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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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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, 2001

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: 000-22209

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PEREGRINE SYSTEMS, INC.(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware

95-3773312(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification Number)


3611 Valley Centre Drive
San Diego, California 92130(Address of principal executive offices, including zip code)

(858) 481-5000(Registrant's telephone number, including area code)

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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, 2001, was 192,308,453.

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PEREGRINE SYSTEMS, INC.        TABLE OF CONTENTS

|PART I     |  | FINANCIAL INFORMATION                                                                                                      |  | PAGE NO
|---------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | -------
|Item 1     |  | Condensed Consolidated Financial Statements                                                                                |  | 1      
|           |  | Condensed Consolidated Balance Sheets as of December 31, 2001 (unaudited) and March 31, 2001 (audited)                     |  | 1      
|           |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2001 and 2000 (unaudited) |  | 2      
|           |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2001 and 2000 (unaudited)           |  | 3      
|           |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                           |  | 4      
|Item 2     |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                      |  | 9      
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                                                                 |  | 30     
|
|Item 2     |  | Changes in Securities and Use of Proceeds                                                                                  |  | 31     
|Item 6     |  | Exhibits and Reports on Form 8-K                                                                                           |  | 31     
|Signatures |  | 32                                                                                                                        

ii

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PART I  ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        PEREGRINE SYSTEMS, INC.  CONDENSED CONSOLIDATED BALANCE SHEETS  (in thousands, except share amounts)

|                                                                                                                           |                                                                                                  | December 31,
2001          |            | March 31,
2001 |          
|-------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------------------------- | ---------- | -------------- | ---------
|
|ASSETS                                                                                                                     |                                                                                                  |                            |            |                |          
|Current Assets:                                                                                                            |                                                                                                  |                            |            |                |          
|                                                                                                                           | Cash and cash equivalents                                                                        |                            | $          | 180,558        |          
|                                                                                                                           | Short-term investments                                                                           |                            |            | 28,836         |          
|                                                                                                                           | Accounts receivable, net of allowance for doubtful accounts of $14,784 and $11,511, respectively |                            |            | 190,096        |          
|                                                                                                                           | Other current assets                                                                             |                            |            | 77,326         |          
|                                                                                                                           |                                                                                                  |                            |            |                |          
|                                                                                                                           |                                                                                                  | Total current assets       |            |                | 476,816  
|Property and equipment, net of accumulated depreciation of $75,234 and $45,699, respectively                               |                                                                                                  |                            | 105,845    |                |          
|Goodwill, net of accumulated amortization of $533,924 and $334,178, respectively                                           |                                                                                                  |                            | 1,417,199  |                |          
|Other intangible assets, investments and other, net of accumulated amortization of $52,227 and $24,015, respectively       |                                                                                                  |                            | 348,170    |                |          
|                                                                                                                           |                                                                                                  |                            |            |                |          
|                                                                                                                           |                                                                                                  | $                          | 2,348,030  |                | $        
|                                                                                                                           |                                                                                                  |                            |            |                |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                       |                                                                                                  |                            |            |                |          
|Current Liabilities:                                                                                                       |                                                                                                  |                            |            |                |          
|                                                                                                                           | Accounts payable                                                                                 |                            | $          | 25,216         |          
|                                                                                                                           | Accrued expenses                                                                                 |                            |            | 202,628        |          
|                                                                                                                           | Current portion of deferred revenue                                                              |                            |            | 126,875        |          
|                                                                                                                           | Current portion of long-term debt                                                                |                            |            | 2,361          |          
|                                                                                                                           | Revolving line of credit                                                                         |                            |            | 100,000        |          
|                                                                                                                           |                                                                                                  |                            |            |                |          
|                                                                                                                           |                                                                                                  | Total current liabilities  |            |                | 457,080  
|Deferred revenue, net of current portion                                                                                   |                                                                                                  |                            | 16,111     |                |          
|Other long-term liabilities                                                                                                |                                                                                                  |                            | 10,096     |                |          
|Long-term debt, net of current portion                                                                                     |                                                                                                  |                            | 4,035      |                |          
|Convertible subordinated notes                                                                                             |                                                                                                  |                            | 263,196    |                |          
|                                                                                                                           |                                                                                                  |                            |            |                |          
|                                                                                                                           |                                                                                                  | Total liabilities          |            |                | 750,518  
|                                                                                                                           |                                                                                                  |                            |            |                |          
|Stockholders' Equity:                                                                                                      |                                                                                                  |                            |            |                |          
|Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued or outstanding                                |                                                                                                  |                            |           |                |          
|Common stock, $0.001 par value, 500,000 shares authorized, 192,308 and 160,359 shares issued and outstanding, respectively |                                                                                                  |                            | 192        |                |          
|Additional paid-in capital                                                                                                 |                                                                                                  |                            | 3,235,859  |                |          
|Accumulated deficit                                                                                                        |                                                                                                  |                            | (1,595,062 | )              |          
|Unearned portion of deferred compensation                                                                                  |                                                                                                  |                            | (28,027    | )              |          
|Cumulative translation adjustment                                                                                          |                                                                                                  |                            | (5,107     | )              |          
|Treasury stock, 492,677 and 414,154 shares held at cost, respectively                                                      |                                                                                                  |                            | (10,343    | )              |          
|                                                                                                                           |                                                                                                  |                            |            |                |          
|                                                                                                                           |                                                                                                  | Total stockholders' equity |            |                | 1,597,512
|                                                                                                                           |                                                                                                  |                            |            |                |          
|                                                                                                                           |                                                                                                  | $                          | 2,348,030  |                | $        
|                                                                                                                           |                                                                                                  |                            |            |                |          

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

1

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PEREGRINE SYSTEMS, INC.  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share and share amounts)  (unaudited)

|                                                                            |                                      | Three Months Ended
December 31, |         | Nine Months Ended
December 31, |        
|--------------------------------------------------------------------------- | ------------------------------------ | ------------------------------- | ------- | ------------------------------ | -------
|
|Revenues:                                                                   |                                      |                                 |         |                                |        
|                                                                            | Licenses                             |                                 | $       | 75,145                         |        
|                                                                            | Services                             |                                 |         | 100,010                        |        
|                                                                            |                                      |                                 |         |                                |        
|                                                                            |                                      | Total revenues                  |         |                                | 175,155
|                                                                            |                                      |                                 |         |                                |        
|Costs and Expenses:                                                         |                                      |                                 |         |                                |        
|                                                                            | Cost of licenses                     |                                 |         | 861                            |        
|                                                                            | Cost of services                     |                                 |         | 50,458                         |        
|                                                                            | Amortization of purchased technology |                                 |         | 7,669                          |        
|                                                                            | Sales and marketing                  |                                 |         | 83,575                         |        
|                                                                            | Research and development             |                                 |         | 39,808                         |        
|                                                                            | General and administrative           |                                 |         | 20,299                         |        
|                                                                            | Acquisition costs and other          |                                 |         | 64,536                         |        
|                                                                            |                                      |                                 |         |                                |        
|                                                                            |                                      | Total costs and expenses        |         |                                | 267,206
|                                                                            |                                      |                                 |         |                                |        
|Loss from operations before interest (net) and income tax benefit (expense) |                                      |                                 | (92,051 | )                              |        
|Interest income (expense), net                                              |                                      |                                 | (3,823  | )                              |        
|                                                                            |                                      |                                 |         |                                |        
|Loss before income tax benefit (expense)                                    |                                      |                                 | (95,874 | )                              |        
|Income tax benefit (expense)                                                |                                      |                                 | 7,574   |                                |        
|                                                                            |                                      |                                 |         |                                |        
|                                                                            | Net loss                             |                                 | $       | (88,300                        | )      
|                                                                            |                                      |                                 |         |                                |        
|Net loss per sharebasic and diluted:                                       |                                      |                                 |         |                                |        
|                                                                            | Net loss per share                   |                                 | $       | (0.46                          | )      
|                                                                            |                                      |                                 |         |                                |        
|                                                                            | Shares used in computation           |                                 |         | 191,801                        |        
|                                                                            |                                      |                                 |         |                                |        

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

2

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PEREGRINE SYSTEMS, INC.  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)  (unaudited)

|                                                                              |                                                         | Nine Months Ended December 31,                         |                                       
|----------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------ | --------------------------------------
|
|Cash flows from operating activities:                                         |                                                         |                                                        |                                       
|                                                                              | Net loss                                                |                                                        | $                                     
|Adjustments to reconcile net loss to net cash used in operating activities:   |                                                         |                                                        |                                       
|                                                                              | Depreciation, amortization, acquisition costs and other |                                                        |                                       
|                                                                              |                                                         | Increase (decrease) in cash resulting from changes in: |                                       
|                                                                              |                                                         |                                                        | Accounts receivable                   
|                                                                              |                                                         |                                                        | Other current assets                  
|                                                                              |                                                         |                                                        | Other assets                          
|                                                                              |                                                         |                                                        | Accounts payable and other liabilities
|                                                                              |                                                         |                                                        | Accrued expenses                      
|                                                                              |                                                         |                                                        | Deferred revenue                      
|                                                                              |                                                         |                                                        |                                       
|                                                                              |                                                         |                                                        |                                       
|                                                                              |                                                         |                                                        |                                       
|Cash flows from investing activities:                                         |                                                         |                                                        |                                       
|                                                                              | Acquisitions and investments, net of cash acquired      |                                                        |                                       
|                                                                              | Purchases of property and equipment                     |                                                        |                                       
|                                                                              |                                                         |                                                        |                                       
|                                                                              |                                                         |                                                        |                                       
|                                                                              |                                                         |                                                        |                                       
|Cash flows from financing activities:                                         |                                                         |                                                        |                                       
|                                                                              | Issuance of note receivable                             |                                                        |                                       
|                                                                              | Issuance of long-term debt, net                         |                                                        |                                       
|                                                                              | Issuance of common stock                                |                                                        |                                       
|                                                                              | Treasury stock purchased                                |                                                        |                                       
|                                                                              |                                                         |                                                        |                                       
|                                                                              |                                                         |                                                        |                                       
|                                                                              |                                                         |                                                        |                                       
|Effect of exchange rate changes on cash and cash equivalents                  |                                                         |                                                        | (1,157                                
|                                                                              |                                                         |                                                        |                                       
|Net increase (decrease) in cash and cash equivalents                          |                                                         |                                                        | (106,100                              
|Cash and cash equivalents, beginning of period                                |                                                         |                                                        | 286,658                               
|                                                                              |                                                         |                                                        |                                       
|Cash and cash equivalents, end of period                                      |                                                         | $                                                      | 180,558                               
|                                                                              |                                                         |                                                        |                                       
|Cash paid during the period for:                                              |                                                         |                                                        |                                       
|                                                                              | Interest                                                |                                                        | $                                     
|                                                                              | Income taxes                                            |                                                        | $                                     
|Supplemental Disclosure of Noncash Investing Activities:                      |                                                         |                                                        |                                       
|Stock issued and other noncash consideration for acquisitions and investments |                                                         | $                                                      | 877,090                               

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

3

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PEREGRINE SYSTEMS, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)

Note 1. Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2001, condensed consolidated statements of operations for the three and nine month
periods ended December 31, 2001 and 2000, and condensed consolidated statements of cash flows for the nine month periods ended December 31, 2001 and 2000, have been prepared by Peregrine
Systems, Inc. (unless otherwise noted, "Peregrine Systems," "we," "PSI," "us," or "our" refers to Peregrine Systems, Inc.) and have not been audited. These condensed consolidated
financial statements, in our opinion, include all adjustments necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for all periods presented.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on
Form 10-K filed for the year ended March 31, 2001, which provides further information regarding our significant accounting policies and other financial and operating
information. Interim operating results are not necessarily indicative of operating results for the full year or any other future period. The condensed consolidated financial statements include the
accounts of PSI and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts for prior periods have been reclassified to conform to
current year presentation.

The
preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and
assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.

Note 2. Revenue Recognition

Our revenues are derived principally from product licensing and services. License fees are generally due upon the granting of the license and typically include a
one-year warranty period as part of the license
agreement. Service revenues are comprised of fees from maintenance (post-contract support), professional services (consulting), network services, and training. We also derive revenues from
transaction fees, subscription fees, and maintenance fees associated with our business-to-business relationship management products.

Revenues
from direct and indirect license agreements are recognized, provided that all of the following conditions are met: a noncancelable license 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; risk of concession is deemed remote; and no other
significant vendor obligations exist. We may grant payment terms of more than one year. Typically this is only done in limited circumstances where the contract is with customers having a proven credit
history; when appropriate we discount the related receivable at the applicable market interest rate as a reduction of revenue. Revenues from maintenance services that are sold separately from license
revenue are recognized ratably over the term of the support period, generally one year. Maintenance revenues that are bundled with license agreements are unbundled using vendor specific objective
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 our products.
Revenues from consulting and training services are recognized as the respective services are performed. Transaction and subscription fees are recognized monthly as services are provided.

Cost
of licenses consists primarily of amounts paid to third-party vendors, product media, manuals, packaging materials, personnel, and related shipping costs. Cost of services consists
primarily of

4

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salaries, benefits, and allocated overhead costs incurred in providing telephone support, professional services, training to customers, and other maintenance. Deferred revenues primarily relate to
maintenance fees, which have been paid by our customers in advance of the performance of these services.

On
occasion, we purchase goods or services for our operations from certain limited vendors at or about the same time we license our software to these organizations. These transactions
are separately negotiated and recorded at terms we consider to be arms length.

Note 3. Computation of Net Loss Per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Potentially
dilutive securities represent incremental shares issuable upon exercise of our equity and debt securities. For the three and nine month periods ended December 31, 2001 and 2000, the diluted
loss per share calculation excludes the effect of certain equity and debt securities as inclusion would be anti-dilutive.

Note 4. Acquisitions

On August 27, 2001, we completed the acquisition of Remedy Corporation ("Remedy"), a supplier of information technology service management and customer
relationship management solutions. We issued approximately 28 million shares of our common stock (excluding assumed options) and paid approximately $280.8 million in cash in exchange for
all of the outstanding shares of Remedy for a total purchase price, including merger related costs, of approximately $1.2 billion.

Pro Forma Financial Information

The following table presents the unaudited pro forma results assuming we had acquired each of Harbinger and Remedy at the beginning of fiscal 2002 and 2001, as
applicable. This information may not necessarily be indicative of our future combined results.

The
unaudited pro forma results of operations exclude the results of operations of certain other acquisitions consummated during fiscal 2002 and fiscal 2001. The inclusion of the results
associated with these acquisitions would not materially affect the pro forma financial information presented below.

Pro Forma Results For the Nine Month Periods Ended December 31,2001

2000(in thousands,
except per share data)
(unaudited)Revenues

$
615,722

$
653,626Net loss

$
(692,941
)
$
(296,861
)Basic and diluted net loss per share

$
(3.64
)
$
(1.74
)


Acquisition-related Liabilities

With respect to acquisition-related liabilities at December 31, 2001, we have both approved and preliminary plans of integration and consolidation. These
plans include the steps we believe will be necessary within the next twelve months to integrate the operations of these acquisitions. The plans provide for the consolidation of duplicate facilities
and infrastructure assets and the elimination of duplicate efforts and positions within the combined company. In connection with these integration and

5

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consolidation plans, we have accrued for acquisition-related costs comprised principally of the following components as of December 31, 2001 (in thousands):

|                                            |  | Acquisition-related
Liabilities
|------------------------------------------- |  | -------------------------------
|Advisory fees                               |  | $                              
|Employee severance and relocation           |  |                                
|Duplicate facilities, equipment and efforts |  |                                
|Other merger related costs                  |  |                                
|                                            |  |                                
|                                            |  | $                              
|                                            |  |                                

This
accrual represents our best estimate, based on information available as of December 31, 2001, of the identifiable and quantifiable charges that we may incur as a result of
these integration and consolidation plans. However, these estimates may change. Any changes in the estimates during the twelve month period following the acquisition will increase or decrease goodwill
as appropriate. We believe substantially all of the above costs will be paid for within twelve months.

The
following represents a detail, by acquisition, of our acquisition-related liabilities (in thousands):

|          |  | March 31,
2000 |        | Additions |   | Uses    |  | March 31,
2001 |         | Additions |   | Uses   |  | December 31,
2001
|--------- |  | -------------- | ------ | --------- | - | ------- |  | -------------- | ------- | --------- | - | ------ |  | -----------------
|F.Print   |  | $              | 2,500  |           | $ |        |  | $              | (2,500  | )         | $ |       |  | $                
|Knowlix   |  |                | 1,100  |           |   |        |  |                | (1,100  | )         |   |       |  |                  
|Telco     |  |                | 11,500 |           |   |        |  |                | (7,500  | )         |   | 4,000  |  |                  
|Harbinger |  |                |       |           |   | 73,600  |  |                | (39,850 | )         |   | 33,750 |  |                  
|Loran     |  |                |       |           |   | 8,500   |  |                | (500    | )         |   | 8,000  |  |                  
|Tivoli    |  |                |       |           |   | 13,500  |  |                | (3,500  | )         |   | 10,000 |  |                  
|Extricity |  |                |       |           |   | 18,000  |  |                |        |           |   | 18,000 |  |                  
|Remedy    |  |                |       |           |   |        |  |                |        |           |   |       |  |                  
|          |  |                |        |           |   |         |  |                |         |           |   |        |  |                  
|          |  | $              | 15,100 |           | $ | 113,600 |  | $              | (54,950 | )         | $ | 73,750 |  | $                
|          |  |                |        |           |   |         |  |                |         |           |   |        |  |                  

---

In addition to the costs included in the accrual for our integration and consolidation plans, we will incur other incremental costs as a direct
result of our efforts. These costs will be accounted for as incurred in future periods. To the extent these costs become significant they could have a material adverse effect on our future operating
results.

Note 5. Revolving Line of Credit

In August 2001, we entered into a $150 million short-term bridge facility with a syndicate of financial institutions. In
October 2001, we replaced this facility with a $150 million three-year revolving line of credit facility, also with a syndicate of financial institutions. This facility is
secured by a pledge of certain tangible and intellectual property assets and interests in the outstanding capital stock of some of our domestic and foreign subsidiaries. The terms of the revolving
line of credit facility include covenants that require us to attain certain financial criteria. Based upon our financial results reported as of December 31, 2001, we determined that we did not
comply with some of these covenants. In February 2002, we entered into an amendment to the revolving line of credit facility that suspends certain of our financial covenants through March 31,
2002, imposes additional other financial covenants, and waives the covenant non-compliance existing as of December 31, 2001.

In
February 2002, all amounts outstanding under the revolving line of credit facility were repaid, with the exception of outstanding letters of credit under the facility of approximately
$18.6 million. The

6

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changes to the facility may limit our current ability to make further borrowings. We may not be able to satisfy the new financial covenants or we may decide to terminate the facility if we conclude
that the terms of the facility, as amended, are not favorable from a business perspective.

Note 6. Comprehensive Loss

Total comprehensive loss is determined as follows:

|                                        |                          | For the Three Month Periods
Ended December 31, |         | For the Nine Month Periods
Ended December 31, |  
|--------------------------------------- | ------------------------ | ---------------------------------------------- | ------- | --------------------------------------------- | -
|
|Net loss                                |                          | $                                              | (88,300 | )                                             | $
|Net unrealized gain on investments      |                          |                                                | 254     |                                               |  
|Foreign currency translation adjustment |                          |                                                | (2,407  | )                                             |  
|                                        |                          |                                                |         |                                               |  
|                                        | Total comprehensive loss |                                                | $       | (90,453                                       | )
|                                        |                          |                                                |         |                                               |  

Note 7. Segment and Geographic Operations

Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS No. 131")
requires disclosure of segment information in a manner consistent with the "management approach." The management approach is based on the way the chief operating decision-maker organizes segments
within a company for making operating decisions and assessing performance. Prior to the acquisition of Harbinger in June 2000, we operated exclusively in the infrastructure management industry.
Effective April 2001 through September 2001, we operated in four segments that met the criteria of being a reportable segment in accordance with the provisions of SFAS No. 131.
These reportable segments were the infrastructure management group, the e-markets group, the integrated solutions group, and the shared-services group. Effective October 2001, we
reorganized into three distinct business groups designed to restructure our business with a functional, rather than product, orientation. These groups are the customer relationships group, the
solutions group, and the shared services group. Transactions between the reportable segments were made at terms which approximated arms length transactions and were in accordance with accounting
principles generally accepted in the United States. There were no significant differences between the measurement of the reportable segment's profits and losses disclosed below and the measurement of
profits and losses in our consolidated statements of operations. Certain management allocations were made between these segments. Prior periods have not been presented, as it would be impracticable to
do so. The segment
information for the three and nine month periods ended December 31, 2001, respectively, inclusive of management allocations, is as follows (in thousands):

|                                            |  | Customer
Relationships
Group |          | Solutions
Group |   | Shared
Services
Group |   | Consolidated |        
|------------------------------------------- |  | ---------------------------- | -------- | --------------- | - | --------------------- | - | ------------ | -------
|Three month period ended December 31, 2001: |  |                              |          |                 |   |                       |   |              |        
|Revenues                                    |  | $                            | 175,155  |                 | $ |                      |   | $            |       
|Loss before income tax benefit              |  | $                            | (21,222  | )               | $ | (50,530               | ) | $            | (24,122
|Nine month period ended December 31, 2001:  |  |                              |          |                 |   |                       |   |              |        
|Revenues                                    |  | $                            | 522,205  |                 | $ |                      |   | $            |       
|Loss before income tax expense              |  | $                            | (483,604 | )               | $ | (133,201              | ) | $            | (55,584

7

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A
summary of our operations by geographic area is as follows (in thousands):

|                           |  | North America |         | EMEA |   | APLA    |  | Consolidated
|-------------------------- |  | ------------- | ------- | ---- | - | ------- |  | ------------
|Three month periods ended: |  |               |         |      |   |         |  |             
|December 31, 2001:         |  |               |         |      |   |         |  |             
|Revenues                   |  | $             | 120,529 |      | $ | 46,674  |  | $           
|December 31, 2000:         |  |               |         |      |   |         |  |             
|Revenues                   |  | $             | 103,785 |      | $ | 49,684  |  | $           
|Nine month periods ended:  |  |               |         |      |   |         |  |             
|December 31, 2001:         |  |               |         |      |   |         |  |             
|Revenues                   |  | $             | 366,060 |      | $ | 136,204 |  | $           
|December 31, 2000:         |  |               |         |      |   |         |  |             
|Revenues                   |  | $             | 263,398 |      | $ | 122,408 |  | $           

Note 8. Recent Accounting Pronouncements

During July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business
Combinations," ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142"). SFAS No. 141 addresses
the accounting for acquisitions of businesses and is effective for acquisitions occurring on or after July 1, 2001. SFAS No. 142 addresses the method of identifying and measuring
goodwill and other intangible assets acquired in a business combination, and requires periodic evaluations of impairment of goodwill and intangible balances. SFAS No. 142 will be adopted
April 1, 2002. The impacts of the adoption of SFAS No. 141 and SFAS No. 142 are still being assessed, but amongst the immediate impacts is that goodwill and certain other
intangible assets acquired on or after July 1, 2001 will no longer be amortized to income in the consolidated statements of operations. Furthermore, upon adoption, goodwill and certain other
intangible assets acquired before July 1, 2001 will no longer be amortized to income in the consolidated statements of operations.

During
August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS No. 143"). SFAS
No. 143 addresses the timing of the liability recognition, the initial measurement of the liability, the allocation of asset retirement cost to expense, the subsequent measurement of the
liability, and the financial statement disclosures for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to all
entities and legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a
long-lived assets, except for certain lessee obligations. SFAS No. 143 will be adopted April 1, 2003. We have not yet determined the impact of its adoption on our
consolidated results of operations, financial position, or cash flows.

During
August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121") and the
accounting and reporting provision of the Accounting Principles Board Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," ("APB No. 30") for the disposal of a segment of a business (as previously defined in that Opinion).
SFAS No. 144 will be adopted April 1, 2002. The provisions of SFAS No. 144 are generally to be applied prospectively. We have not yet determined the impact of its adoption on our
consolidated results of operations, financial position, or cash flows.

8

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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 statements include, among other things, statements concerning our future operations, financial condition and prospects, and business
strategies. The words "believe," "expect," "anticipate," and other similar expressions generally identify forward-looking statements. These forward-looking statements are subject to substantial risks
and uncertainties that could cause our future business, financial condition, or results of operations to differ materially from our historical results or currently anticipated results. Investors
should carefully review the information contained under the caption "Factors that may affect our business, financial condition, and future operating results," beginning on page 16 of this
report.

Overview

We are a leading provider of software and services that are designed to reduce the frictional cost of doing business for our clients' organizations. Our
infrastructure resource management, employee relationship management, and business-to-business relationship management products and services permit businesses to eliminate
points of friction in their business processes and improve their returns on capital with respect to investments in infrastructure and electronic business assets. Our solutions are intended to make our
customers more competitive in their markets by removing the friction points associated with three primary business processes:



Until
October 2001, we were organized into distinct business units based on the products and services we offered. One unit focused on sales and marketing of our infrastructure
management solutions, while another focused on our e-markets solutions. A third group, referred to as our integrated solutions group, focused on integrating our sales efforts for both our
product families to large enterprise customers.

In
October 2001, we announced that we would integrate these divisions and restructure our business with a functional, rather than product, orientation. Through this organization,
we combined our product development teams and sales forces, which were previously focused on specific product lines, in an effort to improve operational efficiencies and cross-sell our
products. Our separate infrastructure management and e-markets sales forces were combined into a new customer relationships group, responsible for customer sales and service. The customer
relationships group also manages our strategic relationships with alliance partners and other distributors. The infrastructure management and e-markets product development groups were
combined into one solutions group, responsible for all our product development and marketing activities.

We
also announced in October 2001 the introduction of Xanadu, an information technology asset management appliance. Xanadu is targeted at small to medium-sized enterprises and
offers asset discovery and tracking, employee self-service, and help desk functionality. Xanadu is a component of the customer relationships group.

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Results of Operations

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

|                                                                            |                     | Three Month Periods Ended December 31, |                          | Nine Month Periods Ended December 31, |      
|--------------------------------------------------------------------------- | ------------------- | -------------------------------------- | ------------------------ | ------------------------------------- | -----
|
|Statements of Operations Data:                                              |                     |                                        |                          |                                       |      
|                                                                            | Revenues:           |                                        |                          |                                       |      
|                                                                            |                     | Licenses                               |                          | 42.9                                  | %    
|                                                                            |                     | Services                               |                          | 57.1                                  |      
|                                                                            |                     |                                        |                          |                                       |      
|                                                                            |                     |                                        | Total revenues           |                                       | 100.0
|                                                                            |                     |                                        |                          |                                       |      
|                                                                            | Costs and Expenses: |                                        |                          |                                       |      
|                                                                            |                     | Cost of licenses                       |                          | 0.5                                   |      
|                                                                            |                     | Cost of services                       |                          | 28.8                                  |      
|                                                                            |                     | Amortization of purchased technology   |                          | 4.4                                   |      
|                                                                            |                     | Sales and marketing                    |                          | 47.7                                  |      
|                                                                            |                     | Research and development               |                          | 22.7                                  |      
|                                                                            |                     | General and administrative             |                          | 11.6                                  |      
|                                                                            |                     | Acquisition costs and other            |                          | 36.8                                  |      
|                                                                            |                     |                                        |                          |                                       |      
|                                                                            |                     |                                        | Total costs and expenses |                                       | 152.5
|                                                                            |                     |                                        |                          |                                       |      
|Loss from operations before interest (net) and income tax benefit (expense) |                     | (52.5                                  | )                        | (46.5                                 | )    
|Interest income (expense), net                                              |                     | (2.2                                   | )                        | 0.1                                   |      
|                                                                            |                     |                                        |                          |                                       |      
|Loss before income tax benefit (expense)                                    |                     | (54.7                                  | )                        | (46.4                                 | )    
|Income tax benefit (expense)                                                |                     | 4.3                                    |                          | (7.1                                  | )    
|                                                                            |                     |                                        |                          |                                       |      
|Net loss                                                                    |                     | (50.4                                  | )%                       | (53.5                                 | )%   
|                                                                            |                     |                                        |                          |                                       |      

COMPARISON OF THREE MONTH PERIODS ENDED DECEMBER 31, 2001 AND 2000

Revenues

Revenues.Total revenues were $175.2 million and $156.6 million for the three months ended December 31,
2001 and 2000, respectively, representing a period-to-period increase of 12%. The reasons for the revenue increase are more fully discussed below.

Licenses.License revenues were $75.1 million and $99.5 million for the three months ended December 31,
2001 and 2000, respectively, representing 43% and 64% of total revenues in the respective periods. License revenues as a percentage of total revenues decreased as our services revenues increased due
to lower than anticipated license revenues and increased services revenues attributable to a larger installed customer base resulting from our fiscal 2001 and fiscal 2002 acquisitions. Our license
revenues were adversely affected in the three months ended September 30, 2001 and December 31, 2001 by continuing economic weakness, particularly continuing unwillingness by our large
enterprise customers to make substantial new technology investments. In addition, during the three months ended December 31, 2001, revenues generated in EMEA declined substantially. We have
reorganized our sales and operations in EMEA, but cannot predict when, or to what extent, our sales will improve. International sales had accounted for an increasing percentage of our total sales in
recent periods.

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We
believe license revenues will fluctuate from period-to-period in absolute dollars and as a percentage of total revenues. In recent periods, our revenues and
revenue growth rates have continued to be dependent on our ability to complete one or more particularly large license transactions with our major enterprise customers. We expect that future periods'
revenue will continue to be dependent on large transaction sizes from a limited number of customers.

Our
products are distributed through our direct sales organization, indirect sales channels, and alliance partners, including value added resellers and systems integrators. We believe
that our alliance partners are particularly important in influencing the purchase decisions of our largest enterprise customers. We have substantially less ability to manage our sales through indirect
channels and less visibility about our alliance partners' success in selling the products that they have purchased from us. To the extent indirect sales continue to increase as a percentage of total
revenues, we could experience unforeseen variability in our future revenues and operating results if our alliance partners are unable to sell our products.

Services.Services revenues consist of support, consulting, and training services. Services revenues were
$100.0 million and $57.1 million for the three months ended December 31, 2001 and 2000, respectively, representing 57% and 36% of total revenues in the respective periods. The
increases are primarily attributable to expansion due to the acquisitions we made during fiscal 2001 and fiscal 2002. While services revenues are increasing in absolute dollars, we expect services
revenues to fluctuate as a percentage of total revenues, given the variability of license revenues.

Costs and Expenses

Cost of Licenses.Cost of licenses primarily consists of third-party software royalties, product packaging, documentation,
and production. Cost of licenses was $0.9 million and $0.4 million for the three months ended December 31, 2001 and 2000, respectively, each representing less than 1% of total
revenues in the respective periods. These costs are expected to remain consistent as a percentage of total revenues.

