<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C.  20549
                                   FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

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

            FOR THE TRANSITION PERIOD FROM ________ TO ________.

                       COMMISSION FILE NUMBER:  0-2222209

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


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

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


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



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

                             YES /X/     NO / /

     The number of issued and outstanding shares of the Registrant's Common 
Stock, $0.001 par value, as of September 30, 1998 was 23,210,942.

<PAGE>

                            PEREGRINE SYSTEMS, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

PART I.                             FINANCIAL INFORMATION                                     PAGE NO.
-------                             ---------------------                                     --------
<S>           <C>                                                                             <C>
     Item 1.  Condensed Consolidated Financial Statements


              Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
              March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    3

              Condensed Consolidated Statements of Operations for the Three Months Ended
              September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . .    4

              Condensed Consolidated Statements of Operations for the Six Months Ended
              September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . .    4

              Condensed Consolidated Statements of Cash Flows for the Six Months Ended
              September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . .    5

              Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . .    6

     Item 2.  Management's Discussion and Analysis of Financial Condition and Results 
              of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9

PART II.                               OTHER INFORMATION
--------                               -----------------

     Item 2.  Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   22

     Item 4.  Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . .   22

     Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . .   23

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   24
</TABLE>

                                       2
<PAGE>

                        PART I.  FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       
                            PEREGRINE SYSTEMS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                   MARCH 31,     SEPTEMBER 30,
                                                                     1998            1998
                                                                   ---------     -------------
                                                                   (AUDITED)      (UNAUDITED)
<S>                                                                <C>           <C>
                          ASSETS
Current Assets:
   Cash and cash equivalents. . . . . . . . . . . . . . . . .       $14,950        $12,552
   Short-term investments . . . . . . . . . . . . . . . . . .         7,027          3,000
   Accounts receivable, net of allowance for doubtful 
     accounts of $485 and $1,447, respectively. . . . . . . .        16,761         24,505
   Deferred tax assets. . . . . . . . . . . . . . . . . . . .         7,297          7,297
   Other current assets . . . . . . . . . . . . . . . . . . .         2,905          6,433
                                                                    -------        -------
      Total current assets. . . . . . . . . . . . . . . . . .        48,940         53,787
Property and equipment, net . . . . . . . . . . . . . . . . .         5,455          9,609
Goodwill and other. . . . . . . . . . . . . . . . . . . . . .         2,342         11,913
                                                                    -------        -------
                                                                    $56,737        $75,309
                                                                    -------        -------
                                                                    -------        -------
          LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable . . . . . . . . . . . . . . . . . . . . .       $ 2,337        $ 4,992
   Accrued expenses . . . . . . . . . . . . . . . . . . . . .         9,310         15,860
   Deferred revenue . . . . . . . . . . . . . . . . . . . . .        11,570         12,017
   Current portion of long-term debt. . . . . . . . . . . . .           151            398
                                                                    -------        -------
      Total current liabilities . . . . . . . . . . . . . . .        23,368         33,267
Long-term debt, net of current portion. . . . . . . . . . . .           966            927
Deferred revenue, net of current portion. . . . . . . . . . .         1,802          1,800
                                                                    -------        -------
         Total liabilities. . . . . . . . . . . . . . . . . .        26,136         35,994
                                                                    -------        -------
Stockholders' Equity:
   Preferred stock, $0.001 par value, 5,000 shares authorized, 
     no shares issued or outstanding. . . . . . . . . . . . .             -              -
   Common stock, $0.001 par value, 200,000 shares authorized,
     18,790 and 23,207 issued and outstanding, respectively .            19             23
   Additional paid-in capital . . . . . . . . . . . . . . . .        74,351        168,024
   Accumulated deficit. . . . . . . . . . . . . . . . . . . .       (41,461)      (125,862)
   Unearned portion of deferred compensation. . . . . . . . .        (1,493)        (1,303)
   Cumulative translation adjustment. . . . . . . . . . . . .          (553)          (496)
   Treasury stock, at cost. . . . . . . . . . . . . . . . . .          (262)        (1,071)
                                                                    -------        -------
         Total stockholders' equity . . . . . . . . . . . . .        30,601         39,315
                                                                    -------        -------
                                                                    $56,737        $75,309
                                                                    -------        -------
                                                                    -------        -------
</TABLE>

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

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED SEPT. 30,    SIX MONTHS ENDED SEPT. 30,
                                                      ----------------------------    --------------------------
                                                          1997           1998             1997          1998
                                                        --------       --------         --------      --------
<S>                                                   <C>              <C>            <C>             <C>
Revenues:
   Licenses. . . . . . . . . . . . . . . . . . . . .    $  7,039       $ 17,375         $ 13,367      $ 31,257
   Maintenance and services. . . . . . . . . . . . .       5,164         12,279            9,851        20,147
                                                        --------       --------         --------      --------
      Total revenues . . . . . . . . . . . . . . . .      12,203         29,654           23,218        51,404
                                                        --------       --------         --------      --------
Costs and Expenses:
   Cost of licenses. . . . . . . . . . . . . . . . .          69             52              128           123
   Cost of maintenance and services. . . . . . . . .       2,095          6,952            3,876        11,407
   Sales and marketing . . . . . . . . . . . . . . .       4,608         10,614            8,925        18,756
   Research and development. . . . . . . . . . . . .       1,659          3,206            3,303         5,599
   General and administrative. . . . . . . . . . . .       1,169          2,677            2,312         4,657
   Acquired in-process research and development                                      
     costs . . . . . . . . . . . . . . . . . . . . .      34,775         91,765           34,775        91,765
                                                        --------       --------         --------      --------
      Total costs and expenses . . . . . . . . . . .      44,375        115,266           53,319       132,307
                                                        --------       --------         --------      --------
Operating loss . . . . . . . . . . . . . . . . . . .     (32,172)       (85,612)         (30,101)      (80,903)
Interest income and other. . . . . . . . . . . . . .         226            193              404           453
                                                        --------       --------         --------      --------
Loss from operations before income taxes . . . . . .     (31,946)       (85,419)         (29,697)      (80,450)
Income tax expense . . . . . . . . . . . . . . . . .       1,048          2,209            1,880         3,951
                                                        --------       --------         --------      --------
Net loss . . . . . . . . . . . . . . . . . . . . . .    $(32,994)      $(87,628)        $(31,577)     $(84,401)
                                                        --------       --------         --------      --------
                                                        --------       --------         --------      --------
Net loss per share - basic:
    Net loss per share . . . . . . . . . . . . . . .    $  (2.20)      $  (4.06)        $  (2.14)     $  (4.12)
                                                        --------       --------         --------      --------
                                                        --------       --------         --------      --------
    Weighted average common shares outstanding . . .      15,001         21,559           14,777        20,506
                                                        --------       --------         --------      --------
                                                        --------       --------         --------      --------
Net loss per share - diluted:                                                        
    Net loss per share . . . . . . . . . . . . . . .    $ (2.20)       $  (4.06)        $  (2.14)     $  (4.12)
                                                        --------       --------         --------      --------
                                                        --------       --------         --------      --------
    Weighted average common shares outstanding . . .    $ 15,001       $ 21,559         $ 14,777      $ 20,506
                                                        --------       --------         --------      --------
                                                        --------       --------         --------      --------
</TABLE>

