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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(mark one)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
     EXCHANGE ACT OF 1934

      For the transition period from _______________ to __________________

                         Commission File Number 0-23852

                      PROJECT SOFTWARE & DEVELOPMENT, INC.
             (Exact name of registrant as specified in its charter)

           MASSACHUSETTS                                 04-2448516
   (State or other jurisdiction of                   (I.R.S. employer
    incorporation or organization)                 identification number)

                 100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730
          (Address of principal executive offices, including zip code)
                                 (781) 280-2000
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None
           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)
                                ----------------

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 filing
requirements for the past 90 days.
Yes     X           No
    ---------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K   Yes            No
                                 ---------     --------

As of December 15, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $137,826,709 based on the
last sale price of such stock on such date.

Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 22,074,351 shares of common stock, $.01 par value per share,
as of December 15, 2000.

                       DOCUMENT INCORPORATED BY REFERENCE
     Certain portions of the Company's Definitive Proxy Statement for its 2000
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Annual Report on Form 10-K.

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                                EXPLANATORY NOTE

This Annual Report on Form 10-K, as well as documents incorporated herein by
reference, may contain forward-looking statements (within the meaning of section
27A of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended). The following and similar expressions
identify forward-looking statements: "expects", "anticipates", and "estimates".
Forward-looking statements include, but are not limited to, statements related
to: the Company's plans, objectives, expectations and intentions; the timing of,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. Actual results may
differ materially from those suggested by the forward-looking statements for
various reasons, including those discussed under "Factors Affecting Future
Performance." These forward-looking statements speak only as of the date of this
Annual Report, or in the case of forward-looking statements in documents
incorporated by reference, as of the dates of those documents.

Project Software & Development, Inc., incorporated in May 1968, under the laws
of the Commonwealth of Massachusetts, is hereinafter sometimes referred to as
the "Company", "PSDI", "our" or "we".

MAXIMO(R) is a registered trademark of PSDI. MAXIMO Enterprise(TM), MAXIMO
Extended Enterprise(TM), MAXIMO Buyer(TM), Struxure(R), Standard Modifier
Dictionary(TM), INTERMAT(R) and SMD(TM) are trademarks of PSDI or its
subsidiaries. MRO.COM(TM), mroMarketplace(TM), mroSupplier(TM),
mroDistributor(TM), mroManufacturer(TM), and mroConnect(TM) are trademarks and
service marks of PSDI or its subsidiaries. MRO Software(TM) is a trademark and
an assumed name of PSDI. Microsoft(R) is a registered trademark of Microsoft
Corporation and Oracle(R) is a registered trademark of Oracle Corporation. Other
company and product names may be trademarks of the respective companies.

(C)2000 Project Software & Development, Inc. All rights reserved.

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                                     PART I

ITEM 1. BUSINESS

STRATEGIC REPOSITIONING

On December 11, 2000 the Company's Board of Directors voted to change the
Company's name to MRO Software, Inc., and to propose this change at the next
annual meeting of the Company's stockholders (the "Annual Meeting"). This change
will become legally effective immediately following the Annual Meeting, assuming
that the Company's stockholders vote in favor of the change. The Company also
intends to change its NASDAQ trading symbol from "PSDI" to "MROI", effective at
approximately the same time.

As of September 30, 2000, the Company reported revenues related to two industry
segments: the development, marketing and support of asset maintenance management
software (MAXIMO) and the development, marketing and support of Internet
e-commerce software products and the related network services (MRO.COM). In
December 2000, the Company announced the repositioning of its Internet-based
business-to-business software products. Commencing in fiscal 2001, the Company
will operate in two new reportable industry segments: (1) the development,
marketing and support of the "Demand-Side" software products and services,
consisting of MAXIMO Enterprise and MAXIMO Extended Enterprise (which includes
MAXIMO Buyer, the e-procurement application that was integrated with MAXIMO
during fiscal 2000), and (2) the development, marketing and support of the
MRO.COM "Supply-Side" software products and services, and the Internet-based
content management tools and cataloging services developed and marketed by our
INTERMAT, Inc. subsidiary. The MRO.COM Supply-Side products will consist of the
mroDistributor, mroManufacturer and mroConnect products.

HISTORY OF INNOVATION

THE MRO SOLUTION

Through our unique combination of domain expertise in maintenance, repair and
operations ("MRO") and enterprise asset maintenance management software
products, and through our hosted solutions enabling manufacturers and
distributors to participate in e-commerce, the Company provides a complete
end-to-end industrial supply chain solution.

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The flagship product of our Demand-Side solutions is MAXIMO Extended
Enterprise. MAXIMO Extended Enterprise combines a robust, proven and
market-leading enterprise asset management application product with
comprehensive e-commerce capabilities that enable e-procurement of MRO
materials, labor and services for both scheduled and unscheduled tasks required
on the plant floor of virtually any industrial entity.

Our MRO.COM brand of Supply-Side solutions provide the tools and technology to
enable distributors and manufacturers of industrial parts - through one catalog
and one connection - to gain exposure to all types of buyers via multiple
marketplaces and exchanges.

The strengths of our Demand- and Supply-Side offerings combine to offer a
comprehensive solution, which makes the entire supply chain more efficient for
all participants.

OVERVIEW

As of September 30, 2000, the Company reported revenues related to two industry
segments: the development, marketing and support of asset maintenance management
software (MAXIMO) and the development, marketing and support of Internet
e-commerce software products and the related network services (MRO.COM).

The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for services, including support contracts, training and
consulting services, application hosting services and commerce fees charged for
electronic commerce transactions, i.e. the purchase or sale of industrial goods
and services effected using the Company's software. The Company also offers
content normalization services through its INTERMAT, Inc. subsidiary.

MAXIMO, the Company's enterprise asset maintenance management system, was first
released in February 1991. MAXIMO enables customers to manage the maintenance,
repair and operation of their enterprise-wide capital assets. Businesses,
government agencies, and other organizations use MAXIMO across their enterprises
to assist in the management of their high-value capital assets, such as plants,
facilities and production equipment, to cut MRO inventories and supply chain
costs, control maintenance expenses, reduce downtime, and more effectively
deploy productive assets, personnel and other resources. Total MAXIMO revenues
from products and services were $139,544,000 in fiscal 2000. MAXIMO offers
robust functionality, drawing upon the Company's established track record as a
provider of large-scale applications critical to the operations of major
industrial companies.

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 In fiscal 1999, the Company released the MRO.COM family of products. The
MRO.COM products enable users of MAXIMO or other enterprise systems to engage in
on-line e-procurement of the industrial goods and services that they need to
maintain and operate their capital assets, by connecting to the distributors and
manufacturers of those products and services through the MRO.COM on-line
marketplace or through other e-commerce exchanges. These solutions enable buyers
at companies to efficiently manage the complex balance between both planned
procurement and spot buy activities. MRO.COM products link an on-line community
of MRO suppliers and buyers to a group of Internet-based procurement products
that reduce purchasing and inventory costs. By using MAXIMO Buyer, purchasers
have access to a community of MRO suppliers aggregated on the MRO.COM
marketplace. It is expected that as a result, users will benefit from reduced
purchasing and inventory costs. Revenues from MRO.COM products and services
increased 378% to $29.1 million in fiscal 2000.

ACQUISITIONS

On September 29, 2000, the Company completed the acquisition of Applied Image
Technology, Inc ("AIT"). AIT specializes in web-based illustrated parts
cataloging systems and graphical maintenance and repair documentation. The
acquisition, recorded under the purchase method of accounting, was for 215,000
shares of the Company's common stock, $4.5 million in cash, and assumed
liabilities of $3.1 million.

On August 21, 2000, the Company completed the acquisition of IDFM, Inc., a
research and development consulting firm specializing in enterprise asset
maintenance software. The acquisition, recorded under the purchase method of
accounting, included the purchase of certain assets for the purchase price of
$2.0 million.

On June 29, 2000, the Company completed the acquisition of its Brazilian MAXIMO
reseller, MIPS Information, Productivity and Systems, Limited. The acquisition,
recorded under the purchase method of accounting, included the purchase of
certain assets and assumed liabilities for the purchase price of $1.3 million
plus acquisition expenses of $100 thousand.

On March 2, 2000, the Company completed the acquisition of INTERMAT, Inc., a
leading provider of MRO content management tools and cataloging services. The
acquisition, recorded under the purchase method of accounting, included the
purchase of the outstanding shares of common stock of INTERMAT, Inc. for $55.1
million in cash plus acquisition costs of $1.3 million.

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On October 29, 1999, the Company completed the acquisition of Modern
Distribution Management, Inc., a leading newsletter publisher covering strategic
management issues affecting suppliers and distributors of MRO supplies. The
acquisition, recorded under the purchase method of accounting, included the
purchase of certain assets and assumed liabilities for the purchase price of
$1.2 million plus acquisition expenses of $8,000.

PRODUCTS  -  OVERVIEW


MAXIMO AND DEMAND-SIDE PRODUCTS

The MAXIMO software suite of products are used to plan and manage ongoing
maintenance and repair operations and to track related labor, parts and costs.
Using MAXIMO, customers can prioritize tasks, assign work based on the
availability of necessary parts and labor, and analyze equipment failures in
order to implement appropriate preventative maintenance measures. MAXIMO permits
work orders to be generated and tracked electronically, and also to be linked to
related information, such as labor and equipment records, job procedures, parts
inventories and purchasing systems. Failure analysis using MAXIMO can assist in
identifying root causes of equipment problems and can aid in designing
preventive maintenance procedures to reduce future equipment failure rates and
downtime. This product includes safety and compliance features so that companies
can implement in-depth tracking and reporting processes that adhere to mandated
regulatory guidelines. MAXIMO is available in English, Brazilian Portuguese,
Dutch, French, German, Latin American Spanish, Simplified Chinese, and Swedish.

The Company offers pre-configured industry specific focused applications for
MAXIMO. MAXIMO for Facilities, MAXIMO for Industry and MAXIMO for Transportation
are all scalable solutions running on industry accepted databases, such as
Microsoft SQL Server and Oracle databases.

MAXIMO FEATURES

MAXIMO is composed of a series of integrated modules, each of which is linked to
the others and to a relational database management system. Each module includes
one or more applications functions, including the following:

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The Equipment Module tracks associated costs, histories, and failures of a
serialized piece of equipment as it moves throughout a plant or facility.

Work Orders Module provides the ability to view detailed planning information,
enter day to day maintenance requests, schedule work orders based on real-time
criticality and compare budgets or estimates against actual and historical work
orders.

Preventative Maintenance Module generates preventative maintenance work orders
individually, batched or automatically.

Resources Module maintains detailed company, service contract, and tool records
for use in other modules to plan and analyze maintenance work.

Labor Module stores information by employee, craft or contractor. It maintains
personnel files and reports labor on work orders in timecard format.

Calendars Module provides the ability to view calendars by month or day and
associates calendars with labor and craft records to plan work based on
equipment and labor availability.

Jobs Plans Module tracks multiple quantities and costs by operation or job plan.

Purchasing Module creates requests for proposal, blanket purchase orders and
purchase agreements, purchase requisitions and purchase orders, records receipt
of parts, analyzes vendor performance and integrates with accounting
applications, including invoice matching and multiple currency functionality.

Inventory Module contains over 2,000 material classification templates, tracks
items, costs and balances by bin, lot or storeroom, reorders automatically,
forecasts materials, accesses up to date cost information and issues parts
directly to work orders.

Safety Module offers users safety features such as identification of hazardous
materials, lock out, tag out capabilities, identification of affected equipment
and locations and tracking of permits.

MAXIMO OPTIONS

MAXIMO offers users a variety of integrated options, including, but not limited
to, the following:

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Integration Gateways - MAXIMO integrates with multiple financial application
systems including packaged integration to Oracle, PeopleSoft, and SAP.

Self Service - MAXIMO allows the "Self Service" creation of new work requests
and review of existing requests through any Java-enabled Internet browser, and
electronic commerce capabilities for the transfer of purchase orders to vendors.

MAXIMO Analyzer - MAXIMO Analyzer provides detailed information allowing users
to rapidly pose multiple questions and assess responding data to make critical
business decisions. The product converts transaction data into a functional
analysis instrument utilizing PowerPlay(R) from Cognos, a leading supplier of
business intelligence tools. MAXIMO Analyzer delivers true distributed Online
Analytical Processing (OLAP) capabilities for MAXIMO users.

MAXIMO EXTENDED ENTERPRISE:

In fiscal 2000, the Company released MAXIMO Extended Enterprise. MAXIMO Extended
Enterprise includes maintenance and repair optimized e-procurement features
designed to streamline the MRO supply chain and supply chain planning.
Customer's who had previously licensed MAXIMO Enterprise could upgrade to MAXIMO
Extended Enterprise by purchasing the new e-procurement software, also available
separately and marketed as MAXIMO Buyer. This product operates on a variety of
commonly used server hardware platforms and network operating systems and also
uses leading commercial SQL databases, including Oracle, and Microsoft SQL
Server.

MAXIMO Extended Enterprise was generally made available in August 2000, and
includes key components of MAXIMO Enterprise and MAXIMO Buyer, including the
following:

o    Desktop Requisitions: a browser-based interface to supplier catalog
     content and purchase order transaction management information. This desktop
     requisition tool provides users with the ability to search for and select
     parts from online catalogs, create requisitions and purchase orders online
     and electronically transfer purchase orders to a company's selected
     suppliers. It also provides the ability to view real-time inventory
     availability, order status information, invoice and shipping history and
     contract pricing.

o    Integration Gateway: a standards-based, open architecture, Application
     Program Interface ("API") that provides a

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     connection to leading Enterprise Resource Planning ("ERP") systems such as
     SAP(TM), Oracle(TM), and PeopleSoft(TM).

o    Workflow: a Java-based application that provides requisition routing and
     approval based on a company's pre-defined business rules. Requisitions
     requiring approval are automatically routed through the approval chain by
     e-mail. An advanced graphical interface is used to create custom rules and
     workflow models.

o    Standard Modifier Dictionary: Provides a structured format, which forms the
     foundation for consolidated materials catalogs. The SMD has over 2,200
     noun-modifier pairs along with the physical characteristics and values to
     identify part items and variations.

o    Transaction Server: an industry-standard, XML-based connection to
     customer-specified distributors, manufacturers, and exchanges that provides
     live, real-time status on orders and transactions between connected buyer
     and suppliers.

MAXIMO BUYER:

MAXIMO Buyer was generally made available in June 1999 under the mroBuyer name.
MAXIMO Buyer is an Internet-based procurement product designed to link buyers
and suppliers in streamlining purchasing efficiencies without the need for a
demand engine. MAXIMO Buyer provides a single interface for electronic
procurement of MRO supplies, materials, parts and services from participating
suppliers. MAXIMO Buyer can link front-line employees to marketplaces of their
choice.


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MMII:

MMII enhances MAXIMO's work management components by providing visual machine
documentation on the plant floor. MMII is a packaged solution that provides
maintenance personnel and planners with instant access to strategic technical
documentation and spare parts information. MMII overcomes one of the largest
barriers to maintenance productivity in large plants today, namely incorrect,
misfiled, or out-of-date critical technical documentation. The time spent on
searching for technical documentation and part information can be significantly
reduced.

MRO.COM AND SUPPLY-SIDE PRODUCTS

MRO.COM products are designed to enable organizations to sell MRO products and
services over the Internet quickly and easily. Purchasers can immediately access
robust and transactionable product catalog content from their selected
suppliers, including product descriptions, pricing and availability. MRO
suppliers (manufacturers and distributors) of maintenance and repair products
and services can create one catalog, implement a connection to their business
systems and have connections to a variety of third party marketplaces and
exchanges.

mroSUPPLIER:

mroSupplier is an e-commerce solution for distributors and manufacturers of
industrial supplies. The product provides suppliers with the tools to post an
electronic catalog and process customer orders either with an on-line
application or by integrating with their back-end business systems. The
supplier's customers can requisition directly from the supplier's catalog, which
is maintained and accessible at the MRO.COM marketplace hub. Suppliers may also
create their own e-Commerce websites. Suppliers can produce custom catalogs that
may contain special pricing and marketing support information tailored to a
specific customer and that are accessible to customers and prospects anywhere in
the world on a 24x7x365 basis.

mroMARKETPLACE:

mroMarketplace is a solution that enables e-commerce participants to aggregate
and connect manufacturers and/or distributors of MRO goods and services, who are
already using mroSupplier, to create a defined and controlled online
marketplace. These "private" marketplaces may be branded and positioned to serve
particular industry segments as determined by the participants.

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mroMarketplace is a secure, global e-commerce network that can handle multiple
languages, currencies and tax codes.

STANDARD MODIFIER DICTIONARY:

The Standard Modifier Dictionary ("SMD") format is designed for buyers, product
specifiers, and MRO end users to find and purchase the products necessary to
keep their businesses and plants operating. Suppliers of MRO goods and services
can use the SMD to structure their data into a consistent, transactionable
format that allows users to identify the part by attributes and offers more
product visibility in cross vendor searches. The SMD has over 2,200
noun-modifier pairs along with the physical characteristics and values to
accurately identify each item and its variations.

STRUXURE:

Struxure includes state-of-the art search tools, line item creation and
maintenance functions, standard and custom reporting features and network
capabilities. It enables the user to search by description or by a series of
references such as vendor, plant, commodity code, UN/SPSC code, and status.

MP/NET:

MP/NET supplements MRO.COM products' strength in the procurement of strategic
MRO items, such as pipes and valves, with more complex equipment assemblies and
associated spare parts. MP/NET provides a visual means of positive parts
identification to ensure the right part is ordered. This web-based Java
architectured system enables OEMs to visually present their complex technical
documentation and critical parts catalogs to customers over the Internet.
Integrated with MAXIMO Buyer, plant floor personnel can identify and procure
critical spare parts quickly, thereby reducing sourcing and procurement costs
while minimizing production downtime.


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AUCTION SERVICES

The Company offers Internet based business-to-business auction services, which
trading partners are able to participate in business-to-business auctions, both
forward and reverse. Bids from vendors can be downloaded via the Internet. The
bids can be analyzed and purchase orders can be issued to the winning vendor.

