PEREGRINE SYSTEMS INC, S-1, 1997-11-10

PEREGRINE SYSTEMS INC
S-1, 1997-11-10
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997

REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PEREGRINE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 7372 95-3773312
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

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12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(619) 481-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------

RICHARD T. NELSON
VICE PRESIDENT AND GENERAL COUNSEL
PEREGRINE SYSTEMS, INC.
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(619) 481-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------

COPIES TO:
DOUGLAS H. COLLOM, ESQ.
ROBERT F. KORNEGAY, ESQ.
MARK B. BAUDLER, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value 1,301,419 $15.00 $19,521,285 $6,617.39
</TABLE>

(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low sales prices as reported on the
Nasdaq National Market on November 6, 1997.
--------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 7, 1997

PROSPECTUS

1,301,419 SHARES

[LOGO]

COMMON STOCK
----------------

This Prospectus relates to an aggregate of 1,301,419 shares (the
"Shares") of Common Stock, $0.001 par value, of Peregrine Systems, Inc.
("Peregrine" or the "Company") which may be offered and sold from time to time
by certain stockholders of the Company (the "Selling Stockholders"). See
"Principal and Selling Stockholders." The Shares were acquired by the Selling
Stockholders on September 19, 1997 in connection with the Company's acquisition
of United Software, Inc. ("United" or "Apsylog") pursuant to an Agreement and
Plan of Reorganization dated effective as of August 29, 1997 (the "Merger
Agreement"). See "Acquisition of Apsylog."

The Shares may be offered for sale by the Selling Stockholders from time
to time in the over-the-counter market, in the Nasdaq National Market, in
privately negotiated transactions or otherwise at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Shares may be sold by the Selling Stockholders directly
to purchasers or through agents, underwriters or dealers. See "Principal and
Selling Stockholders" and "Plan of Distribution." If required, the names of any
such agents or underwriters involved in the sale of the Shares in respect of
which this Prospectus is being delivered and the applicable agent's commission,
dealer's purchase price or underwriter's discount, if any, will be set forth in
an accompanying supplement to this prospectus (a "Prospectus Supplement").

The Selling Stockholders will receive all of the net proceeds from the
sale of Shares held by them and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the Shares. The Company is
responsible for payment of all other expenses incident to the offer and sale of
the Shares.

The Selling Stockholders and any broker/dealers, agents or underwriters
which participate in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions, discounts or concessions received by
them and any profit on the resale of the Shares purchased by them may be deemed
to be underwriting commissions or discounts under the Securities Act.

The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "PRGN." On November 6, 1997, the last reported sale price of the
Common Stock was $15.25 per share. See "Price Range of Common Stock."
---------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OF ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
<PAGE>
THE DATE OF THIS PROSPECTUS IS , 1997
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TABLE OF CONTENTS

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PAGE
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Additional Information.................................................... 2
Trademarks................................................................ 2
Forward Looking Statements................................................ 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Selected Consolidated Financial Data...................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 30
Acquisition of Apsylog.................................................... 36
Management................................................................ 38
Certain Transactions...................................................... 48
Principal and Selling Stockholders........................................ 50
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 56
Plan of Distribution...................................................... 58
Legal Matters............................................................. 59
Experts................................................................... 59
Index to Financial Statements............................................. F-1
</TABLE>

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ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. In each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference. The Registration Statement, including exhibits
and schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates,
and through the National Association of Securities Dealers, Inc. located at 1735
K Street, N.W., Washington, D.C. 20006. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.

TRADEMARKS

PEREGRINE SYSTEMS, SERVICECENTER, STATIONVIEW and OPENSNA are registered
United States trademarks of the Company. ASSETCENTER, PNMS, SERVERVIEW and IR
EXPERT are also trademarks of the Company. This Prospectus also contains
trademarks and tradenames of other companies.

FORWARD LOOKING STATEMENTS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT"). DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN
THE MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY," "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
"BUSINESS," AND "ACQUISITION OF APSYLOG" AS WELL AS IN THE PROSPECTUS GENERALLY.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS, WHICH
PROSPECTIVE INVESTORS SHOULD REVIEW CAREFULLY.

2
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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). DISCUSSIONS CONTAINING SUCH
FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH UNDER
"PROSPECTUS SUMMARY," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND "ACQUISITION OF
APSYLOG" AS WELL AS IN THE PROSPECTUS GENERALLY. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

Peregrine is a leading provider of Enterprise Service Desk software. The
Company develops, markets and supports SERVICECENTER, an integrated suite of
applications that automates the management of complex, enterprise-wide
information technology ("IT") infrastructures. SERVICECENTER is designed to
address the IT management requirements of large organizations and can be
deployed across all major hardware platforms and network operating systems and
protocols. SERVICECENTER utilizes advanced client/server and sophisticated
intelligent agent technologies and a modular architecture.

The development of the market for the Company's products reflects an
increasingly competitive business environment in which information technology
has become an important source of competitive advantage. Organizations rely
heavily on information technology in efforts to improve operational efficiency,
react more quickly to changes in the marketplace, and better understand and
respond to customer needs. IT is an integral part of many core business
functions, including plant management, inventory management, and customer
billing, and is critical to many new tactical and strategic initiatives such as
business process reengineering, supply chain management, and enhanced customer
care.

Most traditional IT management solutions have been designed to address a
limited set of problems, principally problem tracking and problem resolution.
These applications have been deployed on a departmental or divisional level or
have otherwise taken a segmented approach to IT management that requires a
specific and separate application to manage each component or system within the
IT infrastructure and that does not permit integration with other third party IT
applications. The Company's SERVICECENTER suite of applications offers
capabilities beyond those of traditional internal help desk solutions and is
intended to create an Enterprise Service Desk capable of meeting the broader
operational and strategic needs of business enterprises. SERVICECENTER provides
an integrated and automated suite of six applications, consisting of problem
management, knowledge-based resolution, change management,
inventory/configuration management, order and catalog management, and financial
management.

The Company believes that its future growth and profitability will depend on
a number of factors, including, among others, factors relating to the quality of
its products and to its ability to further penetrate existing markets and to
penetrate new markets. In that regard, the Company's strategy is focused on
maintaining and enhancing its technological position and the functionality of
its products; broadening its target markets from the Fortune 500 to include
smaller organizations worldwide comprising the Global 2000; expanding
international sales; leveraging a product authorship model that rewards
individual product developers based on sales of products developed by them;
leveraging a direct sales model intended to minimize the number of remote sales
offices and focus on effective use of telephone and network communications;
implementing and expanding existing programs aimed at improving customer
relationships through information exchanges among the Company, existing
customers, and prospective customers; and expanding its distribution channels
through relationships with third party distributors; system integrators, and
original equipment manufacturers.

3
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ACQUISITION OF APSYLOG

On August 29, 1997, the Company's Board of Directors approved the
acquisition of Apsylog S.A., a corporation organized under the laws of the
Republic of France, through the acquisition of all the outstanding shares of
United Software, Inc., a Delaware corporation that holds all the outstanding
share capital of Apsylog S.A. (the "Apsylog Acquisition"). The Apsylog
Acquisition was completed in September 1997. Unless the context otherwise
requires, Apsylog S.A. and United Software, Inc. are referred to collectively in
this Prospectus as "Apsylog."

Apsylog is a leading provider of IT asset management software solutions. The
development of a market for asset management solutions in recent years has
paralleled that of the market for Enterprise Service Desk solutions and reflects
the need of large organizations to manage increasingly complex and dispersed IT
infrastructures. Apsylog's ASSETMANAGER product line, now renamed ASSETCENTER,
provides asset management capabilities for IT infrastructures by tracking an
organization's assets throughout their life cycles, thereby permitting more
informed investment decisions in the acquisition, change and disposition of IT
assets. The Company believes that ASSETCENTER will complement SERVICECENTER,
allowing the Company to deliver an integrated suite of software applications and
enabling organizations to take a more comprehensive approach to managing their
IT infrastructures.

In connection with the Apsylog Acquisition, the Company issued an aggregate
of 1,916,213 shares of the Company's Common Stock to the stockholders of United
Software, Inc., including 32,021 shares issuable upon exercise of outstanding
options held by employees of Apsylog and assumed by the Company. The Company
issued such shares to the stockholders of Apsylog in reliance on the exemptions
from the registration requirements of the Securities Act set forth in Section
4(2) thereof and Regulation D and Regulation S promulgated thereunder. The
Apsylog Acquisition was treated as a "purchase" for accounting and financial
reporting purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisition of Apsylog" and "Acquisition of
Apsylog."

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

The Company was incorporated in California in 1981 and reincorporated in
Delaware in 1994. Unless the context otherwise requires, references in this
Prospectus to "Peregrine" and the "Company" refer to Peregrine Systems, Inc., a
Delaware corporation, its predecessor, Peregrine Systems, Inc., a California
corporation, and except as otherwise indicated, its subsidiaries, including
Apsylog. The Company's executive offices are located at 12670 High Bluff Drive,
San Diego, California 92130, and its telephone number at that address is (619)
481-5000.