Cost of Services.Cost of services primarily consists of personnel-related costs and facilities and systems costs used in
providing support, consulting, and training services. Cost of services was $50.5 million and $30.2 million for the three months ended December 31, 2001 and 2000, respectively,
representing 29% and 19% of total revenues in the respective periods. The dollar increases are primarily attributable to the acquisitions we made during fiscal 2001 and fiscal 2002. Cost of services
as a percentage of total revenues increased principally because services revenues grew at a faster rate than license revenues.

Amortization of Purchased Technology.Amortization of purchased technology was $7.7 million and $3.3 million
for the three months ended December 31, 2001 and 2000, respectively, representing 4% and 2% of total revenues in the respective periods. This increase is due to the amortization of purchased
technology acquired in acquisitions we made during fiscal 2001 and fiscal 2002.

Sales and Marketing.Sales and marketing expenses primarily consist of personnel-related costs, facilities and systems costs,
advertising costs, and travel and entertainment costs. Sales and marketing expenses were $83.6 million and $60.4 million for the three months ended December 31, 2001 and 2000,
respectively, representing 48% and 39% of total revenues in the respective periods. The dollar increases are primarily attributable to the significant expansion of both the North American and
international sales and marketing forces due to the acquisitions we made during fiscal 2001 and fiscal 2002. Sales and marketing as a percentage of total revenues increased principally because license
revenues were less than originally anticipated. If we continue to experience a decrease in sales force productivity or for any other reason a decline in revenues, it is likely that our operating
margins will decline as well.

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Research and Development.Research and development expenses primarily consist of personnel-related costs and facilities and
systems costs. Research and development expenses were $39.8 million and $19.1 million for the three months ended December 31, 2001 and 2000, respectively, representing 23% and 12%
of total revenues in the respective periods. The dollar increases in research and development are primarily attributable to an increase in the number of personnel conducting research and development
associated with new product initiatives, and the integration of applications acquired during
fiscal 2001 and fiscal 2002. Research and development as a percentage of total revenues increased principally because license revenues were less than originally anticipated.

General and Administrative.General and administrative expenses primarily consist of employee salaries and overhead for
administrative personnel. General and administrative expenses were $20.3 million and $13.0 million for the three months ended December 31, 2001 and 2000, respectively,
representing 12% and 8% of total revenues in the respective periods. The dollar increases in general and administrative expenses are primarily attributable to an increase in the number of personnel to
support our growth, due to the acquisitions we made during fiscal 2001 and fiscal 2002. The increase in general and administrative expenses as a percentage of total revenues reflects lower than
anticipated license revenues.

Acquisition Costs and Other.Acquisition costs and other consist principally of amortization of intangibles, acquired
in-process research and development costs and other items. Acquisition costs and other were $64.5 million and $103.1 million for the three months ended December 31,
2001 and 2000, respectively, representing 37% and 66% of total revenues in the respective periods. The decreases are primarily attributable to acquired in-process research and development
costs and other acquisition related items recognized in the third quarter of fiscal 2001 associated with the acquisitions of the Tivoli Service Desk Suite of products and Loran Network Holding
Corporation, Inc.

Income Tax Benefit (Expense)We recorded an income tax benefit of $7.6 million for the three months ended
December 31, 2001, and an income tax expense of $11.1 million for the three months ended December 31, 2000. The income tax benefit for the three months ended December 31,
2001 is due to a net taxable loss during the quarter. Excluding the effect of acquisition costs and other, our effective tax rate was 33.0% for the three months ended December 31, 2000. For the
three months ended December 31, 2001, we recognized a tax benefit. However, the effective tax rate on a year-to-date basis has remained consistent at 32%. Income tax
expense is expected to remain consistent as a percentage of operating revenues.

COMPARISON OF NINE MONTH PERIODS ENDED DECEMBER 31, 2001 AND 2000

Revenues

Revenues.Total revenues were $522.2 million and $393.6 million for the nine months ended December 31,
2001 and 2000, respectively, representing a period-to-period increase of 33%. The reasons for the revenue increase are more fully discussed below.

Licenses.License revenues were $263.2 million and $249.4 million for the nine months ended December 31,
2001 and 2000, respectively, representing 50% and 63% of total revenues in the respective periods. License revenues increased 6% for the nine months ended December 31, 2001 as compared to the
nine months ended December 31, 2000. The dollar increases are primarily due to a larger installed customer base resulting from our fiscal 2001 and fiscal 2002 acquisitions, offset by relatively
weaker demand in the third quarter of fiscal 2002. This relative weakness, discussed above in the comparison of our three months ended December 31, 2001 and 2000, was principally responsible
for the decrease in license revenues as a percentage of total revenues.

Services.Services revenues consist of support, consulting, and training services. Services revenues were
$259.0 million and $144.3 million for the nine months ended December 31, 2001 and 2000,

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respectively, representing 50% and 37% of total revenues in the respective periods. The increases are primarily attributable to the support, consulting, and training services related to acquisitions
we made during fiscal 2001 and fiscal 2002.

Costs and Expenses

Cost of Licenses.Cost of licenses primarily consists of third-party software royalties, product packaging, documentation,
and production. Cost of licenses was $3.1 million and $1.4 million for the nine months ended December 31, 2001 and 2000, respectively, each representing less than 1% of total
revenues in the respective periods. These costs are expected to remain consistent as a percentage of total revenues.

Cost of Services.Cost of services primarily consists of personnel-related costs and facilities and systems costs used in
providing support, consulting, and training services. Cost of services was $130.0 million and $77.8 million for the nine months ended December 31, 2001 and 2000, respectively,
representing 25% and 20% of total revenues in the respective periods. The dollar increases are primarily attributable to the acquisitions we made during fiscal 2001 and fiscal 2002. Cost of services
as a percentage of total revenues increased principally because services revenues grew at a faster rate than license revenues, particularly during the third quarter of fiscal 2002.

Amortization of Purchased Technology.Amortization of purchased technology was $18.3 million and $7.9 million
for the nine months ended December 31, 2001 and 2000, respectively, representing 4% and 2% of total revenues in the respective periods. This increase is due to the amortization of purchased
technology acquired in acquisitions we made during fiscal 2001 and fiscal 2002.

Sales and Marketing.Sales and marketing expenses primarily consist of personnel-related costs, facilities and systems costs,
advertising costs, and travel and entertainment costs. Sales and marketing expenses were $222.7 million and $150.3 million for the nine months ended December 31, 2001 and 2000,
respectively, representing 43% and 38% of total revenues in the respective periods. The dollar increases are primarily attributable to the significant expansion of both the North American and
international sales and marketing forces due to the acquisitions we made during fiscal 2001 and fiscal 2002. Sales and marketing as a percentage of total revenues increased, principally because
license revenues were less than originally anticipated.

Research and Development.Research and development expenses primarily consist of personnel-related costs and facilities and
systems costs. Research and development expenses were $93.5 million and $50.5 million for the nine months ended December 31, 2001 and 2000, respectively, representing 18% and 13%
of total revenues in the respective periods. The dollar increases in research and development are primarily attributable to an increase in the number of personnel conducting research and development
associated with new product initiatives, and the integration of applications acquired during fiscal 2001 and fiscal 2002. The increase in research and development expenses as a percentage of total
revenues reflects lower than anticipated license revenues.

General and Administrative.General and administrative expenses primarily consist of employee salaries and overhead for
administrative personnel. General and administrative expenses were $49.4 million and $34.9 million for the nine months ended December 31, 2001 and 2000, respectively, representing
10% and 9% of total revenues in the respective periods. The dollar increases in general and administrative expenses are primarily attributable to an increase in the number of personnel to support our
growth, due to the acquisitions we made during fiscal 2001 and fiscal 2002.

Acquisition Costs and Other.Acquisition costs and other consist principally of amortization of intangibles, acquired
in-process research and development costs and other items. Acquisition costs and other were $671.5 million and $306.9 million for the nine months ended December 31,
2001 and 2000,

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respectively, representing 129% and 78% of total revenues in the respective periods. The increases are primarily attributable to a charge associated with impaired intangibles, investments and other
assets written off in the second quarter of fiscal 2002.

Income Tax Expense.Income tax expense was $5.6 million and $26.1 million for the nine months ended
December 31, 2001 and 2000, respectively. This decrease in absolute dollars is attributable to a decrease in taxable income. Excluding the effect on net income of acquisition costs and other,
our effective tax rates were 32.0% and 33.0% for the nine months ended December 31, 2001 and 2000, respectively. Income tax expense is expected to remain consistent as a percentage of operating
revenues.

Liquidity and Capital Resources

On December 31, 2001, we had cash, cash equivalents, and short-term investments totalling $109.4 million, net of $100.0 million
in principal then outstanding under our revolving line of credit, discussed further below. Short-term investments on December 31, 2001 consisted primarily of investment-grade
corporate bonds, municipal bonds, and commercial paper.

In
August 2001, we entered into a $150 million short-term bridge facility with a syndicate of financial institutions. In October 2001, we replaced this
facility with a $150 million three-year revolving line of credit facility, also with a syndicate of financial institutions. This facility is secured by a pledge of certain tangible
and intellectual property assets and interests in the outstanding capital stock of some of our domestic and foreign subsidiaries. The terms of the revolving line of credit facility include covenants
that require us to attain certain financial criteria. Based upon our financial results reported as of December 31, 2001, we determined that we did not comply with some of these covenants. In
February 2002, we entered into an amendment to the revolving line of credit facility that suspends certain of our financial covenants through March 31, 2002, imposes additional other financial
covenants, and waives the covenant non-compliance existing as of December 31, 2001.

In
February 2002, all amounts outstanding under the revolving line of credit facility were repaid, with the exception of outstanding letters of credit under the facility of approximately
$18.6 million. The changes to the facility may limit our current ability to make further borrowings. We may not be able to satisfy the new financial covenants or we may decide to terminate the
facility if we conclude that the terms of the facility, as amended, are not favorable from a business perspective.

We
currently expect our available cash, cash equivalents, and short-term investments, together with cash currently anticipated to be generated from business operations, to be sufficient
to satisfy our forseeable working capital requirements. Our ability to generate cash from operations is subject to substantial risks described below under the caption "Factors that may effect our
business, financial condition, and future operating results." We encourage you to review these risks carefully. If we are unable to generate sufficient cash from our operations, it would have a
material adverse effect on our business and financial condition.

We
may consider additional sources of financing in the future, which may take the form of issuances of our common or preferred stock, or the issuance of debt securities, including debt
securities convertible into shares of our capital stock. In November 2001, we filed a registration statement with the Securities and Exchange Commission ("SEC") allowing us to issue up to
$250 million of our equity and/or debt securities. The SEC has declared the registration statement effective, and we may from time to time issue securities under it. If we require additional
financing, however, it may not be available to us or may not be available on commercially reasonable terms. The issuance of additional equity securities, including securities convertible into our
equity securities, would dilute the interests of our existing stockholders. Issuance of additional debt securities, if sources of debt financing were available, could impair our financial condition as
we become increasingly leveraged, and interest payments could have an adverse effect on our results of operations. We currently have outstanding

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approximately $270 million in aggregate principal amount of our 51/2% Convertible Subordinated Notes dues 2007. These notes provide for annual aggregate interest payments of
$14,850,000, payable semi-annually in arrears.

Quantitative and qualitative disclosures about market risk

Other than forward-rate currency contracts described below, which are used for hedging our foreign currency risk, we do not use derivative financial
instruments in our investment portfolio. Our financial instruments consist of cash and cash equivalents, short-term investments, trade accounts and contracts receivable, accounts payable,
and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents. Our exposure to market risk for changes in interest rates relates primarily to short-term investments and short-term obligations. As a result, we do not expect
fluctuations in interest rates to have a material impact on the fair value of these securities.

We
conduct business overseas in a number of foreign currencies, principally in Europe. Although we currently derive no material revenues from highly inflationary economies, we are
expanding our presence in international markets outside Europe, including the Pacific Rim and Latin America, whose currencies have fluctuated in value relative to the U.S. dollar more than European
currencies. There can be no assurance that future fluctuations in the value of foreign currencies relative to the U.S. dollar will not have a material adverse effect on our business, financial
condition, or results of operations.

Currently,
we attempt to mitigate our transaction currency risks through our foreign exchange hedging program. The hedging program consists primarily of using forward-rate
currency contracts of approximately one month in length to minimize the short-term impact of foreign currency fluctuations. To the extent not properly hedged by obligations denominated in
local currencies, our foreign operations remain subject to the risks of future foreign currency fluctuations, and there can be no assurances that our hedging activities will adequately protect us
against such risk.

In
the fall of 2000, the technology driven Nasdaq Stock Market began a steep decline in stock prices, particularly in the e-commerce sectors. In early 2001 it became apparent
to us that the downturn was other than temporary. In addition, it became apparent that technology spending, particularly in the e-commerce and enterprise resource planning environments,
would drop sharply in 2001. Accordingly, during fiscal 2001 we determined a SFAS No. 121 triggering event had occurred related to certain of our tangible and intangible assets. At that time, we
wrote-off impaired intangibles, investments, and other assets related primarily to an acquisition made in what was then our e-markets group and investments made in what used to
be our infrastructure management group. The macroeconomic environment not only remained weak throughout our major markets, but also was further intensified by the events of September 11. Thus,
during the second quarter of fiscal 2002, we determined another SFAS No. 121 triggering event had occurred related to certain of our tangible and intangible assets and we took an
additional write-off. We will continue to monitor the value of such assets in the future and may have future such impairment charges.

Recent Accounting Pronouncements

During July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business
Combinations," ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142"). SFAS No. 141 addresses
the accounting for acquisitions of businesses and is effective for acquisitions occurring on or after July 1, 2001. SFAS No. 142 addresses the method of identifying and measuring
goodwill and other intangible assets acquired in a business combination, and requires periodic evaluations of impairment of goodwill and intangible balances. SFAS No. 142 will be adopted

15

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April 1, 2002. The impacts of the adoption of SFAS No. 141 and SFAS No. 142 are still being assessed, but amongst the immediate impacts is that goodwill and certain other
intangible assets acquired on or after July 1, 2001 will no longer be amortized to income in the consolidated statements of operations. Furthermore, upon adoption, goodwill and certain other
intangible assets acquired before July 1, 2001 will no longer be amortized to income in the consolidated statements of operations.

During
August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS No. 143"). SFAS
No. 143 addresses the timing of the liability recognition, the initial measurement of the liability, the allocation of asset retirement cost to expense, the subsequent measurement of the
liability, and the financial statement disclosures for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to all
entities and legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a
long-lived assets, except for certain lessee obligations. SFAS No. 143 will be adopted April 1, 2003. We have not yet determined the impact of its adoption on our
consolidated results of operations, financial position, or cash flows.

During
August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121") and the
accounting and reporting provision of the Accounting Principles Board Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," ("APB No. 30") for the disposal of a segment of a business (as previously defined in that Opinion).
SFAS No. 144 will be adopted April 1, 2002. The provisions of SFAS No. 144 are generally to be applied prospectively. We have not yet determined the impact of its adoption on our
consolidated results of operations, financial position, or cash flows.

Factors that may affect our business, financial condition, and future operating results

This report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements and other prospective information relating to future events. These forward-looking statements and other information are subject to risks and uncertainties that could cause
our actual results to differ materially from our historical results or currently anticipated results, including the following:

We have a history of losses, expect to continue to incur losses for the foreseeable future, and cannot assure that we will be profitable in the future on an
operating basis or otherwise.

We
have incurred substantial losses in recent years, and predicting our future operating results is difficult. If we continue to incur losses, if our revenues decline or grow at a slower
rate, or if our expenses increase without commensurate increases in revenues, our operating results will suffer and the price of our common stock may fall. Through December 31, 2001, we had
recorded cumulative net losses of approximately $1.6 billion, principally as a result of acquisition costs related to acquisitions completed since late 1997. We have incurred, and expect to
continue to incur, substantial expenses associated with acquisition related costs. The amortization of certain of our intangible assets will result in our continuing to incur net losses for the
foreseeable future, which could lead to a dramatic decline in our stock price. In addition, as a result of continued economic weakness and a decline in revenues generated in EMEA, during the three
month period ended December 31, 2001 we incurred a substantial operating loss.

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Our revenues are not predictable and vary significantly from quarter-to-quarter for numerous reasons beyond our control.
Quarter-to-quarter variations could result in a substantial decrease in our stock price if our revenues or operating results are less than market analysts
anticipate.

Our
revenues or operating results in a given quarter could be substantially less than anticipated by market analysts, which could result in a substantial decline in our stock price. For
example, our stock price fell after our January 2, 2002 announcement that our revenues for the three months ended December 31, 2001 would be less than market analysts anticipated. In
addition, quarter-to-quarter variations, such as those recently experienced, could create uncertainty about the direction or progress of our business, which could also result
in a decline in the price of our common stock. Our revenues and operating results will vary from quarter to quarter for many reasons beyond our control, including those described in this section. As a
result, our quarterly revenues and operating results are not predictable with any significant degree of accuracy. In addition, we do not believe historical revenue growth rates are sustainable in the
future or indicative of future growth rates. If our revenue growth rates slow or our revenues decline, our operating results could be seriously impaired because many of our expenses are fixed and
cannot be easily or quickly changed, which could lead to a dramatic decline in our stock price.

Our revenue growth is increasingly dependent on a small number of large license transactions.

Our
revenues in a given quarter could be adversely affected if we are unable to complete one or more large license agreements, if the completion of a large license agreement is delayed,
or if the contract terms were to prevent us from recognizing revenue during that quarter. For example, our inability to complete several large license transactions before quarter-end
contributed to our lower than anticipated license revenues during the second and third quarters of fiscal 2002.

Our
revenue growth in recent periods has been attributable in part to an increase in the number of large license transactions sold to a limited number of large, enterprise customers
during a given period. We expect our reliance on these types of transactions to continue for the foreseeable future. If we are unable to complete one or more large license transactions by the end of a
particular quarter, our revenues and operating results could be materially below the expectations of market analysts, and our stock price could fall.

Our
dependence on a few relatively large license transactions could continue to have an adverse effect on our quarterly revenues, revenue growth rates, or operating results in future
quarters if the slow-down in technology investment continues as a result of economic or political factors.

In
addition, when negotiating large software licenses, many customers time their negotiations near quarter-end in an effort to improve their ability to negotiate more
favorable pricing terms. As a result, we recognize a substantial portion of our revenues in the last month or weeks of a quarter, and license revenues in a given quarter depend substantially on orders
booked during the last month or weeks of a quarter. If we are unable to complete a sufficient number of license agreements during this short and intense sales period, our revenues could be
substantially below the expectations of market analysts, and our stock price could decline.

Our quarterly and annual revenue and revenue growth rates may be affected if our distribution partners are unsuccessful in selling our products or if we are
unsuccessful in adding new distribution partners.

Many
of our transactions are sourced, developed, and closed through our strategic and distribution partners, including resellers and system integrators. We believe that these transaction
partners are extremely important influencers of customer purchase decisions, particularly purchase decisions by large, enterprise customers. If the number or size of our partner-sourced or
partner-influenced transactions were to decrease for any reason, our revenue growth rates and operating results would be materially and adversely affected. If our sales through these indirect
channels, or to new distributors,

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resellers, or strategic partners, were to decrease in a given quarter, our total revenues and operating results could be harmed. Sales through indirect channels, including distributors, third party
resellers, and system integrators, represent a significant percentage of our total sales, and this percentage has increased in recent periods. We expect this trend to continue in the future. As a
result, we could experience a shortfall in our revenues, or a substantial decline in our rate of revenue growth, if sales through these channels were to decrease or were to increase at a slower rate
than recently experienced. We have less ability to manage sales through indirect channels, relative to direct sales, and less visibility about our distribution partners' success in selling our
products. In addition, many of our distribution arrangements are non-exclusive, and these distributors may carry competing products. As a result, we could experience unforeseen variability
in our revenues and operating results for a number of reasons, including the following: inability of our distribution partners to sell our products; a decision by our distribution partners to favor
competing products; or an inability of our distribution partners to manage the timing of their purchases from us against their sales to end-users, resulting in inventories of unsold
licenses held by distribution partners.

Our quarterly and annual revenues and revenue growth rates are dependent on the budgeting cycles and investment cycles of our customers.

Our
quarter-to-quarter revenues will depend on customer budgeting cycles. If customers change their budgeting cycles, or reduce their capital spending on
technology, our revenues could decline. Many analysts predict that the substantial reductions in information technology capital investment that we experienced in 2001 could continue through 2002.
Moreover, many software companies, including Peregrine, have experienced increasing reluctance by customers to make substantial investments in new technologies. In our second and third quarters of
fiscal 2002, economic and political uncertainty resulted in even greater reluctance by customers to make large investments in our products. To the extent these trends continue, we expect our quarterly
revenues and operating results could be adversely affected.

During
this downturn, we have been highly dependent on our ServiceCenter, AssetCenter, and FacilityCenter product lines to maintain our revenue growth rates, and we expect our dependence
on these product lines to continue. If the capital investment downturn continues or worsens, we may experience reduced demand for these core products as well, which could have a material and adverse
effect on our revenues, operating results, financial condition, and stock price. Most software companies, including Peregrine, currently have very limited visibility with respect to their near term
quarters and are having difficulty predicting their revenues and operating results during these periods.

Our operating results could be adversely affected by changes in product mix and other factors, including factors related to the macroeconomic environment and
competitive factors in our markets.

Changes
in our product mix could adversely affect our operating results because some products provide higher margins than others. For example, margins on software licenses tend to be
higher than margins on maintenance and services. Cancellations of licenses, subscriptions, or maintenance contracts could reduce our revenues and could adversely affect our operating results. Our
operating margins were adversely affected by the shortfall in license revenues that occurred in our second and third quarters of
fiscal 2002, and we would expect a continued adverse effect on our margins if our license revenues continue to fall short of current expectations.

Our
maintenance contracts with customers terminate on an annual basis. Substantial cancellations of maintenance or subscription agreements, or a substantial failure to renew these
contracts, would reduce our revenues and impact our operating results. Other factors, including indirect factors resulting from the macroeconomic climate, could also have an adverse effect on our
operating results in a given quarter or over several quarterly periods. For example, in the current economic environment, we have experienced increased demand from some customers for customer
financing, including loan financing, and leasing solutions. We expect this demand for customer financing to continue, and we have engaged

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in customer financing where we believe it is a competitive factor in obtaining business. Although we have programs in place to monitor and mitigate the associated risks, there can be no assurance
that such programs will be effective in reducing related credit risk. We have experienced losses due to customers' failing to meet their obligations. Future losses, if incurred, could harm our
business and have a material adverse effect on our operating results and financial condition. The Company may at times market certain client receivable balances without recourse.

The long sales cycle for our products may cause substantial fluctuations in our revenues and operating results.

Delays
in customer orders could result in our revenues being substantially below the expectations of market analysts. Our customers' planning and purchase decisions involve a significant
commitment of resources and a lengthy evaluation and product qualification process. As a result, we may incur substantial sales and marketing expenses during a particular period in an effort to obtain
orders. If we are unsuccessful in generating offsetting revenues during that period, our revenues and earnings would be substantially reduced, and we could experience a large loss. The sales cycle for
our products typically takes four to nine months to complete, and we may experience delays that further extend this period. The length of the sales cycle may be extended beyond four to nine months due
to factors over which we have little or no control, including the size of the transaction and the level of competition we encounter. Until the second quarter of fiscal 2002, the average size of our
license transactions had been increasing as we generated an increasing percentage of our revenues from a limited number of large, enterprise customers. Our average license size decreased in the second
and third quarters of fiscal 2002, however, because we were unable to complete several large transactions and also because Remedy's average transaction size has historically been smaller than
Peregrine's. Nevertheless, we expect our dependence on large transactions to continue, which could have the effect of further extending our sales cycle. During our sales cycle, we typically provide a
significant level of education to prospective customers regarding the use and benefits of our products. Any delay in the sales cycle of a large license or a number of smaller licenses could have an
adverse effect on our operating results and financial condition.

Our new product introductions may not be successful in increasing our revenues, and new product introductions by our competitors could adversely affect our
revenues and operating results.

If
our new product introductions are not successful, our revenues, revenue growth rates, and operating results could be adversely affected, particularly if we invest substantial
resources in the development and marketing of new products that do not generate sufficient offsetting revenue. In October 2001, we announced the development of Xanadu, an information technology
asset management appliance. Xanadu will be targeted at small to medium-sized enterprises and will offer asset discovery and tracking, employee self-service, and help desk functionality. We
will provide the software for Xanadu, which will be installed on network servers, primarily marketed and sold by our distribution partners. As a result, our success in selling and marketing Xanadu
will depend largely on the efforts of distribution partners over whom we have little or no control. The market for Xanadu is currently unproven, and we cannot predict whether it will gain market
acceptance or generate material revenues. In the meantime, we are investing substantial resources in this new product line.

Announcements
of new products by our competitors, or enhancements to their existing products, could delay purchases by our customers pending the introduction of the new product or
enhancements. Similarly, announcements by us or our competitors concerning pricing policies could have an adverse effect on our revenues in a given quarter. Any announcement having the effect of
deferring or delaying customer purchase decisions would be expected to have an adverse effect on our revenues and results of operations.

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Seasonal trends in sales of our software products may result in periodic reductions in our revenues and impairment of our operating
results.

Seasonality
in our business could result in our revenues in a given period being less than market estimates. Seasonality could also result in quarter-to-quarter
decreases in our revenues. In either of these events, seasonality could have an adverse impact on our results of operations. Historically, our revenues and operating results in our third quarter have
tended to benefit, relative to our first and second quarters, from purchase decisions made by the large concentration of our customers with calendar year-end budgeting requirements. Our
first and second quarters tend to be our weakest. Revenues and operating results in the fourth quarter have tended to benefit from the efforts of our sales force to meet fiscal year-end
sales quotas. Notwithstanding these seasonal factors, other factors, including those identified in this section, could still result in reduced revenues or operating results in our third and fourth
quarters. Historical patterns may change over time, particularly as our operations become larger and the sources of our revenue change or become more diverse. For example, our international operations
have expanded significantly in recent years. We may experience variability in demand associated with seasonal buying patterns in these foreign markets.

We may experience problems integrating our business with Remedy's business. Any integration problems could cause us to incur substantial unanticipated costs and
expenses, which would harm our operating results.

On
August 27, 2001, we acquired Remedy Corporation, a supplier of information technology service management and customer relationship management solutions. If we fail to
successfully integrate our business with Remedy's business, we will incur substantial costs, which will increase our expenses and increase our losses. Our target markets have differed historically
from those of Remedy. Specifically, our customer base has been comprised principally of large, multinational enterprises, while Remedy's sales historically focused primarily on small to
mid-size businesses and organizations. To the extent it sold software to larger companies, Remedy typically sold its software on a departmental or divisional, as opposed to enterprise,
basis. The characteristics of these two market segments may be sufficiently distinct so that we do not realize the anticipated synergies of the merger. We have less experience selling to smaller
organizations, and our sales practices and processes may not be well-suited to success in these markets. In particular, our sales efforts tend to focus on senior executives, chief
financial officers and chief technology officers of large, multinational corporations to whom we seek to sell large, enterprise-wide licenses of our infrastructure management products. In
contrast, Remedy's transaction sizes tend to be substantially smaller, and their sales efforts, when targeted at larger organizations, have focused historically on managers of departments or divisions
within the organization. In addition, Remedy markets and sells other products, such as its customer relationship management products, that we have no experience marketing or selling. If we are
unsuccessful in integrating the companies' respective businesses, our combined revenues could fall or grow at a slower rate than anticipated, we
could incur substantial unexpected expenses, and we could fail to realize the anticipated benefits of the merger.

Any
integration problems we experience could divert our management's attention from other business opportunities, which could result in slower revenue growth than anticipated or in
declines in revenue. Integrating our business with Remedy's business will be complex, time-consuming, and expensive. The merger may disrupt both companies' businesses if not completed in a
timely and efficient manner. Peregrine and Remedy are both global companies with substantial operations throughout the world, and integrating geographically separate and dispersed organizations may be
difficult. Specific integration challenges we face include the following:



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We could experience losses as a result of our strategic investments.

If our strategic investments in other companies are not successful, we could incur losses. We have made and expect to continue to make minority investments in
companies with businesses or technologies that we consider to be complementary to our business or technologies. These investments have generally been made by issuing shares of our common stock or, to
a lesser extent, paying cash. Many of these investments are in companies whose operations are not yet sufficient to establish them as profitable concerns. Adverse changes in market conditions or poor
operating results of underlying investments could result in our incurring losses or our being unable to recover the carrying value of our investments. For example, during fiscal 2001 and fiscal 2002,
we recognized impairment charges associated principally with impairment of acquired assets but to a lesser extent with strategic investments. We will continue to monitor the value of these
investments, and may have additional impairment charges in the future.

Our business and operating results will be harmed if we cannot compete effectively against other companies in our markets.

The
markets for our products are intensely competitive and diverse, and the technologies for our products can change rapidly. New products are introduced frequently and existing products
are continually enhanced. We face competition from a number of sources in the markets for our infrastructure resource management, procurement, and e-business connectivity solutions. We
face competition from numerous companies that offer products that compete with one or more of our products and services. With respect to our infrastructure management products, these competitors
include software companies as well as information technology and system management companies, such as Applix, Blue Ocean, Computer Associates, Control Software (a division of CSI-Maximus),
FrontRange, Hewlett-Packard, IBM, Intraware, Main Control, Microsoft, MRO Software (formerly Project Software and Development Inc.), Network Associates, Nortel, PeopleSoft, and Royal Blue
Technologies. Our e-commerce enablement technology faces competition from providers of customer relationship portals, such as Aspect Communications; providers of catalog management
solutions, such as Requisite Technology; providers of e-commerce enablement software such as webMethods; and providers of legacy e-commerce technology and services such as SBC
Communications, through its acquisition of Sterling Commerce; and General Electric eXchange Solutions. In the markets for employee relationship management products, including procurement and
e-procurement solutions, we face competition from established providers of business-to-business Internet commerce solutions such as Ariba and CommerceOne;
established providers of enterprise resource planning software such as Oracle and SAP; and numerous start-up and other entrepreneurial companies offering products that provide one or more
aspects of employee relationship management such as self-help service offerings or web-based knowledge management systems.

If
we cannot compete effectively in our markets by offering products that are comparable in functionality, ease of use and price to those of our competitors, our revenues will decrease
and our

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operating results will be adversely affected. Many of our current and potential competitors have substantially greater financial, technical, marketing and other resources than we have. As a result,
they
may be able to devote greater resources than we can to the development, promotion and sale of their products, and they may be able to respond more quickly to new or emerging technologies and changes
in customer needs.

Additional
competition from new entrepreneurial companies or established companies entering our markets could have an adverse effect on our business, revenues, and operating results. In
addition, alliances among companies that are not currently direct competitors could create new competitors with substantial market presence. Because few barriers to entry exist in the software
industry, we anticipate additional competition from new and established companies as well as business alliances. We expect that the software industry will continue to consolidate. In particular, we
expect that large software companies will continue to acquire or establish alliances with our smaller competitors, thereby increasing the resources available to those competitors. These new
competitors or alliances could rapidly acquire significant market share at our expense.

We may experience integration or other problems with new acquisitions, which could have an adverse effect on our business or results of operations. New
acquisitions could dilute the interests of existing stockholders, and the announcement of new acquisitions could result in a decline in the price of our common stock.

In
addition to the acquisitions of Harbinger and Remedy, we have made a number of acquisitions of businesses and technologies over the last four years, and we may continue to make
acquisitions as part of our growth strategy. We are frequently in formal or informal discussions with potential acquisition candidates. Accordingly, we may in the future make acquisitions of, or large
investments in, businesses that offer products, services, and technologies that we believe would complement our products or services. We may also make acquisitions of, or investments in, businesses
that we believe could expand our distribution channels. Even though we announce an acquisition, we may not be able to complete it. Any future acquisition or substantial investment would present
numerous risks. The following are examples of these risks:



We
expect that future acquisitions could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and our common stock. If the consideration for
the transaction were paid in common stock, this would further dilute our existing stockholders. In addition, we may raise additional equity or debt capital to finance cash acquisitions. Raising
additional equity capital would further dilute the interests of our existing stockholders, and additional debt could impair our operating results and financial condition. Additional financing may not
be available when and as needed on commercially reasonable terms, if at all. If an inability to obtain financing were to preclude us from making an acquisition or completing a previously announced
acquisition, our future operating results could be adversely affected, and our stock price could fall.

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Our future revenues and operating results may be adversely affected if the software application market continues to evolve toward a subscription-based model,
which may prove less profitable for us.

We
expect our revenue growth rates and operating results to be adversely affected as customers require us to offer our products under a subscription-based application service provider
model. Historically, we have sold our infrastructure management solutions on a perpetual license basis in exchange for an up-front license fee. Customers are increasingly attempting to
reduce their up-front capital expenditures by purchasing software applications under a hosted subscription service model. Under the hosted model, the customer subscribes to use an
application from the software provider. The application is generally hosted on a server managed by the software provider or a third-party hosting service. We expect that a substantial portion of
future revenues generated by our business-to-business relationship management products will be realized under a subscription-based model. We also expect that an increasing
portion of future revenues generated by our infrastructure resource management products may be represented by subscriptions.

Under
the subscription revenue model, we generally will recognize revenue and receive payment ratably over the term of a subscription. As a result, our rates of revenue growth under a
subscription model may be less than our historical rates under a license model. In addition, the price of our services will be fixed at the time of entering into the subscription agreement. If we are
unable to adequately predict the costs associated with maintaining and servicing a customer's subscription, then the periodic expenses associated with a subscription may exceed the revenues we
recognize for the subscription in the same period, which would adversely affect our operating results.

In
addition, if we are not successful in implementing the subscription revenue model, or if market analysts or investors do not believe that the model is attractive relative to our
traditional license model, our business could be impaired, and our stock price could decline dramatically.

If we, or third parties on which we will rely, are unable to adequately deliver our internet-based applications, our operating results may be adversely
affected.

We
have entered into agreements with third parties to provide a full complement of services that will enable us to outsource the delivery of Internet-based products to our customers. For
example, our third-party service providers will manage the application servers, maintain communications equipment, manage the network data centers where our software and data will be stored, and
provide client support. If we are unable to adequately deliver our Internet-based applications, we may lose customers or be unable to attract new customers, which would adversely affect our revenues.

In
addition, the third-party service providers that we engage may not deliver adequate support or service to our clients, which may harm our reputation and our business. Because these
third-party service providers handle the installation of the computer and communications equipment and software needed for the day-to-day operations of our Internet-based
applications, we will be dependent on them to manage, maintain and provide adequate security for customer applications. If our customers experience any delays in response time or other performance
problems while using our Internet applications, as hosted by a third-party or by us, our customers may perceive the delays as defects with our products and may stop using our applications, which would
adversely affect our revenues. We have limited experience outsourcing these services and may have difficulty managing this process. We will be required to monitor our third-party service providers to
ensure that they perform these services adequately. In addition, if we do not maintain good relations with these third-party service providers, or if they go out of business, they may be unable to
perform critical support functions for us. If we were unable to find replacement third-party service providers, we would be required to perform these functions ourselves. We may not be successful in
obtaining or performing these services on a timely or cost-effective basis.

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If we do not respond adequately to our industry's evolving technology standards, or do not continually develop products that meet the complex and evolving needs
of our customers, sales of our products may decrease.

As
a result of rapid technological change in our industry, our competitive position in existing markets, or in markets we may enter in the future, can be eroded rapidly by product
advances and technological changes. We may be unable to improve the performance and features of our products as necessary to respond to these developments. In addition, the life cycles of our products
are difficult to estimate. Our growth and future financial performance depend in part on our ability to improve existing products and
develop and introduce new products that keep pace with technological advances, meet changing customer needs, and respond to competitive products. Our product development efforts will continue to
require substantial investments. In addition, competitive or technological developments may require us to make substantial, unanticipated investments in new products and technologies, and we may not
have sufficient resources to make these investments.

If we cannot attract and retain qualified sales personnel, software developers, and customer service personnel, we will not be able to sell and support our
products.

Competition
for qualified employees is intense, particularly in the technology industry, and we have in the past experienced difficulty recruiting qualified employees. If we are not
successful in attracting and retaining qualified sales personnel, software developers, and customer service personnel, our revenue growth rates could decrease, or our revenues could decline, and our
operating results could be materially harmed. Our products and services require a sophisticated selling effort targeted at several key people within a prospective customer's organization. This process
requires the efforts of experienced sales personnel as well as specialized consulting professionals. In addition, the complexity of our products, and issues associated with installing and maintaining
them, require highly-trained customer service and support personnel. We intend to hire a significant number of these personnel in the future and train them in the use of our products. We believe our
success will depend in large part on our ability to attract and retain these key employees.

If immigration laws limit our ability to recruit and employ skilled technical professionals from other countries, our business and operating results could be
harmed.

Limitations
under United States immigration laws could prevent us from recruiting skilled technical personnel from foreign countries, which could harm our business if we do not have
sufficient personnel to develop new products and respond to technological changes. This inability to hire technical personnel could lead to future decreases in our revenues or decreases in our revenue
growth rates, either of which would adversely affect our operating results. Because of severe shortages for qualified technical personnel in the United States, many companies, including Peregrine,
have recruited engineers and other technical personnel from foreign countries. Foreign computer professionals such as those we have employed typically become eligible for employment in the United
States by obtaining a nonimmigrant visa. The number of nonimmigrant visas is limited annually by federal immigration laws. In recent years, despite increases in the number of available visas, the
annual allocation has been exhausted well before year-end.

Our business could be harmed if we lost the services of one or more members of our senior management team.

The
loss of the services of one or more of our executive officers or key employees, or the decision of one or more of these individuals to join a competitor, could adversely affect our
business and harm our operating results and financial condition. Our success depends to a significant extent on the continued
service of our senior management and other key sales, consulting, technical and marketing personnel. None of our senior management is bound by an employment or non-competition agreement.
We do not maintain key man life insurance on any of our employees.

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If we fail to manage expansion effectively, this will place a significant strain on our management and operational resources.

Our
recent growth rates, together with integration efforts resulting from our numerous acquisitions, have placed a significant strain on our management and operational resources. We have
expanded the size and geographic scope of our operations rapidly in recent years, both internally and through acquisitions. Our customer relationships could be strained if we are unable to devote
sufficient resources to them as a result of our growth, which could have an adverse effect on our future revenues and operating results.

We may be unable to expand our business and increase our revenues if we are unable to expand our distribution channels.

If
we are unable to expand our distribution channels effectively, our business, revenues and operating results could be harmed. In particular, we will need to expand our direct sales
force and establish relationships with additional system integrators, resellers, and other third party partners who market and sell our products. If we cannot establish these relationships, or if our
business partners are unable to market our products effectively or provide cost-effective customer support and service, our revenues and operating results will be harmed. Even where we are
successful in establishing a new third-party relationship, our agreement with the third party may not be exclusive and, as a result, our business partner may carry competing product lines.

If we are unable to expand our business internationally, our business, revenues, and operating results could be harmed.

In
order to grow our business, increase our revenues, and improve our operating results, we believe we must continue to expand internationally. If we expend substantial resources
pursuing an international strategy and are not successful, our revenues will be less than our management or market analysts anticipate, and our operating results will suffer. We have several
international sales offices in Europe, as well as offices in Japan, Singapore, Australia, and elsewhere. International expansion will require significant management attention and financial resources,
and we may not be successful expanding our international operations. We have limited experience in developing local language versions of our products or in marketing our products to international
customers. We may not be able to successfully translate, market, sell, and deliver our products internationally.

Conducting business internationally poses risks that could affect our financial results.

Even
if we are successful in expanding our operations internationally, conducting business outside North America poses many risks that could adversely affect our operating results. In
particular, we may experience gains and losses resulting from fluctuations in currency exchange rates, for which hedging activities may not adequately protect us. Moreover, exchange rate risks can
have an adverse effect on our ability to sell our products in foreign markets. Where we sell our products in U.S. dollars, our sales could be adversely affected by declines in foreign currencies
relative to the dollar, thereby making our products more expensive in local currencies. Where we sell our products in local currencies, we could be competitively unable to change our prices to reflect
fluctuations in the exchange rate.

Additional
risks we face in conducting business internationally include the following:



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Our outstanding indebtedness could adversely affect our results of operations and financial condition, and we may incur substantially more
debt.

As
of December 31, 2001, we had approximately $370 million of indebtedness outstanding, consisting principally of $263 million in outstanding principal (including
unamortized purchasers' discount) under our 51/2% Convertible Subordinated Notes due 2007 and $100 million outstanding on our $150 million three-year revolving
line of credit. Our indebtedness could adversely affect our results of operations and financial condition. For example, our results of operations will be adversely affected by approximately
$15 million in annual interest expense associated with the Convertible Subordinated Notes, payable semi-annually. In addition, our indebtedness could:



Our
indebtedness will require the dedication of a substantial portion of our cash flow from operations to the payment of principal and interest on our indebtedness, thereby reducing the
availability of cash flow to fund our growth strategy, working capital, capital expenditures, and other general corporate purposes.

We
may incur substantial additional debt in the future, and if new debt is added to our current levels, the related risks described above could intensify.

Our revolving line of credit agreement may not be available if we do not attain required financial criteria, and alternative sources of financing may not be
available.