MAXIMO AND MRO.COM PRODUCT ARCHITECTURE

MAXIMO's client/server versions are provided by a direct link to many of today's
leading commercial SQL databases, including the Oracle and Microsoft SQL Server
database products. MAXIMO accommodates database servers operating under Novell
NLM, Windows NT and UNIX operating systems, and supports a variety of network
operating systems, including Novell NetWare, Banyan VINES and IBM LAN Server for
OS/2, and standard network communications protocols including TCP/IP and
IPX/SPX. MAXIMO's use of a standard SQL database and support for a broad range
of server platforms, network operating systems and communications protocols
provides customers with the flexibility to match their computing resources to
their needs, and facilitates the integration of data from other applications
such as accounting and human resources.

The MAXIMO "Self Service Requisitions" application delivers MAXIMO functionality
in a browser-based, object oriented, component architecture designed to replace,
in an evolutionary manner, the existing MAXIMO client/server architecture. This
framework is initially being used to develop Java-based self-service
applications and wireless applications running on hand held devices.

The MRO.COM products utilize an object oriented, scaleable architecture to
support a full web browser-based environment. Communication between buyers and
suppliers is real-time, utilizing XML standards. The MRO applications are hosted
on multiple servers located at the mroHosting Center.




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CUSTOMER SUPPORT AND SERVICES

A high level of customer service and technical support is critical to customer
satisfaction because many of the Company's customers implement our products in
complex, large-scale applications on which the success of their organizations
depend. The Company offers support and consulting services designed to assist
customers in meeting these challenges and in successfully implementing business
solutions. The Company believes that its approach to service and support has
been and will continue to be a significant factor in the market acceptance of
its products.

CUSTOMER SUPPORT PROGRAMS. As of September 30, 2000, the Company employed a
technical hot-line support staff of 98 employees operating out of the Company's
corporate headquarters in Massachusetts and four international technical
response centers located in the United Kingdom, Australia, Canada, and Brazil.
Support services are provided on a seven-day week, 24-hour day basis.

Subscribers to the Company's annual support contracts are entitled to receive
(i) customer service and technical support by telephone, fax, support on line
via the Internet and electronic bulletin board, (ii) a newsletter and periodic
technical bulletins, (iii) an invitation to attend the Company's annual user
group meeting and (iv) any periodic software updates. The Company believes that
support contracts are a stable source of recurring revenue.

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Implementation, Consulting and Training. As of September 30, 2000, the Company
employed a consulting and training staff of 330 employees. The Company's network
of international distributors also provides services within their geographic
territories.

The Company provides consulting services to assist customers in planning and
carrying out the implementation of the Company's solutions. In some cases,
customers install and implement MAXIMO systems and perform any necessary
customization themselves with only limited assistance from the Company. In other
cases, particularly where a complex, integrated solution or extensive
customization is required, the Company provides comprehensive implementation
planning, project management, network communications, system integration and
custom modification services. The Company also contracts with third party
consultants as needed in order to meet any services backlog.

The Company conducts comprehensive training programs covering Company
applications and concepts for its end users. Training is offered at the
Company's headquarters in Massachusetts and at regional centers located in
California, Georgia, Texas, Virginia, Australia, France, Germany, Sweden, the
United Kingdom and the Netherlands. The Company also offers on-site training
classes at customer sites upon request.

CUSTOMERS

The Company's customers include electric, water and other utilities,
educational, research and health care institutions, government agencies, hotels,
casinos, airlines and railroads, as well as large, well-known corporations in
manufacturing, oil and gas, construction, mining, aerospace, defense, ship
building, telecommunications, ground fleet transportation, data processing,
semiconductor, financial, computer, entertainment, banking, insurance,
pharmaceutical and other industries. The Company's products have been installed
and are supported in major markets worldwide. Local language support is provided
in many of these markets.

SALES AND MARKETING

The Company markets its products in the United States through a direct sales
force of 163 persons operating out of its Massachusetts headquarters and sales
offices located in California, Colorado, Florida, Georgia, Illinois, Maryland,
Michigan, New Hampshire, New Jersey, New York, Texas, and Virginia. The Company
markets its products outside the United States through a sales force of 157
persons from a network of sales offices in Argentina, Australia, Belgium,
Brazil, Canada,

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China, France, Germany, Hong Kong, Japan, India, Mexico, the Netherlands,
Sweden, Thailand and the United Kingdom and through distributors in parts of
Africa, Asia, Europe, the Middle East and South America. Approximately 39% of
the Company's total revenues in fiscal 2000 were derived from sales outside the
United States.

The Company markets its products through advertising campaigns in national trade
periodicals, direct mail, seminars and its Web sites (http://www.maximo.com,
www.mro.com and www.mrosoftware.com). These efforts are supplemented by listings
in relevant trade directories, exhibitions at trade shows and conference
appearances. Initial leads are qualified by the tele-marketing operation before
being turned over to either the direct sales force or tele-sales.

The sales cycle for MAXIMO products, from the initial sales presentation to the
issuance of a purchase order, typically ranges from six to twelve months. The
Company believes that customers generally choose MAXIMO based on the features it
provides and upon a preference for the product architecture, implementation
time, domain expertise and ease of use.

The sales cycle for MRO.COM products, from the initial sales presentation to the
issuance of a purchase order, typically ranges from three to nine months. The
Company has focused its MRO.COM sales strategy towards capital-intensive
industrial companies more than the service type industries, such as banks and
financial institutions.

Delivery lead times for the Company's products are very short and, consequently,
substantially all of the Company's software revenues in each quarter result from
the orders received in the quarter. Accordingly, the Company only maintains a
backlog for its consulting and training services and believes that its backlog
at any point in time is not a reliable indicator of future sales and earnings.
The absence of significant backlog may contribute to unpredictability in the
Company's results of operations.

The Company has marketing alliances with Oracle, Ariba and PeopleSoft. The
Company also offers a solution to SAP through an alliance with IBM Global
Services (an affiliate of IBM). The Company develops reseller channels that
supplement the direct sales force. The Company has agreements with outsourcing
vendors such as Johnson Controls, Inc. and ABB Service Worldwide (an affiliate
of Asea Brown Boveri). The Company works closely with major systems integrators
such as IBM Global Services, and Innolog, Inc. The Company has OEM arrangements
with companies such as Honeywell Incorporated, The Foxboro Company, and
Elsag-Bailey.

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In fiscal 2000, the Company joined the Ariba, Inc., Partner Marketing Program as
a platinum member. This program unites Ariba business-to-business e-commerce
solutions, brand awareness and marketing power with industry leaders, Internet
innovators and systems integrators. The program is designed to leverage the
strengths of the participants to increase revenues, gain market share and
generate new business in the business-to-business e-Commerce market. The
Company, through this business relationship, will enable buyers and suppliers
using the MAXIMO and MRO.COM solutions to transact with buyers, marketplaces and
suppliers on the Ariba business-to-business platform, and to use the
value-added services of the Ariba Commerce Services Network.

The Company also seeks out alliances with niche solution providers who provide a
complementary solution to MAXIMO. The Company has established the MAXIMO Connect
Program to develop integrated solutions with niche applications to enhance the
overall MAXIMO enterprise asset maintenance management solution.

COMPETITION

The market in which the Company operates is highly competitive and is
characterized by a large number of competitors including both independent
software vendors and certain enterprise resource planning vendors.

The Company's MRO supply chain e-commerce solutions have many diverse
competitors offering a wide range of differing products, services and
technologies. The Company expects competition to intensify as current
competitors expand their product offerings and new competitors enter the market.
The current potential competitors in the MRO e-commerce market include Ariba,
Clarus, Commerce One, Concur, Connect, Peregrine, IBM, Intellisys, i2, Oracle,
PeopleSoft, SAP and others. Many of the Company's enterprise asset maintenance
management competitors are also entering the MRO e-commerce market.

MAXIMO competes with products offered by independent software vendors, such as
Datastream and Indus. MAXIMO also competes with integrated enterprise resource
planning systems which are provided by several large vendors, such as SAP and JD
Edwards and others, and which include maintenance modules. MAXIMO also
encounters competition from vendors of low cost maintenance management systems
designed initially for use by a single user or limited number of users as
vendors of these products upgrade their functionality to enter the client/server
market.

Certain of the Company's enterprise resource planning management competitors
have greater financial, marketing, service and support and technological
resources than

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the Company. To the extent that such competitors increase their focus on the
asset maintenance or planning and cost systems markets, or on the supply chain
management business, the Company could be at a competitive disadvantage.

PRODUCT DEVELOPMENT

The Company has made substantial investments in research and software product
development. The Company's total product development expenses in fiscal years
2000, 1999 and 1998 were $21.2 million, $14.9 million, and $13.2 million,
respectively. As of September 30, 2000, the Company's research and development
staff consisted of 188 employees and a number of outside consultants. The
Company's development organization is comprised of relatively small teams of
senior level developers and engineers, who focus on different areas of
development. The Company maintains development centers in Bedford,
Massachusetts; London, Ontario; Ann Arbor, Michigan; and Houston, Texas.

The Company's products consist primarily of internally developed software and
the products acquired through acquisitions. In addition, the Company has
incorporated in its products graphical user interfaces, report writers,
application development tools and database management systems under licenses
from other vendors.

The Company has developed a Java-based component architect software application
to incorporate into the MAXIMO product technologies emerging in conjunction with
the Internet. Internet technologies and applications generally are developing
and gaining acceptance rapidly in the e-commerce market. MRO supply chain
management using electronic commerce is a nascent market with many standards and
technologies remaining to be developed. Accordingly, developing technologies
pose risks to the Company.

The Company will continue to work closely with customers to define and develop
market driven product enhancements. The Company's product development efforts
have been focused on a standards based component architecture written in the
Java programming language. Moving beyond traditional client/server and
three-tier architectures, an open standards based component architecture
provides benefits in terms of greater flexibility, improved integration
capabilities, lower "cost of ownerships" in maintaining and application
infrastructure, as well as improved developer productivity in both development
and implementations. The Company continues its efforts to integrate its products
with major ERP systems, such as PeopleSoft, Oracle and SAP, to offer its clients
a complete and flexible financial application. The Company will continue to
research and investigate new technologies that should complement the Company's
product strategies in the future.

                                       17
<PAGE>   18

LICENSED TECHNOLOGY

The Company licenses and will continue to license certain software programs from
third-party developers and incorporate them into the Company's products. These
licenses are non-exclusive worldwide licenses that terminate on varying dates.
If we are unable to continue to license any of this software on favorable terms,
we will face delays in releases of our software until equivalent technology may
be identified, licensed or developed, and integrated into our current products.
However, the Company believes that it will be able to renew these licenses or
that it will be able to obtain substitute products if needed.

PROPRIETARY RIGHTS AND LICENSES

The Company has registered a number of its trademarks with the United States
Patent and Trademark Office. Registrations with equivalent offices in many
foreign countries in which the Company or its distributors do business have been
obtained or are in process. The Company has filed a patent application with the
United States Patent and Trademark Office for inventory sharing as it relates to
electronic commerce. There has been no objection to the patent in the United
States to date. The Company intends to file in other countries within key
geographies for the same.

The Company regards its software as proprietary and attempts to protect its
rights with a combination of trademark, copyright and employee and third party
non-disclosure agreements. Despite these precautions, it may be possible for
unauthorized parties to copy or reverse-engineer portions of the Company's
products. While the Company's competitive position could conceivably be
threatened by its inability to protect its proprietary information, the Company
believes that copyright and trademark protection are less important to the
Company's success than other factors such as knowledge, ability and experience
of the Company's personnel, its name recognition and ongoing product
development, support and innovation.

The Company's software products are usually licensed to customers under a
perpetual, non-transferable, non-exclusive license that stipulates how many
concurrent users may access the system. The Company relies on both "shrink wrap"
and "click wrap" licenses and negotiated agreements. A shrink wrap license
agreement is a printed license agreement included with packaged software that
sets forth the terms and conditions under which the purchaser can use the
product, and purports to bind the purchaser to such terms and conditions by its
acceptance and purchase of the software. A click wrap license agreement is
displayed to an

                                       18
<PAGE>   19

end-user during the on-line registration process, and purports to bind the
end-user to its terms and conditions when the end-user acknowledges and agrees
to those terms and conditions via an interactive process. Certain provisions of
the Company's shrink wrap and click wrap licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of certain jurisdictions.
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.

PRODUCTION

The principal materials and components used in the Company's software products
include computer media, user manuals and training guides. The Company currently
uses third-party vendors to print its user manuals, packaging and related
materials, and occasionally to duplicate program CD-ROMs and diskettes. The
majority of CD-ROM and diskette duplication is done by the Company's
manufacturing and distribution facility located at its corporate headquarters.
The Company then assembles the third party produced documentation with diskettes
and CD-ROMs and ships these directly from its manufacturing and distribution
facility. To date, the Company has been able to obtain adequate supplies of all
components and materials and has not experienced any material difficulties or
delays in manufacture and assembly of its products or materials due to product
defects.

EMPLOYEES

As of September 30, 2000, the Company had 1,048 full-time employees including
320 in sales, marketing and related services, 188 in product research and
development, 98 in customer support, 330 in training and consulting services,
and 112 in finance, administration, information technology, human resources,
manufacturing and office services. The Company's employees are not represented
by any collective bargaining organization, and the Company has never experienced
a work stoppage. The Company believes that its relations with employees are
good.

ITEM 2.  PROPERTIES

The Company leases its corporate headquarters and its manufacturing and
distribution facilities in Bedford Massachusetts. The leased facility consists
of approximately 110,000 square feet, at an average annual base cost of
$1,300,000, under a 6 year net lease with a renewal option through December 31,
2009. Additionally, the Company estimates that its annual operating expenses
under the lease will be approximately $1,000,000, based on information currently

                                       19
<PAGE>   20

available. The actual costs will depend on such factors as actual electricity
usage, real estate taxes and operating costs. Under the terms of its lease, the
Company has the ability to sublease the space and may elect to do so in the
future should business conditions dictate. The Company leases additional sales
offices in California, Colorado, Florida, Georgia, Idaho, Illinois, Maryland,
Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New York, Ohio,
Tennessee, Texas, and Virginia. The Company also leases offices for its
international operations in Argentina, Australia, Brazil, Canada, China, France,
Germany, Hong Kong, India, Japan, Mexico, the Netherlands, Singapore, Sweden,
Thailand and the United Kingdom.

ITEM 3. LEGAL PROCEEDINGS

As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.

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

None.


                                       20
<PAGE>   21

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS

STOCK INFORMATION

Price Range of Common Stock

The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on the National Association of Securities Dealers Automated Quotation
National Market System ("The NASDAQ Stock Market") under the symbol PSDI. As of
December 15, 2000, there were approximately 92 holders of record of the
Company's Common Stock. This reflects the fact that most of the Company's stock
is held in street names through one or more nominees.

The following table sets forth the high and low per share sales prices of the
Company's Common Stock, as reported on the NASDAQ Stock Market consolidated
reporting system for each quarterly period within the two year period ended
September 30, 2000.

        FISCAL 2000                   HIGH                  LOW
       First Quarter                 $55.50               $21.63
      Second Quarter                 $96.75               $47.00
       Third Quarter                 $47.25               $18.00
      Fourth Quarter                 $22.75               $11.88
                                      HIGH                  LOW
        FISCAL 1999
       First Quarter                 $16.00                $6.50
      Second Quarter                 $21.06                $9.69
       Third Quarter                 $17.19                $9.00
      Fourth Quarter                 $27.00               $15.38

On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock to be paid to all
shareholders of record on December 15, 1999. The payment distribution date for
the stock dividend was December 22, 1999. The stock split was subject to
shareholder approval of an increase in the Company's authorized common stock,
$0.01 par value per share, from 15,350,000 to 50,000,000 shares. Stockholders
approved the transaction on December 15, 1999. All share and per share data has
been restated to reflect this stock split in the form of a dividend as though it
had occurred at the beginning of the earliest period presented.

Since 1983, the Company has not declared or paid cash dividends on its Common
Stock, other than distributions to stockholders made with respect to fiscal
years 1992 and 1993 to satisfy

                                       21
<PAGE>   22

certain federal and state tax obligations of the stockholders attributable to
the Company's S Corporation status prior to October 1, 1993. The Company
currently intends to retain any future earnings to finance growth and therefore
does not anticipate paying cash dividends in the foreseeable future.

Certain provisions of the Company's Certificate of Incorporation and Bylaws
could delay the removal of incumbent directors and could make a merger, tender
offer or proxy contest involving the Company more difficult, even if such events
would be beneficial to the interests of the stockholders. In addition, the
Company has 1,000,000 shares of authorized Preferred Stock. The Company may
issue shares of such Preferred Stock in the future without further stockholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority or the outstanding voting
stock of the Company. In addition, the staggered terms of the Company's Board of
Directors could have the effect of delaying or deferring a change in control of
the Company.

In January 1998, the Board of Directors of the Company adopted a stockholder
rights plan by declaring a dividend distribution of one preferred stock purchase
right (one "Right") on each share of the Company's Common Stock outstanding on
January 27, 1998 or, in certain circumstances, issued thereafter. Initially, the
Rights are not exercisable, not represented by separate Right certificates and
do not trade separately from the Company's Common Stock. Ten days after a tender
offer or acquisition of 15% or more of the Company's common stock, each right
may be exercised for $140 ("Exercise Price") to purchase one one-thousandth of
one share of the Company's Series A Junior Participating Preferred Stock. Each
one one-thousandth of each share of Series A Junior Participating Preferred
Stock will generally be afforded economic rights similar to one share of the
Company's common stock. In addition, after such rights are triggered, each Right
entitles the holder to purchase common stock of the Company with a fair value of
twice the Exercise Price or, in certain circumstances, securities of the
acquiring company for the Exercise Price. Each Right expires in January 2008
and, during specified periods, the Company may redeem or exchange each Right for
$.01 or one share of common stock, respectively. The Rights Agreement has been
filed by the Company with the Securities and Exchange Commission as an exhibit
to a Registration Statement on Form 8-A dated February 2, 1998.

