1997 DIRECTOR STOCK OPTION


 Peritus
 

 Software Services, Inc.

 1997 DIRECTOR STOCK OPTION PLAN, AS
   AMENDED AND RESTATED 

 1.     
   Purpose

          The purpose of
   this 1997 Director Stock Option Plan, as amended and restated on March 24,
   2000 (the "Plan") of Peritus Software Services, Inc., a
   Massachusetts corporation (the "Company"), is to advance the
   interests of the Company's shareholders by enhancing the Company's ability
   to attract, retain and motivate outside directors of the Company by
   providing such directors with equity ownership opportunities and
   performance-based incentives and thereby better aligning the interests of
   such directors with those of the Company's shareholders. 

 2.     
   Eligibility

          Each Director
   of the Company who is not an employee of the Company (an "Eligible
   Director") is eligible to be granted options, under the Plan. Any
   person who has been granted an option under the Plan shall be deemed a
   "Participant". 

 3.     
   Administration

 
            The Plan will be
   administered by the Board of Directors of the Company (the
   "Board"). Grants of stock options under the Plan and the amount
   and nature of the grants to be awarded shall be automatic and
   nondiscretionary in accordance with Section 5. However, the Board shall have
   authority to adopt, amend and repeal such administrative rules, guidelines
   and practices relating to the Plan as it shall deem advisable. The Board may
   correct any defect, supply any omission or reconcile any inconsistency in
   the Plan or any option in the manner and to the extent it shall deem
   expedient to carry the Plan into effect and it shall be the sole and final
   judge of such expediency. No member of the Board shall be liable for any
   action or determination relating to the Plan. All decisions by the Board
   shall be made in the Board's sole discretion and shall be final and binding
   on all persons having or claiming any interest in the Plan or in any Award.
   No director or person acting pursuant to the authority delegated by the
   Board shall be liable for any action or determination under the Plan made in
   good faith. 

 4.      Stock
   Available for Awards

          (a) 
        Number of Shares. Subject to adjustment
   under Section 4(b), options may be
 Common Stock as listed on a nationally recognized securities exchange or other
   securities market, on the date of grant (or, if no such price is reported on
   such date, such price as reported on the nearest preceding day); or (ii) the
   fair market value of the stock on the date of grant, as determined by the
   Board of Directors, if the Common Stock is not publicly traded

          (c) 
        Exercise Period. Each option granted on the
   Effective Date shall vest and be exercisable on a cumulative basis as to
   one-third of the shares subject to such option on each of the first, second
   and third anniversaries of the date of the grant of such option,
   provided that, subject to the provisions of Sections 5(d) and 5(e),
   no option may be exercised more than 90 days after the optionee ceases to
   serve as a director of the Company and such option may the only be exercised
   for the purchase of such number of shares as were vested and exercisable at
   the time of such termination. No option shall be exercisable after the
   expiration of ten (10) years from the date of grant or prior to approval of
   the Plan by the stockholders of the Company.

          (d) 
        Exercise Period Upon Retirement.
   Notwithstanding the provisions of Section 5(c), in the event an optionee
   ceases to be a director by reason of retirement age determined by the
   Company or by reason of the Company's failure to nominate the optionee for
   reelection as a director (other than for such director's refusal to serve as
   a director), each option then held by such director shall, at the time he or
   she ceases to be a director, be exercisable for that number of shares of
   Common Stock which equals the sum of (i) the shares which are then vested
   and exercisable and (ii) the shares which would otherwise become vested and
   exercisable at the next following anniversary of the date of grant of the
   option.

          (e) 
        Exercise Period Upon Death or Disability.
   Notwithstanding the provisions of Section 5(c), any option granted under the
   Plan:

 	 	(i)	 may be exercised in full by an optionee
     who becomes disabled (within the meaning of Section 22(e)(3) of the Code
     or any successor provision thereto) while serving as a director of the
     Company; or

   
	 	 	 
	 	(ii)	may be exercised
	 	 	 	 
	 	 	(x)	 in full upon the death of an optionee
     while serving as a director of the Company, or
	 	 	 	 
	 	 	(y)	 to the extent then exercisable upon
     the death of an optionee within 90 days of ceasing to serve as a director
     of the Company,


 by the person to whom it is transferred
   by will, by the laws of descent and distribution, or by written designation
   of beneficiary filed with the Company;

 in each such case within the period of
   one year after the date the optionee ceases to be such a director by reason
   of such death or disability; provided, that no option shall be exercisable
   after the expiration of ten (10) years from the date of grant.

          (f) 
        Payment Upon Exercise. Common Stock
   purchased upon the exercise of an Option granted under the Plan shall be
   paid for as follows:

           
            (1)
        in cash or by check, payable to the order of
   the Company;

           
            (2)  
       except as the Board may otherwise provide in an Option,
   delivery of an irrevocable and unconditional undertaking by a credit worthy
   broker to deliver promptly to the Company sufficient funds to pay the
   exercise price, or delivery by the Participant to the Company of a copy of
   irrevocable and unconditional instructions to a credit worthy broker to
   deliver promptly to the Company cash or a check sufficient to pay the
   exercise price;

           
            (3)  
       (i) by delivery of shares of Common Stock owned by the
   Participant valued at their fair market value as determined by the Board in
   good faith ("Fair Market Value"), which Common Stock was owned by
   the Participant at least six months prior to such delivery, (ii) by delivery
   of a promissory note of the Participant to the Company on terms determined
   by the Board, or (iii)by payment of such other lawful consideration as the
   Board may determine; or 

           
            (4)  
       any combination of the above permitted forms of
   payment.

 6.     
   General Provisions Applicable to Options

          (a) 
        Transferability of Options. Except as the
   Board may otherwise determine or provide in an option agreement, options
   shall not be sold, assigned, transferred, pledged or otherwise encumbered by
   the person to whom they are granted, either voluntarily or by operation of
   law, except by will or the laws of descent and distribution, and, during the
   life of the Participant, shall be exercisable only by the Participant.
   References to a Participant, to the extent relevant in the context, shall
   include references to authorized transferees.

          (b) 
        Documentation. Each option under the Plan
   shall be evidenced by a written instrument in such form as the Board shall
   determine. Each option may contain terms and conditions in addition to, and
   not inconsistent with, those set forth in the Plan.

          (c) 
        Acquisition Events. Except to the extent
   otherwise provided in the instrument evidencing the Award or in any other
   agreement between the Participant and the Company, upon the occurrence of an
   Acquisition Event or with respect to Options or any other similar Awards
   only, upon the execution by the Company of any agreement with respect to an
   Acquisition Event, (i) the Board shall cause all Options then outstanding to
   become
 immediately exercisable in full as of a specified date (the "Acceleration
   Date") prior to the Acquisition Event, and shall provide written notice
   to the Participants informing them that all such options have become
   exercisable in full and will terminate immediately prior to the consummation
   of such Acquisition Event, except to the extent exercised by the
   Participants between the Acceleration Date and the consummation of such
   Acquisition Event; (ii) all Restricted Stock Awards then outstanding shall
   become immediately free of all restrictions; (iii) all other stock-based
   Awards all become immediately exercisable, realizable or vested in full, or
   shall be immediately free of all restrictions or conditions, as the case may
   be. 

          An
   "Acquisition Event" shall mean: (a) any merger or consolidation
   which results in the voting securities of the Company outstanding
   immediately prior thereto continuing to represent (either by remaining
   outstanding or by being converted into voting securities of the surviving or
   acquiring entity) less than 60% of the combined voting power of the voting
   securities of the Company or such surviving or acquiring entity outstanding
   immediately after such merger or consolidation; (b) any sale of all or
   substantially all of the assets of the Company; (c) the complete liquidation
   of the Company; or (d) the acquisition of "beneficial ownership"
   (as defined in Rule 13d-3 under the Exchange Act) of securities of the
   Company representing 50% or more of the combined voting power of the
   Company's then outstanding securities (other than through a merger or
   consolidation or an acquisition of securities directly from the Company) by
   any "person", as such term is used in Sections 13(d) and 14(d) of
   the Exchange Act other than the Company, any trustee or other fiduciary
   holding securities under an employee benefit plan of the Company or any
   corporation owned directly or indirectly by the shareholders of the Company
   in substantially the same proportion as their ownership of stock of the
   Company.

          (d) 
        Withholding. Each Participant shall pay to
   the Company, or make provision satisfactory to the Board for payment of, any
   taxes required by law to be withheld in connection with Awards to such
   Participant no later than the date of the event creating the tax liability.
   The Board may allow Participants to satisfy such tax obligations in whole or
   in part in shares of Common Stock, including shares retained from the Award
   creating the tax obligation, valued at their Fair Market Value. The Company
   may, to the extent permitted by law, deduct any such tax obligations from
   any payment of any kind otherwise due to a Participant.

          (e) 
        Conditions on Delivery of Stock. The Company
   will not be obligated to deliver any shares of Common Stock pursuant to the
   Plan or to remove restrictions from shares previously delivered under the
   Plan until (i) all conditions of the Award have been met or removed to the
   satisfaction of the Company, (ii)in the opinion of the Company's counsel,
   all other legal matters in connection with the issuance and delivery of such
   shares have been satisfied, including any applicable securities laws and any
   applicable stock exchange or stock market rules and regulations, and (iii)
   the Participant has executed and delivered to the Company such
   representations or agreements as the Company may consider appropriate to
 satisfy the requirements of any applicable laws, rules or
   regulations.

          (f) 
        Acceleration. The Board may at any time
   provide that any Options shall become immediately exercisable in full or in
   part.

 7.     
   Miscellaneous

          (a) 
        No Right To Continue as a Director. Neither
   the Plan nor the granting of an option nor any other action taken pursuant
   to the Plan shall constitute or be evidence of any agreement or
   understanding, express or implied, that the Company will retain a director
   for any period of time.

          (b) 
        No Rights As Stockholder. No Participant or
   Designated Beneficiary shall have any rights as a stockholder with respect
   to any shares of Common Stock to be distributed with respect to an option
   until becoming the record holder of such shares.

          (c) 
        Effective Date and Term of Plan. The Plan
   shall become effective on the date on which it is adopted by the Board. No
   options shall be granted under the Plan after the completion of ten years
   from the earlier of (i) the date on which the Plan was adopted by the Board
   or (ii) the date the Plan was approved by the Company's shareholders, but
   options previously granted may extend beyond that date.

          (d) 
        Amendment of Plan. The Board may amend,
   suspend or terminate the Plan or any portion thereof at any time, provided
   that no amendment shall be made without stockholder approval if such
   approval is necessary to comply with any applicable tax or regulatory
   requirements. Amendments requiring stockholder approval shall become
   effective when adopted by the Board. 

          (e)     
   Governing Law. The provisions of the Plan and all options made
   hereunder shall be governed by and interpreted in accordance with the laws
   of the Commonwealth of Massachusetts, without regard to any applicable
   conflicts of law.

 	 	Originally adopted by the Board of
     Directors
   

   on May 5th
   , 1997 
	 	 
	 	Originally approved by the Stockholders
     on
   

   May 28th
   , 1997 
	 	 
	 	Amendment and Restatement adopted by
     the Board of
   

   Directors on March 24, 2000