<PAGE>

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

  /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 NUMBER)
           INCORPORATION OR
             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.
                                EXPLANATORY NOTE

           In October 1998, the Securities and Exchange Commission issued a
letter to the American Institute of Certified Public Accountants citing its
views on the proper procedures and practices that should be followed in purchase
accounting for acquired in-process research and development related to corporate
acquisitions. In this letter and in following public statements, the Commission
has affirmed its intention to require all companies to conform to these
announced views where purchase accounting for acquired in-process research and
development is involved.

           As of the date of this amendment, the Company has completed five
corporate acquisitions which have been accounted for using the purchase method
of accounting and which have resulted in charges associated with the valuation
of acquired in-process research and development. These acquisitions include
United Software, Inc. during the second quarter of fiscal 1998, Innovative Tech
Systems, Inc. and certain technology and other assets and liabilities of
International Software Solutions, both in the second quarter of fiscal 1999,
Prototype, Inc. in the fourth quarter of fiscal 1999 and FPrint UK Ltd. in the
first quarter of fiscal 2000. The Company believes that its periodic reports
filed in fiscal 1998 and 1999, which include charges for in-process research and
development resulting from those acquisitions that have been reported to date,
were made in accordance with generally accepted accounting principles and
established industry practices at the time. However, in response to and in
conformance with the Commission's announced guidelines on purchase accounting
for acquired in-process research and development, the Company is restating its
financial results for all periods extending back to the period ended September
30, 1997.

           This amendment to the Company's Quarterly Report on Form 10-Q, which
sets forth the Company's restated financial results for the period, does not
otherwise attempt to update the information included herein beyond the original
filing date of the report.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I.                        FINANCIAL INFORMATION                    PAGE NO.
-------                        ---------------------                    --------
<S>                                                                     <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.....................................      10


PART II.                       OTHER INFORMATION
                               ------------------
  Item 2. Changes in Securities.........................................      23

  Item 4. Submission of Matters to a Vote of Security Holders...........      23

  Item 6. Exhibits and Reports on Form 8-K..............................      24

Signatures..............................................................      25
</TABLE>


                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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

<TABLE>
<CAPTION>
                                                                                    RESTATED - SEE NOTE 1
                                                                                    ---------------------

                                                                                MARCH 31,        SEPTEMBER 30,
                                                                                  1998               1998
                                                                               -----------      ---------------
                                                                                (AUDITED)         (UNAUDITED)
                                                  ASSETS
<S>                                                                            <C>              <C>
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
Intangible assets and other...........................................            29,173            102,659
                                                                                 -------           --------
                                                                                 $83,568           $166,055
                                                                                 -------           --------
                                                                                 -------           --------

                                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable...................................................           $ 2,337           $  4,992
   Accrued expenses...................................................            11,103             17,653
   Deferred revenue...................................................            11,570             12,017
   Current portion of long-term debt..................................               151                398
                                                                                 -------           --------
      Total current liabilities.......................................            25,161             35,060
Long-term debt, net of current portion................................               966                927
Deferred revenue, net of current portion..............................             1,802              1,800
                                                                                 -------           --------
        Total liabilities.............................................            27,929             37,787
                                                                                 -------           --------

  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................................................           (16,423)           (36,909)
   Unearned portion of deferred compensation..........................            (1,493)            (1,303)
   Cumulative translation adjustment..................................              (553)              (496)
   Treasury stock, at cost............................................              (262)            (1,071)
                                                                                 -------           --------
        Total stockholders' equity....................................            55,639            128,268
                                                                                 -------           --------
                                                                                 $83,568           $166,055
                                                                                 -------           --------
                                                                                 -------           --------
</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>
                                                                                 RESTATED - SEE NOTE 1
                                                                                 ---------------------

                                                               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          2,334           2,312           4,121
   Amortization of intangible assets......................             -           4,936              -            6,520
   Acquired in-process research and development costs.....          6,955         21,866           6,955          21,866
                                                                  -------       --------         -------        --------
      Total costs and expenses............................         16,555         49,960          25,499          68,392
                                                                  -------       --------         -------        --------
Operating loss............................................         (4,352)       (20,306)         (2,281)        (16,988)
Interest income and other.................................            226            193             404             453
                                                                  -------       --------         -------        --------
Loss from operations before income taxes..................         (4,126)       (20,113)         (1,877)        (16,535)
Income tax expense........................................          1,048          2,209           1,880           3,951
                                                                  -------       --------         -------        --------
Net loss..................................................        $(5,174)      $(22,322)        $(3,757)       $(20,486)
                                                                  -------       --------         -------        --------
                                                                  -------       --------         -------        --------