                                       22
<PAGE>   23

Stockholders are urged to review the Rights Agreement for a complete
understanding of the Rights Plan. The Rights Plan, while providing the Board of
Directors with flexibility in connection with possible acquisitions and
deterring unfair or coercive takeover tactics, could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from acquiring, beneficial ownership of 15% or more of the outstanding shares of
the Company's Common Stock.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data of the Company set forth below has been
derived from the consolidated financial statements for the Company for the
periods indicated. This selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED SEPTEMBER 30,
                                         ---------------------------------------------------------------------
(in thousands, except
 per share data)
                                            2000            1999            1998           1997          1996
                                            ----            ----            ----           ----          ----
<S>                                      <C>            <C>              <C>            <C>            <C>
Revenues                                 $168,661       $145,665         $120,016       $ 96,700       $73,329
(Loss)/income from operations                (571)        24,333           12,902         16,271        14,606
Net income                                  2,102         17,880            6,222         11,570        10,046
Net income per share, basic                  0.10           0.87             0.32           0.59          0.53
Net income per share, diluted                0.09           0.85             0.31           0.58          0.50
Weighted number of common and common       22,786         21,094           20,156         20,128        20,104
equivalent shares

                                         ---------------------------------------------------------------------

Total assets                              181,056        159,033          114,520        102,239        83,476
Long-term obligations                         188            282              906            144           628
Dividends per share                         - - -          - - -            - - -          - - -         - - -
</TABLE>

On October 15, 1999, the Company's Board of Director's approved a 2-for-1 stock
split in the form of a dividend of its common stock. The stock split was subject
to approval of an increase in the Company's authorized common stock.
Stockholders approved the transaction on December 15, 1999. All historical share
and per data has been restated to reflect this stock split as though it had
occurred at the beginning of the earliest period presented.

Included in net income for the year ended 1998 is a one-time charge for
purchased in-process product technology of $9,172,000 related to the purchase of
the A.R.M. Group Inc., on February 6, 1998.

                                       23
<PAGE>   24

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report contains
forward-looking statements. The forward-looking statements are subject to
substantial risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors that
might cause such differences include, but are not limited to; those discussed in
the section entitled "Factors Affecting Future Performance". Readers should
carefully review the risk factors described in other documents that the Company
files from time to time with the Securities and Exchange Commission, including
those set forth under the heading "Factors Affecting Future Performance" in the
Quarterly Reports on Form 10-Q filed by the Company in fiscal 2000.

OVERVIEW

The Company develops, markets and supports business-to-business Maintenance,
Repair, and Operations ("MRO") e-commerce systems and enterprise asset
maintenance software ("MAXIMO"). The Company complements its MAXIMO enterprise
asset maintenance software with its MRO.COM brand Internet-based
business-to-business technology. MRO.COM offers a marketplace for MRO buyers and
suppliers and a suite of online procurement software products that improve
purchasing efficiency.

Businesses, government agencies, and other organizations use the Company's
MAXIMO product across their enterprise to assist in the management of their
high-value capital assets, such as plants, facilities, and production equipment,
to cut inventories and supply chain costs, control maintenance expenses, reduce
downtime, and more effectively deploy productive assets, personnel and other
resources. The Company also offers Internet-based content management tools and
cataloging services developed and marketed by its INTERMAT, Inc. subsidiary. The
Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for services, including support contracts, training and
consulting services, application hosting services and commerce fees charged for
electronic commerce transactions. The Company also offers data normalization
services through its INTERMAT, Inc. subsidiary.

ACQUISITIONS AND OTHER RELATED MATTERS

On October 29, 1999, the Company completed the acquisition of Modern
Distribution Management, Inc., a newsletter publisher

                                       24
<PAGE>   25

covering strategic management issues affecting suppliers and distributors of MRO
supplies. The acquisition, recorded under the purchase method of accounting,
included the purchase of certain assets and assumed liabilities for the purchase
price of $1.2 million plus acquisition expenses. Goodwill of $1.2 million is
being amortized on a straight-line basis over a period of five years.

On March 2, 2000, the Company completed the acquisition of INTERMAT, Inc., a
leading provider of MRO content management tools and cataloging services. The
acquisition, recorded under the purchase method of accounting, included the
purchase of the outstanding shares of common stock of INTERMAT, Inc. for $55.1
million in cash plus acquisition costs of $1.3 million. A portion of the
purchase price has been allocated to assets acquired and liabilities assumed
based on the estimated fair market value at the date of acquisition while the
remaining balance of $54.2 million was recorded as goodwill and other intangible
assets. Goodwill of $47.7 million is being amortized over a period of five years
on a straight-line basis. Other intangible assets of $6.5 million are being
amortized over a period of three to five years on a straight-line basis.

On June 29, 2000, the Company completed the acquisition of the MAXIMO reseller
business unit of MIPS Information, Productivity and Systems, Limited in Brazil.
The acquisition, recorded under the purchase method of accounting, included the
purchase of certain assets and assumed liabilities for the purchase price of
$1.3 million plus acquisition expenses of $100 thousand. Goodwill of $1.4
million is being amortized on a straight-line basis over a period of five years.

On August 21, 2000, the Company completed the acquisition of IDFM, Inc., a
research and development consulting firm. The acquisition, recorded under the
purchase method of accounting, included the purchase of certain assets for the
purchase price of $2 million plus acquisition expenses. Goodwill of $2 million
is being amortized on a straight-line basis over a period of five years.

On September 29, 2000, the Company completed the acquisition of Applied Image
Technology, Inc.("AIT"). AIT specializes in web-based illustrated parts
cataloging systems and graphical maintenance and repair documentation. The
acquisition was recorded under the purchase method of accounting. The Company
purchased all of the outstanding common stock of AIT for $4.5 million, 215,000
shares of the Company's common stock and also assumed liabilities of $3.1
million. Goodwill of $10.4 million is being amortized on a straight-line basis
over a period of five years.

                                       25
<PAGE>   26

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues:

<TABLE>
<CAPTION>
                                                 YEAR ENDED SEPTEMBER 30,
                                                 ------------------------
                                           2000            1999           1998
                                           ----            ----           ----
<S>                                        <C>             <C>            <C>
Revenues:
   Software                                  42%             43%            45%
   Support and services                      58              57             55
                                           ----            ----           ----
     Total revenues:                        100             100            100
Total cost of revenues                       35              33             31
                                           ----            ----           ----
Gross margin                                 65              67             69
                                           ----            ----           ----
Operating expenses:
   Sales and marketing                       40              33             31
   Product development                       13              10             11
   General and administration                 9               8              8
   Goodwill and other intangibles             4              --             --
   Purchased in-process                      --              --              8
     product development
Total operating expenses:                    66              51             58
                                           ----            ----           ----
(Loss)/income from operations                (1)             16             11
Other income (expense), net                   2               2              1
                                           ----            ----           ----
Income before income taxes                    1              18             12
Income taxes                                 --               6              7
                                           ----            ----           ----
Net income                                    1%             12%             5%
                                           ----            ----           ----
</TABLE>

<TABLE>
<CAPTION>
REVENUES

                                          Fiscal                   Fiscal                    Fiscal
                                           Year                     Year                      Year
                                           Ended       Change       Ended       Change        Ended
(in thousands)                            9/30/00        %         9/30/99         %         9/30/98
-------------------------------------------------------------------------------------------------------
<S>                                     <C>          <C>         <C>          <C>          <C>
Software licenses                         $70,987       14%        $62,240        15%        $54,007
Percentage of total revenues                42%                       43%                       45%

Support and services                      $97,674       17%        $83,425        26%        $66,009
Percentage of total of revenues             58%                       57%                       55%

Total revenues                           $168,661       16%       $145,665        21%       $120,016
</TABLE>

In fiscal 2000 and 1999, revenue from software licenses increased 14% and 15%,
respectively. The increases in fiscal 2000 are mainly attributable to the
increases in MRO e-commerce license sales. In addition, two significant license
agreements for e-commerce

                                       26
<PAGE>   27

software were concluded in fiscal 2000 for approximately $2.8 million and $4.4
million. Revenue from MAXIMO asset maintenance license sales decreased 8% in
fiscal 2000 while MRO e-commerce license sales increased 263%. The decrease in
MAXIMO software license sales is partially attributable to a decrease in
international sales due to market conditions and the Company's increased focus
on e-commerce sales.

In fiscal 2000 and 1999, support and services revenues increased 17% and 26%,
respectively. Consulting services increased 12% and 30% in fiscal 2000 and 1999,
respectively. E-commerce services represented 16% of service revenues in fiscal
2000 compared to 1% of services revenues in fiscal 1999. The Company is
continuing to make significant investments in its e-commerce services
organization and has reallocated some of its MAXIMO resources to focus on the
e-commerce side of its business. Support services revenue increased 25% and 22%
in fiscal 2000 and 1999, respectively. The increases are related to the
increases in software licenses and the high renewal rate for MAXIMO maintenance
contracts.

Revenues from sales outside the United States decreased to 39% of total revenues
in fiscal 2000 compared to 46% of total revenues in fiscal 1999. The decrease in
the percentage of revenues generated outside the U.S. for fiscal 2000 was
primarily attributable to weak market conditions in the European and Asia
Pacific regions. The increase in the percentage of revenues generated outside
the U.S. for fiscal 1999 was attributable to the Company's global expansion.

<TABLE>
<CAPTION>
COST OF REVENUES

                                             Fiscal                   Fiscal                   Fiscal
                                              Year                     Year                     Year
                                              Ended       Change      Ended       Change       Ended
(in thousands)                               9/30/00        %        9/30/99         %        9/30/98
--------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>         <C>         <C>          <C>
Software licenses                            $4,739        (6)%       $5,018        11%        $4,537
Percentage of software licenses                 7%                       8%                      8%

Support and services                         $53,651       27%       $42,310        29%       $32,936
Percentage of support and services             55%                      51%                      50%

Total cost of revenues                       $58,390       23%       $47,328        26%       $37,473
Percentage of total revenues                   35%                      33%                      31%
</TABLE>

Cost of software licenses revenues consists of software purchased for resale,
royalties paid to vendors of third party software,

                                       27
<PAGE>   28

the amortization of capitalized software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping. The decrease in fiscal 2000 of the cost of software
licenses revenues was due primarily to a decrease in software purchased for
resale, offset by an increase in royalties paid to third-party vendors. The
increase in fiscal 1999 was due primarily to software purchased for resale,
royalties paid to third party vendors, and production materials, which was
partially offset by no software amortization cost.

Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increases in the cost of
support and services in fiscal 2000 and 1999 were attributable to the hiring of
employees for the Company's support and services organization and the use of
third-party consultants contracted to perform services for the Company. The
Company utilizes the services of these higher cost third-party consultants in
order to meet demand for its services and backlog. The increase as a percentage
of revenues in fiscal 2000 over fiscal 1999 was attributable to expenses
incurred to hire and train new personnel, reduced utilization of services
personnel during the first quarter of fiscal 2000 related to year 2000 factors
and expenses related to the costs incurred to grow the MRO e-commerce services
organization. The increase as a percentage of revenues in fiscal 1999 over
fiscal 1998 was attributable to salary and benefits increases for new hires and
the costs for third-party contractors. The Company is making and will continue
to make significant investments in its services organization to build up MRO
expertise.


                                       28
<PAGE>   29

<TABLE>
<CAPTION>
OPERATING EXPENSES

                                          Fiscal                   Fiscal                    Fiscal
                                           Year                     Year                      Year
                                           Ended       Change       Ended       Change        Ended
(in thousands)                            9/30/00        %         9/30/99         %         9/30/98
-------------------------------------------------------------------------------------------------------
<S>                                     <C>          <C>         <C>            <C>        <C>
Sales and marketing                       $66,870       42%        $46,952        27%        $37,053
Percentage of total revenues                 40%                      32%                       31%

Product development                       $21,288       42%        $14,959        13%        $13,247
Percentage of total revenues                 13%                      10%                       11%

General and administrative                $15,131       30%        $11,628        19%        $9,804
Percentage of total revenues                 9%                       8%                        8%

Goodwill amortization and other
intangibles                               $7,553       1,524%       $465          27%         $365
Percentage of total revenues                 4%                      ---                       ---

Purchased In-process product
Development                                 ---                      ---        (100)%       $9,172
Percentage of total revenues                ---                      ---                        8%
</TABLE>

Total operating expenses have increased 50% in fiscal 2000 as compared to fiscal
1999. The increase is primarily attributable to the significant investments made
to the MRO.COM sales and marketing organization.

The increases in sales and marketing expenses in fiscal 2000 and 1999 were due
to increases in sales, sales support and marketing personnel, sales commissions,
market research, telemarketing expenses and higher travel costs. In fiscal 2000,
additional sales support and marketing personnel were hired to support the
MRO.COM e-commerce organization. The Company has made and will continue to make
significant investments in the MRO.COM e-commerce sales and marketing
organization.

The increase in product development expenses year over year was primarily due to
the hiring of additional employees and the cost of third-party research and
development consultants. In fiscal 2000, additional personnel were hired to
further enhance and develop MRO.COM e-commerce products.

The Company intends to continue to make investments in electronic commerce
products for MRO supply chain management. The Company will also continue to
invest in the development and improvement of its MAXIMO enterprise asset
maintenance product.

The increases in general and administrative expenses in fiscal 2000 and 1999
were primarily due to the hiring of additional personnel and related benefits,
as well as other expenses to support the increase in revenues and global
expansion of the Company. Also contributing to the increase in fiscal 2000 were
provisions for bad debt to cover doubtful foreign receivables. The days' sales
outstanding for September 30, 2000 were 98 days, which was above the Company's
targeted range of 90 to 95 days.

The increase in goodwill amortization expense in fiscal 2000 is attributable to
the acquisitions of businesses completed during the year.

In February 1998, the Company acquired The A.R.M. Group Inc. The acquisition was
accounted for as a purchase. The Company allocated the purchase price to the
assets acquired and liabilities assumed based on their estimated fair value. The
fair value assigned to intangible assets acquired consisted of

                                       29
<PAGE>   30

purchased in-process product development and completed technology. In the
opinion of management, the purchased in-process product development had not yet
reached technological feasibility and had no alternative future use.
Accordingly, the Company recorded a non-recurring charge of $9.2 million during
the second quarter of fiscal 1998. The value was determined by estimating the
costs to develop the purchased in-process technology into commercially viable
products, estimating the net cash flows from such projects, and discounting the
net cash flows back to their present values.

<TABLE>
<CAPTION>
NON-OPERATING EXPENSES

                                               Fiscal                  Fiscal                  Fiscal
                                                Year                    Year                    Year
                                               Ended       Change      Ended       Change      Ended
(in thousands)                                9/30/00        %        9/30/99        %        9/30/98
--------------------------------------------------------------------------------------------------------
<S>                                          <C>         <C>         <C>          <C>        <C>
Interest income                                $3,221        6%        $3,052        27%       $2,411
Interest (expense)                             $(107)       114%       $ (50)       (87)%      $(389)
Other income (expense)                          $686       (492)%      $(175)       (54)%      $(376)
Loss on minority interest                        ---        ---         ---        (100)%      $(44)
</TABLE>

The increase in interest income in fiscal 2000 is attributable to interest
earned on marketable securities and cash equivalents from cash flow generated
from operations including accounts receivable collections. The Company
liquidated a portion of its marketable securities in March 2000 in order to
complete the purchase of INTERMAT, Inc. and has thus earned less interest income
from investments. The Company may decide to make further investments in
marketable securities in the future.

The increase in interest expense in fiscal 2000 was due to premiums amortized
for purchased marketable securities. In

                                       30
<PAGE>   31

fiscal 1998, the Company obtained financing from a third party for a receivable
due from the United States Government, which is why interest expense was lower
in fiscal 1999 as compared with fiscal 1998.

Other income for fiscal 2000 was primarily attributable to a gain recorded in
the fourth quarter for the sale of short-term investments. The decrease in other
expense in fiscal 1999 was attributable to income derived from the MAXIMO Users
Group Conference, offset by foreign translation losses. To date, the Company has
not engaged in currency hedging transactions.

PROVISION FOR INCOME TAXES

The Company's effective tax rate was 35% in fiscal 2000. The increase in the
effective tax rate in 2000 is mainly attributable to the effects of state income
tax law. The Company's effective tax rate in fiscal 1999 was 34%. The lower
effective tax rate in fiscal 1999 compared to fiscal 1998 was primarily due to
foreign tax credits and benefits from a foreign sales corporation. The Company's
effective tax rate before a one time non-deductible charge for purchased
in-process product development was 35% in fiscal 1998. The income tax expense
provided during fiscal 1998 reflects the non-deductible nature of certain
charges related to the acquisition of the A.R.M. Group, Inc.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2000, the Company had cash and cash equivalents and
marketable securities of $36.9 million and working capital of $50.1 million.
Cash provided by operating activities for fiscal 2000 was $5.5 million,
primarily attributable to income generated for the year, an increase in deferred
revenue, an increase in deferred income taxes, an increase in accounts payable,
offset by increases in income taxes payable and accounts receivable.

Cash used in investing activities for fiscal year 2000 totaled $38.6 million,
primarily due to acquisitions of businesses and property and equipment, offset
by sales of marketable securities in order to complete the purchase of INTERMAT,
Inc. in the quarter ended March 31, 2000.

Cash provided by financing activities for fiscal year 2000 was $5.1 million,
resulting from proceeds received from exercises of employee stock options.

As of September 30, 2000, the Company's principal commitments consist primarily
of office leases for its U.S. and European

                                       31
<PAGE>   32

headquarters. Under the terms of the U.S. lease agreement, upon termination of
the lease, the Company has the right to extend the lease for an additional six
year term for an agreed upon fixed cost. The Company leases its facilities and
certain equipment under non-cancelable operating lease agreements that expire at
various dates through June 2006.

As of September 30, 2000, the Company's subsidiary AIT, had a $2,500,000 line of
credit with a bank, which matures on July 1, 2001. The two notes bear interest
at the bank's prime interest rate and the bank's prime interest rate plus .50%,
respectively. The prime interest rate at September 30, 2000 was 9.5%. The notes
are secured by the business assets of AIT. As of September 30, 2000, the amount
outstanding on this line of credit was $2,278,000.

The Company may use a portion of its cash to acquire additional businesses,
products and technologies complementary to its business. The Company also
plans to make investments over the next year in its MRO.COM e-commerce products,
and to develop content and add suppliers to www.mro.com, its e-commerce hub.

The Company believes that its current cash balances and marketable securities
combined with cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements through at least September 30,
2001.