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

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                              SEPTEMBER 30,
                                                                          ----------------------
                                                                            1997          1998
                                                                          --------      --------
<S>                                                                       <C>           <C>
Cash flow from operating activities:
   Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . .          $(31,577)     $(84,401)
   Adjustments to reconcile net loss to net cash provided 
      by (used in) operating activities:
   Depreciation and amortization . . . . . . . . . . . . . . . .               391         1,661
   Charge for acquired research and development. . . . . . . . .            34,775        91,765
 Increase (decrease) in cash resulting from changes in:
         Accounts receivable . . . . . . . . . . . . . . . . . .            (1,899)       (5,125)
         Financed receivables. . . . . . . . . . . . . . . . . .               217             -
         Deferred tax asset. . . . . . . . . . . . . . . . . . .             1,415             -
         Other current assets. . . . . . . . . . . . . . . . . .                 7        (3,276)
         Other assets. . . . . . . . . . . . . . . . . . . . . .               588          (166)
         Accounts payable. . . . . . . . . . . . . . . . . . . .               893         1,289
         Accrued expenses. . . . . . . . . . . . . . . . . . . .            (1,425)       (7,835)
         Deferred revenue. . . . . . . . . . . . . . . . . . . .            (1,027)       (2,515)
                                                                          --------      --------
                                                                             2,358        (8,603)
                                                                          --------      --------
         Net cash used by discontinued business. . . . . . . . .              (170)            -
                                                                          --------      --------
            Net cash provided by (used in) operating activities.             2,188        (8,603)
                                                                          --------      --------
Cash flows from investing activities:
   Purchases of property and equipment . . . . . . . . . . . . .              (280)       (3,882)
   Purchases of short-term investments . . . . . . . . . . . . .                 -       (25,000)
   Maturities of short-term investments. . . . . . . . . . . . .                 -        29,027
   Cash acquired in acquisition. . . . . . . . . . . . . . . . .               582            46
                                                                          --------      --------
         Net cash provided by investing activities . . . . . . .               302           191
                                                                          --------      --------
Cash flows from financing activities:
   Repayment on bank line of credit, net . . . . . . . . . . . .            (1,974)            -
   Repayments of long-term debt. . . . . . . . . . . . . . . . .            (1,683)         (489)
   Issuance of common stock. . . . . . . . . . . . . . . . . . .            18,269         7,257
   Treasury stock purchased. . . . . . . . . . . . . . . . . . .              (262)         (809)
   Principal payments under capital lease obligation . . . . . .              (218)            -
                                                                          --------      --------
         Net cash provided by financing activities . . . . . . .            14,132         5,959
                                                                          --------      --------
Effect of exchange rate changes on cash. . . . . . . . . . . . .              (173)           55
                                                                          --------      --------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . .            16,449        (2,398)
Cash and equivalents, beginning of period. . . . . . . . . . . .               305        14,950
                                                                          --------      --------
Cash and equivalents, end of period. . . . . . . . . . . . . . .          $ 16,754      $ 12,552
                                                                          --------      --------
                                                                          --------      --------
Supplemental Disclosure of Cash Flow Information:
   Cash paid during the period for:
      Interest . . . . . . . . . . . . . . . . . . . . . . . . .          $     23      $     10
      Income taxes . . . . . . . . . . . . . . . . . . . . . . .          $    567      $     45
Supplemental disclosure of non-cash investing and financial activities:
      Stock issued and other non-cash consideration for 
        acquisition. . . . . . . . . . . . . . . . . . . . . . .          $ 38,617      $ 86,421
</TABLE>

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

                                       5
<PAGE>

                              PEREGRINE SYSTEMS, INC.

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  BASIS OF PRESENTATION

     The accompanying condensed consolidated balance sheet as of September 
30, 1998, the condensed consolidated statements of operations for the three 
and six month periods ended September 30, 1998 and 1997, and the condensed 
consolidated statements of cash flows for the six month periods ended 
September 30, 1998 and 1997 have been prepared by Peregrine Systems, Inc. 
(the "Company") and have not been audited.  These financial statements, in 
the opinion of management, include all adjustments (consisting only of normal 
recurring accruals) necessary for a fair presentation of the financial 
position, results of operations and cash flows for all periods presented.  
These financial statements should be read in conjunction with the financial 
statements and notes thereto included in the Company's Annual Report on Form 
10-K filed for the year ended March 31, 1998, which provides further 
information regarding the Company's significant accounting policies and other 
financial and operating information.  Interim operating results are not 
necessarily indicative of operating results for the full year or any other 
future period.  The consolidated condensed financial statements include the 
accounts of the Company and its wholly owned subsidiaries.  All significant 
intercompany transactions and balances have been eliminated.


NOTE 2.  EARNINGS PER SHARE

     Effective fiscal year 1998, the Company retroactively adopted the 
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No. 
128"), "Earnings per share."  SFAS No. 128 requires companies to compute net 
income (loss) per share under two different methods, basic and diluted per 
share data for all periods for which an income statement is presented.  Basic 
earnings per share is computed by dividing net income (loss) by the weighted 
average number of common shares outstanding during the period.  Diluted 
earnings per share reflects the potential dilution that could occur if the 
income were divided by the weighted-average number of common shares and 
potential common shares from outstanding stock options for the period.  
Potential common shares are calculated using the treasury stock method and 
represent incremental shares issuable upon exercise of the Company's 
outstanding options.  For the periods reflected in the table below the 
diluted loss per share calculation excludes effects of outstanding stock 
options as such inclusion would be anti-dilutive.  The following table 
provides reconciliation of numerators and denominators used in calculating 
basic and diluted loss per share.

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED SEPT. 30    SIX MONTHS ENDED SEPT. 30
                                                      ---------------------------    -------------------------
                                                          1997           1998           1997            1998
                                                        --------       --------       --------       ---------
                                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                   <C>              <C>            <C>            <C>
BASIC EARNINGS PER SHARE:
  Net loss . . . . . . . . . . . . . . . . . . . .       (32,994)       (87,628)       (31,577)       (84,401)
  Weighted average common shares outstanding . . .        15,001         21,559         14,777         20,506
                                                        --------       --------       --------       --------
Basic loss per share . . . . . . . . . . . . . . .      $  (2.20)      $  (4.06)      $  (2.14)      $  (4.12)
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
DILUTED EARNINGS PER SHARE:
  Net loss . . . . . . . . . . . . . . . . . . . .      $(32,994)      $(87,628)      $(31,577)      $(84,401)
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
  Weighted average common shares outstanding . . .        15,001         21,559         14,777         20,506
  Common stock options outstanding
   (unless anti-dilutive). . . . . . . . . . . . .             -              -              -              -
                                                        --------       --------       --------       --------
Total weighted average common shares and
 equivalents . . . . . . . . . . . . . . . . . . .        15,001         21,559         14,777         20,506
                                                        --------       --------       --------       --------
Diluted loss per share . . . . . . . . . . . . . .      $  (2.20)      $  (4.06)      $  (2.14)      $  (4.12)
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
</TABLE>

                                       6
<PAGE>

NOTE 3.  ACCOUNTING STANDARDS

     Statement of Financial Accounting Standards Board's SFAS No. 130, 
"Reporting Comprehensive Income" is effective for fiscal years beginning 
after December 15, 1997.  SFAS No. 130 establishes standards for reporting 
and display of comprehensive income and its components (revenue, expense, 
gains, and losses) in a full set of general-purpose financial statements. The 
adoption of this statement had no impact on the Company's net income or 
stockholders' equity, therefore no adjustments are reflected in stockholders' 
equity.

     Statement of Financial Accounting Standards Board's SFAS No. 131, 
"Disclosures about Segments of an Enterprise and Related Information" is 
effective for fiscal years beginning after December 15, 1997.  SFAS No. 131 
establishes standards for the way that public business enterprises report 
information about operating segments in annual financial statements and 
requires that those enterprises report selected information about operating 
segments in interim financial reports. SFAS No. 131 also establishes 
standards for related disclosures about products and services, major 
customers, and material countries in which the entity holds assets and 
reports revenue.  The adoption of SFAS No. 131 did not affect the results of 
operations or financial position of the Company,  but  may require the 
Company to disclose segment information in its Annual Report on Form 10-K for 
the year ending March 31, 1999.

     Statement of Financial Accounting Standards Board's SFAS No. 132, 
"Employers' Disclosure about Pensions and Other Postretirement Benefits" is 
effective for fiscal years beginning after December 15, 1997.  SFAS No. 132 
established standards for employers' disclosures about pension and other 
postretirement benefit plans.  It does not change the measurement or 
recognition of those plans.  The adoption of SFAS No.132 had no material 
impact on the Company's financial statements or related disclosures thereto.

     Statement of Financial Accounting Standards Board's SFAS No. 133, 
"Accounting for Derivative Instruments and Hedging Activities" is effective 
for fiscal years beginning after June 15, 1999.  SFAS No. 133 establishes 
standards for companies to record derivatives on the balance sheet as assets 
or liabilities, measured at fair value.  Gains or losses resulting from 
changes in the values of those derivatives would be accounted for depending 
on the use of the derivatives and whether they qualify for hedge accounting.  
The key criterion for hedge accounting is that the hedging relationship must 
be highly effective in achieving offsetting changes in fair value or cash 
flows.  The Company has not yet determined what impact, if any, the adoption 
of SFAS No. 133 will have on the Company's consolidated financial statements, 
results of operations, or related disclosures thereto.


NOTE 4.   ACQUISITIONS

     On July 30, 1998, the Company completed the acquisition of Innovative 
Tech Systems, Inc. ("Innovative").  The acquisition was structured as a 
tax-free stock-for-stock exchange resulting in the issuance of 2,959,164 
shares of Company Common Stock for all outstanding shares of Innovative 
Common Stock valued at a total purchase price of $85.9 million, including 
merger costs and assumed liabilities.  The transaction was accounted for 
under the purchase method of accounting and, accordingly, the assets, 
including in-process research and development, and liabilities, were recorded 
based on their fair values at the date of acquisition and the results of 
operations for Innovative have been included in the financial statements for 
the period subsequent to acquisition.  The Company allocated the excess 
purchase price over the fair value of net liabilities assumed to goodwill.  
As of the acquisition date, technological feasibility of the in-process 
technology had not been established; therefore the Company has expensed 
in-process research and development of $81.6 million as of the date of 
acquisition in accordance with generally accepted accounting principles.

     On September 23, 1998, the Company completed the acquisition of certain 
technology and other assets and liabilities from International Software 
Solutions and related persons and entities (collectively "ISS").  The Company 
issued 392,080 shares of Company Common Stock in exchange for these assets 
valued at a total purchase price, including merger costs, of $15.6 million.  
The transaction was accounted for as an asset purchase and, accordingly the 
assets, including in-process research and development, were recorded based on 
their fair value at the date of acquisition and the results of operations for 
ISS have been included in the financial statements for the period subsequent 
to the acquisition. The Company has allocated the excess purchase price over 
the fair value of net assets acquired to goodwill. 

                                       7
<PAGE>

As of the acquisition date, technological feasibility of the in-process 
technology had not been established; therefore the Company has expensed the 
amount of the purchase price allocated to in-process research and development 
of $10.1 million as of the date of acquisition in accordance with generally 
accepted accounting principles.

     The amount of the purchase prices for the aforementioned acquisitions 
allocated to in-process research and development was determined by examining 
the stage of development of each in-process research and development project 
at the date of acquisition, estimating cash flows resulting from the expected 
revenues generated from such projects, and discounting the net cash flows 
back to their present value. The goodwill recorded in connection with these 
acquisitions will be amortized over a five year period on a straight-line 
basis. If these projects are not successfully developed, the Company may not 
realize the value assigned to the in-process research and development 
projects.  In addition, the value of the other acquired intangible assets may 
also become impaired.

       The following unaudited pro forma consolidated operating results of 
the Company and Innovative for the six months ended September 30, 1997 and 
1998 are summarized below (in thousands):

<TABLE>
<CAPTION>
                                            1997           1998
                                          -------        -------
<S>                                       <C>            <C>
Revenue. . . . . . . . . . . . . .        $30,345        $61,085
Operating income . . . . . . . . .          4,454         11,002
Net income . . . . . . . . . . . .          3,011          7,446
</TABLE>

     These unaudited pro forma results have been prepared for comparative 
purposes only and include certain adjustments such as the amortization of 
goodwill.  However, they do not include the impact of the write-off of $34.8 
million and $81.6 million of acquired in-process research and development 
costs in 1997 and 1998, respectively.  They do not purport to be indicative 
of the results of operations that actually would have resulted had the 
acquisitions been effective on April 1, 1997 and 1998, or of future results 
of operations of the consolidated entities.  The pro forma effect of the ISS 
transaction, exclusive of the write-off of in-process research and 
development, is considered immaterial for all periods presented.

                                       8
<PAGE>

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

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

OVERVIEW

     The Company (alternatively "PSI" or "We") develops, markets, and 
supports an integrated suite of software applications that automates the 
management of complex, enterprise-wide information and infrastructure assets. 
In 1995, the Company commenced sales of SERVICECENTER, the Company's 
Enterprise Service Desk product suite.  During fiscal 1998 the Company 
expanded the strategic concept of its product line by implementing its 
Infrastructure Management strategy and executing on that strategy with its 
acquisition in September 1997 of United Software, Inc., including its 
wholly-owned subsidiary Apsylog, S.A. ("Apsylog Acquisition").  As a result 
of the Apsylog Acquisition, the Company acquired its ASSETCENTER asset 
management product suite. SERVICECENTER and ASSETCENTER are currently 
available for the Windows NT and UNIX platforms, and SERVICECENTER continues 
to be available for the MVS platform.

     Since the release of SERVICECENTER in July 1995, and until the Apsylog 
Acquisition, SERVICECENTER accounted for substantially all of the Company's 
license revenues.  Since the Apsylog Acquisition, SERVICECENTER and 
ASSETCENTER together have accounted for substantially all of the Company's 
license revenues. 

     During fiscal 1998, the Company determined that customer needs required 
a more comprehensive solution for control and management of their 
infrastructure assets, including availability of assets, minimizing 
investments and expense, consolidating data, and interfacing to enterprise 
applications.  Accordingly, the Company refocused its marketing strategy and 
product positioning to focus on this Infrastructure Management strategy.  The 
Company's focus on the Infrastructure Management strategy, the Company's 
rapid growth, and the Apsylog Acquisition have resulted in continuing efforts 
to rebuild the Company's senior management team, redefine the product 
development strategy, establish a comprehensive marketing strategy, and 
strengthen the Company's financial and budgeting processes.

     On July 30, 1998, the Company completed the acquisition of Innovative 
Tech Systems, Inc., a provider of facilities management software systems 
("Innovative").  The Company acquired Innovative to further its 
Infrastructure Management strategy by coupling the Company's SERVICECENTER 
and ASSETCENTER products, which focus on the users information technology 
infrastructure, with Innovative's SPAN-FM product, which assist users to 
track and manage their physical plant, facilities, and related assets.

     On September 23, 1998, the Company completed the acquisition of certain 
technology and other assets and liabilities of International Software 
Solutions and related persons and entities ("ISS").  The Company acquired 
these assets to further its Infrastructure Management strategy by extending 
its ability to provide enterprise remote control activities.

     The Company's revenues are derived from product licensing, maintenance 
and services. License fees are generally due upon the granting of the license 
and typically include a one-year maintenance period as part of the license 
agreement. The Company also provides ongoing maintenance services, which 
include technical support and product enhancements, for an annual fee based 
upon the current price of the product.  The Company has sold its original 
PNMS software to a sizable installed base of customers, many of whom have 
transitioned to SERVICECENTER. The Company's installed customer base has 
generated a consistent level of maintenance revenues. 

                                       9
<PAGE>

     Revenues from license agreements are recognized currently, 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, and no other significant vendor obligations 
exist. Revenues from post-contract support services are recognized ratably 
over the term of the support period, generally one year. Maintenance revenues 
which are bundled 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 the Company's 
products. Revenues from consulting and training services are recognized as 
the respective services are performed. 

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

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

     Although the Company has been expanding its presence in the Pacific Rim 
over the last year, its Pacific Rim sales activity has not been material.  
Accordingly, the Company's operations and financial conditions have not been 
materially impacted by the recent Asian financial crisis.

                                       10
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED SEPT. 30,   SIX MONTHS ENDED SEPT. 30,
                                                     ----------------------------   --------------------------
                                                         1997          1998            1997         1998
                                                        ------        ------          ------       ------
<S>                                                  <C>              <C>           <C>            <C>
STATEMENT OF OPERATIONS DATA:
 Revenues:
   Licenses. . . . . . . . . . . . . . . . . . . . .      57.7 %        58.6 %          57.6 %       60.8 %
   Maintenance and services. . . . . . . . . . . . .      42.3          41.4            42.4         39.2
                                                        ------        ------          ------       ------
                                                         100.0         100.0           100.0        100.0
 Costs and expenses:                                                             
   Cost of licenses. . . . . . . . . . . . . . . . .       0.6           0.2             0.6          0.2
   Cost of maintenance and services. . . . . . . . .      17.1          23.4            16.7         22.2
   Sales and marketing . . . . . . . . . . . . . . .      37.7          35.8            38.4         36.5
   Research and development. . . . . . . . . . . . .      13.6          10.8            14.2         10.9
   General and administrative. . . . . . . . . . . .       9.6           9.0            10.0          9.1
   Acquired research and development costs . . . . .     285.0         309.5           149.8        178.5
                                                        ------        ------          ------       ------
      Total costs and expenses . . . . . . . . . . .     363.6         388.7           229.7        257.4
                                                        ------        ------          ------       ------
 Operating income. . . . . . . . . . . . . . . . . .    (263.6)       (288.7)         (129.7)      (157.4)
 Interest income and other . . . . . . . . . . . . .       1.8           0.7             1.8          0.9
                                                        ------        ------          ------       ------
 Income (loss) before income taxes . . . . . . . . .    (261.8)       (288.0)         (127.9)      (156.5)
 Income tax expense. . . . . . . . . . . . . . . . .       8.6           7.4             8.1          7.7
                                                        ------        ------          ------       ------
 Net income. . . . . . . . . . . . . . . . . . . . .    (270.4)%      (295.4)%        (136.0)%     (164.2)%
                                                        ------        ------          ------       ------
                                                        ------        ------          ------       ------
</TABLE>

THREE MONTH AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997

     The Company's results of operations for the three month and six month 
periods ended September 30, 1998 include results of operation for (i) 
Innovative subsequent to July 30, 1998 and (ii) subsequent to September 23, 
1998, activity related to the assets and liabilities acquired from ISS.

     REVENUES

     Total revenues were $29.7 million and $12.2 million in the second 
quarter of fiscal 1999 and 1998, respectively, representing a 
period-to-period increase of 143%.  For the six month periods ended September 
30, 1998 and 1997, total revenues increased 121% from $23.2 million to $51.4 
million. The reasons for the revenue increases are more fully discussed below.

     LICENSES.  License revenues were $17.4 million and $7.0 million in the 
second quarter of fiscal 1999 and 1998, respectively, representing 59% and 
58% of total revenues in the respective periods and $31.3 million and $13.4 
million for the six months ended September 30, 1998 and 1997, respectively, 
representing 61% and 58% of total revenues for such periods.  License 
revenues increased 147% in the second quarter of fiscal 1999 compared to the 
second quarter of fiscal 1998.  For the six months ended September 30, 1998, 
license revenues increased 134% compared to the six month period ended 
September 30, 1997.  The increases in license revenues are attributable to 
increased demand for new licenses of SERVICECENTER and ASSETCENTER, the full 
quarter's effect of ASSETCENTER activity, additional seats purchased by 
existing customers, higher average transaction sizes, more effective 
corporate marketing programs, improved sales force productivity, expansion of 
the Company's domestic and international sales forces, and the effects of 
combining Innovative's operations since the Innovative acquisition in July 
1998.

     MAINTENANCE AND SERVICES.  Maintenance and services revenues were  $12.3 
million and $5.2 million in the second quarter of fiscal 1999 and 1998, 
respectively, representing 41% and 42% of total revenues in the respective 
periods and $20.1 million and $9.9 million for the six months ended September 
30, 1998 and 1997, respectively, representing 39% and 42% of total revenues 
for such periods. Maintenance and services revenues increased 138% in the 

                                       11
<PAGE>

second quarter of fiscal 1999 compared to the second quarter of fiscal 1998.  
For the six months ended September 30, 1998, maintenance and services 
revenues increased 105% compared to the six months ended September 30, 1997. 
The dollar increases are attributable to renewals of maintenance agreements 
from the Company's expanded installed base of customers, maintenance revenues 
included as part of new licenses, an increased number of consulting 
engagements related to implementation of software from initial license 
agreements, and the effects of combining Innovative's operations since the 
Innovative acquisition in July 1998. 

COSTS AND EXPENSES

     COST OF LICENSES.  Cost of licenses was $52,000 and $69,000 in the 
second quarter of fiscal 1999 and 1998, respectively, each representing less 
than 1% of total license revenues in the respective periods and $123,000 and 
$128,000 for the six month periods ended September 30, 1998 and 1997, 
respectively, again representing less than 1% of the total license revenues 
in the respective periods. 

     COST OF MAINTENANCE AND SERVICES.  Cost of maintenance and services 
revenues was $7.0 million and $2.1 million in the second quarter of fiscal 
1999 and 1998, respectively, representing 57% and 41% of total maintenance 
and service revenues in the respective periods and $11.4 million and $3.9 
million for the six months ended September 30, 1998 and 1997, respectively, 
representing 57% and 39% of total maintenance and services revenues for such 
periods, respectively. The dollar increases in the second quarter of fiscal 
1999 over 1998 and in the six months ended September 30, 1998 over the same 
period in 1997 are attributable to an increase in customer support personnel 
and professional services personnel in connection with the corresponding 
increase in professional services revenue, the full quarter's effect of 
ASSETCENTER activity, and the effects of combining Innovative's operations 
since the Innovative acquisition in July 1998.  Cost of maintenance and 
services increased as a percentage of related revenues because of increased 
labor and associated recruiting costs.

     SALES AND MARKETING.  Sales and marketing expenses were $10.6 million 
and $4.6 million in the second quarter of fiscal 1999 and 1998, respectively, 
representing 37% and 38% of total revenues in the respective periods and 
$18.8 million and $8.9 million for the six months ended September 30, 1998 
and 1997, respectively, representing 36% and 38% of total revenues in such 
periods. The dollar increases in sales and marketing expenses are 
attributable to the significant expansion of both the North American and 
international sales forces, increase in marketing personnel, the full 
quarter's effect of ASSETCENTER activity, the effect of moderate operating 
expense increases, and the effects of combining Innovative's operations since 
the Innovative acquisition in July 1998.  Sales and marketing have decreased 
as a percentage of total revenues for the respective periods as a result of 
revenues increasing at a faster rate. If the Company experiences a decrease 
in sales force productivity or for any other reason a decline in revenues, it 
is likely that operating margins will decline as well.

     RESEARCH AND DEVELOPMENT.  Research and development expenses were $3.2 
million and $1.7 million in the second quarter of fiscal 1999 and 1998, 
respectively, representing 11% and 14% of total revenues in the respective 
periods and $5.6 million and $3.3 million for the six months ended September 
30, 1998 and 1997, respectively, representing 11% and 14% of total revenues 
in such periods.  The dollar increases in research and development from 
fiscal 1998 to 1999 are due primarily to the increased cost of product author 
commissions, the hiring of additional software developers, an increase in the 
number of personnel in the Research and Development department, the full 
quarter's effect of ASSETCENTER activity, and the effects of combining 
Innovative's operations since the Innovative acquisition in July 1998.  
Research and development expenses have decreased as a percentage of total 
revenues from the second quarter of fiscal 1998 to the second quarter of 
fiscal 1999 as a result of revenues increasing at a faster rate. 

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses were 
$2.7 million and $1.2 million in the second quarter of fiscal 1999 and 1998, 
respectively, representing 9% and 10% of total revenues in the respective 
periods, and $4.7 million and $2.3 million for the six months ended September 
30, 1998 and 1997, respectively, representing 9% and 10% of total revenues in 
such periods. The dollar increases from fiscal 1998 to 1999 are attributable 
primarily to costs associated with administrative personnel additions to 
support the Company's growth, amortization of goodwill, management 
restructuring, the full quarter's effect of ASSETCENTER activity, and the 
effects of combining Innovative's operations since the Innovative acquisition 
in July 1998 while the decreases as a percentage of total revenues reflect 
the fact that revenues grew at a faster rate than general and administrative 
expenses.  

                                       12
<PAGE>

     ACQUIRED RESEARCH AND DEVELOPMENT COSTS.  Acquired in-process research 
and development costs of $91.8 million were incurred in the second quarter of 
fiscal 1999 in connection with the Innovative and ISS acquisitions.  Acquired 
in-process research and development costs of $34.8 million were incurred in 
the second quarter of fiscal 1998 in connection with the acquisition of 
United Software, Inc.

     INCOME TAX EXPENSE.  Income tax expense for the second fiscal quarter of 
1999 amounted to $2.2 million compared with $1.0 million in the comparable 
quarter of fiscal 1998.  This increase results from the $3.5 million dollar 
increase in operating profits, before taxes and recognition of the acquired 
research and development costs in the respective periods.  Excluding the 
effect of expensing the acquired in-process research and development costs, 
the effective tax rate for the second quarter of fiscal 1998 and for the six 
months ended September 30, 1998 was 35%.

LIQUIDITY AND CAPITAL RESOURCES

     The Company had $15.6 million in cash, cash equivalents, and short-term 
investments at September 30, 1998 compared to $22.0 million at March 31, 
1998.  The decrease in cash, cash equivalents, and short-term investments is 
primarily attributable to acquisition related costs incurred during the six 
month period.

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

YEAR 2000 RISKS

    Many currently installed computer systems and software products are coded 
to accept only two digit entries in the date code field. These date code 
fields will need to accept four digit entries to distinguish 21st century 
dates from 20th century dates. As a result, many companies' software and 
computer systems may need to be upgraded or replaced in order to comply with 
such Year 2000 requirements. Significant uncertainty exists in the software 
industry concerning the potential effects associated with such compliance.

    The Company utilizes third party equipment and software that may not be 
Year 2000 compliant and is conducting an internal audit of products provided 
by outside vendors to determine if such third party products are Year 2000 
compliant. Although such audit is not net completed, the Company has received 
assurances from suppliers of all third party software that the Company deems 
material to its business that such software is Year 2000 compliant. Failure 
of such third party equipment or software to operate properly with regard to 
the Year 2000 and thereafter could require the Company to incur unanticipated 
expenses to remedy any problems, which could have a material adverse effect on 
its business, results of operations, and financial condition. If key systems, 
or a significant number of systems, were to fail as a result of Year 2000 
problems or if the Company was to experience delays implementing Year 2000 
compliant software products, the Company could incur substantial costs and 
disruption of its business, which would potentially have a material adverse 
effect on its results of operations and financial conditions.

     The Company is still assessing the impact the Year 2000 issue will have 
on its proprietary software products and internal information systems and 
will take appropriate corrective actions based on the results of such 
analyses. Management of the Company has not yet determined the costs related 
to achieving Year 2000 compliance but does not believe such costs will be 
material. To the extent the cost of achieving Year 2000 compliance are 
material, such costs will have a material adverse effect on its business, 
results of operations,and financial condition.

     In the ordinary course of its business, the Company tests and evaluates 
its own software products and believes that its software products are 
generally Year 2000 compliant, meaning that the use or occurrence of dates on 
or after January 1, 2000 will not materially affect the performance of such 
software products with respect to four digit date dependent data or the 
ability of such products to correctly create, store, process, and output 
information related to such data. There can be no assurance, however, that 
the Company will not subsequently learn that certain of its software products 
do not contain all necessary software routines and codes necessary for the 
accurate calculation, display, storage, and manipulation of data involving 
dates. In addition, in certain circumstances, the Company has warranted that 
the use or occurrence of dates on or after January 1, 2000 will not adversely 
affect the performance of its products with respect to four digit date 
dependent data or the ability to create, store, process, and output 
information related to such data. If any licensees experience Year 2000 
problems, such licensees could assert claims for damages.

     In addition, the purchasing patterns of customers and potential 
customers may be affected by Year 2000 issues. Many companies are expending 
significant resources to correct their current software systems for Year 2000 
compliance. These expenditures may result in reduced funds available to 
purchase software products such as those offered by the Company, which could 
have an adverse effect on the business, results of operations, and financial 
condition of the Company.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     HISTORY OF OPERATING LOSSES. We have recorded cumulative net losses of 
approximately $125.9 million through September 30, 1998. This amount includes 
approximately $34.8 million related to the write-off of acquired in-process 
research and development in connection with our acquisition of United 
Software, Inc. including its Apsylog S.A. subsidiary ("Apsylog") which was 
completed in September 1997, $81.6 million related to the write-off of 
acquired in-process research and development in connection with our July 1998 
acquisition of Innovative Tech Systems, Inc. ("Innovative"), and $10.1 
million related to the write-off of acquired in-process research and 
development in connection with our September 1998 acquisition of certain 
remote control technology from International Software Solutions ("ISS"). Our 
main product lines have changed substantially in recent years. For example, 
our SERVICECENTER product only began shipping in mid-1995 and our ASSETCENTER 
product only began shipping in mid-1996. As a result, prediction of our 
future operating results is difficult, if not impossible. Although our 
operating results were positive during the years ended March 31, 1997 and 
1998 (excluding the impact of the $34.8 million charge related to acquired 
in-process research and development in connection with our acquisition of 
Apsylog), we may not remain profitable on a quarterly or annual basis. In 
addition, we do not believe that the growth in our revenues that we have 
experienced in recent years is indicative of future revenue growth or future 
operating results.

     POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; LENGTHY SALES CYCLE; 
SEASONALITY.  The Company's quarterly operating results have varied 
significantly in the past and may vary significantly in the future depending 
upon a number of factors, many of which are beyond the Company's control. 
These factors include, among others, the ability of the Company to develop, 
introduce and market new and enhanced versions of its software on a timely 
basis; market demand for the Company's software; the size, timing and 
contractual terms of significant orders; the timing and significance of new 
software product announcements or releases by the Company or its competitors; 
changes in pricing policies by the Company or its competitors; changes in the 
Company's business strategies; budgeting cycles of its 

                                       13
<PAGE>

potential customers; changes in the mix of software products and services 
sold; changes in the mix of revenues attributable to domestic and 
international sales; the impact of acquisitions of competitors; seasonal 
trends; the cancellations of licenses or maintenance agreements; product life 
cycles; software defects and other product quality problems; and personnel 
changes. The Company has often recognized a substantial portion of its 
revenues in the last month or weeks of a quarter. As a result, license 
revenues in any quarter are substantially dependent on orders booked and 
shipped in the last month or weeks of that quarter. Due to the foregoing 
factors, quarterly revenues and operating results are not predictable with 
any significant degree of accuracy. In particular, the timing of revenue 
recognition can be affected by many factors, including the timing of contract 
execution and delivery. The timing between initial customer contact and 
fulfillment of criteria for revenue recognition can be lengthy and 
unpredictable, and revenues in any given quarter can be adversely affected as 
a result of such unpredictability. In the event of any downturn in potential 
customers' businesses or the economy in general, planned purchases of the 
Company's products may be deferred or canceled, which could have a material 
adverse effect on the Company's business, operating results and financial 
condition. 

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

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

     PRODUCT CONCENTRATION. Almost all of our license revenues results from 
the sale of our SERVICECENTER and ASSETCENTER products. We expect these 
products to continue to account for a large portion of our revenues for the 
foreseeable future. Our future operating results are dependent upon continued 
market acceptance of SERVICECENTER and ASSETCENTER, including future 
enhancements. In addition, our operating results will be affected by customer 
acceptance of SPAN-FM as a PSI product suite. We acquired SPAN-FM, a 
facilities automation software application, through our July 1998 acquisition 
of Innovative. Any factors adversely affecting the pricing of, demand for, or 
market acceptance of SERVICECENTER, ASSETCENTER, or SPAN-FM, such as 
competition or technological change, could materially adversely affect our 
business, operating results, and financial condition. 
     
     DEPENDENCE ON MARKET ACCEPTANCE OF INFRASTRUCTURE MANAGEMENT SOFTWARE 
SOLUTIONS AND RAPID TECHNOLOGY CHANGE. Until recently, we have focused on 
developing software products to help manage many aspects of a business's 
information technology ("IT") systems. In September 1997, we broadened our IT 
infrastructure management product suite by acquiring ASSETCENTER, an asset 
management product line, through our acquisition of Apsylog. In addition, we 
have increased the functionality of SERVICECENTER to manage aspects of the 
enterprise infrastructure not necessarily related to IT.  In July 1998, we 
acquired Innovative, a provider of facilities management software. 
Innovative's product strategy has focused on providing building and 
facilities management and fire safety and inspection software applications, 
including SPAN-FM. In acquiring Innovative, we intend to further broaden our 
product line beyond traditional IT infrastructure management. We are seeking 
to offer a more comprehensive product suite capable of managing a business's 
IT infrastructure, its physical plant and facilities, its communications 
infrastructure, and its distribution systems. 

     In recent years, the market for enterprise software solutions has been 
characterized by rapid technological 

                                       14
<PAGE>

change, frequent new product announcements and introductions, and evolving 
industry standards. In response to advances in technology, customer 
requirements have become increasingly complex, resulting in industry 
consolidation of product lines offering similar or related functionality. We 
believe that a market for integrated enterprise-wide infrastructure 
management solutions is evolving from existing requirements for specific IT 
management solutions. Such enterprise-wide solutions would include 
applications for IT management, asset management, building and facilities 
management, communications resource management, and distribution systems 
management. However, the existence of such a market is unproven. If such a 
market does not fully develop, this would materially adversely affect our 
business, operating results, and financial condition. 

     As a result of rapid technology change in our industry, our position in 
existing markets or other markets that we may enter can be eroded rapidly by 
product advances. The life cycles of our products are difficult to estimate. 
Our growth and future financial performance depends in part upon our ability 
to improved existing products, 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. We may not have sufficient resources to make 
the necessary investments. 

     INTEGRATION OF INNOVATIVE TECH SYSTEMS INTO PSI'S BUSINESS. Our 
acquisition of Innovative, which was completed in July 1998, will require 
integrating Innovative into PSI. Prior to the acquisition, Innovative and PSI 
were two geographically separated companies that had been operated 
independently. We believe that the acquisition of Innovative will further our 
strategy to provide customers with a complete infrastructure management 
software solution. However, difficulties may be encountered in integrating 
the product offerings, operations and technology of Innovative with those of 
PSI. We may not be able to successfully complete technology development or 
market new products currently in development or develop any new products that 
relate to the Innovative products. Anticipated marketing, distribution, or 
other operational benefits and efficiencies from the acquisition of 
Innovative may not be achieved. The morale of PSI and Innovative employees 
may be adversely affected as a result of the acquisition and the resulting 
integration. 

     Integrating Innovative into our existing business may prove difficult 
given that the two companies were geographically separated, have different 
corporate cultures and have personnel with different business backgrounds. We 
may not be able to retain a sufficient number of Innovative's key employees. 
Additionally, we may have problems combining the engineering teams from 
Innovative with our existing teams so that such teams will successfully 
cooperate and realize any technological benefits from the combined 
businesses. Sales of Innovative products may not be markedly enhanced by the 
broader distribution and marketing opportunities available through PSI. We 
may not be able to benefit from the broader product offerings available as a 
result of the acquisition or from any other anticipated benefits. Any failure 
to integrate the businesses and technologies of the companies successfully or 
any failure to realize the anticipated benefits of the acquisition could 
materially adversely affect our business, results of operations, and 
financial condition. 
     
     In addition, if our management devotes too much time and attention to 
the integration of Innovative into our existing business, this also could 
materially adversely affect our business, operating results, and financial 
condition. In addition, certain of Innovative's suppliers, distributors, or 
customers may end their agreements with Innovative as a result of the 
acquisition. In addition, prospective customers of Innovative may delay their 
orders as a result of uncertainties resulting from the acquisition. For 
example, customers or potential customers of Innovative could terminate or 
delay orders with PSI because they may feel that we are not committed to 
providing products and enhancements or support services for Innovative 
products. If a significant number of Innovative customers or potential 
customers cancel or do not renew their arrangements with Innovative or PSI or 
delay their orders of our products, this could have materially adversely 
affect our business, results of operations, and financial condition. We 
expect any such affects to be felt most strongly in near-term quarters. 
     
     INTEGRATION OF INTERNATIONAL SOFTWARE SOLUTIONS INTO PSI'S PRODUCTS. Our 
acquisition of remote control technology from International Software 
Solutions and related entities and persons (collectively "ISS"), which was 
completed in September 1998, will require integrating the ISS technology with 
SERVICECENTER and ASSETCENTER. Difficulties may be encountered in this 
integration process. In addition, we may not be able to successfully complete 
and market new products that use the ISS technology.  The marketing, 
distribution, or other operational benefits and efficiencies anticipated from 
the acquisition of the ISS technology may not be achieved. We plan to 
continue to work with employees of ISS to integrate the ISS technology with 
our products. However, there may be problems combining 

                                       15
<PAGE>

the engineering teams from ISS with our existing teams. As a result, we may 
not fully realize the expected technological benefits from the acquired ISS 
technology. Any failure to integrate the ISS technology into our products 
could materially adversely affect our business, operating results, and 
financial condition. 

     RISKS ASSOCIATED WITH PSI ACQUISITIONS. We have recently completed our 
acquisitions of Apsylog, Innovative, and the ISS technology. In the future 
PSI may make acquisitions of, or large investments in, other businesses that 
offer products, services, and technologies that further our goal of providing 
integrated infrastructure management software solutions to businesses. Our 
acquisitions of Apsylog, Innovative, and the ISS technology and any future 
acquisitions or investments that PSI were to complete present risks commonly 
encountered with these types of transactions. The following are examples of 
such risks: 

     - difficulty in combining the technology, operations, or work force of 
       the acquired business 
     - disruption of the Company's on-going businesses 
     - difficulty in realizing the potential financial and strategic position 
       of PSI through the successful integration of the acquired business 
     - difficulty in maintaining uniform standards, controls, procedures, and 
       policies -possible impairment of relationships with employees and 
       clients as a result of any integration of new businesses and management 
       personnel 
     - difficulty in obtaining preferred acquisition accounting treatment for 
       these types of transactions 
     - diversion of management attention 

     The risks described above, either individually or in the aggregate, 
could materially adversely affect our business, operating results, and 
financial condition. We expect that future acquisitions, if any, could 
provide for consideration to be paid in cash, shares of PSI common stock, or 
a combination of cash and PSI common stock. However, we may not be able to 
complete any such additional acquisitions in the future. 

     DEPENDENCE ON KEY PERSONNEL.  The Company's success will depend to a 
significant extent on the continued service of its senior management and 
certain other key employees of the Company, including selected sales, 
consulting, technical and marketing personnel. Few of the Company's 
employees, including its senior management, are bound by an employment or 
noncompetition agreement.  In addition, the Company does not generally 
maintain key man life insurance on any employee. The loss of the services of 
one or more of the Company's executive officers or key employees or the 
decision of one or more of such officers or employees to join a competitor or 
otherwise compete directly or indirectly with the Company could have a 
material adverse effect on the Company's business, operating results and 
financial condition. 

     In addition, several of the Company's executive officers, including its 
President and Chief Executive Officer, Chief Financial Officer, and certain 
operating vice presidents, have been employed by the Company for a relatively 
short period of time. Since joining the Company, the new management team has 
devoted substantial effort in refocusing the Company's product, sales and 
marketing strategies. In connection with such changes, the Company 
restructured its sales and marketing departments, which resulted in the 
replacement of a significant number of employees. Although management 
believes that this restructuring has benefited the Company, many of the 
Company's current employees have been with the Company for only a limited 
period of time. The ultimate results of such restructuring is impossible to 
predict.

     ABILITY TO RECRUIT PERSONNEL. 

     EXECUTIVE OFFICERS AND KEY PERSONNEL. Our future success will likely 
depend in large part on our ability to attract and retain additional highly 
skilled technical, sales, management, and marketing personnel. Competition 
for such personnel in the computer software industry is intense, and in the 
past we have experienced difficulty in recruiting qualified personnel. New 
employees generally require substantial training in the use of our products. 
We may not succeed in attracting and retaining such personnel. If we do not, 
our business, operating results, and financial condition could be materially 
adversely affected. 
     
     FOREIGN EMPLOYEES. To achieve our business objectives we must be able to 
recruit and employ skilled 

                                       16
<PAGE>

technical professionals from other countries. Any future shortage of 
qualified technical personnel who are either United States citizens or 
otherwise eligible to work in the United States could increase our reliance 
on foreign professionals. Many technology companies have already begun to 
experience shortages of such personnel. Any failure to attract and retain 
qualified personnel as necessary, including as a result of limitations 
imposed by federal immigration laws and the availability of visas issued 
thereunder, could materially adversely affect our business and operating 
results. Foreign computer professionals such as those employed by us 
typically become eligible for employment in the United States by obtaining a 
nonimmigrant visas. The number of nonimmigrant visas is limited by federal 
immigration law. Currently, Congress is considering approving an increase in 
the number of visas available. We cannot predict whether such legislation 
will ultimately become law. We also cannot predict what effect any future 
changes in the federal immigration laws will have on our business, operating 
results, or financial condition. 

     COMPETITION. The market for our products is highly competitive and 
diverse. The technology for infrastructure management software products can 
change rapidly. New products are frequently introduced and existing products 
are continually enhanced. Competitors vary in size and in the scope and 
breadth of the products and services offered. 

     EXISTING COMPETITION. We have faced competition from a number of 
sources, including: 

     - providers of internal help desk software applications such as Remedy 
       Corporation and Software Artistry, Inc. (now a division of Tivoli 
       Systems, Inc.) 
     - customer interaction software companies such as Clarify Inc. and The 
       Vantive Corporation, whose products include internal help desk 
       applications
     - information technology and systems management companies such as IBM, 
       Computer Associates International, Inc., Network Associates, Inc. 
       (recently formed as a result of the business combination of McAfee 
       Associates, Inc. and Network General Corporation), and Hewlett-Packard 
       Company through its acquisition of PROLIN 
     - providers of asset management and facilities management software 
     - the internal information technology departments of those companies 
       with infrastructure management needs 

     FUTURE COMPETITION. Because competitors can easily penetrate the 
software market, we anticipate additional competition from other established 
and new companies as the market for enterprise infrastructure management 
applications develops. In addition, current and potential competitors have 
established or may in the future establish cooperative relationships among 
themselves or with third parties. Large software companies may acquire or 
establish alliances with smaller competitors of PSI. We expect that the 
software industry will continue to consolidate. It is possible that new 
competitors or alliances among competitors may emerge and rapidly acquire 
significant market share. 
     
     Our ability to sell our products depends in part on their compatibility 
with and support by providers of system management products, including 
Tivoli, Computer Associates, and Hewlett-Packard. Both Tivoli and 
Hewlett-Packard have recently acquired providers of help desk software 
products. These providers of system management products may decide to close 
their systems to competing vendors like PSI. They may also decide to bundle 
their infrastructure management and/or help-desk software products with other 
products for enterprise licenses for promotional purposes or as part of a 
long-term pricing strategy. If that were to happen, our ability to sell our 
products could be adversely affected. Increased competition may result from 
acquisitions of help desk and other infrastructure management software 
vendors by system management companies. The results of increased competition 
including price reductions of our products, reduced gross margins, and 
reduction of market share, could materially adversely affect our business, 
operating results, and financial condition. 
     
     GENERAL COMPETITION. Some of our current and many of our potential 
competitors have much greater financial, technical, marketing, and other 
resources than PSI. As a result, they may be able to respond more quickly to 
new or emerging technologies and changes in customer needs. They may also be 
able to devote greater resources to the development, promotion, and sale of 
their products than we can. We may not be able to compete successfully 
against current and future competitors. In addition, competitive pressures 
faced by PSI may materially adversely 

                                       17
<PAGE>

affect our business, operating results, and financial condition. 
     
     MANAGEMENT OF GROWTH. We have grown greatly in recent periods, with 
total revenues increasing from $19.6 million in fiscal 1995 to $23.8 million 
in fiscal 1996, to $35.0 million in fiscal 1997, and to $61.9 million in 
fiscal 1998. 
     
     If we achieve our growth plans, including the integration of Apsylog, 
Innovative, and the technology acquired from ISS, such growth may burden our 
operating and financial systems. This burden will require large amounts of 
senior management attention and will require the use of other PSI resources. 
Our ability to compete effectively and to manage future growth (and our 
future operating results) will depend in part on our ability to implement and 
expand operational, customer support, and financial control systems and to 
expand, train, and manage our employees. In particular, in connection with 
the acquisitions, we will be required to integrate additional personnel and 
to augment or replace existing financial and management systems. Such 
integration could disrupt our operations and could adversely affect our 
financial results. We may not be able to augment or improve existing systems 
and controls or implement new systems and controls in response to future 
growth, if any. Any failure to do so could materially adversely affect our 
business, operating results, and financial condition.
     
     EXPANSION OF DISTRIBUTION CHANNELS. We sell our products through our 
direct sales force and a limited number of distributors and we provide 
maintenance and support services through our technical and customer support 
staff. We plan to continue to invest large amounts of resources to our direct 
sales force, particularly in North America where we have recently opened 
several new sales offices. In addition, we are developing additional sales 
and marketing channels through system integrators and original equipment 
manufacturers and other channel partners. We may not be able to attract 
channel partners that will be able to market our products effectively or that 
will be qualified to provide timely and cost-effective customer support and 
service. If we establish distribution through such indirect channels, our 
agreements with channel partners may not be exclusive. As a result, such 
channel partners may also carry competing product lines. If we do not 
establish and maintain such distribution relationships, this could materially 
adversely affect our business, operating results, and financial condition. 
     
     INTERNATIONAL OPERATIONS. International sales represented approximately 
29% of our total revenues in fiscal 1997 and 36% of our total revenue in 
fiscal 1998. We currently have international sales offices in London, Paris, 
Frankfurt, Amsterdam, and Copenhagen. Our continued growth and profitability 
will require continued expansion of our international operations, 
particularly in Europe, Latin America, and the Pacific Rim. Accordingly, we 
intend to expand our current international operations and enter additional 
international markets. Such expansion will require significant management 
attention and financial resources. Our international operations are subject 
to a variety of risks associated with conducting business internationally, 
including the following: 

     - fluctuations in currency exchange rates 
     - longer payment cycles 
     - difficulties in staffing and managing international operations 
     - problems in collecting accounts receivable 
     - seasonal reductions in business activity during the summer months in 
       Europe and certain other parts of the world 
     - increases in tariffs, duties, price controls, or other restrictions on 
       foreign currencies trade barriers imposed by foreign countries 

     These factors could materially adversely affect our business, operating 
results, and financial condition. We have only limited experience in 
developing local-language versions of our products and marketing and 
distributing its products internationally. We may not be able to successfully 
translate, market, sell and deliver our products internationally. If we are 
unable to expand our international operations successfully and in a timely 
manner, our business, operating results, and financial condition could be 
adversely affected. 

Recent instability in the Asian-Pacific economies and financial markets could 
adversely affect our business, operating results, and financial condition in 
future quarters as well. 

                                       18
<PAGE>

     CURRENCY FLUCTUATION. A large portion of our business is conducted in 
foreign currencies. Fluctuations in the value of foreign currencies relative 
to the U.S. dollar have caused and will continue to cause currency 
transaction gains and losses. We cannot predict the effect of exchange rate 
fluctuations upon future operating results. We may experience currency losses 
in the future. We currently maintain a foreign exchange hedging program, 
consisting principally of purchases of one month forward-rate currency 
contracts. However, our hedging activities may not adequately protect us 
against the risks associated with foreign currency fluctuations. 
     
     ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION.  On January 1, 1999, 
certain member states of the European Economic Community (the "EEC") will fix 
their respective currencies to a new currency, the euro. On that day, the 
euro will become a functional legal currency within these countries. During 
the three years beginning on January 1, 1999, business in these EEC member 
states will be conducted in both the existing national currency, such as the 
French franc or deutsche mark, and the euro. Companies operating in or 
conducting business in EEC member states will need to ensure that their 
financial and other software systems are capable of processing transactions 
and properly handling the existing currencies, as well as the euro. Our 
ASSETCENTER product was originally developed for the European market and is 
capable of managing currency data measured in euros. We are still assessing 
the impact that the euro will have on our internal systems and our other 
products. We will take corrective actions based on the results of such 
assessment. We have not yet determined the costs related to this problem. 
Issues related to the introduction of the euro may materially adversely 
affect our business, operating results, and financial condition. 
     
     CONTROL BY EXISTING STOCKHOLDERS. Based on shares outstanding as of 
September 30, 1998, PSI's officers, directors, and entities directly related 
to such individuals together beneficially own approximately 42.0% of the 
outstanding shares of PSI common stock. In particular, John J. Moores, 
Chairman of PSI's board of directors, owns approximately 36.3% of the 
outstanding shares. As a result, PSI's officers and directors will be able to 
control most matters requiring stockholder approval, including the election 
of directors and the approval of mergers, consolidations, and sales of all or 
substantially all of the assets of PSI. Such concentrated share ownership may 
prevent or discourage potential bids to acquire PSI unless the terms of 
acquisition are approved by such officers and directors. 
     
     PRODUCT DEVELOPMENT DELAYS. We have experienced product development 
delays in the past and may experience delays in the future. Difficulties in 
product development could delay or prevent the successful introduction or 
marketing of new or improved products. Any such new or improved products may 
not achieve market acceptance. Our current or future products may not conform 
to industry requirements. If we are unable, for technological or other 
reasons, to develop and introduce new and improved products in a timely 
manner, our business, operating results, and financial condition could be 
adversely affected. 
     
     Because our software products are complex, these products may contain 
errors that could be detected at any point in a product's life cycle. In the 
past we have discovered software errors in certain of our products and have 
experienced delays in shipment of our products during the period required to 
correct these errors. Despite testing by PSI and by current and potential 
customers, errors in our products may be found in the future. Detection of 
such errors may result in, among other things, loss of, or delay in, market 
acceptance and sales of our products, diversion of development resources, 
injury to our reputation, or increased service and warranty costs. If any of 
these results were to occur, our business, operating results, and financial 
condition could be materially adversely affected. 
     
     DEPENDENCE ON PROPRIETARY TECHNOLOGY. Our success will be heavily 
dependent upon proprietary technology. We rely primarily on a combination of 
copyright and trademark laws, trade secrets, confidentiality procedures and 
contractual provisions to protect our proprietary rights. Such laws provide 
only limited protection. 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. In 
particular, we may provide our licensees with access to our data model and 
other proprietary information underlying our licensed applications. Such 
means of protecting our proprietary rights may not be adequate. Additionally, 
our competitors may independently develop similar or superior technology. 
Policing unauthorized use of software is difficult and, while we do not 
expect software piracy to be a persistent problem, some foreign laws do not 
protect our 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. Litigation could result in 
substantial 

                                       19
<PAGE>

costs and diversion of resources to PSI and could materially adversely affect 
our business, operating results, and financial condition. 

     RISKS OF INFRINGEMENT. While we are not aware that any of our software 
product offerings infringes the proprietary rights of third parties, third 
parties may claim infringement with respect to our current or future 
products. We expect that software product developers will increasingly be 
subject to infringement claims as the number of products and competitors in 
the software industry segment grows and the functionality of products in 
different industry segments overlaps. Any such claims, with or without merit, 
could be time consuming, result in costly litigation, cause product shipment 
delays, or require us to enter into royalty or licensing agreements. Royalty 
or license agreements may not be available on acceptable terms or at all. As 
a result, infringement claims could have a material adverse affect on our 
business, operating results, and financial condition. 
     
     PRODUCT LIABILITY. Our license agreements with our customers typically 
contain provisions designed to limit exposure to potential product liability 
claims. Such limitation of liability provisions may, however, not be 
effective under the laws of certain jurisdictions. Although we have not 
experienced any product liability claims to date, the sale and support of our 
products entails the risk of such claims. We may be subject to such claims in 
the future. A product liability claim could materially adversely affect our 
business, operating results, and financial condition. 



                                       20
<PAGE>

     UNDESIGNATED PREFERRED STOCK.  PSI's 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, preferences, 
privileges, and restrictions of such preferred stock without any further vote 
or action by PSI's stockholders. The issuance of preferred stock allows PSI 
to have flexibility in connection with possible acquisitions and other 
corporate purposes. However, the issuance of shares of preferred stock may 
delay or prevent a change in control transaction without further action by 
the PSI stockholders. As a result, the market price of the PSI common stock 
and the voting and other rights of the holders of PSI common stock may be 
adversely affected. The issuance of preferred stock may result in the loss of 
voting control to others. PSI has no current plans to issue any shares of 
preferred stock. 
     
     CHARTER PROVISIONS. Certain provisions of PSI's charter documents 
eliminate the right of stockholders to act by written consent without a 
meeting and specify certain procedures for nominating directors and 
submitting proposals for consideration at stockholder meetings. Such 
provisions are intended to increase the likelihood of continuity and 
stability in the composition of the PSI board of directors and in the 
policies set by the board. These provisions also discourage certain types of 
transactions which may involve an actual or threatened change of control 
transaction. These provisions are designed to reduce the vulnerability of PSI 
to an unsolicited acquisition proposal. As a result, these provisions could 
discourage potential acquisition proposals and could delay or prevent a 
change in control transaction. These provisions are also intended to 
discourage certain tactics that may be used in proxy fights. However, they 
could have the effect of discouraging others from making tender offers for 
PSI's shares. As a result, these provisions may prevent the market price of 
PSI common stock from reflecting the effects of actual or rumored takeover 
attempts. These provisions may also prevent changes in the management of PSI. 
     
     ANTITAKEOVER EFFECTS OF DELAWARE LAW.  PSI is subject to the 
antitakeover provisions of the Delaware General Corporation Law, which 
regulates corporate acquisitions. The Delaware law prevents certain Delaware 
corporations, including PSI, from engaging, under certain circumstances, in a 
"business combination" with any "interested stockholder" for three years 
following the date that such stockholder became an interested stockholder. 
For purposes of Delaware law, a "business combination" includes, among other 
things, a merger or consolidation involving PSI and the interested 
stockholder and the sale of more than 10% of PSI's assets. In general, 
Delaware law defines an "interested stockholder" as any entity or person 
beneficially owning 15% or more of the outstanding voting stock of a company 
and any entity or person affiliated with or controlling or controlled by such 
entity or person. Under Delaware law, a Delaware corporation may "opt out" of 
the antitakeover provisions. PSI has not "opted out" of the antitakeover 
provisions of Delaware Law. 
     
     VOLATILITY OF TRADING PRICES. We completed the initial public offering 
of PSI common stock in April 1997. Prior to April 1997 no public market 
existed for PSI common stock. In the past, the market price of PSI common 
stock has varied greatly and the volume of PSI common stock traded has 
fluctuated greatly as well. We expect such fluctuation to continue. The 
fluctuation result due to a number of factors including: 

     - any shortfall in revenues or net income from revenues or net income 
       expected by securities analysts 
     - announcements of new products by PSI or our competitors
     - quarterly fluctuations in our financial results or the results of 
       other software companies, including those of our direct competitors 
     - changes in analysts' estimates of our financial performance, the 
       financial performance of our competitors, or the financial performance 
       of software companies in general 
     - general conditions in the software industry - changes in prices for 
       our products or the products of our competitors
     - changes in our revenue growth rates or the growth rates of our 
       competitors 
     - sales of large blocks of the PSI common stock conditions in the 
       financial markets in general 

     In addition, the stock market may from time to time experience extreme 
price and volume fluctuations. Many technology companies in particular have 
experienced such fluctuations. Often such fluctuations have been unrelated to 
the operating performance of the specific companies. The market prices of 
PSI's common stock may experience significant fluctuations in the future.

                                       21
<PAGE>

                                    PART II.
                               OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

RECENT SALES OF UNREGISTERED SECURITIES

     On September 23, 1998, the Company completed the acquisition of certain 
technology and other assets and liabilities from International Software 
Solutions and related entities and persons (collectively "ISS") pursuant to 
an Asset Purchase Agreement dated September 23, 1998. In connection with such 
acquisition, the Company issued 392,080 shares of its Common Stock to the 
sellers in reliance on the exemptions from the registration requirements of 
the Securities Act of 1933, as amended, set forth in Section 4(2) of and 
Regulation D under the Securities Act.

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

     The 1998 Annual Meeting of the Stockholders of the Company was held on 
September 9, 1998 in San Diego, California. John J. Moores, Christopher A. 
Cole, David A. Farley, Stephen P. Gardner, Richard A. Hosley, Charles E. 
Noell III, and Norris van den Berg were elected to the Board of Directors. In 
addition, the following items were acted upon:

1.   To approve an amendment to the Company's 1994 Stock Option Plan (the 
     "Stock Plan") to (i) increase the number of shares reserved for issuance 
     thereunder by 3,000,000 shares and (ii) provide for additional automatic 
     increases in the number of shares reserved for issuance thereunder such 
     that effective as of January 1 of each calendar year, beginning January 
     1, 1999 and ending January 1, 2003, the number of shares available for 
     issuance under the Stock Plan but not subject to outstanding options 
     will be not less than the lesser of 4% of the Company's outstanding 
     shares or 4,000,000 and to approve the material terms of the Stock Plan, 
     as amended.

<TABLE>
<CAPTION>
               VOTES FOR           VOTES AGAINST          ABSTENTIONS
               ---------           -------------          -----------
               <S>                 <C>                    <C>
               12,153,601            2,914,701               4,128
</TABLE>

2.   To approve an amendment to the Company's Amended and Restated 
     Certificate of Incorporation to increase the authorized number of 
     shares of the Company's Common Stock from 50,000,000 to 200,000,000.

<TABLE>
<CAPTION>
               VOTES FOR           VOTES AGAINST          ABSTENTIONS
               ---------           -------------          -----------
               <S>                 <C>                    <C>
               15,146,977            1,617,987               3,800
</TABLE>

3.   To approve the restricted stock agreement entered between the Company 
     and its President and Chief Executive Officer, pursuant to which the 
     Company issued 50,000 shares of Common Stock, which are subject to 
     accelerated vesting over six years if the Company achieves certain 
     financial milestones.

<TABLE>
<CAPTION>
               VOTES FOR           VOTES AGAINST          ABSTENTIONS
               ---------           -------------          -----------
               <S>                 <C>                    <C>
               13,693,828            1,414,382               4,900
</TABLE>

5.   Ratification of Arthur Andersen LLP as independent accountants for the 
     Company for the year ending March 31, 1999.

<TABLE>
<CAPTION>
               VOTES FOR           VOTES AGAINST          ABSTENTIONS
               ---------           -------------          -----------
               <S>                 <C>                    <C>
               16,749,120              2,600                17,044
</TABLE>


                                       22
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a)   Exhibits:

<TABLE>
<CAPTION>
           Exhibits     Exhibit Title
           --------     -------------------------------------------
           <S>          <C>
             27.1       Financial Data Schedule
</TABLE>

b)   Reports on Form 8-K:

     The Company filed on Form 8-K on July 31, 1998, in connection with its 
acquisition of Innovative Tech Systems, Inc.  The Company filed on Form 8-K 
on September 23, 1998 in connection with its acquisition of certain 
technology and other assets and liabilities of International Software 
Solutions.



                                       23
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized in the City of San Diego, California, 
this 16th day of November, 1998.


                                     PEREGRINE SYSTEMS, INC.


                                     By     /s/ David A. Farley
                                        -----------------------------
                                                David A. Farley
                                        Vice President, Finance, Chief Financial
                                             Officer (Principal Financial and 
                                                     Accounting Officer)



                                       24