4
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THE OFFERING

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<S> <C>
Common Stock offered by the Selling
Stockholders.............................. 1,301,419 shares
Common Stock to be outstanding after the
offering.................................. 17,175,094 shares (1)
Nasdaq National Market symbol............... PRGN
</TABLE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
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1997 1997
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PRO PRO
1995 1996 ACTUAL FORMA (2) ACTUAL FORMA (3)
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STATEMENT OF OPERATIONS DATA:
Total revenues........................ $19,628 $ 23,766 $ 35,035 $ 41,503 $ 23,218 $ 27,697
Gross profit.......................... 15,662 19,825 30,159 33,114 19,214 21,739
Acquired in-process research and
development......................... 606 -- -- -- 34,775(4) --
Operating income (loss)............... (3,919) (4,266) 4,688 (1,117 ) (30,101) 2,563
Net income (loss)..................... 51(5) (6,411) 5,802 322 (31,577) 1,077
Net income (loss) per share........... $ (0.52) $ 0.39 $ 0.02 $ (2.14) $ 0.05
Shares used in per share
calculation......................... 12,250 12,331 14,964 16,880 14,777 19,933
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
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BALANCE SHEET DATA:
Cash and equivalents................................. $ 16,754
Working capital...................................... 9,101
Total assets......................................... 40,343
Stockholders' equity................................. 14,060
</TABLE>

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(1) Based upon shares outstanding as of September 30, 1997. Excludes 4,202,180
shares of Common Stock issuable upon exercise of options outstanding at
September 30, 1997 under the Company's Nonqualified Stock Option Plan, 1991
Nonqualified Stock Option Plan and 1994 Stock Option Plan at a weighted
average exercise price of 2.74 and 32,021 shares of Common Stock issuable
upon exercise of options assumed in connection with the Apsylog Acquisition
at a weighted average exercise price of $0.32. Also excludes 766,602 shares
reserved at September 30, 1997 for future issuance under the 1994 Stock
Option Plan, the 1997 Director Option Plan and the 1997 Employee Stock
Purchase Plan and 1,824,000 shares reserved after September 30, 1997 for
future issuance under the 1994 Stock Option Plan. See "Management--Stock
Plans," "Description of Capital Stock" and Notes 10 and 13 of Notes to
Consolidated Financial Statements.

(2) Pro forma to give effect to the Apsylog Acquisition as if such acquisition
had taken place as of April 1, 1996 (excluding the impact of $34.8 million
in acquired in-process research and development associated with the Apsylog
Acquisition). The Apsylog Acquisition was accounted for as a "purchase"
transaction. See "Acquisition of Apsylog."

(3) Pro forma to give effect to the Apsylog Acquisition as if such acquisition
had taken place as of April 1, 1997 (excluding the impact of $34.8 million
in acquired in-process research and development associated with the Apsylog
Acquisition).

(4) Acquired in-process research and development charge relates to the Apsylog
Acquisition. See Note 13 of Notes to Consolidated Financial Statements.

(5) Includes a gain on the sale of a software product line in April 1994 of
$4,025,000. See Note 4 of Notes to Consolidated Financial Statements.

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

EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO GIVE EFFECT TO A TWO-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK
EFFECTED IN FEBRUARY 1997 IN THE FORM OF A STOCK DIVIDEND. SEE "DESCRIPTION OF
CAPITAL STOCK."

5
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RISK FACTORS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF
FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE
IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS. IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION PRESENTED IN
THIS PROSPECTUS.

LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES

Through September 30, 1997, the Company has recorded cumulative net losses
of approximately $47.4 million, including approximately $34.8 million related to
the write-off of acquired in-process research and development incurred in
connection with the Apsylog Acquisition. In recent years, the product lines of
both the Company and Apsylog have changed substantially. The Company's
SERVICECENTER product, from which the Company derived substantially all of its
license revenues for the fiscal year ended March 31, 1997 and for the six months
ended September 30, 1997, only began shipping in mid-1995. Apsylog's ASSETCENTER
product only began shipping in mid-1996. As a result, prediction of the
Company's future operating results is difficult, if not impossible. Although the
Company achieved profitability during the year ended March 31, 1997 and for the
six months ended September 30, 1997 (excluding the impact of the write-off of
$34.8 million related to acquired in-process research and development incurred
in connection with the Apsylog Acquisition), there can be no assurance that the
Company will be able to remain profitable on a quarterly or annual basis. In
addition, the Company does not believe that the growth in revenues it has
experienced in recent years is indicative of future revenue growth or future
operating results. See "--Product Concentration; Dependence on Market Acceptance
of Enterprise Service Desk Software," "--Risks Associated with Apsylog
Acquisition and Future Acquisitions," "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY

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

The Company's business has experienced and is expected to continue to
experience seasonality. The Company's revenues and operating results in its
December quarter typically benefit from purchase decisions

6
<PAGE>
made by the large concentration of customers with calendar year-end budgeting
requirements, while revenues and operating results in the March quarter
typically benefit from the efforts of the Company's sales force to meet fiscal
year-end sales quotas. In addition, the Company is currently attempting to
expand its presence in international markets, including Europe, the Pacific Rim
and Latin America. International revenues comprise a significant percentage of
the Company's total revenues, and the Company may experience additional
variability in demand associated with seasonal buying patterns in such foreign
markets. In particular, the quarter ended September 30 tends to reflect the
effects of summer slowing of international business activity, particularly in
Europe. See "--International Operations; Currency Fluctuations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

PRODUCT CONCENTRATION; DEPENDENCE ON MARKET ACCEPTANCE OF ENTERPRISE SERVICE
DESK SOFTWARE

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

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

RISKS ASSOCIATED WITH APSYLOG ACQUISITION AND FUTURE ACQUISITIONS

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

7
<PAGE>
Apsylog's success depends to a significant extent upon a limited number of
members of Apsylog's senior management, certain development personnel, and other
key Apsylog employees. Apsylog's future performance will also depend in
significant part upon the continued service of its key technical, sales and
senior management personnel following the Apsylog Acquisition. Only certain of
these individuals (including Apsylog's Chief Executive Officer and seven
additional employees) will be bound by non-competition agreements. In addition,
in connection with the Apsylog Acquisition, all repurchase restrictions on
shares of restricted Apsylog Common Stock held by Apsylog stockholders lapsed
and all unvested options in respect of Apsylog Common Stock vested and became
immediately exercisable. The loss of the services of one or more of Apsylog's
executive officers, development personnel, or other key employees or the
decision of one or more of such officers or key employees to join a competitor
or otherwise compete directly or indirectly with the Company could have a
material adverse effect on the Company's business, operating results and
financial condition.

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

DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL

The Company's ability to achieve anticipated revenues is substantially
dependent on its ability to attract and retain skilled personnel, especially
sales, service and implementation personnel. Other than certain employees of
Apsylog, none of the Company's employees, including its senior management, is
bound by an employment or non-competition agreement, and the Company does not
maintain key man life insurance on any employee. The loss of the services of one
or more of the Company's executive officers or key employees or the decision of
one or more of such officers or employees to join a competitor or otherwise
compete directly or indirectly with the Company could have a material adverse
effect on the Company's business, operating results and financial condition.

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

COMPETITION

8
<PAGE>
of sources, including (i) providers of internal help desk software applications
such as Remedy Corporation and Software Artistry, Inc., (ii) customer
interaction software companies such as Clarify Inc. and The Vantive Corporation,
whose products include internal help desk applications, (iii) information
technology and systems management companies such as International Business
Machines Corporation ("IBM"), Computer Associates International, Inc., McAfee
Associates, Inc. and Hewlett-Packard Company through its recent acquisition of
PROLIN, (iv) providers of asset management software, and (v) the internal
information technology departments of those companies with help desk
requirements. Because barriers to entry in the software market are relatively
low, the Company anticipates additional competition from other established and
emerging companies as the markets for Enterprise Service Desk and asset
management applications expand. In addition, current and potential competitors
have established or may in the future establish cooperative relationships among
themselves or with third parties. The Company expects software industry
consolidation to occur in the future, and it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. Some of the Company's current and many of its potential competitors
have significantly greater financial, technical, marketing and other resources
than the Company. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their products than
the Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Competition."

MANAGEMENT OF GROWTH

The Company's business has grown substantially in recent periods, with total
revenues increasing from $19.6 million in fiscal 1995 to $23.8 million in fiscal
1996 to $35.0 million in fiscal 1997 and to $23.2 million in the first six
months of fiscal 1998. If the Company is successful in achieving its growth
plans, including the integration of Apsylog, such growth is likely to place a
significant burden on the Company's operating and financial systems, resulting
in increased responsibility for senior management and other personnel within the
Company. The Company's ability to compete effectively and to manage future
growth, if any, and its future operating results will depend in part on the
ability of its officers and other key employees to implement and expand
operational, customer support and financial control systems and to expand, train
and manage its employee base. In particular, in connection with the Apsylog
Acquisition, the Company will be required to integrate additional personnel and
to augment or replace Apsylog's existing financial and management systems. Such
integration could result in a disruption of operations of the Company or Apsylog
and could adversely affect the Company's financial results. There can be no
assurance that the Company's existing management or any new members of
management will be able to augment or improve existing systems and controls or
implement new systems and controls in response to future growth, if any. The
Company's failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition. See "--Dependence on Key
Personnel; Ability to Recruit Personnel," "--Risks Associated with Apsylog
Acquisition and Future Acquisitions" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

LENGTHY SALES CYCLES

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

9
<PAGE>
material adverse effect on the Company's business, operating results and
financial condition. See "--Potential Fluctuations in Quarterly Results;
Seasonality."