FACTORS AFFECTING FUTURE PERFORMANCE

The nature of forward-looking information is that such information involves
significant assumptions, risks and uncertainties. Certain public documents of
the Company and statements made by authorized officers, directors, employees,
agents and representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the factors described
below, and by other assumptions, risks and uncertainties. Forward-looking
information is based on assumptions, estimates, forecasts and projections
regarding the Company's future results as well as the future effectiveness of
the Company's strategic plans and future operational decisions. Forward-looking
statements made by or on behalf of the Company (including without limitation
those identified by footnotes in the foregoing discussion) are subject to the
risk that the forecasts, projections, and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may become
inaccurate. Accordingly, actual results and the Company's implementation of its
plans and operations may differ materially from forward-looking statements made
by or on behalf of the Company. The following discussion identifies certain
important factors that could affect the Company's actual results and actions and
could cause such results and actions to

                                       32
<PAGE>   33

differ materially from any forward-looking statements made by or on behalf of
the Company that related to such results and actions.

Other factors, which are not identified herein, could also have such an effect.

RAPID TECHNOLOGICAL CHANGE

The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements. The Company's success depends upon its ability to continue to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and industry standards, and achieve market acceptance. In particular, the
Company believes that it must continue to respond quickly to users' needs for
new functionality and to advances in hardware and operating systems, and that
it must continue to create products that conform to industry standards regarding
the communication and interoperability between software products of different
vendors. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in product development or introduction, could result in a loss of
competitiveness and revenues. There can be no assurance that the Company will be
successful in developing and marketing new products or product enhancements, or
that the Company will not experience significant delays in developing such new
products or product enhancements. Such delays could have a material adverse
effect on the Company's results of operations. In addition, there can be no
assurance that new products and product enhancements developed by the Company
will achieve market acceptance.

DEPENDENCE ON MAXIMO

A significant portion of the Company's revenues are derived from the licensing
of its MAXIMO family of products and to related services and support. Revenues
from licenses of MAXIMO and related services and support accounted for
approximately 83% of the Company's total revenues in fiscal 2000, but declined
in absolute dollar amount compared with fiscal 1999. The Company's financial
performance in 2001 depends largely on continued market acceptance of MAXIMO,
and the acceptance of its Demand-Side e-commerce procurement application MAXIMO
Buyer. The Company believes that continued market acceptance of MAXIMO will
largely depend on its ability to enhance and broaden the capabilities of MAXIMO
by among other things, developing additional application modules and by
developing and incorporating into the MAXIMO product technologies that are

                                       33
<PAGE>   34

emerging in connection with the Internet. Any factor adversely affecting sales
of MAXIMO, such as delays in development, significant software flaws,
incompatibility with significant hardware platforms, operating systems or
databases, increased competition or negative evaluations of MAXIMO, would have a
material adverse effect on the Company's business and financial results.

NEW PRODUCTS; NEW MARKETS

In the first quarter of fiscal 2001, the Company repositioned its MRO.COM brand
Internet-based business-to-business marketplace as mroDistributor,
mroManufacturer and mroConnect, offering the suppliers of MRO goods and services
the ability to drive and control their Internet-based e-commerce initiatives.

There can be no assurance that the Company's Supply-Side products will be sold
successfully, or that the Company's Supply-Side products will achieve market
acceptance. There is also no assurance that the Company and its customers will
create a large enough community of sellers, connected to a large enough
community of buyers, for the Company to achieve leverage and market synergy
between its Demand-Side and Supply-Side products.

The Company's future success in the electronic commerce market may depend on its
ability to accurately determine the functionality and features required by its
customers, as well as the ability to enhance its Supply-Side products and
deliver them in a timely manner. The Company may incur substantial costs to
enhance and modify its Supply-Side products and services in order to meet the
demands of this growing and changing market. The Company's Supply-Side product
segment is not yet profitable and may not be profitable for sometime.

MAXIMO Extended Enterprise is now marketed to satisfy prospective customers'
e-procurement requirements, and its pricing has been changed from user-based
pricing to demand capacity pricing, where the customer purchases the right to
process a certain number of transactions during the year. There can be no
assurance that this pricing model will be accepted in the market, and sales of
MAXIMO could be delayed or lost if the Company has to change its pricing model.
MAXIMO Buyer is also offered to non-MAXIMO customers who wish to engage in
e-procurement. The Internet e-procurement market is a nascent market that may
undergo rapid technological change and rapid influx of competing technologies
and vendors. The Company cannot predict the present and future size of the
potential market for its MAXIMO Extended Enterprise and MAXIMO Buyer products,
or whether the Demand-Side products will achieve acceptance in that market.

                                       34
<PAGE>   35

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY

The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results, which may
negatively impact the price of our stock. The Company's revenues and income from
operations typically grow at a lower rate or decline in the first quarter of
each fiscal year, compared to the fourth quarter of the preceding fiscal year.
In addition, revenues are typically higher in the fourth quarter than in other
quarters of the year. The Company believes that these quarterly patterns are
partly attributable to the Company's sales commission policies, which compensate
members of the Company's direct sales force for meeting or exceeding annual
quotas. In addition, the Company's quarterly revenues and operating results have
fluctuated historically due to the number and timing of product introductions
and enhancements, the budgeting and purchasing cycles of customers, the timing
of product shipments and the timing of marketing and product development
expenditures. The Company typically realizes a significant portion of its
revenue from sales of software licenses in the last two weeks of a quarter,
frequently even in the last days of a quarter. Failure to close a small number
of large software license contracts may have a significant impact on revenues
for any quarter and could, therefore, result in significant fluctuations in
quarterly revenues and operating results. Accordingly, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.

The Company generally ships its products upon receipt of orders and maintains no
significant product backlog. As a result, revenues from license fees in any
quarter are substantially dependent on orders booked and shipped in that
quarter. A delay in or loss of orders can cause significant variations in
operating results. A significant portion of the Company's operating expenses is
fixed in the short term, and planned expenditures are based primarily on sales
forecasts. Accordingly, if revenues do not meet the Company's expectations in
any given quarter, operating results may be materially adversely affected.

COMPETITION

The market for enterprise asset maintenance software such as MAXIMO is
fragmented by geography, by hardware platform and by industry orientation, and
is characterized by a large number of competitors including both independent
software vendors and certain enterprise resource planning ("ERP") vendors.
Independent software vendors include Datastream, Manugistics and Indus. MAXIMO

                                       35
<PAGE>   36
also competes with integrated ERP systems which include integrated maintenance
modules provided by several large vendors, such as SAP, Oracle and JD Edwards
and others. Currently, MAXIMO competes with products of a number of large
vendors, some of which have traditionally provided maintenance software running
on mainframes and minicomputers and are now offering systems for use in the
client/server environment. MAXIMO also encounters competition from vendors of
low cost maintenance management systems designed initially for use by a single
user or limited number of users as vendors of these products upgrade their
functionality to enter the client/server market. Some of the companies mentioned
above have also developed e-procurement applications that are competitive with
MAXIMO Buyer.

The Company's Supply-Side business has many diverse competitors offering a wide
range of differing products, services and technologies. The Company expects
competition to intensify as current competitors expand their product offerings
and new competitors enter the market. We may not remain competitive, and
increased competition could seriously harm our business. Our competitors offer a
variety of e-business products that compete with ours including supply chain and
other core Supply-Side business. We may compete with vendors who have
established electronic marketplaces and indirect procurement capabilities, such
as Ariba and Commerce One. Other competitive factors include internal
development efforts by corporate information technology departments and
companies offering customized products.

Certain of the Company's competitors have greater financial, marketing, service
and support and technological resources than the Company. To the extent that
such competitors increase their focus on the asset maintenance or planning and
cost systems markets, or on the industrial supply chain market, the Company
could be at a competitive disadvantage.

INTERNATIONAL OPERATIONS

A significant portion of the Company's total revenues is derived from operations
outside the United States. The Company derived 39%, 46%, and 46% of its total
revenue from sales outside the United States in fiscal years 2000, 1999, and
1998, respectively. The Company continues to invest in international
infrastructure, global product functionality and translated versions of
financial and other software products. In the event international expansion
and/or product globalization efforts are not successful, the Company's business
operating results and financial condition may be adversely affected. This
international

                                       36
<PAGE>   37

business is subject to various risks common to international activities,
including exposure to currency fluctuations, greater difficulty in collecting
accounts receivable, political and economic instability, the greater difficulty
of administering business abroad and the need to comply with a wide variety of
foreign import and United States export laws and regulatory requirements.

A significant portion of the Company's total revenue is derived from
international operations that are conducted in foreign currencies. Changes in
the values of these foreign currencies relative to the United States dollar have
in the past adversely affected, and may in the future affect, the Company's
results of operations and financial position. Gains and losses on translation to
United States dollars and settlement of receivables from international
subsidiaries may contribute to fluctuations in the Company's results of
operations. To date, the Company has not engaged in currency hedging
transactions. The Company may in the future undertake currency hedging, although
there can be no assurance that hedging transactions, if entered into, would
materially reduce the effects of fluctuations in foreign currency exchange rates
on the Company's results of operations.

DEPENDENCE ON THIRD PARTIES

The Company has entered into nonexclusive license agreements with other third
party software developers, pursuant to which the Company incorporates into its
products software providing certain application development, user interface,
business intelligence, content and graphics capabilities developed by these
companies. If the Company were unable to renew these licenses (or unable to
renew them on commercially reasonable terms), or if any of such vendors were to
become unable to support and enhance its products, the Company could be required
to devote additional resources to the enhancement and support of these products
or to acquire or develop software providing equivalent capabilities, which could
cause delays in the development and introduction of products incorporating such
capabilities.

                                       37
<PAGE>   38


The Supply-Side operations, is dependent on Digital Island, a third party data
center, which could be destroyed or damaged. In addition, the Company must stay
on good terms with this vendor, and be able to renew its agreement with this
vendor on commercially reasonably terms. If this data center were to become
inoperable or unavailable on commercially reasonable terms, the Company would
incur significant expense, and potentially lose its ability to provide these
services altogether during the period of downtime and transition, resulting in
customer dissatisfaction and market rejection of its Supply-Side offerings. The
Company's Supply-Side operations are dependent upon the Company's ability to
protect computer equipment and the information stored in these third party data
centers against damage that may be caused by natural disasters, fire, power
loss, telecommunication or Internet failures, unauthorized intrusions, computer
viruses and other similar damaging events. The Company cannot assure that any of
these damaging events would not result in a prolonged outage of the Company's
network services or that the Company would not experience a reduction of
revenues or unexpected expenses which could have a material adverse effect on
our business and financial results.

HOSTING

The Company does not have extensive experience in hosting applications. We may
not adequately predict the flow of traffic. If we do not predict the volume of
traffic adequately, we may experience slower response times or other problems.
Any delays in response time or performance problems could cause our customers to
perceive this service as not functioning properly and they may discontinue use
of our products and services.

The Company's success and profitability in its Supply-Side business is dependent
on the Company's ability to increase the scaleability and performance of its
Supply-Side solutions, meaning that the Company must be able to host and operate
a large number of mroDistributor, mroManufacturer and mroConnect product
instances on a single computer using multiple processors. This is because the
Company incurs fixed costs associated with the hosting environment, regardless
of how many, or how few, Supply-Side products are hosted at the same time. If
the Company is unable to host a certain number of Supply-Side solutions per
computer, then the Supply-Side business may not become profitable for a long
time. Moreover, if the Company is not able to operate a large number of
Supply-Side product instances on the same computer without denigrating product
performance, the Supply-Side solutions may not gain customer acceptance and
market penetration.



                                       38
<PAGE>   39

ERRORS IN DATA

The Company needs to publish accurate catalog data, as this is critical to our
customers' businesses. Our content management tools help suppliers manage the
collection and publication of catalog content. Any defects or errors in these
tools, or in the catalog data produced by using them, could deter businesses
from utilizing our Supply-Side solutions.

PRODUCT DEVELOPMENT:  INTERNET

The Company has developed a Java-based component architect software application
to incorporate into the MAXIMO product technologies emerging in conjunction with
the Internet. Internet technologies and applications generally are developing
and gaining acceptance rapidly in the market. MRO supply chain management using
electronic commerce is a nascent market with many standards and technologies
remaining to be developed. Accordingly, developing technologies pose risks to
the Company. The Company believes that electronic commerce products and
technologies complement the Company's enterprise asset management products.
There can be no assurance that the Company will successfully anticipate trends
in this market, that the Company will be successful in Internet technology
development or acquisition efforts or that the Company's Internet applications,
if developed, will achieve market acceptance.

INTERNET RELATED RISKS

If Internet usage continues to grow rapidly, its infrastructure may not be able
to support customer and user demands and its performance and reliability may
decline. If outages, delays, or viruses on the Internet occur frequently or
increase in frequency, overall Internet usage including usage of the Company's
products and services could grow more slowly or decline. The Company is
dependent upon improvements being made to the entire Internet as well as to
particular customers' networking infrastructures to alleviate overloading and
congestion. If these improvements are not made, the ability of the Company's
customers to utilize the Company's solution will be hindered, and the Company's
business, operating results and financial condition may suffer.

LIMITED INTELLECTUAL PROPERTY PROTECTION

The Company's success is dependent upon its proprietary technology. The Company
currently has one patent and protects its technology primarily through
copyrights, trademarks, trade secrets and employee and third party nondisclosure
agreements. The Company's software products are sometimes licensed to customers
under "shrink wrap" or "click wrap" licenses included

                                       39
<PAGE>   40

as part of the product packaging or acknowledged by customers who register
on-line. Although, in larger sales, the Company's shrink-wrap and click wrap
licenses may be accompanied by specifically negotiated agreements signed by the
licensee, in many cases its shrink-wrap and click wrap licenses are not
negotiated with or signed by individual licensees. Certain provisions of the
Company's shrink-wrap and click wrap licenses, including provisions protecting
against unauthorized use, copying, transfer and disclosure of the licensed
program, may be unenforceable under the laws of certain jurisdictions. 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.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any valid claim of
any patent or any other proprietary rights of others, there can be no assurance
that third parties will not assert infringement claims in the future. Litigation
may be necessary to enforce the Company's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could potentially have a material adverse result on our operating
results and financial condition.

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on certain key executive officers, technical and
sales employees, the loss of one or more of who could have an adverse impact on
the future operations of the Company. The Company does not have employment
contracts with, and does not maintain key person life insurance policies on, any
personnel. The Company continues to hire a significant number of additional
sales, services and technical personnel. Competition for hiring of such
personnel in the software industry is intense, and the Company from time to time
experiences difficulty in locating candidates with the appropriate
qualifications within the desired geographic locations, or with certain industry
specific domain expertise. It is widely believed that the technology industry is
at or beyond a condition of full employment. There can be no assurance that the
Company will be able to retain its existing personnel or attract additional
qualified employees.

CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS

As part of its overall strategy, the Company plans to continue to acquire or
invest in complementary companies, products, or technologies and to enter into
joint ventures and strategic

                                       40
<PAGE>   41

alliances with other companies. There can be no assurance that the Company will
be successful in overcoming the risks associated or problems encountered in
connection with such business combinations, investments, or joint ventures, or
that such transactions will not materially adversely affect the Company's
business, financial condition, or operating results.

POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE

Fiscal 1999 and 2000 was marked by significant fluctuations in the market price
of the common stock, par value $.01 per share, of the Company (the "Common
Stock"). Factors such as announcements of technological innovations or new
products by the Company, its competitors and other third parties, as well as
quarterly variations in the Company's results of operations and market
conditions in the industry, may cause the market price of the Common Stock to
continue to fluctuate significantly. In addition, the stock market in general
has recently experienced substantial price and volume fluctuations, which have
particularly affected the market prices of many software and e-commerce
companies and which have often been unrelated to the operating performance of
such companies. These broad market fluctuations also may adversely affect the
market price of the common stock.

EFFECT OF ACCOUNTING PRONOUNCEMENTS

On December 3, 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101, as ammended, summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. All registrants are expected to apply the accounting and
disclosure requirements that are described in SAB 101 by the fourth quarter of
their fiscal year beginning after December 15, 1999. The Company is in the
process of evaluating the impact of this interpretation on its future financial
statements.

NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS

The Company has no obligation to release publicly any revision or update to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.

                                       41
<PAGE>   42

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and
exposures to foreign currency exchange rate fluctuations.

At September 30, 2000, the Company held $36.9 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Cash equivalents are classified as available for sale and valued at amortized
cost, which approximates fair market value. A hypothetical 10 percent increase
in interest rates would not have a material impact on the fair market value of
these instruments due to their short maturity.

The Company develops its products in the United States and markets them in North
America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin
America. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Currently, the Company has no hedging contracts.


                                       42
<PAGE>   43

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information with respect to exhibits and financial statement schedules are
included in Part IV item 14(a)(1) and (2).

QUARTERLY FINANCIAL DATA (UNAUDITED)
The company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.

<TABLE>
<CAPTION>
(in thousands, except per share amounts)
2000 QUARTER
------------                                                                                                 Year
                                           Dec.31,        Mar. 31,       June 30,       Sep. 30,            Ended
ENDED:                                        1999            2000           2000           2000             2000
------                                     -------        --------       --------       --------         --------
<S>                                        <C>            <C>            <C>            <C>              <C>
Total revenues                             $37,986         $41,621        $45,293        $43,761         $168,661

Gross margin                                24,799          28,604         29,471         27,397          110,271
Income/(loss) from operations                3,219           2,609           (605)        (5,794)            (571)
Income/(loss) before income taxes            3,961           3,708           (463)        (3,977)           3,229
Provision(benefit) for income taxes          1,365           1,345           (177)        (1,406)           1,127
Net income/(loss)                            2,596           2,363           (286)        (2,571)           2,102

Net income per share, diluted              $  0.11         $  0.10        $ (0.01)       $ (0.12)        $   0.09
</TABLE>


<TABLE>
<CAPTION>
1999 QUARTER
------------                                                                                                 Year
                                           Dec.31,        Mar. 31,       June 30,       Sep. 30,            Ended
ENDED:                                        1998            1999           1999           1999             1999
------                                     -------        --------       --------       --------         --------
<S>                                        <C>            <C>            <C>            <C>              <C>
Total revenues                             $33,917         $32,910        $36,425        $42,413         $145,665

Gross margin                                23,190          21,694         24,730         28,723           98,337
Income from operations                       5,892           6,091          6,340          6,010           24,333
Income before income taxes                   6,595           6,440          6,747          7,378           27,160
Provision for income taxes                   2,309           2,146          2,269          2,556            9,280
Net income                                   4,286           4,294          4,478          4,822           17,880

Net income per share, diluted
                                           $  0.21         $  0.21        $  0.21        $  0.22         $   0.85
</TABLE>

On October 15, 1999, the Company's Board of Director's approved a 2-for-1 stock
split in the form of a dividend of its common stock. All historical share and
per data has been restated to reflect this stock split as though it had occurred
at the beginning of the earliest period presented.

