<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 DECEMBER 31, 1997

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

              FOR THE TRANSITION PERIOD FROM ________ TO ________.

                        COMMISSION FILE NUMBER: 0-2222209

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

            DELAWARE                                     95-3773312
         (STATE OR OTHER                              (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 December 31, 1997 was 18,039,030.
-------------------------------------------------------------------------------
<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 December 31,
             1997 (unaudited) and March 31, 1997...........................    3

           Condensed Consolidated Statements of Operations for the
            Three Months Ended December 31, 1997 and 1996 (unaudited)......    4

           Condensed Consolidated Statements of Operations for the
            Nine Months Ended December 31, 1997 and 1996 (unaudited).......    5

           Condensed Consolidated Statements of Cash Flows for the
            Nine Months Ended December 31, 1997 and 1996 (unaudited).......    6

           Notes to condensed Consolidated Financial Statements
            (unaudited)....................................................    7

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations.............................   10


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

   Item 2. Changes in Securities...........................................   21

   Item 4. Submission of Matters to a Vote of Security Holders.............   21

   Item 6. Exhibits and Reports on Form 8-K................................   21

Signatures.................................................................   22
</TABLE>

                                       2

<PAGE>

                                     PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                             PEREGRINE SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                     RESTATED - SEE NOTE 1
                                                                                 -----------------------------
                                                                                 MARCH 31,        DECEMBER 31,
                                                                                   1997              1997
                                                                                 ---------        ------------
                                                                                 (AUDITED)        (UNAUDITED)
<S>                                                                              <C>              <C>
                                                  ASSETS
Current Assets:
   Cash and cash equivalents..........................................          $    305          $ 15,503
   Accounts receivable, net of allowance for doubtful accounts of
      $220 and $462, respectively.....................................            10,191            17,325
   Financed receivables...............................................             1,182               968
   Deferred tax assets................................................             1,752                 -
   Other current assets...............................................               924             2,109
                                                                                --------          --------
        Total current assets..........................................            14,354            35,905
Property and equipment, net...........................................             4,364             4,855
Intangible assets.....................................................                 -            30,079
Other assets..........................................................             1,020               552
                                                                                --------          --------
                                                                                $ 19,738          $ 71,391
                                                                                --------          --------
                                                                                --------          --------
                              LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
   Accounts payable...................................................          $    916          $  2,368
   Accrued expenses...................................................             6,079            12,024
   Bank line of credit................................................             1,974                 -
   Deferred revenue...................................................             8,419             8,954
   Current portion of long-term debt..................................               497               197
   Current portion of capital lease obligation........................               364                32
   Net liabilities of discontinued operation..........................               170                 -
                                                                                --------          --------
   Total current liabilities..........................................            18,419            23,575
Long-term debt, net of current portion................................             1,395               921
Deferred revenue, net of current portion..............................             2,773             2,691
                                                                                --------          --------
        Total liabilities.............................................            22,587            27,187
                                                                                --------          --------
Stockholders' Equity (Deficit):
   Preferred stock....................................................                 -                 -
   Common stock.......................................................                13                18
   Additional paid-in capital.........................................            15,081            64,642
   Accumulated deficit................................................           (15,807)          (18,176)
   Unearned portion of deferred compensation..........................            (1,748)           (1,482)
   Cumulative translation adjustment..................................              (388)             (536)
   Treasury stock, at cost............................................                 -              (262)
                                                                                --------          --------
        Total stockholders' equity (deficit)..........................            (2,849)           44,204
                                                                                --------          --------
                                                                                $ 19,738          $ 71,391
                                                                                --------          --------
                                                                                --------          --------
</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 DECEMBER 31,
                                                                      -------------------------------
                                                                          1996              1997
                                                                        -------           -------
<S>                                                                     <C>               <C>
Revenues:
   Licenses...............................................              $ 6,076           $12,374
   Maintenance and services...............................                3,451             6,135
                                                                        -------           -------
      Total revenues......................................                9,527            18,509
                                                                        -------           -------
Costs and Expenses:
   Cost of licenses.......................................                   50                98
   Cost of maintenance and services.......................                1,144             2,839
   Sales and marketing....................................                3,895             6,797
   Research and development...............................                1,568             2,467
   General and administrative.............................                1,095             1,908
   Amortization of Intangibles............................                    -             1,584
                                                                        -------           -------
         Total costs and expenses.........................                7,752            15,693
                                                                        -------           -------
      Operating income....................................                1,775             2,816
Interest and other income (expense), net..................                 (137)              204
                                                                        -------           -------
Income before income taxes................................                1,638             3,020
Income tax expense........................................                    -             1,632
                                                                        -------           -------
Net income................................................              $ 1,638           $ 1,388
                                                                        -------           -------
                                                                        -------           -------
Earnings per share:  diluted
Net earnings per share....................................              $  0.11           $  0.07
                                                                        -------           -------
                                                                        -------           -------
Weighted average common and common equivalent shares
   outstanding............................................               14,519            20,110
                                                                        -------           -------
                                                                        -------           -------
Earnings per share:  basic
Net earnings per share....................................              $  0.13           $  0.08
                                                                        -------           -------
                                                                        -------           -------
Weighted average common and common equivalent shares
   outstanding............................................               12,904            18,039
                                                                        -------           -------
                                                                        -------           -------
</TABLE>

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

                                       4
<PAGE>

                             PEREGRINE SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                          RESTATED - SEE NOTE 1
                                                                      ------------------------------
                                                                      NINE MONTHS ENDED DECEMBER 31,
                                                                      ------------------------------
                                                                          1996             1997
                                                                        -------          --------
<S>                                                                   <C>                <C>
Revenues:
   Licenses...............................................             $ 13,932          $ 25,741
   Maintenance and services...............................               10,595            15,986
                                                                        -------          --------
      Total revenues......................................               24,527            41,727
                                                                        -------          --------
Costs and Expenses:
   Cost of licenses.......................................                  155               226
   Cost of maintenance and services.......................                3,423             6,715
   Sales and marketing....................................               11,217            15,722
   Research and development...............................                4,368             5,770
   General and administrative.............................                2,780             4,220
   Amortization of Intangibles............................                    -             1,584
   Acquired research and development costs................                    -             6,955
                                                                        -------          --------
      Total costs and expenses............................               21,943            41,192
                                                                        -------          --------
      Operating income....................................                2,584               535
Interest and other income (expense), net..................                 (366)              608
                                                                        -------          --------
Income before income taxes................................                2,218             1,143
Income tax expense........................................                    -             3,512
                                                                        -------          --------
Net income (loss).........................................              $ 2,218          $ (2,369)
                                                                        -------          --------
                                                                        -------          --------
Earnings (loss) per share: diluted
Net earnings (loss) per share.............................              $  0.15          $  (0.15)
                                                                        -------          --------
                                                                        -------          --------
Weighted average common and common equivalent shares
   outstanding............................................               14,438            15,510
                                                                        -------          --------
                                                                        -------          --------
Earnings (loss) per share:  basic
Net earnings (loss) per share.............................              $  0.17          $  (0.15)
                                                                        -------          --------
                                                                        -------          --------
Weighted average common and common equivalent shares
   outstanding............................................               12,901            15,510
                                                                        -------          --------
                                                                        -------          --------
</TABLE>

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

                                       5
<PAGE>

                             PEREGRINE SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                               RESTATED - SEE NOTE 1
                                                                           ------------------------------
                                                                           NINE MONTHS ENDED DECEMBER 31,
                                                                           ------------------------------
                                                                                1996            1997
                                                                           -------------    ------------ 
<S>                                                                        <C>              <C>
Cash flow from operating activities:
   Net income..................................................               $2,218         $ (2,369)
  Adjustments to reconcile net income to net cash provided by
        (used in) operating activities:
        Depreciation and amortization..........................                1,373            2,985
        Charge for acquired in process research and 
              development......................................                    -            6,955
  Increase (decrease) in cash resulting from changes, net of
      business acquired, in:
        Accounts receivable....................................              (5,407)           (7,728)
        Financed receivables...................................                   -               214
        Deferred tax asset.....................................                   -             1,752
        Other current assets...................................                   74             (320)
        Other long-term assets.................................                 (641)             468
        Accounts payable.......................................                 (397)             705
        Accrued expenses.......................................                1,605            1,228
        Deferred revenue.......................................                1,854             (366)
                                                                             -------          -------
                                                                                 679            3,524
                                                                             -------          -------
        Net cash used by discontinued business.................                 (973)            (170)
                                                                             -------          -------
           Net cash provided by (used in) operating activities.                 (294)           3,354
                                                                             -------          -------
Cash flows from investing activities:
   Purchases of property and equipment.........................                 (382)          (1,291)
   Proceeds from sale of product line..........................                  700                -
   Cash acquired in acquisition................................                    -              582
                                                                             -------          -------
        Net cash provided by (used in) operating activities....                  318             (709)
                                                                             -------          -------
Cash flows from financing activities:
   Proceeds (repayment) on bank line of credit, net............                1,485           (3,387)
   Repayments of long-term debt, net...........................                  (96)          (2,336)
   Issuance of common stock....................................                   15           19,060
   Treasury stock purchased....................................                    -             (262)
   Principal payments under capital lease obligation...........                 (269)            (374)
                                                                             -------          -------
          Net cash provided by (used in) financing activities..                1,135            12,701
                                                                             -------          -------
Effect of exchange rate changes on cash........................                 (325)            (148)
                                                                             -------          -------
Net increase in cash...........................................                  834           15,198
Cash and equivalents, beginning of period......................                  437              305
                                                                             -------          -------
Cash and equivalents, end of period............................              $ 1,271          $15,503
                                                                             -------          -------
                                                                             -------          -------
Supplemental disclosure of cash flow information: Cash paid
  during the period for:
      Interest.................................................              $   337          $    34
      Income taxes.............................................              $     -          $   567
Supplemental disclosures of noncash investing and financing activities:
      Stock issued and other noncash consideration for
          acquisition..........................................              $     -          $38,617
</TABLE>
              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       6
<PAGE>

                             PEREGRINE SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  BASIS OF PRESENTATION

         The accompanying condensed consolidated balance sheet as of December 
31, 1997, the condensed consolidated statements of operations for the three 
and nine month periods ended December 31, 1997 and 1996, and the condensed 
consolidated statements of cash flows for the nine month periods ended 
December 31, 1997 and 1996 have been restated to reflect a change in the 
original accounting or the purchase price allocation related to 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 filed for the year ended March 31, 1997, 
which provides further information regarding the Company's significant 
accounting policies and other financial and operating information. Interim 
operating results are not necessarily indicative of operating results for the 
full year 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 nine month 
periods ended December 31, 1997.
<TABLE>
<CAPTION>
                                                     
STATEMENT OF OPERATIONS                                           THREE MONTHS ENDED                      NINE MONTHS ENDED 
-----------------------                                            DECEMBER 31, 1997                      DECEMBER 31, 1997 
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS.)                          -----------------                      ----------------- 
                                                             DECEMBER 31,    DECEMBER 31,          DECEMBER 31,     DECEMBER 31,
                                                                 1997            1997                  1997             1997
                                                             -------------   ------------          -------------    ------------
                                                             (As reported)    (Restated)           (As reported)     (Restated)
<S>                                                          <C>             <C>                   <C>               <C>
        Total revenues                                         $ 18,509        $ 18,509              $ 41,727         $ 41,727
        Costs and expenses                                       14,109          14,109                32,653           32,653
                                                               --------        --------              --------         --------
        Income from operations excluding acquired in-
           process research and development costs and
           amortization of purchased intangible assets            4,400           4,400                 9,074            9,074
        Amortization of purchased intangible assets                 193           1,584                   193            1,584
                                                               --------        --------              --------         --------
        Income from operations excluding acquired
           in-process research and development costs              4,207           2,816                 8,881            7,490
        Acquired in-process research and development costs            -               -                34,775            6,955
                                                               --------        --------              --------         --------
        Income (loss) from operations                             4,207           2,816               (25,894)             535
        Other income, net                                           204             204                   608              608
        Income tax expense                                        1,632           1,632                 3,512            3,512
                                                               --------        --------              --------         --------
        Net income (loss)                                       $ 2,779         $ 1,388              $(28,798)        $ (2,369)
                                                               --------        --------              --------         --------
                                                               --------        --------              --------         --------
        Basic net income (loss) per share                       $  0.15         $  0.08              $  (1.86)        $  (0.02)
        Diluted net income (loss) per share                     $  0.14         $  0.07              $  (1.86)        $  (0.02)
</TABLE>
NOTE 2.  USE OF ESTIMATES

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

                                       7
<PAGE>

NOTE 3. CASH AND CASH EQUIVALENTS

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

NOTE 4.  COMPUTATION OF NET INCOME PER SHARE

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

NOTE 5.  LINE OF CREDIT

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

NOTE 6.  ACQUISITION

         On August 29, 1997, the Company's Board of Directors approved the 
acquisition of Apsylog S.A., a French corporation based in Paris, France, 
through the acquisition of all of the outstanding shares of United Software, 
Inc., a Delaware corporation and the parent corporation of Apsylog. The 
acquisition, which was completed September 19, 1997, was pursuant to an 
Agreement and Plan of Reorganization dated effective as of August 29, 1997. 
United Software, Inc. develops decision software solutions designed for asset 
management. The consideration for the stock of United Software, Inc. included 
1,916,213 shares of Peregrine Common Stock (including 32,021 shares of Common 
Stock issuable upon exercise of outstanding options assumed by the Company, 
all of which were fully vested at the time of the acquisition) valued at 
$15.92 per share or $30,506,000 plus an additional $8,111,000 consisting of 
expenses directly related to the acquisition and the assumption of net 
liabilities of United Software, Inc. 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 of 
United Software 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                 $  6,955
Purchase price in excess of identifiable assets                31,684
                                                             --------
Total                                                        $ 38,639
                                                             --------
                                                             --------
</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.

                                       8
<PAGE>

         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 Apsylog had 
initiated development efforts related to the product features and 
functionality that will reside in the advancement of its Asset Manager 
Technology. This new product line is designed to deliver state of the art 
asset management technology.

         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 Apsylog                        38%         5 years          2Q/1999
</TABLE>

         The technology development projects under development at the time of 
the acquisition included the development of a leasing module, incorporating 
advanced reporting capabilities, providing a new user interface and 
mail/action improvements, enhancing contract management, and improving 
response time. This will involve reconstructing certain aspects of the 
software architecture of the existing products to achieve complete 
compatibility, as well as developing new technology for adding the desired 
functionality. No assurance can be given, however, that the underlying 
assumptions used to estimate expected product 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 
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 believed that the foregoing assumptions used in 
Apsylog'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 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 Apsylog'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.

                                       9
<PAGE>

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

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

OVERVIEW

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

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

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

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

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

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

                                       10
<PAGE>

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

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

         RESULTS OF OPERATIONS

         The following table sets forth for the periods indicated selected 
consolidated statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
                                                                  THREE MONTHS        NINE MONTHS
                                                                      ENDED              ENDED
                                                                   DECEMBER 31,       DECEMBER 31,
                                                                  -------------      -------------
                                                                  1996     1997      1996     1997
                                                                  ----     ----      ----     ----
<S>                                                               <C>      <C>       <C>      <C> 
STATEMENT OF OPERATIONS DATA:
  Revenues:
      Licenses.........................................           63.8%     66.9%     56.8%    61.7%
      Maintenance and services..........................          36.2      33.1      43.2     38.3
                                                                 -----     -----     -----    -----
        Total revenues..................................         100.0     100.0     100.0    100.0
  Costs and expenses:
      Cost of licenses..................................           0.5       0.5       0.6      0.5
      Cost of maintenance and services..................          12.0      15.3      14.0     16.1
      Sales and marketing...............................          40.9      36.7      45.7     37.7
      Research and development..........................          16.5      13.4      17.8     13.8
      General and administrative........................          11.5      10.3      11.4     10.1
      Acquired research and development costs...........            -         -         -      16.7
      Amortization of intangible assets.................            -        8.6        -       3.8
                                                                 -----     -----     -----    -----
        Total costs and expenses........................          81.4      84.8      89.5     98.7
                                                                 -----     -----     -----    -----
   Operating and other income...........................          18.6      15.2      10.5      1.3
   Interest and other income (expense), net.............          (1.4)      1.1      (1.5)     1.4
                                                                 -----     -----     -----    -----
   Income before income taxes...........................          17.2      16.3       9.0      2.7
   Income tax expense...................................            -        8.8        -       8.4
                                                                 -----     -----     -----    -----
   Net income...........................................          17.2%      7.5%      9.0%    (5.7)%
                                                                 -----     -----     -----    -----
                                                                 -----     -----     -----    -----
</TABLE>
THREE MONTH AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996

REVENUES

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

                                       11
<PAGE>

         LICENSES. License revenues were $12.4 million and $6.1 million in 
the third quarter of fiscal 1998 and 1997, respectively, representing 67% and 
64% of total revenues in the respective periods and $25.7 million and $13.9 
million for the nine months ended December 31, 1997 and 1996, respectively, 
representing 62% and 57% of total revenues for such periods. License revenues 
increased 104% in the third quarter of the fiscal 1998 compared to the third 
quarter of fiscal 1997. For the nine months December 31, 1997, license 
revenues increased 85% compared to the nine month period ended December 31, 
1997. The increases in license revenues are attributable to increased demand 
for new licenses of SERVICECENTER and the first quarterly effect of 
ASSETCENTER revenue, additional seats purchased by existing SERVICECENTER and 
ASSETCENTER customers, more effective corporate marketing programs, improved 
sales force productivity, and expansion of the Company's sales force.

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

COSTS AND EXPENSES

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

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

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

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

                                       12
<PAGE>

         GENERAL AND ADMINISTRATIVE. General and administrative expenses were 
$1.9 million and $1.1 million in the third quarter of fiscal 1998 and 1997, 
respectively, representing 10% and 12% of total revenues in the respective 
periods and $4.2 million and $2.8 million for the nine months ended December 
31, 1997 and 1996, respectively, representing 10% and 11% of the total 
revenues, respectively. The dollar increase from fiscal 1997 to 1998 are 
attributable primarily to administrative personnel additions to support the 
Company's growth, including Apsylog, and the additional administrative 
expenses associated with becoming a publicly traded company.

         AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets 
amounted to $1.6 million, or 9% of total revenues, in the third fiscal 
quarter of 1998, compared to zero in the third fiscal quarter of 1997. 
Amortization of intangible assets amounted to $1.6 million, or 4% of total 
revenues, in the nine months ended December 31, 1997 compared to zero in the 
nine months ended December 31, 1996. The increases from fiscal 1997 to fiscal 
1998 are due to the full period amortization of intangible assets associated 
with the Apsylog Acquisition.

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

                                       13
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

         LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES. Through December 
31, 1997, the Company has recorded cumulative net losses of approximately 
$18.2 million, including approximately $7.0 million related to the write-off 
of acquired in-process research and development in connection with the 
acquisition of United Software, Inc. including its wholly-owned operating 
subsidiary Apsylog S.A., a corporation organized under the laws of France 
("Apsylog") in September 1997 (the "Apsylog Acquisition"). In recent years, 
the product lines of both the Company and Apsylog have changed substantially. 
The Company's SERVICECENTER product, from which the Company derived 
substantially all of its license revenues for the fiscal year ended March 31, 
1997 and for the nine months ended December 31, 1997, only began shipping in 
mid-1995. Apsylog's ASSETCENTER product only began shipping in mid-1996. As a 
result, prediction of the Company's future operating results is difficult, if 
not impossible. Although the Company achieved profitability during the year 
ended March 31, 1997 and for the nine months ended December 31, 1997 
(excluding the impact of the $7.0 million charge related to acquired 
in-process research and development in connection with the Apsylog 
Acquisition), there can be no assurance that the Company will be able to 
remain profitable on a quarterly or annual basis. In addition, the Company 
does not believe that the growth in revenues it has experienced in recent 
years is indicative of future revenue growth or future operating results. See 
"--Product Concentration; Dependence on Market Acceptance of Enterprise 
Service Desk Software" and "--Risks Associated with Apsylog Acquisition and 
Future Acquisitions."

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

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

                                       14
<PAGE>

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

         The Company's product strategy has focused on integrating a broad 
array of IT management applications with other traditional internal help desk 
applications to create an Enterprise Service Desk. The market for Enterprise 
Service Desk software is relatively new and is characterized by ongoing 
technological developments, frequent new product announcements and 
introductions, evolving industry standards and changing customer 
requirements. The Company's future financial performance will depend in part 
on continued growth in the number of organizations implementing Enterprise 
Service Desk solutions.

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

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

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

                                       15
<PAGE>

consideration to be paid in cash, shares of stock or a combination of cash 
and stock. In the event of such an acquisition or investment, the factors 
described herein could have a material adverse effect on the Company's 
business, financial condition and results of operations.

         DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL The 
Company's ability to achieve anticipated revenues is substantially dependent 
on its ability to attract and retain skilled personnel, especially sales, 
service and implementation personnel. Other than certain employees of 
Apsylog, none of the Company's employees, including its senior management, is 
bound by an employment or non-competition agreement, and the Company does not 
maintain key man life insurance on any employee. The loss of the services of 
one or more of the Company's executive officers or key employees or the 
decision of one or more of such officers or employees to join a competitor or 
otherwise compete directly or indirectly with the Company could have a 
material adverse effect on the Company's business, operating results and 
financial condition. In January 1998, the Company's President and Chief 
Executive Officer resigned. The Company has appointed Stephen P. Gardner, its 
Executive Vice President, to act as interim Chief Executive Officer, until 
such time as a permanent Chief Executive Officer is identified. Although the 
Company believes it will be able to identify and retain a permanent Chief 
Executive Officer, any delays in hiring such an individual or market 
uncertainty concerning the Company's management could have an adverse effect 
on results of operations in a particular quarter or result in volatility in 
the Company's stock price.

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

         COMPETITION. The market for the Company's products is highly 
competitive, fragmented and subject to rapid technological change and 
frequent new product introductions and enhancements. Competitors vary in size 
and in the scope and breadth of the products and services offered. The 
Company encounters competition from a number of sources, including (i) 
providers of internal help desk software applications such as Remedy 
Corporation and Software Artistry, Inc. (recently acquired by Tivoli Systems, 
Inc. ("Tivoli")), (ii) customer interaction software companies such as 
Clarify Inc. and The Vantive Corporation, whose products include internal 
help desk applications, (iii) information technology and systems management 
companies such as International Business Machines Corporation ("IBM"), 
Computer Associates International, Inc. ("Computer Associates"), McAfee 
Associates, Inc. and Hewlett-Packard Company ("Hewlett-Packard") through its 
recent acquisition of PROLIN, (iv) providers of asset management software, 
and (v) the internal information technology departments of those companies 
with help desk requirements. Because barriers to entry in the software market 
are relatively low, the Company anticipates additional competition from other 
established and emerging companies as the market for Enterprise Service Desk 
applications expands. In addition, current and potential competitors have 
established or may in the future establish cooperative relationships among 
themselves or with third parties. The Company expects software industry 
consolidation to occur in the future, and it is possible that new competitors 
or alliances among competitors may emerge and rapidly acquire significant 
market share. For example, the Company's ability to sell its Enterprise 
Service Desk products depends in part on their compatibility with and support 
by providers of system management products, including Tivoli, Computer 
Associates, and Hewlett-Packard. Both Tivoli and Hewlett-Packard have 
recently acquired providers of help desk software products. The decision of 
one or more providers of system management products to close their systems to 
competing vendors like the Company could have an adverse effect on the 
Company's ability to sell its products. Increased competition, including 
increased competition as a result of acquisitions of help desk software 
vendors by systems management companies, is likely to result in price 
reductions, reduced gross margins and loss of market share, any of which 
could have a material adverse effect on the Company's business, operating 
results and financial condition. Some of the Company's current and many of 
its potential competitors have significantly greater financial, technical, 
marketing and other resources than the Company. As a result, they may be able 
to respond more quickly to new or emerging technologies and changes in 
customer requirements or to devote greater resources to the development, 
promotion and sale of their products than 

                                       16
<PAGE>

the Company. There can be no assurance that the Company will be able to 
compete successfully against current and future competitors or that 
competitive pressures faced by the Company will not have a material adverse 
effect on the Company's business, operating results and financial condition.

         MANAGEMENT OF GROWTH. The Company's business has grown substantially 
in recent periods, with total revenues increasing from $19.6 million in 
fiscal 1995 to $23.8 million in fiscal 1996 and to $35.0 million in fiscal 
1997 and to $41.7 million in the first nine months of fiscal 1998. If the 
Company is successful in achieving its growth plans, including the 
integration of Apsylog, such growth is likely to place a significant burden 
on the Company's operating and financial systems, resulting in increased 
responsibility for senior management and other personnel within the Company. 
The Company's ability to compete effectively and to manage future growth, if 
any, and its future operating results will depend in part on the ability of 
its officers and other key employees to implement and expand operational, 
customer support and financial control systems and to expand, train and 
manage its employee base. In particular, in connection with the Apsylog 
Acquisition, the Company will be required to integrate additional personnel 
and to augment or replace Apsylog's existing financial and management 
systems. Such integration could result in a disruption of operations of the 
Company or Apsylog and could adversely affect the Company's financial 
results. There can be no assurance that the Company's existing management or 
any new members of management will be able to augment or improve existing 
systems and controls or implement new systems and controls in response to 
future growth, if any. The Company's failure to do so could have a material 
adverse effect on the Company's business, operating results and financial 
condition. See "--Dependence on Key Personnel; Ability to Recruit Personnel" 
and "--Risks Associated with Apsylog Acquisition and Future Acquisitions."

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

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

         INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. International sales 
represented approximately 29% and 32% of the Company's total revenues in 
fiscal 1996 and fiscal 1997, respectively, and 36% for the nine months ended 
December 31, 1997. The Company currently has international sales offices in 
London, Paris, Frankfurt, Amsterdam, and Copenhagen. Apsylog currently has 
international offices in Paris and Munich. The Company believes that its 
continued growth and profitability will require continued expansion of its 
international operations, particularly in Europe, Latin America and the 
Pacific Rim. Accordingly, the Company intends to expand its international 
operations and enter additional international markets, which will require 
significant management attention and financial resources. In addition, the 
Company's international operations are subject to a variety of risks 
associated with conducting business internationally, including fluctuations 
in currency exchange rates, longer payment cycles, difficulties in staffing 
and managing international operations, problems in collecting accounts 

                                       17
<PAGE>

receivable, seasonal reductions in business activity during the summer months 
in Europe and certain other parts of the world, increases in tariffs, duties, 
price controls or other restrictions on foreign currencies, and trade 
barriers imposed by foreign countries, any of which could have a material 
adverse effect on the Company's business, operating results and financial 
condition. In particular, recent instability in the Asian-Pacific economies 
and financial markets, could have an adverse effect on the Company's 
operating results in future quarters. In addition, the Company has only 
limited experience in developing localized versions of its products and 
marketing and distributing its products internationally. There can be no 
assurance that the Company will be able to successfully localize, market, 
sell and deliver its products internationally. The inability of the Company 
to expand its international operations successfully and in a timely manner 
could have a material adverse effect on the Company's business, operating 
results and financial condition.

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

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

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

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

                                       18
<PAGE>

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

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

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

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

         VOLATILITY OF STOCK PRICE. The Company completed its initial public 
offering of Common Stock in April 1997, prior to which time no public market 
existed for the Company's Common Stock. The market price of the Company's 
Common Stock has been since the initial public offering and is expected to 
continue to be subject to significant fluctuations in the future based on a 
number of factors, including any shortfall in the Company's revenues or net 
income from revenues or net income expected by securities analysts; 
announcements of new products by the Company or its competitors; quarterly 
fluctuations in the Company's financial results or the results of other 
software companies, including those of direct competitors of the Company; 
changes in analysts' estimates of the Company's financial performance, the 
financial performance of competitors, or the financial performance of 
software companies in general; general conditions in the software industry; 
changes in prices for the Company's products or competitors' products; 
changes in revenue growth rates for the Company or its competitors; sales of 
large blocks of Common Stock by holders whose ability to sell has been 
limited by restrictions under applicable 

                                       19
<PAGE>

securities laws and conditions in the financial markets. In addition, the 
stock market may from time to time experience extreme price and volume 
fluctuations, which particularly affect the market price for the securities 
of many technology companies and which have often been unrelated to the 
operating performance of the specific companies. There can be no assurance 
that the market price of the Company's Common Stock will not experience 
significant fluctuations in the future.



                                       20

<PAGE>

                                    PART II.
                                OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

         None.

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

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a)   Exhibits:

<TABLE>
<CAPTION>
         Exhibits  Exhibit Title
         --------  -------------
         <S>       <C>
          10.23*   Severance Settlement Agreement and Release of Claims
                   between Alan H. Hunt and the Company, dated January 30, 1998.
          11.1     Statement regarding computation of per share earnings.
          27.1     Financial Data Schedule
</TABLE>

  *Exhibit filed with the Company's original Quarterly Report on Form 10-Q 
for the quarter ended December 31, 1997.

b)  Reports on Form 8-K:

         None.

                                       21

<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


                                       22