EXPANSION OF DISTRIBUTION CHANNELS

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

INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS

International sales represented approximately 29% and 32%, respectively, of
the Company's total revenues in fiscal 1996 and fiscal 1997 and 33% for the six
months ended September 30, 1997. The Company currently has international sales
offices in London, Paris, Frankfurt and Copenhagen. Apsylog currently has
international offices in Paris and Munich. The Company believes that its
continued growth and profitability will require continued expansion of its
international operations, particularly in Europe, Latin America and the Pacific
Rim. Accordingly, the Company intends to expand its international operations and
enter additional international markets, which will require significant
management attention and financial resources. In addition, the Company's
international operations are subject to a variety of risks associated with
conducting business internationally, including fluctuations in currency exchange
rates, longer payment cycles, difficulties in staffing and managing
international operations, problems in collecting accounts receivable, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, increases in tariffs, duties, price controls or other
restrictions on foreign currencies, and trade barriers imposed by foreign
countries, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company
has only limited experience in developing localized versions of its products and
marketing and distributing its products internationally. There can be no
assurance that the Company will be able to successfully localize, market, sell
and deliver its products internationally. The inability of the Company to expand
its international operations successfully and in a timely manner could have a
material adverse effect on the Company's business, operating results and
financial condition.

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

10
<PAGE>
YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY BUDGETS

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

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

CONTROL BY EXISTING STOCKHOLDERS

Based on shares outstanding on September 30, 1997, the Company's officers,
directors and their affiliates together beneficially own approximately 68.7% of
the outstanding shares of Common Stock. In particular, John J. Moores, Chairman
of the Company's Board of Directors, and entities affiliated with Mr. Moores
collectively own approximately 58.9% of the outstanding shares of Common Stock.
As a result, these stockholders will be able to control most matters requiring
stockholder approval, including the election of directors and the approval of
mergers, consolidations and sales of all or substantially all of the assets of
the Company. This may prevent or discourage potential bids to acquire the
Company unless the terms of acquisition are approved by such stockholders. See
"Principal and Selling Stockholders."

DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT

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

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

11
<PAGE>
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Intellectual Property."

RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS

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

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

PRODUCT LIABILITY

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

EFFECT OF CERTAIN CHARTER PROVISIONS; LIMITATION OF LIABILITY OF DIRECTORS;
ANTITAKEOVER EFFECTS OF DELAWARE LAW

12
<PAGE>
in control of the Company without further action by the stockholders and may
adversely affect the market price of the Common Stock and the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. The
Company has no current plans to issue any shares of Preferred Stock.

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws eliminate the right of stockholders to act by written
consent without a meeting and specify certain procedures for nominating
directors and submitting proposals for consideration at stockholder meetings.
Such provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such provisions are designed to reduce the vulnerability of the Company
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
Common Stock that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company.

The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances, in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
the Company and the interested stockholder and the sale of more than 10% of the
Company's assets. In general, the Antitakeover Law defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the Company and any entity or person affiliated with
or controlling or controlled by such entity or person. A Delaware corporation
may "opt out" of the Antitakeover Law with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from amendments approved by the holders of at
least a majority of the company's outstanding voting shares. The Company has not
"opted out" of the provisions of the Antitakeover Law. See "Description of
Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public market
could adversely affect the market price for the Company's Common Stock. The
number of shares of Common Stock available for sale in the public market is
limited by restrictions under the Securities Act of 1933, as amended (the
"Securities Act"). As a result of these restrictions, based on shares
outstanding as of September 30, 1997, other than the 1,301,419 shares offered
hereby, the 2,300,000 shares sold by the Company in its initial public offering
in April 1997 and 497,120 shares that were previously restricted but have been
sold into the public market in reliance on Rule 144, 436,500 shares will be
eligible for sale on the date of this Prospectus pursuant to Rule 144(k) under
the Securities Act, and approximately 11,082,701 shares will be eligible for
sale under Rule 144, subject to volume limitations and manner of sale
requirements. In addition, in October 1997, the Company filed a registration
statement on Form S-8/S-3 covering 1,088,991 shares of outstanding Common Stock
and 5,000,803 shares of Common Stock issuable upon exercise of outstanding
options, all of which will be freely tradeable to the extent vested. Of the
outstanding shares and shares issuable upon exercise of outstanding options
registered in such registration, 2,537,585 shares were vested as of September
30, 1997.

In connection with the Apsylog Acquisition, the Company issued 1,884,192
shares of Common Stock, all of which were restricted securities under the
Securities Act at the time of issuance. Of the shares issued in the

13
<PAGE>
Apsylog Acquisition, 396,865 shares were issued pursuant to Apsylog's stock
incentive plans and have been registered for resale pursuant to a resale
prospectus included in the Company's Registration Statement on Form S-8/S-3 and
will be available for resale in the date of this Prospectus, subject at least
until April 1997 to the volume and manner of sale requirements of Rule 144. Of
the remaining shares issued in the Apsylog Acquisition and excluding the
1,301,419 shares being registered for sale pursuant to this Prospectus, 29,139
shares were issued pursuant to Regulation D under the Securities Act and will
not be available for sale, absent registration, until September 1997, and
156,776 shares were issued in reliance on Regulation S under the Securities Act.
Notwithstanding any resale restrictions under applicable securities laws, all of
such remaining shares are currently subject to an escrow provision of the Merger
Agreement and may be surrendered to the Company in the event of certain breaches
of representations and warranties made by Apsylog in the Merger Agreement. The
escrow will terminate in September 1998, and the shares then available for
distribution will be delivered to the former stockholders of Apsylog. The
Company granted the stockholders of Apsylog certain rights to sell shares
pursuant to this Prospectus and certain additional rights to have their shares
registered for resale on Form S-3 beginning in April 1998. See "Description of
Capital Stock--Registration Rights."

In general, under Regulation S as currently in effect, securities issued and
sold by a reporting issuer under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), in reliance on the exemption under Regulation S will be
eligible for resale in the United States or to U.S. Persons (as defined in
Regulation S) if the securities have been held for at least 40 days from the
date of purchase in a transaction meeting the requirements of Regulation S. The
Securities and Exchange Commission (the "Commission") is currently evaluating a
proposal that would, among other things, classify all equity securities of
domestic issuers placed offshore under Regulation S as "restricted securities"
under Rule 144. Such a proposal, if adopted, would reinforce the Commission's
current view that any person who would be considered an "underwriter" within the
meaning of the Securities Act may not resell securities sold in reliance on
Regulation S following expiration of the applicable Rule 144 restricted period
in the absence of registration or an exemption therefrom. In particular, such
persons may not assume the availability of the exemption set forth in Section
4(1) of the Securities Act with respect to resales of securities in the United
States or to U.S. Persons. The determination as to the applicable restricted
period is subject to change in the event of further regulation or guidance from
the Commission. In the event the Commission determines not to impose the longer
Rule 144 holding period, the shares of Common Stock issued in the Apsylog
Acquisition in reliance on Regulation S could become available for sale prior to
April 1998. See "Description of Capital Stock--Registration Rights" and "Shares
Eligible for Future Sale."

VOLATILITY OF STOCK PRICE

The Company completed its initial public offering of Common Stock in April
1997, prior to which time no public market existed for the Company's Common
Stock. The market price of the Company's Common Stock has been since the initial
public offering and is expected to continue to be subject to significant price
and volume fluctuations in the future based on a number of factors, including
any shortfall in the Company's revenues or net income from revenues or net
income expected by securities analysts; announcements of new products by the
Company or its competitors; quarterly fluctuations in the Company's financial
results or the results of other software companies, including those of direct
competitors of the Company; changes in analysts' estimates of the Company's
financial performance, the financial performance of competitors, or the
financial performance of software companies in general; general conditions in
the software industry; changes in prices for the Company's products or
competitors' products; changes in revenue growth rates for the Company or its
competitors; sales of large blocks of Common Stock by holders whose ability to
sell has been limited by market stand-off agreements with the underwriters of
the Company's initial public offering and this offering or by restrictions under
applicable securities laws and conditions in the financial markets. In addition,
the stock market may from time to time experience extreme price and volume
fluctuations, which particularly affect the market price for the securities of
many technology companies and which have often been unrelated to the operating
performance of the specific companies. There can be no assurance that the market
price of the Company's Common Stock will not experience significant fluctuations
in the future.

14
<PAGE>
USE OF PROCEEDS

The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Stockholders.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "PRGN." The following table lists the high and low closing prices since
the Company's Common Stock began trading on the Nasdaq National Market on April
9, 1997.

<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
Fiscal Year ending March 31, 1998:
Third Quarter (through November 6, 1997)............................ $ 17.500 $ 14.250
Second Quarter...................................................... 20.250 14.000
First Quarter (beginning April 9, 1997)............................. 15.625 8.500
</TABLE>

On November 6, 1997, the closing price of the Company's Common Stock as
reported by the Nasdaq National Market was $15.25 per share. There were
approximately 165 holders of record of the Company's Common Stock as of
September 30, 1997. The Company estimates that there are approximately 1,200
beneficial stockholders.

15
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1997. The capitalization information set forth in the table below
is qualified by, and should be read in conjunction with, the more detailed
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
(IN
THOUSANDS)
<S> <C>
Notes payable and capital lease obligations, net of current portion................................ 1,094
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and
outstanding.................................................................................. --
Common Stock, $0.001 par value, 50,000,000 shares authorized, 17,175,094 shares issued and
outstanding(1)............................................................................... 17
Additional paid-in capital......................................................................... 63,852
Accumulated deficit................................................................................ (47,384)
Unearned portion of deferred stock compensation.................................................... (1,602)
Cumulative translation adjustment.................................................................. (561)
Treasury stock, at cost............................................................................ (262)
-------------
Total stockholders' equity..................................................................... 14,060
-------------
Total capitalization........................................................................... $ 15,154
-------------
-------------
</TABLE>

- ------------------------
(1) Based upon shares outstanding as of September 30, 1997. Excludes 4,202,180
shares of Common Stock issuable upon exercise of options outstanding at
September 30, 1997 under the Company's Nonqualified Stock Option Plan, 1991
Nonqualified Stock Option Plan and 1994 Stock Option Plan at a weighted
average exercise price of $2.74 and 32,021 shares of Common Stock issuable
upon exercise of options assumed in connection with the Apsylog Acquisition
at a weighted average exercise price of $0.32. Also excludes 766,602 shares
reserved at June 30, 1997 for future issuance under the 1994 Stock Option
Plan, the 1997 Director Option Plan and the 1997 Employee Stock Purchase
Plan and 1,824,000 shares reserved after September 30, 1997 for future
issuance under the 1994 Stock Option Plan. See "Management--Stock Plans,"
"Description of Capital Stock" and Notes 10 and 13 of Notes to Consolidated
Financial Statements.

16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company presented
below as of March 31, 1994, 1995, 1996, and 1997, and for each of the years in
the four-year period ended March 31, 1997, are derived from the consolidated
financial statements of Peregrine Systems, Inc. and its subsidiaries, which
financial statements have been audited by Arthur Andersen LLP, independent
public accountants. The selected consolidated financial data of the Company
presented below as of March 31, 1993 and for the year ended March 31, 1993 are
derived from consolidated financial statements of the Company that were audited
by another accounting firm. The consolidated statement of operations data for
the six-month periods ended September 30, 1996 and 1997 and the consolidated
financial data presented as of September 30, 1997 are derived from the Company's
unaudited consolidated financial statements that include, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
that the Company considers necessary for a fair presentation of the financial
information included therein. The selected consolidated financial data set forth
below is qualified in its entirety by, and should be read in conjunction with,
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
----------------------------------------------------- --------------------------
1997 1997
----------------- -----------------
PRO PRO
1993 1994 1995 1996 ACTUAL FORMA(1) 1996 ACTUAL FORMA(2)
------- ------- ------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses........................ $ 6,311 $ 6,714 $ 9,137 $11,642 $20,472 $24,640 $ 7,856 $13,367 $16,039
Maintenance and services........ 6,533 9,046 10,491 12,124 14,563 16,863 7,144 9,851 11,658
------- ------- ------- ------- ------- -------- ------- ------- --------
Total revenues.............. 12,844 15,760 19,628 23,766 35,035 41,503 15,000 23,218 27,697
Costs and expenses:
Cost of licenses.............. 303 322 393 415 215 1,394 105 128 733
Cost of maintenance and
services.................... 2,165 3,457 3,573 3,526 4,661 6,995 2,279 3,876 5,225
Sales and marketing........... 5,218 6,118 9,549 11,820 15,778 18,739 7,322 8,925 10,541
Research and development...... 3,983 4,670 6,483 7,742 5,877 9,646 2,800 3,303 5,216
General and administrative.... 1,839 1,898 2,943 4,529 3,816 5,846 1,685 2,312 3,419
Acquired in-process research
and development............. -- -- 606 -- -- -- -- 34,775 --
------- ------- ------- ------- ------- -------- ------- ------- --------
Total costs and expenses.... 13,508 16,465 23,547 28,032 30,347 42,620 14,191 53,319 25,314
------- ------- ------- ------- ------- -------- ------- ------- --------
OPERATING INCOME (LOSS)........... (664) (705) (3,919) (4,266) 4,688 (1,117 ) 809 (30,101) 2,563
Interest income (expense) and
other, net...................... (72) (30) 3,970 (286) (478) (153 ) (229) 404 394
Income (loss) from continuing
operations before income
taxes........................... (736) (735) 51 (4,552) 4,210 (1,270 ) 580 (29,697) 2,957
Benefit from (Provision for)
income taxes.................... -- -- -- -- 1,592 1,592 -- (1,880) (1,880 )
------- ------- ------- ------- ------- -------- ------- ------- --------
Income (loss) from continuing
operations...................... (736) (735) 51 (4,552) 5,802 322 580 (31,577) 1,077
LOSS FROM DISCONTINUED OPERATIONS:
Loss from operations............ -- -- -- (781) -- -- -- -- --
Loss on disposal................ -- -- -- (1,078) -- -- -- -- --
------- ------- ------- ------- ------- -------- ------- ------- --------
Loss from discontinued
operations.................. -- -- -- (1,859) -- -- -- -- --
------- ------- ------- ------- ------- -------- ------- ------- --------
Net income (loss)................. $ (736) $ (735) $ 51 $(6,411) $ 5,802 $ 322 $ 580 $(31,577) $ 1,077
------- ------- ------- ------- ------- -------- ------- ------- --------
------- ------- ------- ------- ------- -------- ------- ------- --------
Net income (loss) per share....... $ (0.52) $ 0.39 $ 0.02 $ 0.04 $ (2.14) $ 0.05
------- ------- -------- ------- ------- --------
------- ------- -------- ------- ------- --------
Shares used in per share
calculation..................... 12,331 14,964 16,880 14,330 14,777 19,933
------- ------- -------- ------- ------- --------
------- ------- -------- ------- ------- --------
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
------------------------------------------- -------------
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents............ $ 385 $ 587 $ 57 $ 437 $ 305 $ 16,754
Working capital (deficit)....... (2,300) (3,045) (4,118) (9,697) (4,065) 9,101
Total assets.................... 4,267 6,689 9,787 13,817 19,738 40,343
Borrowings under bank line of
credit........................ 300 658 1,315 2,829 1,974 1,413
Stockholders' equity
(deficit)..................... (2,120) (2,859) (2,197) (8,450) (2,849) 14,060
</TABLE>

- ------------------------------
(1) Pro forma to give effect to the Apsylog Acquisition as if such acquisition
had taken place as of April 1, 1996, excluding the impact of $34.8 million
in acquired in-process research and development associated with the Apsylog
Acquisition.

(2) Pro forma to give effect to the Apsylog Acquisition as if such acquisition
had taken place as of April 1, 1997, excluding the impact of $34.8 million
of acquired in-process research and development associated with the Apsylog
Acquisition.

17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE
EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY, WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND
ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

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

In the latter half of fiscal 1996 and the beginning of fiscal 1997, the
Company implemented an internal restructuring to capitalize on the market
opportunity for products addressing the requirements of the Enterprise Service
Desk. This restructuring included rebuilding the Company's senior management
team, redefining the product development strategy, initiating a comprehensive
marketing strategy and strengthening the Company's financial and budgeting
processes. In addition, in April 1996, the Company substantially reorganized its
sales force and instituted new sales management procedures.

The Company acquired Apsylog in September 1997 for consideration consisting
of approximately 1,916,213 shares of the Company's Common Stock, including
32,021 shares issuable upon exercise of outstanding options held by employees
and consultants of Apsylog and assumed by the Company and has accounted for the
transaction as a purchase. See "Acquisition of Apsylog." The Company accounted
for the Apsylog Acquisition as a purchase transaction. The total purchase price
was $38.6 million, including $30.5 million of Common Stock, $3.5 million in
direct transaction costs and costs associated with integrating the operations of
the two companies and $4.6 million of assumed liabilities. The purchase price of
$38.6 million was allocated based on the fair value of the acquired assets as
follows: $4.6 million to tangible assets, $34.8 million to acquired in-process
research and development, which was written off, and $3.8 million as goodwill.
The goodwill is being amortized over five years using the straight line method.

The Company's revenues are derived from product licensing, maintenance and
services. License fees are generally due upon the granting of the license and
typically include a one-year maintenance period as part of the license
agreement. The Company also provides ongoing maintenance services, which include
technical support and product enhancements, for an annual fee based upon the
current price of the product. In fiscal 1995, 1996 and 1997, maintenance and
service revenues represented 53%, 51% and 42% of total revenues, respectively.
The Company has sold its original PNMS software to a sizable installed base of
customers, many of whom have transitioned to SERVICECENTER. The Company's large
installed customer base has generated a high level of maintenance revenues. In
fiscal 1995, 1996, and 1997, more than 90% of the Company's customers renewed
their maintenance agreements. Maintenance revenues from new licenses of
SERVICECENTER combined with recurring maintenance revenues from existing
customers are expected to provide a continued source of revenues as the
Company's installed customer base increases.

Revenues from license agreements are recognized currently, provided that all
of the following conditions are met: a noncancelable license agreement or other
legally binding agreement has been signed, the product has been delivered, there
are no material uncertainties regarding customer acceptance, collection of the

18
<PAGE>
resulting receivable is deemed probable, and no other significant vendor
obligations exist. Revenues from post-contract support services are recognized
ratably over the term of the support period, generally one year. Maintenance
revenues which are bundled with license agreements are unbundled and recognized
using vendor-specific evidence. Consulting revenues are primarily related to
implementation services most often performed on a time and material basis under
separate service agreements for the installation of the Company's products.
Revenues from consulting and training services are recognized as the respective
services are performed.

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

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

19
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ---------- ----------- ---------- ---------- -----------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.............................. 49.2 % 42.6 % 46.6% 49.0 % 58.4% 52.4% 57.6 %
Maintenance and services.............. 50.8 57.4 53.4 51.0 41.6 47.6 42.4
----- ----- ----- ----- ----- ----- -----------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:.....................
Cost of licenses...................... 2.4 2.0 2.0 1.7 0.6 0.7 0.6
Cost of maintenance and services...... 16.8 22.0 18.2 14.9 13.3 15.2 16.7
Sales and marketing................... 40.7 38.8 48.7 49.7 45.0 48.8 38.4
Research and development.............. 31.0 29.6 33.0 32.6 16.8 18.7 14.2
General and administrative............ 14.3 12.1 15.0 19.1 10.9 11.2 10.0
Acquired in-process research and
development......................... -- -- 3.1 -- -- -- 149.8
----- ----- ----- ----- ----- ----- -----------
Total costs and expenses............ 105.2 104.5 120.0 118.0 86.6 94.6 229.7
----- ----- ----- ----- ----- ----- -----------
Operating income (loss)................. (5.2) (4.5) (20.0) (18.0) 13.4 5.4 (129.7)
Interest income (expense) and other,
net................................... (0.5) (0.2) 20.3 (1.2) (1.4) (1.5) 1.8
----- ----- ----- ----- ----- ----- -----------
Income (loss) from continuing operations
before income taxes................... (5.7) (4.7) 0.3 (19.2) 12.0 3.9 (127.9)
Benefit from (Provision for) income
taxes................................. -- -- -- -- 4.5 -- (8.1)
----- ----- ----- ----- ----- ----- -----------
Income (loss) from continuing
operations............................ (5.7) (4.7) 0.3 (19.2) 16.5 3.9 (136.0)
Loss from discontinued operations:......
Loss from operations.................. -- -- -- (3.3) -- -- --
Loss on disposal...................... -- -- -- (4.5) -- -- --
Loss from discontinued operations... -- -- -- (7.8) -- -- --
----- ----- ----- ----- ----- ----- -----------
Net income (loss)....................... (5.7)% (4.7)% 0.3% (27.0)% 16.5% 3.9% (136.0)%
----- ----- ----- ----- ----- ----- -----------
----- ----- ----- ----- ----- ----- -----------
</TABLE>

SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1996

The Company's results of operations for the six month period ended September
30, 1997 include results of operations for Apsylog subsequent to September 19,
1997. The impact of Apsylog's operations on the consolidated results of
operations for the six months ended September 30, 1997 was de minimus.

REVENUES

For the six month periods ended September 1997 and 1996, total revenue
increased 55% from $15.0 million to $23.2 million.

LICENSES. License revenues were $13.4 million and $7.9 million for the six
months ended September 30, 1997 and 1996, respectively, representing 58% and 52%
of total revenues for such periods. For the six months ended September 30, 1997,
license revenues increased 70% compared to the six months ended September 30,
1996. The dollar and percentage increases in license revenues are attributable
to increased demand for new licenses of SERVICECENTER, additional seats
purchased by existing SERVICECENTER customers, more effective corporate
marketing programs, improved sales force productivity, and expansion of the
Company's sales force.

MAINTENANCE AND SERVICES. Maintenance and services revenues were $9.9
million and $7.1 million for the six months ended September 30, 1997 and 1996,
respectively, representing 42% and 48% of total revenues for such periods. For
the six months ended September 30, 1997, maintenance and service revenues
increased 38% compared to the six months ended September 30, 1996. The dollar
and percentage increases in maintenance and services revenues are attributable
to renewals of maintenance agreements from the Company's expanded

20
<PAGE>
installed base of customers and maintenance revenues included as part of new
licenses and an increased number of consulting engagements related to
implementation of software from initial license agreements.

COSTS AND EXPENSES

COST OF LICENSES. Cost of license revenues was $128,000 and $105,000 for
the six month periods ended September 30, 1997 and 1996, respectively,
representing 1% of total license revenues in the respective periods.

COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services revenues
was $3.9 million and $2.3 million for the six months ended September 30, 1997
and 1996, respectively, representing 39% and 32% of total maintenance and
services revenues for such periods. The dollar increases are attributable to an
increase in customer support and professional services personnel in connection
with the corresponding increase in professional services revenue.

SALES AND MARKETING. Sales and marketing expenses were $8.9 million and
$7.3 million for the six months ended September 30, 1997 and 1996, respectively,
representing 38% and 49% of total revenues in such periods. The dollar increases
in sales and marketing expenses are attributable to the increase in personnel in
the marketing department and marketing spending and, to a lesser extent,
expansion of both the North American and international sales forces and to
moderate operating expense increases. If the Company experiences a decrease in
sales force productivity or for any other reason a decline in revenues, it is
likely that operating margins will decline as well. The decrease in sales and
marketing expenses as a percentage of total revenues is attributable to
increased revenues, particularly increased license revenues, economies of scale,
and the delayed hiring of additional sales staff.

RESEARCH AND DEVELOPMENT. Research and development expenses were $3.3
million and $2.8 million for the six months ended September 30, 1997 and 1996,
respectively, representing 14% and 19% of total revenues in such periods. The
dollar increase from fiscal 1997 to fiscal 1998 is due primarily to the hiring
of additional software developers, and the decrease as a percentage of total
revenues is due to increased revenues.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.3
million and $1.6 million for the six months ended September 30, 1997 and 1996,
respectively, representing 10% and 11% of the total revenues in such periods.
The dollar increases from fiscal 1997 to 1998 are attributable primarily to
administrative personnel additions to support the Company's growth and the
additional administrative expenses associated with becoming a publicly traded
company, while the decrease as a percentage of total revenues reflects the fact
that revenues grew at a faster rate than general and administrative expenses.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. Acquired in-process
research and development costs of $34.8 million were incurred in the second
quarter of fiscal 1998 in connection with the Apsylog Acquisition.

The impact of the charge for acquired in-process research and development on
net earnings and earnings per share is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPT. 30, 1997
----------------------------------
NET BEFORE ACQUIRED
R&D NET
---------------------- ----------
<S> <C> <C>
Earnings (loss) before income taxes...................... $ 5,078 $ (29,697)
Income taxes............................................. $ 1,880 $ 1,880
-------- ----------
Net earnings (loss)...................................... $ 3,198 $ (31,577)
Net earnings (loss) per share............................ $ 0.18 $ (2.14)
Shares used in computing eps............................. 18,017 14,777
</TABLE>

- ------------------------
SEE NOTE 4 FOR ADDITIONAL DETAILS.

PROVISION FOR INCOME TAXES

Income tax expense for the six months ended September 30, 1997 amounted to
$1.0 million compared with zero in the comparable period of 1996. This increase
results from the $3.9 million increase in operating profits, before taxes and
recognition of the acquired research and development costs during the period.

21
<PAGE>
Excluding the effect of expensing the acquired research and development costs,
the effective tax rate for the six months ended September 30, 1997 was 37%.

FISCAL YEARS ENDED MARCH 31, 1995, 1996, AND 1997

REVENUES

Total revenues were $19.6 million, $23.8 million, and $35.0 million in
fiscal 1995, 1996, and 1997, respectively, representing year-to-year increases
of 21% between 1995 and 1996 and 47% between 1996 and 1997.

LICENSES. License revenues were $9.1 million, $11.6 million, and $20.5
million in fiscal 1995, 1996, and 1997, respectively, representing 47%,49%, and
58% of total revenues in the respective periods. The increases in license
revenues are attributable to increased demand for new licenses of SERVICECENTER,
additional seats purchased by existing SERVICECENTER customers, higher average
transaction sizes, more effective corporate marketing programs, improved sales
force productivity and expansion of the Company's international sales force.

MAINTENANCE AND SERVICES. Maintenance and services revenues were $10.5
million, $12.1 million, and $14.6 million in fiscal 1995, 1996, and 1997,
respectively, representing 53%, 51 %, and 42% of total revenues in the
respective periods. The dollar increases are attributable to renewals of
maintenance agreements from the Company's expanded installed base of customers
and maintenance revenues included as part of new licenses and an increased
number of consulting engagements related to implementation of software from
initial license agreements.

COST OF REVENUES

COST OF LICENSES. Cost of license revenues was $393,000, $415,000, and
$215,000 for fiscal 1995, 1996, and 1997, respectively, representing 4%, 4%, and
1% of total license revenues in the respective periods.

COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services revenues
was $3.6 million, $3.5 million, and $4.7 million in fiscal 1995, 1996, and 1997,
respectively, representing 34%, 29%, and 32% of total maintenance and service
revenues in the respective periods. The dollar increase in 1997 is attributable
to an increase in customer support personnel and professional services personnel
in connection with the corresponding increase in professional services revenue.
Cost of maintenance and services decreased as a percentage of related revenues
because of improved operating efficiencies.

SALES AND MARKETING. Sales and marketing expenses were $9.5 million, $11.8
million, and $15.8 million in fiscal 1995, 1996, and 1997, respectively,
representing 49%, 50%, and 45% of total revenues in the respective periods. The
increases are attributable to the significant expansion of both the North
American and international sales forces and to moderate operating expense
increases. If the Company experiences a decrease in sales force productivity or
for any other reason a decline in revenues, it is likely that operating margins
will decline as well.

RESEARCH AND DEVELOPMENT. Research and development expenses were $6.5
million, $7.7 million, and $5.9 million in fiscal 1995, 1996, and 1997,
respectively, representing 33%, 33% and 17% of total revenues in the respective
periods. The increase from fiscal 1995 to fiscal 1996 is due primarily to the
hiring of additional mainframe software developers, which was offset, in part,
by the Company's divestiture of XVT Software Inc. ("XVT"), which represented
that mainframe software development portion of its business, in October 1995.
The decrease as a percentage of total revenues from fiscal 1996 to fiscal 1997
was also attributable to such divestiture. See "Certain Transactions" and Note 8
of Notes to Consolidated Financial Statements of Peregrine.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.9
million, $4.5 million, and $3.8 million in fiscal 1995, 1996, and 1997,
respectively, representing 15%, 19%, and 11% of total revenues

22
<PAGE>
in the respective periods. The increase from fiscal 1995 to 1996 is attributable
primarily to administrative personnel additions to support growth and costs
associated with a managing restructuring. The decrease from fiscal 1996 to 1997
was attributable to the costs incurred in the fiscal 1996 management
restructuring.

OTHER INCOME

In fiscal 1995, the Company sold the rights to one of its software products,
resulting in other income of $4.0 million. The purchase price from the product
sale is payable to the Company in annual installments ending in fiscal 1998.

PROVISION FOR INCOME TAXES/INCOME TAX BENEFIT

The Company did not incur any significant income taxes during fiscal 1995
and 1996 due to operating losses. In fiscal 1997 the Company recorded an income
tax benefit of $1.6 million resulting from the utilization of a portion of the
Company's available net operating loss carry-forwards as an offset against
taxable income. As of March 31, 1997, the Company had net operating loss
carry-forwards of approximately $290,000 for federal tax reporting purposes
which expire beginning in 2004. Utilization of the net operating losses may be
subject to annual limitations resulting from certain changes in ownership of the
Company. The Company has recorded a valuation allowance to partially offset the
carrying value of its net deferred tax assets due to uncertainty surrounding its
realization. Management evaluates on a quarterly basis the recoverability of the
deferred tax assets and the amount of the valuation allowance. At such time as
it is determined that it is more likely than not that all or part of the
deferred tax assets are realizable, the valuation allowance will be reduced
accordingly.

DISCONTINUED OPERATIONS

During fiscal 1996, the Company acquired XVT Software Inc. ("XVT"),
substantially all of the outstanding equity of which was owned by the majority
stockholder of the Company. In January 1996, the Company determined that
maintaining an interest in XVT was not consistent with the Company's business
strategy and adopted a plan to discontinue the operations of XVT. The Company
incurred a loss from discontinued operations of XVT in fiscal 1996 of $1.9
million.

IMPACT OF INFLATION

The effect of inflation on the Company's financial position has not been
significant to date.

23
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth selected consolidated statement of operations
data for the eight quarters ended September 30, 1997, both in dollar amounts and
as a percentage of revenues. This information has been derived from the
Company's unaudited consolidated financial statements. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements contained herein and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information when read in
conjunction with the Company's annual audited consolidated financial statements
and notes thereto appearing elsewhere in this Prospectus. The Company's
quarterly results are subject to fluctuations. The operating results for any
quarter are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses......................... $ 3,861 $ 2,851 $ 3,760 $ 4,096 $ 6,076 $ 6,540 $ 6,328 $ 7,039
Maintenance and services......... 3,013 3,277 3,740 3,404 3,451 3,968 4,687 5,164
-------- -------- -------- --------- -------- -------- -------- ---------
Total revenues................. 6,874 6,128 7,500 7,500 9,527 10,508 11,015 12,203
Costs and expenses:
Cost of licenses................. 141 95 61 44 50 60 59 69
Cost of maintenance and
services....................... 1,013 858 1,149 1,130 1,144 1,238 1,781 2,095
Sales and marketing.............. 3,263 3,428 3,725 3,597 3,895 4,561 4,317 4,608
Research and development......... 2,215 1,576 1,415 1,385 1,568 1,509 1,644 1,659
General and administrative....... 1,610 1,558 807 878 1,095 1,036 1,143 1,169
Acquired research and development
costs.......................... -- -- -- -- -- -- -- 34,775
-------- -------- -------- --------- -------- -------- -------- ---------
Total costs and expenses....... 8,242 7,515 7,157 7,034 7,752 8,404 8,944 44,375
Operating income (loss)............ (1,368) (1,387) 343 466 1,775 2,104 2,071 (32,172)
Interest income (expense), and
other, net....................... (43) (112) (112) (117) (137) (112) 178 226
-------- -------- -------- --------- -------- -------- -------- ---------
Income (loss) from
continuing operations before
income taxes..................... (1,411) (1,499) 231 349 1,638 1,992 2,249 (31,946)
Benefit from (Provision for) income
taxes............................ -- -- -- -- -- 1,592 (832) (1,048)
-------- -------- -------- --------- -------- -------- -------- ---------
Income (loss) from continuing
operations....................... $(1,411) $(1,499) $ 231 $ 349 $ 1,638 $ 3,584 $ 1,417 $(32,994)
-------- -------- -------- --------- -------- -------- -------- ---------
-------- -------- -------- --------- -------- -------- -------- ---------
(AS A PERCENTAGE OF TOTAL REVENUES)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses......................... 56.2% 46.5% 50.1% 54.6% 63.8% 62.2% 57.4% 57.7%
Maintenance and services......... 43.8 53.5 49.9 45.4 36.2 37.8 42.6 42.3
-------- -------- -------- --------- -------- -------- -------- ---------
Total revenues................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of licenses................. 2.1 1.5 0.8 0.6 0.5 0.6 0.5 0.6
Cost of maintenance and
services....................... 14.7 14.0 15.3 15.1 12.0 11.8 16.2 17.1
Sales and marketing.............. 47.5 56.0 49.7 48.0 40.9 43.4 39.2 37.8
Research and development......... 32.2 25.7 18.9 18.5 16.5 14.4 14.9 13.6
General and administrative....... 23.4 25.4 10.8 11.7 11.5 9.8 10.4 9.6
Acquired research and development
costs.......................... -- -- -- -- -- -- -- 285.0
-------- -------- -------- --------- -------- -------- -------- ---------
Total costs and expenses....... 119.9 122.6 95.5 93.9 81.4 80.0 81.2 363.6
Operating income (loss)............ (19.9) (22.6) 4.5 6.1 18.6 20.0 18.8 (263.6)
Interest income (expense), and
other, net....................... (0.6) (1.8) (1.5) (1.5) (1.4) (1.1) 1.6 (1.8)
Other income (expense), net........ 1.3 -- -- (0.1) (0.2) -- (0.1) --
-------- -------- -------- --------- -------- -------- -------- ---------
Income (loss) from
continuing operations before
income taxes..................... (20.5) (24.4) 3.0 4.6 17.2 18.9 20.4 (261.8)
Benefit from (Provision for) income
taxes............................ -- -- -- -- -- 15.2 (7.5) (8.6)
-------- -------- -------- --------- -------- -------- -------- ---------
Income (loss) from continuing
operations....................... (20.5)% (24.4)% 3.0% 4.6% 17.2% 34.1% 12.9% (270.4)%
-------- -------- -------- --------- -------- -------- -------- ---------
-------- -------- -------- --------- -------- -------- -------- ---------
</TABLE>

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<PAGE>
ACQUISITION OF APSYLOG

The Company completed the Apsylog Acquisition in September 1997. Apsylog
develops and markets client/server application software that allows
organizations to professionally manage their technology assets. Apsylog's
ASSETCENTER product suite, formerly ASSETMANAGER, offers two-tier client server
software applications written in C++ and with proprietary tools, running on
Windows 95, Windows NT, and UNIX and utilizing a variety of relational database
technologies, including products from Oracle Corporation, Informix Corporation,
and Sybase, Inc.

Apsylog entered the IT asset management market in 1992 with a personnel
computer-based software solution selling in the range of $3,000 to $15,000 per
license. The product was licensed primarily in France and other European
countries. In 1994, Apsylog undertook a development project to re-engineer its
product for a more scalable client/server platform and at the same time to
increase its functionality and to improve its user interface. This project
resulted in the introduction of ASSETCENTER, which Apsylog began shipping in
Europe in mid-1996. At approximately the same time, Apsylog also entered the
North American market, establishing a North American sales and support office in
San Ramon, California. In Europe, ASSETCENTER is distributed both directly and
indirectly through a partner network. Sales distribution activities in North
America are similar to those in Europe although Apsylog has tended to place
relatively greater emphasis on generating North American sales through reseller
partnerships, including agreements with GE Capital, AT&T Capital, and Hitachi
Data Systems.

Apsylog operates under a financial model similar to Peregrine. Its revenues
are derived primarily from licensing its software products and from providing
maintenance services. To a lesser extent, Apsylog derives revenues from
consulting services. Apsylog's total revenues were $7.0 million and $6.5 million
for the years ended December 31, 1995 and 1996, respectively, and $3.1 million
and $4.5 million for the six months ended June 30, 1996 and 1997, respectively.
License revenues represented 78% and 64% of total revenues for the years ended
December 31, 1995 and 1996, respectively, and 60% of total revenues for the six
months ended June 30, 1996 and 1997, respectively. The balance of revenues was
comprised of maintenance and service revenues. Revenues in 1995 and 1996 also
include revenues for operations which have been discontinued or divested.

Through June 30, 1997, Apsylog had recorded cumulative net losses of
approximately $8.9 million. Since inception, Apsylog financed its operations
through bank borrowings, private sales of equity securities, and grants from
entities affiliated with the government of France under various state programs.
At June 30, 1997, Apsylog had approximately $1.5 million outstanding under a
bank credit facility, which the Company repaid following the Apsylog
Acquisition. In addition, approximately $0.8 million in government-supported
grants may become repayable in connection with the Apsylog Acquisition.

LIQUIDITY AND CAPITAL RESOURCES

The Company had $16.8 million in cash and cash equivalents at September 30,
1997 compared to $0.3 million at March 31, 1997. The increase is primarily
attributable to the Company's completion of its initial public offering in April
1997. The Company offered and sold 2.3 million shares of its Common Stock at an
initial public offering price of $9.00 per share, raising $19.3 million after
underwriting discounts and commissions.

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

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

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<PAGE>
At September 30, 1997, there were no amounts outstanding under the line of
credit facility. The outstanding line of credit balance at September 30, 1997 of
$1.4 million is entirely attributable to borrowings of the Company's wholly
owned subsidiary Apsylog S.A., acquired in September 1997 in connection with the
United Software, Inc. In October 1997, the Apsylog line of credit was repaid in
full and terminated.

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

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<PAGE>
BUSINESS

THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS RELATING
TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY, WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

Peregrine is a leading provider of Enterprise Service Desk software. The
Company develops, markets and supports SERVICECENTER, an integrated suite of
applications that automates the management of complex, enterprise-wide
information technology infrastructures. SERVICECENTER is specifically designed
to address the IT management requirements of large organizations and can be
deployed across all major hardware platforms and network operating systems and
protocols. SERVICECENTER utilizes advanced client/server and intelligent agent
technologies and a modular architecture.

Most traditional IT management solutions have been designed to address a
limited set of problems, principally problem tracking and problem resolution
These applications have been deployed on a departmental or divisional level or
have otherwise taken a segmented approach to IT management that requires a
specific and separate application to manage each component or system within the
IT infrastructure and that does not permit integration with other third party IT
applications. The Company's SERVICECENTER suite of applications offers
capabilities beyond those of traditional internal help desk solutions and is
intended to create an Enterprise Service Desk capable of meeting the broader
operational and strategic needs of business enterprises. SERVICECENTER provides
an integrated and automated suite of six applications, consisting of problem
management, knowledge-based resolution, change management,
inventory/configuration management, order and catalog management, and financial
management.

In September 1997, the Company completed the acquisition of Apsylog, a
leading provider of IT asset management software solutions. The development of a
market for asset management solutions in reccent years has paralleled that of
the market for Enterprise Service Desk solutions and reflects the need of large
organizations to manage increasingly complex and dispersed IT infrastructures.
Apsylog's ASSETMANAGER product line, now renamed ASSETCENTER, provides asset
mangement capabilities for IT infrastructures by tracking an organization's
assets throughout their life cycles, thereby permitting more informed investment

27
<PAGE>
decisions in the acquisition, change and disposition of IT assets. The Company
believes that ASSETCENTER will complement SERVICECENTER, allowing the Company to
deliver an integrated suite of software applications and enabling organizations
to take a more comprehensive approach to managing their IT infrastructures. See
"Acquisition of Apsylog."

PRODUCTS

Peregrine's principal product is SERVICECENTER, an Enterprise Service Desk
software solution that integrates six critical management applications, or
modules, on a common platform. SERVICECENTER supports most major computing
platforms, including UNIX, Microsoft Windows 3.1, Windows 95, Windows NT, MVS
and Apple Macintosh. While SERVICECENTER can be implemented readily without
modification, SERVICECENTER users can customize the applications, screen
formats, databases or reports using the Company's Rapid Application Development
("RAD") environment, a fourth generation application language. In August 1997,
the Company announced the release of SERVICECENTER 2.0. The release features a
new user interface, ticketing and query capabilities targeted at the Company's
multi-location and multi-national customer base, and data integration
capabilities that link related service requests with caller name and phone
numbers.

SERVICECENTER APPLICATIONS

PROBLEM MANAGEMENT. The problem management application automates the
process of reporting and tracking specific problems or classes of problems
associated with an enterprise network computing environment. Help desk personnel
open problem tickets using templates specific to the class of problem reported.

KNOWLEDGE-BASED RESOLUTION. The problem management application works
together with the Company's IR EXPERT, a text search expert system that employs
neural network technology to allow network operators to retrieve relevant
information quickly and accurately. This application assists in problem solving,
based on prior solutions. The IR EXPERT reduces a user's question, or query, to
a number of "terms," refining the query to fit knowledge in the database and can
then search resolution databases using related terms. This application is
self-learning, so the customer does not have to perform any work to keep the
knowledge base up to date.

CHANGE MANAGEMENT. The change management application provides a functional
framework for proposing, accepting, scheduling, approving, reviewing and
coordinating network changes. Change management permits end-users to enter
proposed changes to the production environment and then circulate those changes
electronically for review and action. Change requests can be tracked and details
can be added at any time to the initial specifications.

INVENTORY/CONFIGURATION MANAGEMENT. The inventory/configuration management
application provides the service desk with a central repository of information
about an organization's IT environment, including inventories of networked
devices and applications as well as information concerning end-users. Easy
access to inventory information permits the service desk to respond to end-user
problems more effectively, to plan changes and services, and to create accurate
reports about the network's status and environmental trends.

ORDER AND CATALOG MANAGEMENT. The order and catalog management application
automates and tracks an organization's equipment and services ordering process
from initial request through installation and follow-up. Using SERVICECENTER, an
end-user identifies and orders products or services from a catalog of items.
SERVICECENTER then consolidates requests, forwards orders through an
organization's standard approval and order processing procedures, and
consolidates orders by vendor. End-users can track the status of requests
through SERVICECENTER at all times.

FINANCIAL MANAGEMENT. The financial management application monitors all
financial and cost information relating to hardware and software in the network
inventory, including component status (E.G., installed, disconnected, on order,
in repair), purchase order/lease numbers, physical location, device type, fixed
asset number and purchase accrual data.

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<PAGE>
OTHER NETWORK MANAGEMENT PRODUCTS

The Company's network management solutions provide critical network
information on a real-time basis, enabling organizations to evaluate the status
of their network computing environment and to respond proactively. OPENSNA
permits users to manage IBM SNA networks graphically from an SNMP-based
management console, to determine network status, and to issue commands.
STATIONVIEW and SERVERVIEW manage Novell NetWare, Microsoft Windows NT, and
Compaq Insight Manager-based servers and workstations from SNMP-based management
platforms.

PRODUCT DEVELOPMENT; PRODUCT AUTHORSHIP MODEL

The Company believes that attracting and retaining talented software
developers is an important component of the Company's product development
activities. To this end, the Company has instituted a product authorship
incentive program that rewards the Company's developers individually with
commissions based on the market success of the applications designed, written,
marketed and supported by them. The Company's product authorship program is
designed to encourage the Company's developers to evaluate the effectiveness of
a product in the actual user environment.

The Company believes that the ability to deliver new and enhanced products
to customers is a key success factor. The Company has historically developed its
products through a consultative process with existing and potential customers.
The Company expects that continued dialogue with such existing and potential
customers may result in enhancements to existing products and the development of
new products, including product suites designed for a specific market segment.
The Company has in the past devoted and expects in the future to continue to
devote a significant amount of resources to developing new and enhanced
products. The Company currently has a number of product development initiatives
underway. There can be no assurance that any enhanced products, new products or
product suites will be embraced by existing or new customers. The failure of
these products to achieve market acceptance would have a material adverse effect
on the Company's business, operating results and financial condition.

The Company's research and development expenditures in fiscal 1997 and for
the six months ended September 30, 1997 were $5.9 million and $3.3 million,
respectively, representing 16.8% and 14.2% of total revenues in the respective
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

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

29
<PAGE>
TECHNOLOGY

The Company's products rely on a number of standard, commercially available
technologies for relational database storage and retrieval and client/server
communications. The Company's products are designed to support a range of
implementations of the Enterprise Service Desk within medium-sized organizations
to large enterprises. In addition, the Company has developed technologies that
provide a comprehensive environment to build, deploy and customize a wide range
of applications.

THREE-TIERED ARCHITECTURE. The Company's database, business rules and
presentation technologies create a three-tiered client/server architecture
intended to provide scalability and flexibility. The tiers are logically
separated, allowing changes to the database design or the graphical interface to
be made without requiring changes to the business rules or other related tiers.

EASY CUSTOMIZATION/EXTENSION. In order to make the software fit the
customers' needs, the product provides a number of easy-to-use tools that enable
customers to customize and extend SERVICECENTER. The design of the database, the
contents and appearance of the user interface, and the business rules can be
modified using the Company's standard tools provided with the system.

RAPID APPLICATION DEVELOPMENT ENVIRONMENT. The Company has created a
"fill-in-the-blanks" development environment for building and deploying
applications. All SERVICECENTER applications are implemented using the Company's
RAD environment. If a customer requires more extensive modification, the system
can be customized by changing the applications provided by the Company or
implementing new applications using the RAD environment.

DISTRIBUTED SERVICES. The Company has announced for delivery in 1997 a
distributed technology that provides both replication services and the
capability to move work from one SERVICECENTER system to another. These services
are database vendor independent and contain knowledge of the application schema.
For example, the transfer of a problem ticket from one server to another
requires moving not only the problem description, but also information about the
person affected by the problem and the inventory items, such as the type of
software being used or the name of the server to which the user is connected.
Distributed services permit all data to be transmitted as a discrete unit.