                                       43
<PAGE>   44

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

                                    PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

     The directors and executive officers of the Company as of September 30,
2000 are as follows. Messrs. Drapeau and Fishman are Class III Directors, whose
terms expire in 2002. Messrs. Daniels and McMullen are Class I Directors, whose
terms expire in 2003. Messrs. Sayre and Stanzler are Class II Directors, whose
terms expire in 2001.

<TABLE>
<CAPTION>
NAME                        AGE                 POSITION
----                        ---                 --------
<S>                         <C>        <C>
Norman E. Drapeau, Jr.      40         President and Chief Executive
                                       Officer and Director - Class
                                       III

Robert L. Daniels           58         Executive Chairman of the
                                       Board - Class I

Peter J. Rice               48         Executive Vice President -
                                       Finance and Administration,
                                       Chief Financial Officer and
                                       Treasurer

William J. Sawyer           54         Executive Vice President-
                                       Operations

Ted D. Williams             52         Executive Vice President-
                                       Worldwide Sales

John W. Young               48         Executive Vice President -
                                       Products and Technology

Craig M. Newfield           41         Vice President, General
                                       Counsel and Clerk

Richard P. Fishman          54         Director - Class III

John A. McMullen            58         Director - Class I

Stephen B. Sayre            49         Director - Class II

Alan L. Stanzler            57         Director - Class II
</TABLE>

                                       44
<PAGE>   45

     NORMAN E. DRAPEAU, JR. joined the Company in 1982 as an applications
analyst. Since that time, he has held various positions with the Company,
including, from 1984 to 1987, that of Manager of Customer Support and from 1989
through 1991, that of Director, Product Marketing. In 1991, Mr. Drapeau was
appointed Vice President, Corporate Marketing, in 1992 was appointed Vice
President - Americas and in July 1996 was appointed Executive Vice President -
Worldwide Sales and Marketing, serving in that capacity until January 1998. In
January 1998, Mr. Drapeau was appointed Executive Vice President and Chief
Operating Officer and was also elected a director of the Company. In May 1998,
Mr. Drapeau was elected President and Chief Executive Officer.

     ROBERT L. DANIELS founded the Company in 1968 and has been a director since
that time. Mr. Daniels served as Chairman of the Board and Chief Executive
Officer from 1968 to 1996 and as President from 1968 to 1995. In May 1998, Mr.
Daniels was elected Executive Chairman of the Board.

     PETER J. RICE joined the Company in 2000 as Executive Vice President of
Finance and Administration, Chief Financial Officer, and Treasurer of the
Company. From 1998 to 2000, Mr. Rice was Vice President of Finance and
Administration, Chief Financial Officer, and Treasurer of Interleaf, a developer
of e-publishing and e-content software products. Interleaf was sold to
Broadvision, Inc. in 2000. From 1995 to 1998, Mr. Rice was Vice President, Chief
Financial Officer and Treasurer for Media 100, Inc. From 1990 to 1995, Mr. Rice
was Vice President, Corporate Controller and Chief Accounting Officer of M/A
Com, Inc. Prior there to, Mr. Rice held senior financial management positions at
Apollo Computer and Atex, Inc.

     WILLIAM J. SAWYER joined the Company in 1978 as an applications consultant
and served in various sales and services positions from 1978 to 1984. Mr. Sawyer
was a Vice President of the Company from 1984 to 1990 and Executive Vice
President from 1990 until November 1997. In November 1997, Mr. Sawyer left the
Company and joined Peritus Software Services, Inc., a software application
company, as Vice President, Operations. Mr. Sawyer rejoined the Company in
October 1998 as Executive Vice President of Operations.

     TED D. WILLIAMS originally joined the Company in 1984 and served as
Director, MAXIMO until 1988. From 1988 to 1993, Mr. Williams was President and
Chief Operating Officer of Comac Systems Corporation, a software application
company. In 1993, Mr. Williams rejoined the Company as Director, Eastern
Regional Sales. He was appointed Vice President-North American Sales in 1996 and
Vice President-Worldwide sales in January 1998. In

                                       45
<PAGE>   46

October 1998, Mr. Williams was appointed Executive Vice President-Worldwide
Sales.

     JOHN W. YOUNG originally joined the Company in 1985 and served until 1988
as MAXIMO Product Manager. From 1988 to 1992, Mr. Young was Vice President of
Sales of Comac Systems Corporation, a software application company. In 1992 he
rejoined the Company as Director of MAXIMO Product Design, was appointed Vice
President - Research and Development of the Company in 1995 and was appointed
Executive Vice President - Products and Technology of the Company in 1998.

     CRAIG M. NEWFIELD joined the Company as Vice President, General Counsel
and Clerk in September 2000. From October 1997 through August 2000, Mr.
Newfield was Vice President, General Counsel and Clerk of Interleaf, Inc., a
developer of e-publishing and e-content software products. Interleaf was sold
to Broadvision, Inc. in 2000. From April 1996 through September 1997, Mr.
Newfield was General Counsel and Secretary of OneWave, Inc., since renamed
Primix Solutions. From February 1993 to April 1996, Mr. Newfield served as
in-house counsel for Marcom Corporation.

     RICHARD P. FISHMAN was elected as a director in March 1999. Mr. Fishman is
currently Executive Vice President at MacAndrews & Forbes Group, Inc., where he
is responsible for venture capital investing. From 1995 to 1997, Mr. Fishman
served as Managing Director of GeoPartners Research, Inc., a strategy and
management consulting firm, where he headed the firm's venture capital
activities. From 1995 to 1997, Mr. Fishman was also Of Counsel at the law firm
of Atkin, Gump, Strauss, Hauer & Feld L.L.P. Mr. Fishman served as President and
Chief Executive Officer of Thinking Machines Corporation from 1993 to 1994 and
was a partner at the law firm of Milbank, Tweed, Hadley & McCoy from 1987 until
1993.

     JOHN A. MCMULLEN was elected as a director in April 2000. Mr. McMullen is
the Managing Principal of Cambridge Meridian Group, Inc., a strategy-consulting
firms that serves Fortune 500 and technology-based companies with which he has
been employed since 1985. Mr. McMullen taught business strategy at Harvard Law
School from the mid 1980's to 1990 and, as one of the original members of CMGI's
Board of Directors, served on that Board from 1988 through 1999. He currently
serves on the Board of Ezenia!, Inc., a Nasdaq listed company, in a term that
began this year. In addition, he serves, or has served , on the boards of twelve
other private, chiefly technology-oriented companies. From 1993 to 1997 he was
an informal advisor to Senator Bill Bradley (NJ). In 1998 he ran for the United
States Senate from Vermont.

     STEPHEN B. SAYRE was elected as a director in September 1998. Mr. Sayre is
currently the Vice President of Marketing for Idiom, Inc. From 1994 to 2000, he
was the Senior Vice President of Marketing at Lotus Development Corporation, a
subsidiary of IBM Corporation. Prior to joining Lotus in 1994, Mr. Sayre was
President of Boston Treasury Systems and has held other senior executive level
positions with Cullinet Software and Easel Corporation.

     ALAN L. STANZLER was elected as a director in May 1998. Mr. Stanzler served
as a director of the Company from 1992 to 1994, and as Clerk of the Company from
1990 to 1996. Mr. Stanzler is a

                                       46
<PAGE>   47

member of the law firm of Maselan Jones & Stanzler, P.C. From 1995 to 1998, Mr.
Stanzler was a member of the law firm of Davis, Malm & D'Agostine, P.C. and from
1978 to 1995 he was a partner in the law firm of Finnegan & Stanzler, P.C.

All directors hold office until the expiration of their respective terms as
described above and until their respective successors are duly elected and
qualified. Executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors.

The information concerning the compliance by the Company's officers, directors
and 10% shareholders with Section 16(a) of the Securities Exchange Act of 1934
is incorporated by reference to the information contained in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Stockholders under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" to be filed,
pursuant to Regulation 14A, within 120 days after the end of the Company's
fiscal year ended September 30, 2000.

(ITEMS 11,12,13)

In accordance with general instruction G(3) to Form 10-K, information required
by Part III is incorporated by reference from the Company's definitive Proxy
Statement for its 2000 Annual Meeting of Stockholders to be filed, pursuant to
Regulation 14A, within 120 days after the end of the Company's fiscal year ended
September 30, 2000.

                                       47
<PAGE>   48

                                     PART IV

              ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND

                               REPORTS ON FORM 8-K

     The financial statements and schedules filed as part of this Report are
listed in the following Index to Financial Statements and Schedules. The
exhibits filed as part of this Report are listed in the accompanying Index to
Exhibits.

(a)  The following documents are filed as a part of this Report:

     1.   Consolidated Financial Statements. The following Consolidated
          Financial Statements of the Company are filed as part of this report:

                                                                          PAGE
                                                                          ----
          Report of Independent Accountants                               53
          Consolidated Balance Sheets -
            September 30, 2000 and 1999                                   54
          Consolidated Statements of Operations -
            Years Ended September 30, 2000, 1999 and 1998                 55
          Consolidated Statements of Cash Flows -
            Years Ended September 30, 2000, 1999 and 1998                 56
          Consolidated Statements of Stockholders' Equity -
            Years Ended September 30, 2000, 1999 and 1998                 57
          Notes to Consolidated Financial Statements                      58

         Financial Statement Schedules.

         SCHEDULE                                                         PAGE
         --------                                                         ----

          II   Valuation and Qualifying Accounts                          80

          Schedules not listed above have been omitted because they are not
          applicable or are not required, or the information required to be set
          forth therein is included in the consolidated Financial Statements or
          Notes thereto.

          2.   Exhibits.

               Exhibits 10.1 through 10.5 comprise the Company's management
               contracts, compensatory plans or compensatory arrangements
               required to be identified pursuant to Item 14(a) of Form 10-K.

               3.   Instruments Defining the Rights of Security-Holders

                    3.1  Amended and Restated Articles of Organization of the
                         Company (included as Exhibit 3.3 to

                                       48
<PAGE>   49

                         the Company's Registration Statement on Form S-1,
                         Registration No. 33-76420, and incorporated herein by
                         reference)

                    3.2  Restated By-Laws of the Company, as amended (included
                         as Exhibit 3.2 to the Company's Annual Report on Form
                         10-K for the fiscal year ended September 30, 1996, File
                         No. 0-23852, and incorporated herein by reference)

                    3.3  Form of Certificate of Designation of Series A Junior
                         Participating Preferred Stock of Project Software &
                         Development, Inc. (which is attached as Exhibit A to
                         the Rights Agreement included as Exhibit 4 (b) to the
                         Company's Current Report on Form 8-K dated February 2,
                         1998, File No. 0-23852, and incorporated herein by
                         reference)

                    3.4  Amendment to Articles of Organization adopted on
                         December 15, 1999 (included as Exhibit 3.4 to the
                         Company's Form 10-Q for the quarter ended December 31,
                         1999, File No. 0-23852, and incorporated herein by
                         reference)

               4.   Instruments Defining the Rights of Security Holders,
                    Including Indentures

                    4.1  Specimen certificate for the Common Stock of the
                         Company (included as Exhibit 4.1 to the Company's
                         Registration Statement on Form S-1, Registration No.
                         33-76420, and incorporated herein by references)

                    4.2  Article 4B of the Amended and Restated Articles of
                         Organization of the Company (included as Exhibit 4.1 to
                         the Company's Registration Statement on Form S-1,
                         Registration No. 33-76420, and incorporated herein by
                         reference)

                    4.3  Rights Agreement dated as of January 27, 1998, between
                         Project Software & Development, Inc. and BankBoston,
                         N.A. as Rights Agent (included as Exhibit 4 (a) to the
                         Company's Current Report on Form 8-K dated February 2,
                         1998, File No. 0-23852, an incorporated herein by
                         reference)

                    4.4  Form of Certificate of Designation of Series A Junior
                         Participating Preferred Stock of

                                       49
<PAGE>   50

                         Project Software & Development, Inc. (included as
                         Exhibit 4 (b) to the Company's Current report on Form
                         8-K dated February 2, 1998, File No. 0-23852, and
                         incorporated herein by reference)

                    4.5  Form of Rights Certificate (included as Exhibit 4 (c)
                         to the Company's Current Report on Form 8-K dated
                         February 2, 1998, File No. 0-23852, and incorporated
                         herein by reference)

               9.   Voting Trust Agreements

                    9.1  1996 Daniels Voting Trust Agreement dated August 19,
                         1996 among Susan H. Daniels, Robert L. Daniels and
                         Robert L. Daniels, as trustee (included as Exhibit 9.1
                         to the Company's Annual Report on Form 10-K for the
                         fiscal year ended September 30, 1996, and incorporated
                         herein by reference)

               10.  Material Contracts

                    10.1 Fiscal Year 2000 Executive Bonus Plan (included as
                         Exhibit 10.1 to the Company's Quarterly Report on Form
                         10-Q for the quarter ended June 30, 2000, Commission
                         File No. 0-23852 and incorporated herein by reference)

                    10.2 Offer letter, Peter J. Rice, Executive Vice President
                         Finance & Administration, Chief Financial Officer &
                         Treasurer

                    10.3 Amended and Restated 1999 Equity Incentive Plan
                         (included as Exhibit 10.2 to the Company's Quarterly
                         Report on Form 10-Q for the quarter ended June 30,
                         2000, Commission File No. 0-23852 and incorporated
                         herein by reference)

                    10.4 Stock Purchase Agreement dated as of January 11, 2000,
                         between Project Software & Development, Inc. and
                         Strategic Distribution, Inc. (included as Exhibit 2.1
                         to the Company's Current Report on Form 8-K dated March
                         15, 2000, File No. 0-23852, and incorporated herein by
                         reference)

                    10.5 Amendment No. 1 to Stock Purchase Agreement dated
                         February 29, 2000 (included as Exhibit 2.2 to the
                         Company's Current Report on Form 8-K dated March 15,
                         2000, File No. 0-23852, and incorporated herein by
                         reference)

                                       50
<PAGE>   51

               21.  Subsidiaries of the registrant

                    21.1 Subsidiaries of the Company

               23.  Consents of independent accountants

                    23.1 Consent of PricewaterhouseCoopers LLP

               27.  Financial Data Schedule

                    27.1 Financial Data Schedule

(b)  Reports on Form 8-K

     During the three months ended September 30, 2000, the Company did not file
     a current report on Form 8-K.

The Company will furnish a copy of any exhibit listed to requesting stockholders
upon payment of the Company's reasonable expense in furnishing those materials.

                                       51
<PAGE>   52

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated: December 29, 2000

                      PROJECT SOFTWARE & DEVELOPMENT, INC.


                           By:  /s/ Norman E. Drapeau, Jr.
                               ---------------------------
                                    Norman E. Drapeau, Jr.
                                    President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<S>                                <C>                        <C>
/s/ Norman E. Drapeau, Jr.         President and Chief        December 29, 2000
----------------------------       Executive Officer
Norman E. Drapeau, Jr.             (Principal Executive
                                   Officer)

/s/ Robert L. Daniels              Executive Chairman of      December 29, 2000
----------------------------       the Board
Robert L. Daniels

/s/ Peter J. Rice                  Executive Vice President,  December 29, 2000
----------------------------       Chief Financial Officer
Peter J. Rice                      and Treasurer
                                   (Principal Financial and
                                   Accounting Officer)

/s/ Richard P. Fishman             Director                   December 29, 2000
----------------------------
Richard P. Fishman

/s/ John A. McMullen               Director                   December 29, 2000
----------------------------
John A. McMullen

/s/ Stephen B. Sayre               Director                   December 29, 2000
----------------------------
Stephen B. Sayre

/s/ Alan L. Stanzler               Director                   December 29, 2000
----------------------------
Alan L. Stanzler
</TABLE>

                                       52
<PAGE>   53

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Project Software & Development,
Inc.:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Project Software & Development, Inc. and its subsidiaries
at September 30, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

                                        PricewaterhouseCoopers LLP
Boston, Massachusetts
November 1, 2000

                                       53
<PAGE>   54

                      PROJECT SOFTWARE & DEVELOPMENT, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,       SEPTEMBER 30,
                                                                 -------------       -------------
                                                                     2000                1999
                                                                     ----                ----
  (IN THOUSANDS)
<S>                                                                <C>                 <C>
                          ASSETS
Current assets:
  Cash and cash equivalents                                        $  31,584           $  59,903
  Marketable securities                                                4,241              30,920
  Accounts receivable, trade, less allowance
   for doubtful accounts of $2,825 at September 30, 2000
   and $2,867 at September 30, 1999, respectively                     47,699              38,736
  Prepaid expenses and other current assets                            7,148               5,090
  Deferred income taxes                                                6,097               2,017
                                                                   ---------           ---------
    Total current assets                                              96,769             136,666
                                                                   ---------           ---------

Marketable securities                                                  1,059               7,413
Property and equipment, net                                           14,571              12,055
Intangible assets, net                                                63,286               1,509
Other assets                                                           2,168                 406
Deferred income taxes                                                  3,203                 984
                                                                   ---------           ---------
    Total assets                                                   $ 181,056           $ 159,033
                                                                   =========           =========

           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable and accrued expenses                             $  16,013           $  12,172
 Accrued compensation                                                  8,551               8,429
 Income taxes payable                                                    660               4,227
 Deferred revenue                                                     19,080              16,580
 Deferred income taxes                                                    94                 187
 Line of credit                                                        2,278                  --
                                                                   ---------           ---------
    Total current liabilities                                         46,676              41,595
                                                                   ---------           ---------

Deferred income taxes                                                     17                  --
Deferred rent                                                            112                 146
Deferred revenue                                                          59                  92

Commitments and contingencies

Equity in minority interest                                               --                  44

Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
 none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
 22,069 and 21,302 issued at September 30, 2000
 and September 30, 1999, respectively                                    220                 213
Additional paid-in capital                                            83,185              67,418
Deferred compensation                                                   (233)                 --
Retained earnings                                                     52,312              50,210
Accumulated other comprehensive income                                (1,292)               (685)
                                                                   ---------           ---------
    Total stockholders' equity                                       134,192             117,156
                                                                   ---------           ---------

    Total liabilities and stockholders' equity                     $ 181,056           $ 159,033
                                                                   =========           =========
</TABLE>

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

                                       54
<PAGE>   55

                      PROJECT SOFTWARE & DEVELOPMENT, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      YEAR ENDED SEPTEMBER 30,
                                                                      ------------------------
                                                           2000                1999                1998
                                                           ----                ----                ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>                 <C>                 <C>
Revenues:
    Software                                             $  70,987           $  62,240           $  54,007
    Support and services                                    97,674              83,425              66,009
                                                         ---------           ---------           ---------
             Total revenues                                168,661             145,665             120,016
                                                         ---------           ---------           ---------

Cost of revenues:
    Software                                                 4,739               5,018               4,537
    Support and services                                    53,651              42,310              32,936
                                                         ---------           ---------           ---------
             Total cost of revenues                         58,390              47,328              37,473
                                                         ---------           ---------           ---------

Gross margin                                               110,271              98,337              82,543

Operating expenses:
    Sales and marketing                                     66,870              46,952              37,053
    Product development                                     21,288              14,959              13,247
    General and administrative                              15,131              11,628               9,804
    Goodwill amortization and other intangibles              7,553                 465                 365
    Charge for purchased in-process
       product development                                      --                  --               9,172
                                                         ---------           ---------           ---------
             Total operating expenses                      110,842              74,004              69,641
                                                         ---------           ---------           ---------

(Loss)/income from operations                                 (571)             24,333              12,902

    Interest income                                          3,221               3,052               2,411
    Interest expense                                          (107)                (50)               (389)
    Other income (expense), net                                686                (175)               (376)
    Loss on minority interest                                   --                  --                 (44)
                                                         ---------           ---------           ---------

Income before income taxes                                   3,229              27,160              14,504

Provision for income taxes                                   1,127               9,280               8,282
                                                         ---------           ---------           ---------

Net income                                               $   2,102           $  17,880           $   6,222
                                                         =========           =========           =========

Net income per share, basic                              $    0.10           $    0.87           $    0.32
                                                         ---------           ---------           ---------
Net income per share, diluted                            $    0.09           $    0.85           $    0.31
                                                         ---------           ---------           ---------

Shares used to calculate net income per share
      Basic                                                 21,682              20,459              19,865
      Diluted                                               22,786              21,094              20,156
</TABLE>



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

                                       55
<PAGE>   56

                       PROJECT SOFTWARE & DEVELOPMENT, INC
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             YEAR ENDED SEPTEMBER 30,
                                                                   2000               1999               1998
                                                                   ----               ----               ----
                                                                                  (IN THOUSANDS)
<S>                                                              <C>                <C>                <C>
Cash flows from operating activities:
   Net income                                                    $  2,102           $ 17,880           $  6,222
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation and amortization                                  13,094              4,255              4,392
    Loss on sale and disposal of property
      and equipment                                                    49                 32                151
    Amortization of discount on marketable securities                 108                188               (563)
    Deferred rent                                                     (35)                 2                132
    Deferred income taxes                                          (6,484)              (857)              (355)
    Charge for purchased in-process product development                --                 --              9,036
    Changes in operating assets and liabilities,
      net of effect of acquisitions:
      Accounts receivable                                          (9,350)            (7,860)            (6,300)
      Prepaid expenses                                                (11)            (1,132)              (891)
      Other assets                                                 (4,844)            (1,080)               134
      Accounts payable and accrued expenses                         6,111              3,276             (2,970)
      Accrued compensation                                            (91)             2,631              1,354
      Income taxes payable                                         (3,446)               252                325
      Tax benefit on exercise of employee stock options             6,000                715                464
      Deferred revenue                                              2,352              3,477              3,403
                                                                 --------           --------           --------
Net cash provided by operating activities                           5,555             21,779             14,534
                                                                 --------           --------           --------

Cash flows from investing activities:
    Acquisitions of businesses, net of cash acquired              (62,278)               397             (7,009)
    Acquisitions of property and equipment and other
       capital expenditures                                        (9,291)            (6,824)            (4,172)
    Additions to computer software costs                               --                 --             (1,284)
    Investment in minority interest                                    --                 --                 47
    Purchases of marketable securities                            (51,884)           (41,022)           (90,433)
    Sales of marketable securities                                 84,839             41,300             90,234
                                                                 --------           --------           --------
Net cash used in investing activities                             (38,614)            (6,149)           (12,617)
                                                                 --------           --------           --------

Cash flows from financing activities:
    Payments on bank loans and debenture                               --                 --             (1,492)
    Proceeds from issuance of common stock,
      net of issuance costs                                            --             13,546                 --
    Proceeds from exercise of stock options                         5,102              2,604              1,327
                                                                 --------           --------           --------
Net cash provided by/(used in) financing activities                 5,102             16,150               (165)
                                                                 --------           --------           --------

Effect of exchange rate changes on cash                              (362)              (331)               738
                                                                 --------           --------           --------
Net (decrease)/increase in cash and cash equivalents              (28,319)            31,449              2,490

Cash and cash equivalents, beginning of year                       59,903             28,454             25,964
                                                                 --------           --------           --------
Cash and cash equivalents, end of year                           $ 31,584           $ 59,903           $ 28,454
                                                                 ========           ========           ========
</TABLE>

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

                                       56
<PAGE>   57

<TABLE>
<CAPTION>
                               Common    Stock                                         Accumulated
                               -----------------  Additional                              Other          Total
                               Shares              Paid-in      Deferred     Retained  Comprehensive  Stockholders'  Comprehensive
(in thousands)                 Issued  Par Value   Capital    Compensation   Earnings     Income         Equity          Income
----------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>     <C>        <C>         <C>            <C>       <C>            <C>            <C>
Balance at September 30, 1997  19,713    $198     $   48,064        $   0    $ 26,108       $  (400)       $ 73,970

 Stock options exercised
    and related tax benefit,
    employee stock purchases      197       2          1,789                                                  1,791
 Acquisitions, net of merger
    expenses                       55                    457                                                    457
 Net income                                                                     6,222                         6,222          6,222
 Translation adjustment                                                                         323             323            323
 Net unrealized loss on
    marketable securities                                                                      (139)           (139)          (139)
                                                                                                                             -----
 Comprehensive income                                                                                                        6,406
----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998  19,965     200         50,310            0      32,330          (216)         82,624

 Stock options exercised and
    related tax benefit,
    employee stock purchases      317       3          3,316                                                  3,319
 Acquisitions, net of merger
    expenses                       20                    256                                                    256
 Shares issued to W.W.
    Grainger, Inc. net of
    legal expenses              1,000      10         13,536                                                 13,546
 Net income                                                                    17,880                        17,880         17,880
 Translation adjustment                                                                        (346)           (346)          (346)
 Net unrealized loss on
    marketable securities                                                                      (123)           (123)          (123)
                                                                                                                             -----
 Comprehensive income                                                                                                       17,411
----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999  21,302     213         67,418            0      50,210          (685)        117,156

 Stock options exercised and
    related tax benefit,
    employee stock purchases      491       5         11,097                                                 11,102
 Acquisitions, net of merger
    expenses                      261       2          4,437                                                  4,439
 Deferred compensation,
    related to common stock
    grants                         15                    233         (233)                                        0
 Net income                                                                     2,102                         2,102          2,102
 Translation adjustment                                                                        (636)           (636)          (636)
 Net unrealized gain on
    marketable securities                                                                        29              29             29
                                                                                                                                --
 Comprehensive income                                                                                                        1,495
----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000  22,069    $220     $   83,185        $(233)   $ 52,312       $(1,292)       $134,192
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       57
<PAGE>   58

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business
     The Company develops, markets, sells and supports a business-to-business
internet-based e-Commerce network, online procurement and desktop requisition
software, content and management tools, and cataloging services, which enable
businesses to engage in electronic commerce. The Company also develops, markets,
sells and supports enterprise asset maintenance software used by businesses,
government agencies and other organizations to assist in the management of their
high-value capital assets, such as plants, facilities, and production equipment,
to cut inventories and supply chain costs, control maintenance expenses, reduce
downtime, and more effectively deploy productive assets, personnel and other
resources.

Basis of Presentation
     The consolidated financial statements include the accounts of Project
Software & Development, Inc. ("PSDI") and its majority-owned subsidiaries
(collectively, the "Company"). All intercompany accounts and transactions have
been eliminated. Minority ownership interests greater than or equal to 20% and
less than 50% are accounted for by the equity method. Certain prior year
financial statement items have been reclassified to the current year's format.

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 amount of assets and liabilities and
disclosures 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.

Cash and Cash Equivalents
     The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market funds, which are stated at cost, which
approximates fair market value.

Concentration of Credit Risk
     Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of temporary cash investments,
marketable securities and accounts receivable. Credit risk on accounts
receivable is minimized as a result of the diverse nature of the Company's
customer base. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit when deemed necessary.


                                       58
<PAGE>   59

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Fair Value of Financial Instruments
     The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of their short-term nature.

Marketable Securities
     The Company's marketable securities are classified as available-for-sale
and are stated at their fair value. All marketable securities are held in the
Company's name and are held in custody with one major financial institution. The
fair value of marketable securities was determined based on quoted market
prices. Unrealized gains and losses on securities classified as
available-for-sale are reported as a separate component of stockholders' equity
and are included in other comprehensive income.

Computer Software Costs
     Computer software costs consist of internally developed software.
Development costs incurred in the research and development of new software
products, and enhancements to existing products, are expensed in the period
incurred unless they qualify for capitalization under Statement of Financial
Accounting Standards No. 86, "Accounting for the Cost of Computer Software to Be
Sold, Leased or Otherwise Marketed." These costs are amortized on a
straight-line basis over the estimated useful or market life of the software
(generally, one to two years). No software development costs were capitalized in
fiscal 2000 and 1999 since costs incurred subsequent to the establishment of
technological feasibility were not significant. There was no amortization
expense in fiscal 2000. Amortization expense for fiscal 1999 and 1998 was
$248,000 and $879,000, respectively.

Goodwill and Intangibles

     Goodwill represents the excess of the cost of acquired businesses over the
fair value of their net tangible and identified intangible assets. Goodwill is
evaluated at each balance sheet date to determine whether any potential
impairment exists. Goodwill is generally amortized on a straight-line basis over
the estimated useful life, usually five years. Other intangibles primarily
consist of purchased technology, workforce and customer lists and are amortized
over periods ranging from three to five years.

     The Company evaluates the potential impairment of its long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. At the occurrence of a certain event of change
in circumstances, the Company evaluates the potential impairment of an asset
based on estimated future undiscounted cash flows. In the event impairment
exists, the Company will measure the amount of such impairment based on the
present value of estimated future cash flows using a discount rate commensurate
with the risks involved. As of September 30, 2000, the Company has determined
that no impairment of long-lived assets exists. Upon the occurrence of a
material circumstance, such as the failure of certain technology to demonstrate
promise that it may gain commercial acceptance or the failure of a business
segment to achieve certain performance objectives, the Company will reassess the
value of associated assets and if appropriate at that time, will recognize an
impairment charge.

Depreciation and Amortization
     Property and equipment are stated at cost.
     Depreciation is computed over the estimated useful lives of the assets as
follows:

          Description                          Estimated Useful Life
          -----------                          ---------------------

          Computer equipment & software               3 years
          Vehicles                                    3 years
          Furniture and fixtures                      5 years

     Leasehold improvements are amortized on the straight-line method over the
shorter of their estimated useful life or the remaining term of the lease.
Maintenance and repairs are charged to expense as incurred. Upon retirement or
sale, the cost of the assets disposed of and the related

                                       59
<PAGE>   60

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of net income.

Advertising Expense
     The Company recognizes advertising expense as incurred. Advertising expense
was approximately $6,296,000, $4,176,000, and $3,704,000 for fiscal 2000, 1999,
and 1998, respectively.

Income per Share
     Basic income per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted income per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. For purposes of this calculation, stock options are
considered dilutive potential common shares in periods in which they have a
dilutive effect. All historical income per share amounts have been restated to
reflect a two-for-one stock split effective December 22, 1999.

Income Taxes
     The Company accounts for income taxes under the asset and liability
approach for accounting and reporting for income taxes. The Company computes
deferred income taxes based on the differences between the financial statement
and tax basis of assets and liabilities using enacted rates in effect in the
years in which the differences are expected to reverse. The Company must
establish a valuation allowance to offset temporary deductible differences, net
operating loss carryforwards and tax credits when it is more likely than not
that the deferred tax assets will not be realized.

     The Company has not provided for the U.S. income tax on earnings of its
foreign subsidiaries as it considers certain of these earnings are intended to
be permanently reinvested. At September 30, 2000, the undistributed earnings of
foreign subsidiaries were $2,610,000.

Revenue Recognition
     The Company licenses its software products under noncancellable license
agreements and provides services including training, installation, consulting,
and maintenance, consisting of product support services and periodic updates.
Software license fee revenues are generally recognized upon contract execution
and shipment, provided collection of the resulting receivable is deemed
probable, the fees are fixed or determinable, and no significant modification or
customization of the software is required.

     The revenue from maintenance contracts is recognized ratably over the term
of the agreement, generally one year. Revenues from services include
implementation fees and consulting and training fees related to the Company's
software products. Services revenues are recognized as the services are
performed. The Company also recognizes revenue from transaction fees and annual
commerce

                                       60
<PAGE>   61

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

fees charged in relation to its electronic commerce products. Transaction fees
are generally recognized as transactions are processed and commerce fees are
recognized ratably, generally over a one-year period.

Deferred Revenue
     Revenue on all software license transactions in which there are significant
outstanding obligations is deferred and recognized once such obligations are
fulfilled. Deferred revenue also includes maintenance contracts and annual
commerce fees billed in advance.

Foreign Currency
     Assets and liabilities are translated at current exchange rates at the
balance sheet dates. The translation adjustments made on translation of the
balance sheet are recorded as a separate component of stockholders' equity.
Revenues and expenses are translated into U.S. dollars at average exchange
rates. Foreign currency transaction gains and losses are included in determining
net income. The Company recorded losses of $890,000, $571,000 and $604,000 for
fiscal 2000, 1999, and 1998, respectively.

Comprehensive Income
     The Company's comprehensive income is comprised of net income, foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale investments, net of tax. Comprehensive income is included in
the stockholders' equity section of the balance sheet.

Stock-Based Compensation
     The Company grants stock options to its employees and out-side directors.
Such grants are for a fixed number of shares with an exercise price equal to the
fair value of the shares at the date of grant. As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company accounts for stock option
grants in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and FASB Interpretation No. 44.
Accordingly, the Company has adopted the provisions of SFAS No. 123 through
disclosure only.

Accounting Standards
     Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. The effective date of this Standard was modified by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" and is
effective for fiscal quarters of fiscal years beginning after June 15, 2000,
with earlier adoption encouraged. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 138 (SFAS 138),
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which amends Statement No. 133 (SFAS 133). SFAS 138 is effective concurrently
with the adoption of SFAS 133 for companies that did not adopt SFAS 133 before
June 15, 2000. For companies that did adopt SFAS 133 prior to June 15, 2000,
SFAS 138 is effective for all fiscal quarters in the fiscal

                                       61
<PAGE>   62

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

year beginning after June 15, 2000. The Company will adopt SFAS 133 and 138 in
the quarter-ended December 31, 2000. The Company does not anticipate that the
adoption of the provisions of SFAS 133 and 138 will have a material impact on
its financial condition.

     On December 3, 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101, as amended, summarizes some of
the staff's interpretations of the application of generally accepted accounting
principles to revenue recognition. All registrants are expected to apply the
accounting and disclosure requirements that are described in SAB 101 by the
fourth quarter of their fiscal year beginning after December 15, 1999. The
Company is in the process of evaluating the impact of this interpretation on its
future financial statements.