The
terms of our revolving line of credit facility include covenants that require us to attain certain financial criteria. Based upon our financial results reported as of
December 31, 2001, we determined that we did not comply with some of these covenants. In February 2002, we entered into an amendment to the revolving line of credit facility that suspends
certain of our financial covenants through March 31, 2002, imposes additional other financial covenants, and waives the covenant non-compliance existing as of December 31,
2001. In February 2002, all amounts outstanding under the facility were repaid, with the exception of outstanding letters of credit under the facility of approximately $18.6 million. We
currently expect our available cash, cash equivalents, and short-term investments, together with cash currently anticipated to be generated from business operations, to be sufficient to satisfy our
forseeable working capital requirements. Our revenues and related cashflows are subject to the numerous risks described in this section. If our cash generated from operations proved in some future
period to be materially less than we currently expect and neither the bank facility nor alternative sources of financing were available, our business could suffer and our stock price could decline.



We will be required to generate cash sufficient to pay all amounts due on our outstanding indebtedness and to conduct our business operations. We have incurred
net losses, and we may not be able to cover our anticipated debt service obligations. This may materially hinder our ability to make payments on our indebtedness. Our ability to meet our future debt
service obligations will be dependent upon our future operating performance, which will be subject to financial, business, and other factors affecting our operations, many of which are beyond our
control.

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We have made substantial capital commitments that could have an adverse effect on our operating results and financial condition if our business does not
grow.

We
have made substantial capital commitments as a result of recent growth in our business that could seriously harm our financial condition if our business does not grow and we do not
have adequate resources to satisfy our obligations. In June 1999, we entered into a series of leases covering up to approximately 540,000 square feet of office space, including an option on
approximately 118,000 square feet, for our headquarters in San Diego, California. This office space (including the option) relates to a five building campus in San Diego, California, of which four
buildings are presently occupied. Our San Diego personnel occupy three of these buildings, and we sublease part of the fourth building. In June 2001, we exercised our option for the fifth and
final building at the San Diego campus, which is scheduled to be completed in October 2002. Including the exercise of the option, the leases require minimum aggregate lease payments of
approximately $201.2 million over their term, which is approximately twelve years. In Atlanta, we lease approximately 95,000 square feet of space, under a lease expiring in 2008. In the San
Francisco Bay Area, we lease approximately 283,000 square feet of space under multiple leases expiring between 2003 and 2006. The capital commitments, construction oversight, and movement of personnel
and facilities involved in a transaction of this type and magnitude present numerous risks, including:



Product development delays could harm our competitive position and reduce our revenues.

If
we experience significant product development delays, our position in the market would be harmed, and our revenues could be substantially reduced, which would adversely affect our
operating results. We have experienced product development delays in the past and may experience delays in the future. In particular, we may experience product development delays associated with the
integration of recently acquired products and technologies. Delays may occur for many reasons, including an inability to hire a sufficient number of developers, discovery of software bugs and errors,
or a failure of our current or future products to conform to industry requirements.

Errors or other software bugs in our products could result in significant expenditures to correct the errors or bugs and could result in product liability
claims.

If
we were required to expend significant amounts to correct software bugs or errors, our revenues could be harmed as a result of an inability to deliver the product, and our operating
results could be impaired as we incur additional costs without offsetting revenues. Errors can be detected at any point in a product's life cycle. We have experienced errors in the past that have
resulted in delays in product shipment and increased costs. Discovery of errors could result in any of the following:



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If
we were held liable for damages incurred as a result of our products, our operating results could be significantly impaired. Our license agreements with our customers typically
contain provisions designed to limit exposure to potential product liability claims. However, these limitations may not be effective under the laws of some jurisdictions.

We could be competitively disadvantaged if we are unable to protect our intellectual property.

If
we fail to adequately protect our proprietary rights, competitors could offer similar products relying on technologies we developed, potentially harming our competitive position and
decreasing our revenues. We attempt to protect our intellectual property rights by limiting access to the distribution of our software, documentation, and other proprietary information and by relying
on a combination of patent, copyright, trademark, and trade secret laws. In addition, we enter into confidentiality agreements with our employees and certain customers, vendors, and strategic
partners. In some circumstances, however, we may, if required by a business relationship, provide our licensees with access to our data model and other proprietary information underlying our licensed
applications.

Despite
precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of software is difficult, and some foreign laws do not protect proprietary rights to the same extent as United States laws. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others, any of which could adversely affect our
revenues and operating results.

If we become involved in an intellectual property dispute, we may incur significant expenses or may be required to cease selling our products, which would
substantially impair our revenues and operating results.

In
recent years, there has been significant litigation in the United States involving intellectual property rights, including rights of companies in the software industry. We have from
time to time in the past received correspondence from third parties alleging that we infringe the third party's intellectual property rights. We expect these claims to increase as Peregrine and its
intellectual property portfolio become larger. Intellectual property claims against us, and any resulting lawsuit, may result in our incurring significant expenses and could subject us to significant
liability for damages and invalidate what we currently believe are our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to
resolve and could divert management's time and attention.
Any potential intellectual property litigation against us could also force us to do one or more of the following:



If
we are subject to a successful claim of infringement and we fail to develop non-infringing intellectual property or license the infringed intellectual property on
acceptable terms and on a timely basis, our revenues could decline or our expenses could increase.

We
may in the future initiate claims or litigation against third parties for infringement of our intellectual property rights or to determine the scope and validity of our proprietary
rights or the proprietary rights of competitors. These claims could also result in significant expense and the diversion of technical and management personnel's attention.

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Control by our officers and directors may limit our stockholders' ability to influence matters requiring stockholder approval and could delay or prevent a change
of control, which could prevent our stockholders from realizing a premium in the market price of their common stock.

The
concentration of ownership of our common stock by our officers and directors could delay or prevent a change of control or discourage a potential acquirer from attempting to obtain
control of Peregrine. This could cause the market price of our common stock to fall or prevent our stockholders from realizing a premium in the market price in the event of an acquisition.

Provisions in our charter documents and Delaware law may discourage potential acquisition bids for Peregrine and may prevent changes in our management that
stockholders otherwise would approve.

Some
provisions of our charter documents eliminate the right of stockholders to act by written consent without a meeting and impose specific procedures for nominating directors and
submitting proposals for consideration at a stockholder meeting. These provisions are intended to increase the likelihood of continuity and stability in the composition of our board of directors and
the policies established by the board of directors. These provisions also discourage some types of transactions, which may involve an actual or threatened change of control. These provisions are
designed to reduce Peregrine's vulnerability to an unsolicited acquisition proposal. As a result, these provisions could discourage potential acquisition proposals and could delay or prevent a change
of control transaction. These provisions are also intended to discourage common tactics that may be used in proxy fights. As a result, they could have the effect of discouraging third parties from
making tender offers for our shares. These provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored take-over attempts. These provisions
may also prevent changes in our management.

Our
board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series. The board of directors can fix the price, rights, preference,
privileges, and restrictions of this preferred stock without any further vote or action by our stockholders. The issuance of preferred stock allows us to have flexibility in connection with possible
acquisitions and for other corporate purposes. The issuance of preferred stock, however, may delay or prevent a change of control transaction. As a result, the market price of our common stock and
other rights of holders of our common stock may be adversely affected, including the loss of voting control to others.

Our stock price has been and is likely to continue to be highly volatile, which may make the common stock difficult to resell at attractive times and
prices.

The
trading price of our common stock has been and is likely to be highly volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including
the following:



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In
addition, the stock markets in general, and in particular the markets for securities of technology and software companies, have experienced extreme price and volume volatility and a
significant cumulative decline in recent months. This volatility has affected many companies irrespective of or disproportionately to the operating performance of these companies. These broad market
and industry factors can materially and adversely affect the market price of our common stock, regardless of our actual operating performance.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is set forth in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of
Operations," beginning on page 9.

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PART II.  OTHER INFORMATION

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

On November 30, 2001, we issued 114,908 shares of our common stock to XTRA On-Line Corporation in connection with our purchase of certain
assets of XTRA On-Line Corporation. The issuance of such shares was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act.

On
December 24, 2001, we issued an aggregate of 54,662 shares of our common stock to the former shareholders of Bodha.com, Inc. in connection with our acquisition of
Bodha.com, Inc. The issuance of such shares was exempt from the registration requirements of the Securities Act pursuant to the rules set forth in Regulation D of the Securities Act.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K



| |  | Exhibit |  | Exhibit Title                                                                                                                                                                   
| |  | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.1    |  | 1994 Stock Option Plan, as amended through April 17, 2001, and a form of Stock Option Agreement.                                                                                
| |  | 10.2    |  | 2000 Stock Option Plan for French Employees, as amended and restated through April 17, 2001, and a form of Stock Option Agreement.                                              
| |  | 10.3    |  | 1999 Nonstatutory Stock Option Plan, as amended through October 17, 2001, and a form of Stock Option Agreement.                                                                 
| |  | 10.4    |  | First Amendment to Revolving Credit Agreement and Limited Waiver by and among Peregrine Systems, Inc., Fleet National Bank, and certain other lenders, dated December 20, 2001. 
| |  | 10.5    |  | Second Amendment to Revolving Credit Agreement and Limited Waiver by and among Peregrine Systems, Inc., Fleet National Bank, and certain other lenders, dated December 31, 2001.



On
September 10, 2001, we filed a Current Report on Form 8-K reporting the completion of our acquisition of Remedy Corporation and providing certain
pro-forma financial information of Remedy.

On
November 13, 2001, we filed a Current Report on Form 8-K to update various disclosure items in our filings under the Securities Exchange Act of 1934. In
particular, we updated the information contained under the caption "Business" in our Annual Report on Form 10-K for the year ended March 31, 2001, which was filed with the
Securities and Exchange Commission on June 29, 2001.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized in the City of San Diego, California, this 14th day of February, 2002.

| |  | PEREGRINE SYSTEMS, INC.
| |  | -----------------------
| |  | By:                    

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EXHIBIT INDEX

| |  | Exhibit |  | Exhibit Title                                                                                                                                                                   
| |  | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.1    |  | 1994 Stock Option Plan, as amended through April 17, 2001, and a form of Stock Option Agreement.                                                                                
| |  | 10.2    |  | 2000 Stock Option Plan for French Employees, as amended and restated through April 17, 2001, and a form of Stock Option Agreement.                                              
| |  | 10.3    |  | 1999 Nonstatutory Stock Option Plan, as amended through October 17, 2001, and a form of Stock Option Agreement.                                                                 
| |  | 10.4    |  | First Amendment to Revolving Credit Agreement and Limited Waiver by and among Peregrine Systems, Inc., Fleet National Bank, and certain other lenders, dated December 20, 2001. 
| |  | 10.5    |  | Second Amendment to Revolving Credit Agreement and Limited Waiver by and among Peregrine Systems, Inc., Fleet National Bank, and certain other lenders, dated December 31, 2001.

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