Net loss per share - basic:
    Net loss per share....................................        $ (0.34)      $  (1.04)        $ (0.25)       $  (1.00)
                                                                  -------       --------         -------        --------
                                                                  -------       --------         -------        --------
    Weighted average common shares outstanding............         15,001         21,559          14,777          20,506
                                                                  -------       --------         -------        --------
                                                                  -------       --------         -------        --------

Net loss per share - diluted:
    Net loss per share....................................        $ (0.34)      $  (1.04)        $ (0.25)       $  (1.00)
                                                                  -------       --------         -------        --------
                                                                  -------       --------         -------        --------
    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>
                                                                              RESTATED - SEE NOTE 1
                                                                              ----------------------
                                                                                 SIX MONTHS ENDED
                                                                                   SEPTEMBER 30,
                                                                                   -------------
                                                                              1997              1998
                                                                           ----------        -----------
<S>                                                                        <C>               <C>
Cash flow from operating activities:
   Net loss....................................................             $(3,757)          $(20,486)
   Adjustments to reconcile net loss to net cash provided
      by (used in) operating activities:
   Depreciation and amortization...............................                 391              7,645
   Charge for acquired research and development................               6,955             21,866
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 restated to reflect a change in the original
accounting or the purchase price allocation related to the July 1998 acquisition
of Innovative Tech Systems, Inc., the September 1998 acquisition of certain
technology and other assets and liabilities of International Software Solutions,
and the September 1997 acquisition of United Software, Inc. The statements have
been prepared by Peregrine Systems, Inc. (the "Company") and have not been
audited. These financial statements, in the opinion of management, include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations and cash flows for
all periods presented. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K/A 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.

         The following table provides the effect of previously reported
condensed consolidated statements of operations for the three and six month
periods ended September 30, 1998.

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED                      SIX MONTHS ENDED
STATEMENT OF OPERATIONS                                   SEPTEMBER 30, 1998                     SEPTEMBER 30, 1998
-----------------------                                   ------------------                     ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS.)
                                                       SEPTEMBER 30,   SEPTEMBER 30,         SEPTEMBER 30,    SEPTEMBER 30,
                                                         1998             1998                  1998             1998
                                                     --------------  --------------        --------------  ----------------
                                                      (As reported)    (Restated)           (As reported)     (Restated)
<S>                                                  <C>              <C>                  <C>             <C>
Total revenues                                         $   29,654      $   29,654             $   51,404          $   51,404

Costs and expenses                                         23,158          23,158                 40,006              40,006
                                                       ----------      ----------             ----------          ----------

Income from operations excluding acquired in-
  process research and development costs and
  amortization of purchased intangible assets               6,496           6,496                 11,398              11,398
Amortization of purchased intangible assets                   343           4,936                    536               6,520
                                                       ----------      ----------             ----------          ----------

Income from operations excluding acquired
  in-process research and development costs                 6,153           1,560                 10,862               4,878
Acquired in-process research and development costs         91,765          21,866                 91,765              21,866
                                                       ----------      ----------             ----------          ----------
Loss from operations                                      (85,612)        (20,306)               (80,903)            (16,988)
Other income, net                                             193             193                    453                 453
Income tax expense                                          2,209           2,209                  3,951               3,951
                                                       ----------      ----------             ----------          ----------
Net loss                                               $  (87,628)     $  (22,322)            $  (84,401)         $  (20,486)
                                                       ----------      ----------             ----------          ----------
                                                       ----------      ----------             ----------          ----------

Basic net loss per share                               $    (4.06)     $    (1.04)            $    (4.12)         $    (1.00)
Diluted net loss per share                             $    (4.06)     $    (1.04)            $    (4.12)         $    (1.00)
</TABLE>



                                       6
<PAGE>

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........................................         (5,174)            (22,322)            (3,757)          (20,486)
  Weighted average common shares outstanding......         15,001              21,559             14,777            20,506
                                                       ----------           ---------          ---------         ---------
Basic loss per share..............................     $    (0.34)          $   (1.04)         $   (0.25)        $   (1.00)
                                                       ----------           ---------          ---------         ---------
                                                       ----------           ---------          ---------         ---------
DILUTED EARNINGS PER SHARE:
  Net loss........................................     $   (5,174)          $ (22,322)         $  (3,757)        $ (20,486)
                                                       ----------           ---------          ---------         ---------
                                                       ----------           ---------          ---------         ---------
  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............................     $    (0.34)          $   (1.04)         $   (0.25)        $   (1.00)
                                                       ----------           ---------          ---------         ---------
                                                       ----------           ---------          ---------         ---------
</TABLE>

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.


                                       7
<PAGE>

         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 periods subsequent to acquisition.
The Company allocated the fair values of the assets acquired between acquired
in-process research and development, developed technology and purchase price in
excess of identifiable assets. The results of the allocation of values between
the assets are as follows:

<TABLE>
<CAPTION>
         Assets                                                               Fair Market Value
         ------                                                               -----------------
                                                                               (in thousands)
<S>                                                                           <C>
Acquired In-Process Research and Development                                      $ 18,907
Purchase price in excess of identifiable assets                                     67,032
                                                                                  --------
Total                                                                             $ 85,939
                                                                                  --------
                                                                                  --------
</TABLE>

         As a result of the recently promulgated guidance by the SEC regarding
its accepted valuation methodology for determining in-process research and
development costs, the Company has adjusted the allocation of the purchase price
originally reported. The value of the acquired in-process technology was
computed using a discounted cash flow analysis on the anticipated income stream
of the related product sales. The value assigned to acquired in-process
technology was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value.

         The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are necessary
to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements. If the R&D project and technologies are not completed as planned,
they will neither satisfy the technical requirements of a changing market nor be
cost effective. As of the acquisition date Innovative had initiated development
efforts related to the next-generation SPAN-FM product line. This new product
suite was designed with a more flexible software architecture allowing for
advanced features and functionality.

         With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Innovative prior to
the close of the acquisition. Following is the estimated completion percentage,
estimated technology life and projected introduction date:

<TABLE>
<CAPTION>
                                                  Percent           Technology            Introduction
In-Process Technology                            Completed             Life                  Dates
---------------------                            ---------             ----                  -----
<S>                                              <C>                <C>                   <C>
Next-generation Innovative Technology               32%              5 years                1Q/2000
</TABLE>


                                       8
<PAGE>

         The technology development projects under development at the time of
the acquisition included the design of a new SPAN-FM product including most of
the 14 add-on modules. These projects required the majority of the existing
software code to be re-written in a more advanced, object-oriented software
language in order to achieve the desired attributes, including robust and
flexible architecture, rich user interface, extended asset management functions,
user-configurable workflow engine, user-defined wizards, and enhanced
scalability.

         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 acquired 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 allocated the fair values of the assets acquired
between acquired in-process research and development, developed technology and
purchase price in excess of identifiable assets. The results of the allocation
of values between the assets are as follows:

<TABLE>
<CAPTION>
         Assets                                                               Fair Market Value
         ------                                                               -----------------
                                                                                (in thousands)
<S>                                                                           <C>
Acquired In-Process Research and Development                                       $ 2,959
Purchase price in excess of identifiable assets                                     12,614
                                                                                  --------
Total                                                                             $ 15,573
                                                                                  --------
                                                                                  --------
</TABLE>

The value of the acquired in-process technology was computed using a discounted
cash flow analysis on the anticipated income stream of related product sales.
The value assigned to acquired in-process technology was determined by
estimating the costs to develop such technology into commercially viable
products, estimating the resulting net cash flows from the products and
discounting the net cash flows to their present value.

         As of the acquisition date, ISS had initiated research and development
efforts related to the product technologies that will reside in the advancement
of its remote management products. This new product line is designed to deliver
a state-of-the-art remote management solution.

         With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of ISS prior to the
close of the acquisition. Following is the estimated completion percentage,
estimated technology life and projected introduction date:

<TABLE>
<CAPTION>
                                                  Percent           Technology            Introduction
In-Process Technology                            Completed             Life                  Dates
---------------------                            ---------             ----                  -----
<S>                                              <C>                <C>                   <C>
Next-generation Innovative Technology               28%              5 years                1Q/1999
</TABLE>

         The acquired research and development at the time of the acquisition
included the development of a web manager based on java technology, enhancements
related to network architecture to gain increased compression and performance,
client gateway improvements, and a redesigned user interface. This will entail
reconstructing certain aspects of the existing software architecture to achieve
complete backward compatibility, as well as developing new technology for adding
the desired functionality.