                                       62
<PAGE>   63

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

B.   INCOME TAXES:

     The components of income before income taxes and the provision for income
taxes consist of the following:

<TABLE>
<CAPTION>
                                                             Year Ended September 30,
                                                       ------------------------------------

(in thousands)                                           2000          1999          1998
                                                       --------      --------      --------
<S>                                                    <C>           <C>           <C>
Income before income taxes:
     United States ...............................     $    892      $ 24,725      $ 21,935
     Foreign .....................................        2,337         2,435        (7,431)
                                                       --------      --------      --------
                                                       $  3,229      $ 27,160      $ 14,504
                                                       ========      ========      ========
The provision for income taxes consists of:
Current taxes:
     Federal .....................................        2,008         7,466         6,354
     State .......................................          604         1,002           897
     Foreign .....................................          792         1,103         1,129
     Foreign withholding taxes ...................          522           527           266
                                                       --------      --------      --------
                                                       $  3,926      $ 10,098      $  8,646
                                                       ========      ========      ========

Deferred taxes:
     Federal .....................................       (2,216)         (652)         (124)
     State .......................................         (378)          (75)          (41)
     Foreign .....................................         (205)          (91)         (199)
                                                       --------      --------      --------
                                                         (2,799)         (818)         (364)
                                                       --------      --------      --------
         Total ...................................     $  1,127      $  9,280      $  8,282
                                                       ========      ========      ========
</TABLE>

                                       63
<PAGE>   64

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:

<TABLE>
<CAPTION>
                                                               Year Ended September 30,
                                                       --------------------------------------

                                                         2000           1999           1998
                                                       --------       --------       --------

<S>                                                    <C>            <C>            <C>
Statutory federal tax rate .......................         35.0%          35.0%          35.0%
FSC benefit ......................................         (4.9)          (2.6)          (2.5)
State taxes, net of federal tax benefit ..........         13.9            2.6            2.9
R&D credit .......................................         (9.3)          (1.3)          (1.3)
Exempt interest ..................................         (5.7)          (0.9)          (1.3)
Net operating loss utilization ...................         (6.2)          --             --
Meals and entertainment ..........................          5.8           --             --
Foreign taxes ....................................          7.8           --             --
Other ............................................         (1.5)           1.4            2.2
Effective tax rate before purchased
   in-process development ........................         34.9%          34.2%          35.0%
                                                       --------       --------       --------
Non-deductible charge for purchased
    in-process development .......................           --             --           22.1
                                                       --------       --------       --------
Effective tax rate ...............................         34.9%          34.2%          57.1%
                                                       ========       ========       ========
</TABLE>


     The components of the deferred tax provision are:

<TABLE>
<CAPTION>
                                                               Year Ended September 30,
                                                       ------------------------------------

(in thousands)                                           2000          1999          1998
                                                       --------      --------      --------

<S>                                                    <C>           <C>           <C>
Depreciation .....................................     $   (310)     $    (90)     $     82
Allowance for doubtful accounts ..................          110           (25)          (87)
Software capitalization ..........................           39           (96)           96
Deferred revenue .................................           63          (111)          (96)
Deferred rent ....................................           11             2           (52)
Package design ...................................           22            (9)           (5)
Accrued vacation .................................           --           (50)          (44)
Net operating loss utilization ...................         (200)          (57)           --
Goodwill .........................................       (1,459)          (36)          (85)
Intangibles ......................................         (441)          (14)           --
Translation loss .................................         (347)         (107)         (116)
Foreign tax credit ...............................          118          (250)           --
Research and development credit ..................         (300)           --            --
Other ............................................         (105)           25           (57)
                                                       --------      --------      --------
                                                       $ (2,799)     $   (818)     $   (364)
                                                       ========      ========      ========
</TABLE>

                                       64
<PAGE>   65

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The components of the deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                      Year Ended September 30,
                                                      ------------------------

(in thousands)                                          2000         1999
                                                       -------      -------
<S>                                                    <C>          <C>
Deferred tax assets:
     Deferred revenue ............................     $   440      $   503
     Deferred rent ...............................          43           54
     Allowance for doubtful accounts .............         680          790
     Accrued vacation ............................         160          160
     Depreciation ................................         657          347
     Package design ..............................          51           73
     Amortized software and intangibles...........         455           36
     Other reserves ..............................         112          117
     Goodwill ....................................       1,698          239
     Translation loss ............................         779          432
     Net operating loss carryforward/carryback ...       5,814          806
     Foreign tax credit carryforward/carryback ...         132          250
     Research and development credit .............         300           --
     Valuation allowance .........................      (2,021)        (806)
                                                       -------      -------
                                                       $ 9,300      $ 3,001
                                                       =======      =======

Deferred tax liabilities:
     Other .......................................     $   111      $   187
                                                       -------      -------
    Net deferred tax assets ......................     $ 9,189      $ 2,814
                                                       =======      =======
</TABLE>

     At September 30, 2000, the Company had foreign tax credit carryforwards of
approximately $132,000, which expire in fiscal year 2004.

     At September 30, 2000, the Company had foreign net operating loss
carryforwards of approximately $1,368,000, which will generally expire in
varying amounts from 2002 through 2006.

     At September 30, 2000, the Company had total domestic net operating loss
carryforwards of approximately $16,000,000. $4,400,000 of the domestic net
operating loss carryforward is attributable to the acquisition of Applied Image
Technology, Inc. ("AIT"). In accordance with the provisions of Internal Revenue
Code Section 382, the Company's utilization of AIT's net operating loss
carryforward is estimated to be limited to approximately, $600,000 per year.
$11,600,000 of the domestic net operating loss carryforward is attributable to
the benefit of the deduction related to the

                                       65
<PAGE>   66

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

exercise of stock options. The domestic net operating loss carryforwards will
generally expire in varying amounts from 2002 through 2020

     At September 30, 2000, a valuation allowance was recorded for a portion of
the net operating losses due to uncertainties as to the amount of taxable income
that would be generated in future years.

C.   ACQUISITIONS:

     On September 29, 2000, the Company completed the acquisition of Applied
Image Technology, Inc. ("AIT"). AIT specializes in web-based illustrated parts
cataloging systems and graphical maintenance and repair documentation. The
acquisition was recorded under the purchase method of accounting. The Company
purchased all of the outstanding shares of common stock of AIT for $4.5 million,
215,000 shares of the Company's common stock and also assumed liabilities of
$3.1 million. Goodwill of $10.4 million is being amortized on a straight-line
basis over a period of five years.

     On August 21, 2000, the Company completed the acquisition of IDFM, Inc., a
research and development consulting firm specializing in enterprise asset
maintenance software. The acquisition, recorded under the purchase method of
accounting, included the purchase of certain assets for the purchase price of
$1,995,000 plus acquisition expenses. Goodwill of $2,003,000 is being amortized
on a straight-line basis over a period of five years.

     On June 29, 2000, the Company completed the acquisition of the MAXIMO
reseller business unit of MIPS Information, Productivity and Systems, Limited in
Brazil. The acquisition, recorded under the purchase method of accounting,
included the purchase of certain assets and assumed liabilities for the purchase
price of $1.3 million plus acquisition expenses. Goodwill of $1.4 million is
being amortized on a straight-line basis over a period of five years.

     On March 2, 2000, the Company completed the acquisition of INTERMAT, Inc.,
a leading provider of Maintenance, Repair and Operations ("MRO") content
management tools and cataloging services. The acquisition, recorded under the
purchase method of accounting, included the purchase of the outstanding shares
of common stock of INTERMAT, Inc. for $55.1 million plus acquisition costs of
$1.3 million. A portion of the purchase price has been allocated to assets
acquired and liabilities assumed based on the estimated fair market value at the
date of acquisition while the remaining balance of $54.2 million was recorded as
goodwill and other intangible assets. Goodwill of $47.7 million is being
amortized over a period of 5 years on a straight-line basis. Other intangible
assets of $6.5 million are being amortized over a period of three to five years
on a straight-line basis.

     On October 29, 1999, the Company completed the acquisition of Modern
Distribution Management, Inc., a leading newsletter publisher covering strategic
management issues affecting suppliers and distributors of MRO supplies. The
acquisition, recorded under the purchase method of accounting, included the
purchase of certain assets and assumed liabilities for the purchase price of

                                       66
<PAGE>   67

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

$1.2 million plus acquisition expenses of $8,000. Goodwill of $1.2 million is
being amortized on a straight-line basis over a period of five years.

     On December 10, 1998, the Company acquired the shares and assumed net
liabilities of its Italian distributor, Work Management Consulting, s.r.l. for
the sum of $411, 000. The transaction was accounted for using the purchase
method of accounting. The resulting goodwill is being amortized on a
straight-line basis over five years.

     On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash, stock, and assumed
liabilities. A.R.M. Group Inc. was a privately held organization that helped
businesses solve maintenance and materials management problems. The Company
recorded the acquisition using the purchase method of accounting with $9.2
million of the purchase price allocated to in-process product development and
charged to the consolidated statement of operations on March 31, 1998, $452,000
allocated to purchased technology, and $657,000 allocated to tangible assets.
The Company determined that certain aspects of the acquired technology had not
reached technological feasibility and had no alternative future use. The Company
expensed the portion of the purchase price allocable to such in-process product
development at the date of acquisition. The operating results of this acquired
business have been included in the consolidated statement of operations from the
date of acquisition.

     The following reflects unaudited proforma combined results of PSDI and
INTERMAT, Inc. as if the acquisition had taken place at the beginning of fiscal
year 2000, 1999, and 1998, respectively.

<TABLE>
<CAPTION>
                                                       Year Ended September 30
                                                       -----------------------
(in thousands, except per share amounts)       2000             1999             1998
                                             ---------        ---------        ---------

<S>                                          <C>              <C>              <C>
Revenue
-------

PSDI .................................       $ 168,661        $ 145,665        $ 120,016
INTERMAT, Inc. .......................           3,629            9,832           10,118
                                             ---------        ---------        ---------
Combined .............................       $ 172,290        $ 155,497        $ 130,134
                                             =========        =========        =========

Net Income
----------

PSDI .................................       $   2,102        $  17,880        $   6,222
INTERMAT, Inc. .......................            (204)             717              898
Amortization of goodwill and
 Other intangible assets .............         (10,852)         (10,852)         (10,852)
                                             ---------        ---------        ---------
Combined .............................       $  (8,954)       $   7,745        $  (3,732)
                                             =========        =========        =========

Basic (loss)/income per share ........       $   (0.41)       $    0.38        $   (0.19)
Diluted (loss)/income per share ......       $   (0.41)       $    0.37        $   (0.19)
</TABLE>

                                       67
<PAGE>   68

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

D.   NET INCOME PER SHARE:

Basic and diluted income per share are calculated as follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30
                                                    -----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)       2000          1999          1998
                                               ----          ----          ----
<S>                                          <C>           <C>           <C>
Net income ...........................       $ 2,102       $17,880       $ 6,222

Denominator:
Weighted average common shares
 outstanding - basic .................        21,682        20,459        19,865

Effect of dilutive securities
 (primarily stock options) ...........         1,104           635           291
                                             -------       -------       -------
Weighted average common shares
 outstanding - diluted ...............        22,786        21,094        20,156
                                             =======       =======       =======
Net income per share - basic .........       $  0.10       $  0.87       $  0.32
Net income per share - diluted .......       $  0.09       $  0.85       $  0.31
</TABLE>

E.   MARKETABLE SECURITIES:

     The Company classifies its marketable securities as "available for sale"
and carries them at aggregate fair value. Unrealized gains and losses are
included as a component of stockholders' equity, net of tax effect. Realized
gains and losses are determined based on the specific identified cost of the
securities. The marketable securities have various contractual maturities
through the year 2017. Dividend and interest income, including amortization of
the premium and discount arising at acquisition, are included in other income.
The pre-tax unrealized holding gains and (losses) for September 30, 2000 were $0
and $(6,000), respectively. The pre-tax unrealized holding gains and (losses)
for September 30, 1999 were $10,000 and $(62,000), respectively.

                                       68
<PAGE>   69

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

As of September 30, 2000, marketable securities consisted of the following:

<TABLE>
<CAPTION>
                                                                       Amortized     Fair Market
                                                                       ---------     -----------
(in thousands)                                                           Cost           Value
                                                                         ----           -----
<S>                                                                    <C>          <C>
     Current:
     Securities with maturity date of less than one year:
      U.S. Government Securities ...............................       $  2,250       $  2,249
      Tax exempt municipal securities ..........................          1,996          1,992
                                                                       --------       --------
                                                                       $  4,246       $  4,241
                                                                       --------       --------

     Noncurrent:
     Securities with maturity date greater than one year:
      Tax exempt municipal securities ..........................          1,060          1,059
                                                                       --------       --------
                                                                       $  1,060       $  1,059
                                                                       --------       --------

                                            Total ..............       $  5,306       $  5,300
                                                                       ========       ========
</TABLE>

As of September 30, 1999, marketable securities consisted of the following:

<TABLE>
<CAPTION>
                                                                       Amortized     Fair Market
                                                                       ---------     -----------
(in thousands)                                                           Cost           Value
                                                                         ----           -----
<S>                                                                    <C>            <C>
     Current:
     Securities with maturity date of less than one year:
      U.S. Government Securities ...............................       $ 17,248       $ 17,226
      Tax exempt municipal securities ..........................         13,705         13,694
                                                                       --------       --------
                                                                       $ 30,953       $ 30,920
                                                                       --------       --------

     Noncurrent:
     Securities with maturity date greater than one year:
       U.S. Government Securities ..............................            884            884
       Tax exempt municipal securities .........................          6,548          6,529
                                                                       --------       --------
                                                                       $  7,432       $  7,413
                                                                       --------       --------

                                            Total ..............       $ 38,385       $ 38,333
                                                                       ========       ========
</TABLE>

F.   INVESTMENTS:

     During fiscal 2000, the Company purchased shares of common stock of a
publicly traded company. In September 2000, the Company sold this common stock
and realized a gain of $1,664,000. The Company has no other common stock
investments as of September 30, 2000.

                                       69
<PAGE>   70

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

G.   PROPERTY AND EQUIPMENT:

     Property and equipment are stated at cost and consist of the following:

<TABLE>
<CAPTION>
                                                                         As of  September 30,
                                                                       ------------------------

(in thousands)                                                           2000            1999
                                                                       --------        --------
<S>                                                                    <C>             <C>
Computer equipment .............................................       $  7,537        $  9,059
Purchased software and internal use software ...................         11,796           6,996
Vehicles .......................................................             55             119
Furniture and fixtures .........................................          6,687           5,576
Leasehold improvements .........................................          3,832           3,051
                                                                       --------        --------
                                                                         29,907          24,801
Less accumulated depreciation and amortization .................        (15,336)        (12,746)
                                                                       --------        --------
                                                                       $ 14,571        $ 12,055
                                                                       ========        ========
</TABLE>

     Total depreciation and amortization expense was $ 5,516,000, $3,702,000,
and $3,300,000 for fiscal 2000, 1999 and 1998, respectively. Included in
depreciation and amortization expense is amortization expense for purchased and
internal use software of $2,628,000, $374,000, and $241,000 for fiscal 2000,
1999 and 1998, respectively.

H.   INTANGIBLE ASSETS:

     Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                                          As of September 30,
                                                                       ------------------------

(in thousands)                                                           2000            1999
                                                                       --------        --------

<S>                                                                    <C>             <C>
Goodwill .......................................................       $ 64,015        $  2,687
Customer lists .................................................            411             411
Other intangible assets ........................................          7,932             100
                                                                       --------        --------
                                                                         72,358           3,198
Less accumulated amortization ..................................         (9,072)         (1,689)
                                                                       --------        --------
                                                                       $ 63,286        $  1,509
                                                                       ========        ========
</TABLE>

Amortization expense was $7,553,000, $465,000 and $365,000 for fiscal 2000, 1999
and 1998, respectively.

                                       70
<PAGE>   71

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

I.   ACCRUED COMPENSATION:

     A summary of accrued compensation consists of the following:

<TABLE>
<CAPTION>
                                                                         As of September 30,
                                                                       -----------------------

(in thousands)                                                           2000           1999
                                                                       --------       --------
<S>                                                                    <C>            <C>
Accrued payroll ................................................          2,037          2,502
Accrued sales commissions ......................................          5,496          5,286
Accrued vacation pay ...........................................          1,018            641
                                                                       --------       --------
                                                                       $  8,551       $  8,429
                                                                       ========       ========
</TABLE>

J.   BANK LINE OF CREDIT:

     At September 30, 2000, the Company's subsidiary, AIT, had a $2,500,000 line
of credit with a bank, which matures on July 1, 2001. The notes bear interest at
the bank's prime interest rate and the bank's prime interest rate plus .50%,
respectively. The prime interest rate at September 30, 2000 was 9.5%. The notes
are secured by the business assets of AIT. As of September 30, 2000, the amount
outstanding on this line of credit was $2,278,000.

K.   COMMITMENTS AND CONTINGENCIES:

     The Company leases its office facilities under operating lease agreements,
which expire at various dates through June 30, 2019. The Company pays all
insurance, utilities, and pro rated portions of any increase in certain
operating expenses and real estate taxes. The aggregated rent expense under
these leases was $5,969,000, $4,772,000, and $4,272,000 for fiscal 2000, 1999
and 1998, respectively.

     The operating leases provide for minimum aggregate future rentals as of
September 30, 2000 as follows:

         (in thousands)
        2001..............................................    $ 5,667
        2002..............................................      5,192
        2003..............................................      2,414
        2004..............................................      1,904
        2005 and thereafter...............................     20,178
                                                              -------
                                                              $35,355
                                                              =======
                                       71
<PAGE>   72

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

     The Company is not a party to any legal proceedings the outcome of which,
in the opinion of management, would have a material adverse effect on the
Company's results of operations or financial condition.

L.   EMPLOYEE BENEFITS:

Cash or Deferred Plan
     The PSDI Cash or Deferred Plan (the "Plan") is a defined contribution plan
available to substantially all of PSDI's domestic employees. The Plan was
established in 1988 under Section 401(a) of the Internal Revenue Code. Under the
Plan, employees may make voluntary contributions based on a percentage of their
pretax earnings.

     Effective January 1, 1993, the Plan was amended to provide for both a
guaranteed and a discretionary contribution made by PSDI. Amounts charged to
expense for this Plan in fiscal 2000, 1999, and 1998 were $656,000, $340,000,
and $329,000, respectively.

1994 Incentive and Nonqualified Stock Option Plans
     On March 10, 1994, the Board of Directors of the Company adopted the 1994
Incentive and Nonqualified Stock Option Plan (the "1994 Option Plan") that
provided for the grant of nonqualified and incentive stock options to directors
and employees. On January 25, 1996, the Board of Directors of the Company voted
to increase the number of shares of Common Stock that may be issued from
1,800,000 to 3,600,000.

     The exercise price of Incentive Options must be at least equal to the fair
market value on the date of grant. The exercise price of Nonqualified options
must not be less than 85% of the fair market value on the date of grant. These
options vest in equal installments over four years, commencing on December 31,
1994.

     On March 4, 1999, the Board of Directors of the Company elected to
terminate the 1994 Option Plan upon the adoption of the 1999 Equity Incentive
Plan (the "1999 Plan"). The stockholders of the Company, on March 24, 1999,
approved amendments to the vesting and transferability of options granted to
outside directors under the 1994 Option Plan.

1999 Equity Incentive Plan
     On March 24, 1999, the Company's stockholders and the Board of Directors of
the Company adopted the 1999 Equity Incentive Plan (the "1999 Plan") that
provided for the grant of incentive stock options, non statutory stock options,
stock bonuses, rights to purchase restricted stock, stock appreciation rights
and other awards based upon the Company's common stock. Up to 1,850,000 shares
of Common Stock (subject to adjustment upon certain changes in the
capitalization of the Company) may be issued pursuant to grants awarded under
the 1999 Plan. The 1999 Plan was amended and restated on April 25, 2000.

                                       72
<PAGE>   73

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

     The exercise price of Incentive Options must be at least equal to the fair
market value on the date of grant. The exercise price of Nonqualified options
must not be less than 85% of the fair market value on the date of grant. These
options vest in equal installments over four years, commencing on March 16,
1999. Awards of options under the 1999 Plan may be made until March 24, 2009. No
incentive options may extend for more than ten years from the date of grant.

     Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                     Weighted
                                              No. of Shares        Average Price
                                              -------------        -------------

<S>                                           <C>                  <C>
Outstanding shares at September 30, 1997       1,507,938             $ 8.82
1998
----
Granted                                          700,400             $12.40
Canceled                                        (477,362)            $11.32
Exercised                                       (221,508)            $ 4.16
Outstanding at September 30, 1998              1,509,468             $10.38
Exercisable at September 30, 1998                591,070             $ 7.89

1999
----
Granted                                        1,061,000             $ 9.66
Canceled                                        (129,954)            $11.00
Exercised                                       (274,478)            $ 7.90
Outstanding at September 30, 1999              2,166,036             $10.30
Exercisable at September 30, 1999                671,400             $ 9.75

2000
----
Granted                                        1,733,750             $34.48
Canceled                                        (197,776)            $23.66
Exercised                                       (451,657)            $10.08
Outstanding at September 30, 2000              3,250,353             $22.42
Exercisable at September 30, 2000                671,974             $10.21
</TABLE>

                                       73
<PAGE>   74

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


The following table summarizes information about stock options outstanding at
September 30, 2000:

<TABLE>
<CAPTION>
                             Options Outstanding                                         Options Exercisable
-------------------------------------------------------------------------------   --------------------------------
                            Number        Weighted-Avg
                         Outstanding      Remaining                               Number
Range of                    As of         Contractual        Weighted-Avg         Exercisable       Weighted-Avg
Exercise Prices            9/30/00        Life (years)       Exercise Price       As of 9/30/00     Exercise Price
---------------            -------        ------------       --------------       -------------     --------------

<S>                      <C>              <C>                <C>                  <C>               <C>
$   2.84-$ 3.17              71,138           3.6               $ 2.92                 71,138           $ 2.92
$   6.82-$ 9.82             851,567           7.6               $ 9.10                220,565           $ 9.03
$  10.57-$15.50             653,148           6.6               $12.35                374,021           $12.10
$  16.00-$21.88             128,500           9.7               $18.59                  6,250           $21.31
$  24.06-$30.13             712,500           9.6               $25.39                    ---              ---
$  36.50-$54.50             654,000           9.1               $38.81                    ---              ---
$  59.13-$85.00             179,500           9.3               $61.25                    ---              ---
                          ---------                                                  --------
Total                     3,250,353                                                   671,974
                          ---------                                                  --------
</TABLE>

     The Company complies with the pro forma disclosure requirements of
Statement of Financial Accounting Standards Board No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). The fair value method of the Company's
stock options was estimated using the Black-Scholes option-pricing model. This
model was developed for use in estimated fair value of traded options that have
no vesting restrictions and are fully transferable. This model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its stock options.

     The fair value of the Company's stock options was estimated using the
following weighted-average assumptions:

<TABLE>
<CAPTION>
                                          Year Ended September 30,
                                    ------------------------------------

                                    2000            1999            1998
                                    ----            ----            ----

<S>                                 <C>             <C>             <C>
Expected life (in years)            3.36            3.49            3.25
Volatility                            91%             76%             70%
Risk-free interest rate             6.22%           4.40%           5.63%
Dividend yield                         0%              0%              0%
</TABLE>

                                       74
<PAGE>   75

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

     For pro forma purposes, the estimated fair value of the Company's stock
options is amortized over the options' vesting period. The Company's pro forma
information is as follows:

<TABLE>
<CAPTION>
                                                                        Year Ended September 30,
                                                                        ------------------------

                                                                   2000           1999           1998
                                                                   ----           ----           ----
     (in thousands, except per share amounts)

<S>                                                              <C>             <C>            <C>
Net income/(loss)
     As reported.............................................    $ 2,102         $17,880        $6,222
     Pro forma                                                   $(4,713)        $14,644        $5,252
Net income/(loss) per share, basic
     As reported.............................................    $  0.10         $  0.87        $ 0.32
     Pro forma                                                   $ (0.22)        $  0.72        $ 0.26
Net income/(loss) per share, diluted
     As reported.............................................    $  0.09         $  0.85        $ 0.31
     Pro forma                                                   $ (0.22)        $  0.70        $ 0.26
</TABLE>

     Under SFAS 123, the weighted-average estimated fair value of options
granted during fiscal 2000, 1999 and 1998 were $21.92, $4.25 and $3.29 per
share, respectively.

Employee Stock Purchase Plan
     On March 10, 1994, the Board of Directors of the Company adopted the 1994
Employee Stock Purchase Plan that provides for a maximum issuance of 450,000
shares of Common Stock for purchase by eligible employees at 85% of the lower of
the fair market value of the Company's Common Stock on either the first or last
day of the semi-annual offering period. No compensation expense is recorded in
connection with the plan. During fiscal year ended 2000, employees purchased
25,766 shares at a price of $23.59 and 13,933 shares at a price of $18.49 for
the offering periods ended November 30, 1999 and May 31, 2000, respectively.
Approximately 214 employees participated in the plan during the fiscal year
ended 2000. Total shares purchased in 1999 and 1998 were 42,736 and 48,654,
respectively.

M.   STOCKHOLDERS' EQUITY:

Preferred Stock
     On March 11,1994, the issuance of up to 1,000,000 shares of preferred
stock, $0.01 par value was authorized. The Board of Directors has the authority
to issue the preferred stock in one or more series and to fix rights,
preferences, privileges and restrictions, including dividends, and the number of
shares constituting any series and the designation of such series.

     In January 1998, the Board of Directors of the Company adopted a
stockholder rights plan by declaring a dividend distribution of one preferred
stock purchase right (one "Right") on each share of the Company's Common Stock
outstanding on January 27, 1998 or, in certain circumstances,

                                       75
<PAGE>   76

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

issued thereafter. Initially, the Rights are not exercisable, not represented by
separate Right certificates and do not trade separately from the Company's
Common Stock. Ten days after a tender offer or acquisition of 15% or more of the
Company's common stock, each right may be exercised for $140 ("Exercise Price")
to purchase one one thousand of one share of the Company's Series A Junior
Participating Preferred Stock. Each one one-thousandth of each share of Series A
Junior Participating Preferred Stock will generally be afforded economic rights
similar to one share of the Company's common stock. In addition after such
rights are triggered, each Right entitles the holder to purchase common stock of
the Company with a fair value of twice the Exercise Price or, in certain
circumstances, securities of the acquiring company for the Exercise price. Each
Right expires in January 2008 and, during specified periods; the Company may
redeem or exchange each Right for $.01 or one share of common stock,
respectively. The Rights Agreement has been filed by the Company with the
Securities and Exchange Commission as an exhibit to a Registration Statement on
Form 8-A dated February 2, 1998. Stockholders are urged to review the Rights
Agreement for a complete understanding of the Rights Plan. The Rights Plan,
while providing the Board of Directors with flexibility in connection with
possible acquisitions and deterring unfair or coercive takeover tactics, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, beneficial ownership of 15% or more
of the outstanding shares of the Company's Common Stock.

Common Stock
     In April 1999, the Company signed agreements with W.W. Grainger, Inc., a
provider of MRO supplies and related information in North America. W.W.
Grainger, Inc. acquired 1,000,000 shares of the Company's common stock for $14.5
million, less expenses of $954 thousand and acquired a two-year option to
purchase 5% of the Company's wholly owned subsidiary, MRO.com, Inc. for an
exercise price of $3.8 million. This option was terminated by agreement of the
parties in November of 2000.

     On October 15, 1999, the Company's Board of Director's approved a 2-for-1
stock split in the form of a dividend of its common stock to be paid to all
shareholders on December 22, 1999. The stock split was subject to shareholder
approval of an increase in the Company's authorized common stock, $0.01 par
value per share, from 15,350,000 shares to 50,000,000 shares. Stockholders
approved the transaction on December 15, 1999. All share and per share data has
been restated to reflect this stock split as though it had occurred at the
earliest period presented.

     As of September 30, 2000, the Company has a restricted stock agreement with
one employee. In exchange for continued employment, the employee received 15,000
shares subject to vesting provisions over the next three years. The shares will
vest equally in amounts of 5,000 on each September 30, 2001, 2002, and 2003.
Upon issuance of the shares, deferred compensation was charged to stockholders'
equity for the cost of the restricted stock and will be amortized to stock based
compensation expense ratably over the vesting periods.

                                       76
<PAGE>   77

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

N.   SUPPLEMENTAL CASH FLOW DISCLOSURES:

     Cash paid for interest and taxes was as follows:

<TABLE>
<CAPTION>
                                                               Year Ended September 30,
                                                               ------------------------

        (in thousands)                                    2000          1999           1998
                                                          ----          ----           ----
<S>                                                     <C>            <C>           <C>
        Interest...............................         $  107         $   38        $  389
        Income taxes...........................          4,773          8,657         7,382
</TABLE>

     Acquisitions of businesses were as follows:

<TABLE>
<CAPTION>
                                                              Year Ended September 30,
                                                              ------------------------

        (in thousands)                                  2000            1999          1998
                                                        ----            ----          ----

<S>                                                   <C>              <C>          <C>
        Fair value of assets acquired..........       $71,783          $ 592        $10,280
        Fair value of liabilities assumed......        (4,446)          (729)        (2,751)
        Net cash paid for acquisitions.........       $62,278          $ 180        $ 6,400
</TABLE>

O.   SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:

     The Company has identified two reportable industry segments: the
development, marketing and support of asset maintenance management software
(MAXIMO) and the development, marketing and support of e-commerce software
products and the related network services (MRO.COM). Asset information by
reportable segment is not reported, since the Company does not produce such
information internally. The Company also manages these segments across
geographic reportable segments: United States, Other Americas (Canada and Latin
America), Europe/Middle East and Africa, and Asia Pacific. The accounting
policies for each segment are the same as those described in the summary of
significant policies (Note A). All segments are managed by the same board of
directors and executive officers.

                                       77
<PAGE>   78

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

     A summary of the Company's operations by product line was as follows:

<TABLE>
<CAPTION>
                                                                                Year Ended September 30,
                                                                                ------------------------

(in thousands)                                                           2000             1999             1998
                                                                       ---------        ---------        ---------
<S>                                                                    <C>              <C>              <C>
Revenues:

       Asset maintenance software and services .................       $ 139,544        $ 139,569        $ 119,156
       Internet e-Commerce software and services ...............          29,117            6,096              860
                                                                       ---------        ---------        ---------
                                                                       $ 168,661        $ 145,665        $ 120,016
                                                                       ---------        ---------        ---------

(Loss)/income from operations:
       Asset maintenance software and services .................       $  28,523        $  31,768        $  23,282
       Internet e-Commerce software and services ...............         (29,094)          (7,435)         (10,380)
                                                                       ---------        ---------        ---------
                                                                       $    (571)       $  24,333        $  12,902
                                                                       ---------        ---------        ---------

Depreciation and amortization expense:
       Asset maintenance software and services .................       $  12,081        $   4,291        $   4,042
       Internet e-Commerce software and services ...............           1,008              132              502
                                                                       ---------        ---------        ---------
                                                                       $  13,089        $   4,423        $   4,544
                                                                       ---------        ---------        ---------
</TABLE>

                                       78
<PAGE>   79

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

     A summary of the Company's operations by geographical area was as follows:

<TABLE>
<CAPTION>
                                                                                  Year Ended September 30,
                                                                                  ------------------------

(in thousands)                                                              2000             1999             1998
                                                                          ---------        ---------        ---------
<S>                                                                       <C>              <C>              <C>
Revenues:

       United States ..............................................       $ 103,623        $  86,603        $  70,284
       Other Americas .............................................          12,458            2,594            5,436
       Intercompany revenues ......................................           2,867           11,869           14,944
                                                                          ---------        ---------        ---------
                                             Subtotal .............       $ 118,948        $ 101,066        $  90,664
                                                                          ---------        ---------        ---------

       Europe/Middle East and Africa ..............................          41,415           44,757           36,956
       Asia/Pacific ...............................................          11,165           11,711            7,340
       Consolidating eliminations .................................          (2,867)         (11,869)         (14,944)
                                                                          ---------        ---------        ---------
                                             Total revenues .......       $ 168,661        $ 145,665        $ 120,016
                                                                          ---------        ---------        ---------

(Loss)/income from operations:
       United States ..............................................       $   2,561        $  23,782        $  21,345
       Other Americas .............................................          (7,880)          (1,731)          (9,780)
       Europe/Middle East and Africa ..............................           8,646            1,655              879
       Asia/Pacific ...............................................          (3,898)             627              458
                                                                          ---------        ---------        ---------
                                                                          $    (571)       $  24,333        $  12,902
                                                                          ---------        ---------        ---------

Long-lived assets:
       United States ..............................................       $  72,898        $  10,510        $   7,192
       Other Americas .............................................           2,234              316              143
       Europe/Middle East and Africa ..............................           4,314            2,577            2,410
       Asia/Pacific ...............................................             579              567              446
                                                                          ---------        ---------        ---------
                                                                          $  80,025        $  13,970        $  10,191
                                                                          ---------        ---------        ---------
</TABLE>

     The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas from which the sales
are made. Intercompany revenues primarily represent shipments of software to
international subsidiaries and are eliminated from consolidated revenues. Income
(loss) from operations excludes interest income, interest expense, provision for
income taxes and transaction gains and losses.

     In 1998, 11% of the Company's operating revenues were derived from U.S.
Government agencies and affiliates. No customer accounted for more than 10% of
revenue in fiscal 2000 or 1999.

                                       79
<PAGE>   80

                      PROJECT SOFTWARE & DEVELOPMENT, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
COL. A                                       COL. B            COL. C                        COL. D            COL. E
------------------------------------------------------------------------------------------------------------------------
                                                                    ADDITIONS
                                                           ----------------------------

                                            BALANCE AT       CHARGED TO      CHARGED TO                       BALANCE AT
                                            BEGINNING         COSTS AND        OTHER                           END OF
                                            OF PERIOD         EXPENSES        ACCOUNTS      DEDUCTIONS         PERIOD
                                           -----------------------------------------------------------------------------
<S>                                        <C>              <C>                             <C>              <C>
YEAR ENDED SEP.30, 2000
  Allowance for doubtful accounts          $ 2,866,751      $   850,940                     $  892,977       $ 2,824,714

YEAR ENDED SEP.30, 1999
  Allowance for doubtful accounts          $ 2,614,137      $ 1,137,694                     $  885,080       $ 2,866,751

YEAR ENDED SEP.30, 1998                    $ 2,286,574      $ 1,916,189                     $1,588,626       $ 2,614,137
  Allowance for doubtful accounts
</TABLE>


<PAGE>   81

                                  EXHIBIT INDEX

EXHIBIT
NO.  DESCRIPTION                                                           PAGE
---  -----------                                                           ----

3.1  Amended and Restated Articles of Organization of the Company (included as
     Exhibit 3.3 to the Company's Registration Statement on Form S-1,
     Registration No. 33-76420, and incorporated herein by reference)
3.2  Restated By-Laws of the Company, as amended (included as Exhibit 3.2 to the
     Company's Annual Report on Form 10-K for the fiscal year ended September
     30, 1996 File No. 0-23852 and incorporated herein by reference)
3.3  Form of Certificate of Designation of Series A Junior Participating
     Preferred Stock of Project Software & Development, Inc. (which is attached
     as Exhibit A to the Rights Agreement included as Exhibit 4 (b) to the
     Company's Current Report on Form 8-K dated February 2, 1998, File No.
     0-23852, and incorporated herein by reference)
3.4  Amendment to Articles of Organization adopted on December 15, 1999
     (included as Exhibit 3.4 to the Company's Form 10-Q for the quarter ended
     December 31, 1999, File No. 0-23852, and incorporated herein by reference)
4.1  Specimen certificate for the Common Stock of the Company (included as
     Exhibit 4.1 to the Company's Registration Statement on Form S-1,
     Registration No. 33-76420, and incorporated herein by reference)
4.2  Article 4B of the Amended and Restated Articles of Organization of the
     Company (included as Exhibit 4.1 to the Company's Registration Statement on
     Form S-1, Registration No. 33-76420, and incorporated herein by reference)
4.3  Rights Agreement dated as of January 27, 1998, between Project Software &
     Development, Inc. and BankBoston, N.A. as Rights Agent (included as Exhibit
     4 (a) to the Company's Current Report on Form 8-K dated February 2, 1998,
     File No.0-23852, and incorporated herein by reference)
4.4  Form of Certificate of Designation of Series A Junior Participating
     Preferred Stock of Project Software & Development, Inc. (included as
     Exhibit 4 (b) to the Company's Current Report on Form 8-K dated February 2,
     1998, File No. 0-23852, and incorporated herein by reference)
4.5  Form of Rights Certificate (included as Exhibit 4 (c) to the Company's
     Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and
     incorporated herein by reference)
9.1  1996 Daniels Voting Trust Agreement dated August 19, 1996 among Susan H.
     Daniels, Robert L. Daniels and

<PAGE>   82

     Robert L. Daniels, as Trustee (included as Exhibit 9.1 to the Company's
     Annual Report on Form 10-K for the fiscal year ended September 30, 19996,
     and incorporated herein by reference) File No. 0-23852 and incorporated
     herein by reference)
10.1 Fiscal Year 2000 Executive Bonus Plan (included as Exhibit 10.1 to the
     Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
     2000, Commission File No. 0-23852 and incorporated herein by reference)
10.2 Offer letter; Peter J. Rice, Executive Vice President Finance &
     Administratiion, Chief Financial Officer & Treasurer
10.3 Amended and Restated 1999 Equity Incentive Plan (included as Exhibit 10.2
     to the Company's Quarterly Report on Form 10-Q for the quarter ended June
     30, 2000, Commission File No. 0-23852 and incorporated herein by reference)
10.4 Stock Purchase Agreement dated as of January 11, 2000, between Project
     Software & Development, Inc. and Strategic Distribution, Inc. (included as
     Exhibit 2.1 to the Company's Current Report on Form 8-K dated March 15,
     2000, File No. 0-23852, and incorporated herein by reference)
10.5 Amendment No. 1 to Stock Purchase Agreement dated February 29, 2000
     (included as Exhibit 2.2 to the Company's Current Report on Form 8-K dated
     March 15, 2000, File No. 0-23852, and incorporated herein by reference)
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule