordingly, the Company intends to expand its international 
operations and enter additional international markets, which will require 
significant management attention and financial resources.  In addition, the 
Company's international operations are subject to a variety of risks 
associated with conducting business internationally, including fluctuations 
in currency exchange rates, longer payment cycles, difficulties in staffing 
and managing international operations, problems in collecting accounts 
receivable, seasonal reductions in business activity during the summer months 
in Europe and certain other parts of the world, increases in tariffs, duties, 
price controls or other restrictions on foreign currencies, and trade 
barriers imposed by foreign countries, any of which could have a material 
adverse effect on the Company's business, operating results and financial 
condition.  In particular, recent instability in the Asian-Pacific economies 
and financial markets, could have an adverse effect on the Company's 
operating results in future quarters.  In addition, the Company has only 
limited experience in developing localized versions of its products and 
marketing and distributing its products internationally.  There can be no 
assurance that the Company will be able to successfully localize, market, 
sell and deliver its products internationally. The inability of the Company 
to expand its international operations successfully and in a timely manner 
could have a material adverse effect on the Company's business, operating 
results and financial condition.

                                       17
<PAGE>

A significant portion of the Company's business is conducted in currencies 
other than the U.S. dollar.  Foreign currency transaction gains and losses 
arising from normal business operations are credited to or charged against 
earnings in the period incurred.  As a result, fluctuations in the value of 
the currencies in which the Company conducts its business relative to the 
U.S. dollar have caused and will continue to cause currency transaction gains 
and losses.  Due to the substantial volatility of currency exchange rates, 
among other factors, the Company cannot predict the effect of exchange rate 
fluctuations upon future operating results.  There can be no assurance that 
the Company will not experience currency losses in the future.  The Company 
has recently implemented a foreign exchange hedging program, consisting 
principally of purchases of one month forward-rate currency contracts.  
Notwithstanding such a program, there can be no assurances that the Company's 
hedging activities will adequately protect the Company against the risks 
associated with foreign currency fluctuations.  See "--Management of Growth."

YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY BUDGETS.  Many currently installed 
computer systems and software products are coded to accept only two digit 
entries in the date code field.  These date code fields will need to accept 
four digit entries to distinguish 21st century dates from 20th century dates. 
 As a result, in less than three years, computer systems and/or software used 
by many companies may need to be upgraded to comply with such "Year 2000" 
requirements. Significant uncertainty exists in the software industry 
concerning the potential effects associated with such compliance.

The Company believes that the purchasing patterns of customers and potential 
customers may be affected by Year 2000 issues.  Many companies are expending 
significant resources to correct their current software systems for Year 2000 
compliance.  These expenditures may result in reduced funds available to 
purchase software products such as those offered by the Company.

DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT.  The Company's 
success is dependent upon proprietary technology.  The Company relies 
primarily on a combination of copyright and trademark laws, trade secrets, 
confidentiality procedures and contractual provisions to protect its 
proprietary rights.  The Company seeks to protect its software, documentation 
and other written materials under trade secret and copyright laws, which 
provide only limited protection. Despite precautions taken by the Company, it 
may be possible for unauthorized third parties to copy aspects of its current 
or future products or to obtain and use information that the Company regards 
as proprietary.  In particular, the Company may provide its licensees with 
access to its data model and other proprietary information underlying its 
licensed applications.  There can be no assurance that the Company's means of 
protecting its proprietary rights will be adequate or that the Company's 
competitors will not independently develop similar or superior technology.  
Policing unauthorized use of the Company's software is difficult and, while 
the Company is unable to determine the extent to which piracy of its software 
products exists, software piracy can be expected to be a persistent problem.  
In addition, the laws of some foreign countries do not protect the Company's 
proprietary rights to the same extent as do the laws of the United States.  
Litigation may be necessary in the future to enforce the Company's 
intellectual property rights, to protect the Company's trade secrets or to 
determine the validity and scope of the proprietary rights of others. Such 
litigation could result in substantial costs and diversion of resources and 
could have a material adverse effect on the Company's business, operating 
results and financial condition.

The Company is not aware that any of its software product offerings infringes 
the proprietary rights of third parties.  There can be no assurance, however, 
that third parties will not claim infringement by the Company with respect to 
its current or future products.  The Company expects that software product 
developers will increasingly be subject to infringement claims as the number 
of products and competitors in the Company's industry segment grows and the 
functionality of products in different industry segments overlaps.  Any such 
claims, with or without merit, could be time-consuming, result in costly 
litigation, cause, product shipment delays or require the Company to enter 
into royalty or licensing agreements.  Such royalty or licensing agreements, 
if required, may not be available on terms acceptable to the Company or at 
all, which could have a material adverse effect on the Company's business, 
operating results and financial condition.

RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS.  The market for the 
Company's products is subject to rapid technological change, changing 
customer needs, frequent new product introductions and evolving industry 

                                       18
<PAGE>

standards that may render existing products and services obsolete.  As a 
result, the Company's position in its existing markets or other markets that 
it may enter could be eroded rapidly by product advances.  The life cycles of 
the Company's products are difficult to estimate.  The Company's growth and 
future financial performance will depend in part upon its ability to enhance 
existing applications, develop and introduce new applications that keep pace 
with technological advances, meet changing customer requirements and respond 
to competitive products.  The Company's product development efforts are 
expected to continue to require substantial investments by the Company.  
There can be no assurance that the Company will have sufficient resources to 
make the necessary investments.  The Company has in the past experienced 
development delays, and there can be no assurance that the Company will not 
experience such delays in the future.  There can be no assurance that the 
Company will not experience difficulties that could delay or prevent the 
successful development, introduction or marketing of new or enhanced 
products.  In addition, there can be no assurance that such products will 
achieve market acceptance, or that the Company's current or future products 
will conform to industry requirements.  The inability of the Company, for 
technological or other reasons, to develop and introduce new and enhanced 
products in a timely manner could have a material adverse effect on the 
Company's business, operating results and financial condition.

     Software products as complex as those offered by the Company may contain 
errors that may be detected at any point in a product's life cycle.  The 
Company has in the past discovered software errors in certain of its products 
and has experienced delays in shipment of products during the period required 
to correct these errors.  There can be no assurance that, despite testing by 
the Company and by current and potential customers, errors will not be found, 
resulting in loss of, or delay in, market acceptance and sales, diversion of 
development resources, injury to the Company's reputation, or increased 
service and warranty costs, any of which could have a material adverse effect 
on the Company's business, results of operations and financial condition.

PRODUCT LIABILITY.  The Company's license agreements with its customers 
typically contain provisions designed to limit the Company's exposure to 
potential product liability claims.  It is possible, however, that the 
limitation of liability provisions contained in the Company's license 
agreements may not be effective under the laws of certain jurisdictions.  
Although the Company has not experienced any product liability claims to 
date, the sale and support of products by the Company may entail the risk of 
such claims, and there can be no assurance that the Company Will not be 
subject to such claims in the future.  A product liability claim brought 
against the Company could have a material adverse effect on the Company's 
business, operating results and financial condition.

VOLATILITY OF STOCK PRICE.  The Company completed its initial public offering 
of Common Stock in April 1997, prior to which time no public market existed 
for the Company's Common Stock.  The market price of the Company's Common 
Stock has been since the initial public offering and is expected to continue 
to be subject to significant fluctuations in the future based on a number of 
factors, including any shortfall in the Company's revenues or net income from 
revenues or net income expected by securities analysts; announcements of new 
products by the Company or its competitors; quarterly fluctuations in the 
Company's financial results or the results of other software companies, 
including those of direct competitors of the Company; changes in analysts' 
estimates of the Company's financial performance, the financial performance 
of competitors, or the financial performance of software companies in 
general; general conditions in the software industry; changes in prices for 
the Company's products or competitors' products; changes in revenue growth 
rates for the Company or its competitors; sales of large blocks of Common 
Stock by holders whose ability to sell has been limited by restrictions under 
applicable securities laws and conditions in the financial markets.  In 
addition, the stock market may from time to time experience extreme price and 
volume fluctuations, which particularly affect the market price for the 
securities of many technology companies and which have often been unrelated 
to the operating performance of the specific companies.  There can be no 
assurance that the market price of the Company's Common Stock will not 
experience significant fluctuations in the future.

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<PAGE>


                                     PART II.
                                 OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

       None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a)   Exhibits:

       EXHIBITS     EXHIBIT TITLE
       --------     -------------

         10.23  Severance Settlement Agreement and Release of Claims between 
                Alan H. Hunt and the Company, dated January 30, 1998.
         11.1   Statement regarding computation of per share earnings.
         27.1   Financial Data Schedule

b)  Reports on Form 8-K:

     None.


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<PAGE>


                                    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 in the City of San Diego, California, 
this 17th day of February, 1998.

                                       PEREGRINE SYSTEMS, INC.

                                       By        /S/ DAVID A. FARLEY
                                       ----------------------------------------
                                       Vice President, Finance, Chief Financial
                                           Officer (Principal Financial and
                                                   Accounting Officer)



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