         The Company believed that the foregoing assumptions used in
Innovative's and ISS's acquired in-process research and development analysis
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will transpire as estimated. The Company currently believes that
actual results have been consistent with forecasts with respect to acquired
in-process revenues. Because the Company does not account for expenses by
product, it is not possible to determine the actual expenses associated with the
acquired technologies. However, the Company believes that expenses incurred to
date


                                       9
<PAGE>

associated with the development and integration of the acquired in-process
research and development projects are approximately consistent with the
Company's previous estimates.

         The Company has completed many of the original research and development
projects in accordance with the plans outlined above. The Company continues to
work toward the completion of other projects. The majority of the projects are
on schedule, but delays may occur due to changes in technological and market
requirements for the Company's products. The risks associated with these efforts
are still considered high and no assurance can be made that Innovative's and
ISS's upcoming products will meet with market acceptance. Delays in the
introduction of certain products may adversely affect the Company's revenues and
earnings in future quarters.

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


                                       10
<PAGE>

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.

         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.



                                       11
<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
                                                           -------           -------           -------          -------
        Total revenues...........................            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               7.9              10.0              8.0
      Amortization of purchased intangible assets              -                16.7               -               12.7
      Acquired research and development costs....             57.0              73.7              29.9             42.5
                                                           -------           -------           -------           ------
        Total costs and expenses.................            135.6             168.5             109.8            133.0
                                                           -------           -------           -------          -------
   Operating income..............................            (35.6)            (68.5)             (9.8)           (33.0)
   Interest income and other.....................              1.8               0.7               1.7              0.9
                                                           -------           -------           -------          -------
   Income (loss) before income taxes.............            (33.8)            (67.8)             (8.1)           (32.1)
   Income tax expense............................              8.6               7.5               8.1              7.7
                                                           -------           -------           -------          -------
   Net income ..................................          (   42.4)%        (   75.3)%        (   16.2)%       (   39.8)%
                                                           -------           -------           -------          -------
                                                           -------           -------           -------          -------
</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 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


                                       12
<PAGE>

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 36% 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 37% 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
$2.3 million and $1.2 million in the second quarter of fiscal 1999 and 1998,
respectively, representing 8% and 10% of total revenues in the respective
periods, and $4.1 million and $2.3 million for the six months ended September
30, 1998 and 1997, respectively, representing 8% 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, 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.

         AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
amounted to $4.9 million, or 17% of total revenues, in the second fiscal quarter
of 1999, compared to zero in the second fiscal quarter of 1998. Amortization of
intangible assets amounted to $6.5 million, or 13% of total revenues, in the six
months ended September 30, 1998 compared to zero in the six months ended
September 30, 1997. The increases from fiscal 1998 to fiscal 1999 are due to the
full period amortization of intangible assets associated with the Apsylog
Acquisition and the partial period amortization of intangible assets associated
with the Innovative and ISS acquisitions during the September 1998


                                       13
<PAGE>

quarter.

         ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process
research and development costs of $18.9 and $3.0 million were incurred in the
second quarter of fiscal 1999 in connection with the Innovative and ISS
acquisitions, respectively. Acquired in-process research and development costs
of $7.0 million and no amortization costs were incurred in the second quarter of
fiscal 1998 in connection with the Apsylog Acquisition.

         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 and amortization of intangibles costs in the respective
periods. Excluding the effect of expensing the acquired in-process research and
development and amortization of intangibles costs, the effective tax rate for
the second quarter of fiscal 1998 and for the six months ended September 30,
1998 was 33%.

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 yet 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 assurances, 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


                                       14
<PAGE>

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 $36.9 million through September 30, 1998. This amount includes
approximately $7.0 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, $18.9 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 $3.0 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 $7.0 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 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


                                       15
<PAGE>

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 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


                                       16
<PAGE>

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 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


                                       17
<PAGE>

         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 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


                                       18
<PAGE>

           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 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.



                                       19
<PAGE>

         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.

         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


                                       20
<PAGE>

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 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.

         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


                                       21
<PAGE>

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.





                                       22
<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>

4. 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>


                                       23
<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 a current report on Form 8-K on July 31, 1998, in
connection with its acquisition of Innovative Tech Systems, Inc. The Company
filed a current report 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.





                                      24
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to its quarterly report on Form
10-Q to be signed on its behalf by the undersigned thereunto duly authorized in
the City of San Diego, California, this 21st day of April, 1999.

                                              PEREGRINE SYSTEMS, INC.


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







                                By            /s/ Matthew C. Gless
                                  ----------------------------------------------
                                                Matthew C. Gless
                                         Vice President, Finance and Chief
                                               Accounting Officer







                                       25