ADAPTORS. The Company provides adaptors to industry standard APIs, such as
SMTP e-mail, and leading vendors, products. These adaptors expand the reach of
the Company's products by allowing them to interact with other products
currently in the customer's environment. The Company has also created adaptors
that permit the system to communicate using e-mail, beeper, fax and Lotus Notes.
The adaptors also provide communication with third party network management
tools such as Hewlett-Packard's OpenView, Tivoli's TME, Cabletron Spectrum,
Sun's SunNet Manager and others. In addition, the Company has created an open
API permitting software developed by third parties, end-users or the Company's
Professional Services group to be integrated into the system.

INTELLIGENT AGENTS. The Company provides intelligent agents that gather and
feed information to SERVICECENTER. The agents provide automated inventory
gathering and problem determination data for use in problem resolution and
management of an IT environment. The agents permit help desk personnel to open,
update and close trouble tickets based on criteria provided by the customers.

SALES AND MARKETING

The Company sells its software and services in both North America and
internationally primarily through a direct sales force. The North American sales
force is located in San Diego and Houston. The international sales force is
located in London, Paris, Frankfurt and Copenhagen. The Company utilizes a sales
model which minimizes the number of remote sales offices and focuses instead on
telephone and network communications for product demonstrations and product
sales. When necessary, however, the Company's sales force will also travel to
customer locations and pursue a consultative sales process. In addition to its
direct sales strategy, the

30
<PAGE>
Company is pursuing indirect distribution channels. In the Pacific Rim and Latin
America, the Company has established a network of channel partners. In North
America, the Company has established a network of regional, national and
strategic integrators. When sold through direct channels, the sales cycle for
the product is typically six to nine months depending on a number of factors,
including the size of the transaction and the level of competition which the
Company encounters in its selling activities. This sales cycle is typically
extended 90 days for product sales through indirect channels.

The Company has significantly increased the size of its sales force over the
last year and expects to continue hiring sales personnel, both domestically and
internationally, over the next twelve months. Competition for qualified sales
personnel is intense in the software industry. The Company also expects to
increase the number of its regional, national, and strategic integrators,
domestically and internationally. Any failure by the Company to expand its
direct sales force or other distribution channels could have a material adverse
effect on the Company's business, operating results and financial condition.

In the last year, the Company has devoted significant resources to
restructuring and building its marketing organization. In the course of this
restructuring, the marketing organization has launched a new corporate marketing
strategy, emphasizing the Company's objective to be the leading Enterprise
Service Desk solution worldwide. As part of its marketing strategy, the Company
has implemented a number of enhanced marketing programs such as seminars,
monthly executive briefings, industry trade shows, advertising and extensive
public relations. For example, in 1997, the Company completed a series of
product seminars in 30 cities in the United States and abroad. The Company plans
to continue to expand its marketing organization to broaden the Company's market
presence.

The Company believes that its continued growth and profitability will
require expansion of its international operations, particularly in Europe, Latin
America and the Pacific Rim. The Company intends to expand its international
operations and enter additional international markets, either directly or
through international distribution or similar arrangements, which will require
significant management attention and financial resources. Competition for
suitable distribution partners is intense in many markets outside North America.
There can be no assurance that the Company will be successful in attracting and
retaining qualified international distributors or that it will be successful in
implementing direct sales programs in selected international markets. If the
Company is unable to obtain qualified international distribution partners or is
otherwise unable to successfully penetrate important international markets, the
Company's business, operating results, and financial condition could be
materially and adversely affected.

In addition, continued international expansion poses a number of risks
associated with conducting business outside the United States, including
fluctuations in currency exchange rates, longer payment cycles, difficulties in
staffing and managing international operations, problems in collecting accounts
receivable, seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world, increases in tariffs, duties, price
controls, or other restrictions on foreign currencies, and trade barriers
imposed by foreign countries, any of which could have a material adverse effect
on the Company's business, operating results and financial condition. In
addition, the Company has only limited experience in developing localized
versions of its products and marketing and distributing its products
internationally. There can be no assurance that the Company will be able to
successfully localize, market, sell, and deliver its products internationally.
The inability of the Company to expand its international operations successfully
and in a timely manner could have a material adverse effect on the Company's
business, operating results, and financial condition.

PROFESSIONAL SERVICES AND CUSTOMER SUPPORT

The Company's Professional Services group provides technical consulting and
training to assist customers in successfully implementing SERVICECENTER.

The Company provides a range of consulting services. Basic consulting
services include analyzing user requirements and providing the customer with a
starter system that will quickly demonstrate significant

31
<PAGE>
benefits of SERVICECENTER. More advanced consulting services include providing
turn-key implementations using the Company's Advanced Implementation
Methodology, which begins with a structured analysis to map the customer's
business rules onto the Company's service desk tools, continues with the
technical design and construction, and finishes with system roll out.
Implementation assistance frequently involves process reengineering and the
development of interfaces between the Company's products and legacy systems and
other tools or systems.

The Company offers training courses in the implementation and administration
of its products. On a periodic basis, the Company offers product training at its
facilities in San Diego and London for customers and channel partners. On-site
training is available for a fee.

The Company maintains a staff of customer service personnel, who provide
technical support and training, and periodic software updates to the Company's
customers and partners. The Company offers technical support services 24 hours a
day, seven days a week through its local offices in Europe and San Diego via
toll free lines. In addition to telephone support, the Company provides support
via fax, e-mail and a Web server.

COMPETITION

The market for the Company's products is highly competitive, fragmented and
subject to rapid technological change and frequent new product introductions and
enhancements. Competitors vary in size and in the scope and breadth of the
products and services offered. The Company encounters competition from a number
of sources, including (i) providers of internal help desk software applications
such as Remedy Corporation and Software Artistry, Inc., (ii) customer
interaction software companies such as Clarify Inc. and The Vantive Corporation,
whose products include internal help desk applications, (iii) information
technology and systems management companies such as IBM, Computer Associates
International, Inc., McAfee Associates, Inc., and Hewlett-Packard Company
through its recent acquisition of PROLIN, (iv) providers of asset management
software, and (v) the internal information technology departments of those
companies with help desk requirements. Because barriers to entry in the software
market are relatively low, the Company anticipates additional competition from
other established and emerging companies as the markets for Enterprise Service
Desk and asset management applications expand. In addition, current and
potential competitors have established or may in the future establish
cooperative relationships among themselves or with third parties, or large
software companies could acquire or establish alliances with smaller competitors
of the Company. The Company expects software industry consolidation to occur in
the future, and it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on the
Company's business, operating results and financial condition. Some of the
Company's current and many of its potential competitors have significantly
greater financial, technical, marketing and other resources than the Company. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion, and sale of their products than the Company.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not have a material adverse effect on the Company's business,
operating results and financial condition.

The Company believes that the principal competitive factors affecting its
market include product features such as adaptability, scalability, ability to
integrate with third party products, functionality, ease of use, product
reputation, quality, performance, price, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although
the Company believes that it currently competes favorably with respect to such
factors, there can be no assurance that the Company can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical, and other resources
than the Company.

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<PAGE>
INTELLECTUAL PROPERTY

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

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

FACILITIES

The Company's principal administrative, sales, marketing, support, research
and development and training functions are located at its headquarters facility
in San Diego, California. The Company currently occupies 95,110 square feet of
space in the San Diego facility, and the lease extends through August 2003.
Management is reviewing the adequacy of its current facilities to meet its needs
in the future. The Company believes that suitable additional facilities will be
available in the future as needed on commercially reasonable terms. An
additional 13,310 square feet of leased space at the San Diego headquarters is
subleased to JMI Services, Inc., an affiliate of the Company. See "Certain
Transactions."

The Company also leases office space for research and development in Cary,
North Carolina and Colorado Springs, Colorado and for sales activities in
Houston, Texas. In Europe, the Company leases space in London, Paris, Frankfurt
and Copenhagen for European sales, customer support, professional services and
administration.

EMPLOYEES

As of September 30, 1997, the Company employed 206 persons, including 68 in
sales and marketing, 31 in research and development, 22 in customer support, 39
in professional services, and 36 in finance and administration. Of the Company's
employees, 43 were located in Europe and the remainder were located in North
America. The Company believes that its future success will depend in part on its
continued ability to attract, hire and retain qualified personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to identify, attract, and retain such personnel in the future. None
of the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.

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ACQUISITION OF APSYLOG

Apsylog develops and markets ASSETCENTER, a comprehensive asset management
solution that manages the IT assets throughout their life-cycle, from asset
acquisition through asset deployment and tracking, to asset retirement.
ASSETCENTER combines procurement, portfolio management, and lease management
into a single enterprise information resource.

Apsylog began shipping ASSETCENTER in mid-1996 has since licensed
ASSETCENTER to over 150 customers.

Apsylog currently sells ASSETCENTER in Europe and North America through a
direct sales force and through a network of distributors and resellers. In
Europe, Apsylog's resellers include principally system integrators and
outsourcing companies. In North America, Apsylog has entered into reseller
arrangements with companies such as GE Capital, AT&T Capital, and Hitachi Data
Systems.

Apsylog's ASSETCENTER suite of applications runs on Windows95, Windows NT
and UNIX and supports most major relational database technologies, including
products from Oracle Corporation, Informix Corporation and Sybase, Inc.
ASSETCENTER is currently available in English, French, German, Italian and
Spanish.

As of the date of the Apsylog Acquisition, Apsylog had 66 employees,
substantially all of whom will continue as employees of Peregrine or Apsylog. A
total of 53 employees were based at Apsylog's headquarters in Paris, France, and
the remainder were based in other Apsylog locations. Apsylog maintains leased
facilities in Paris, France, San Ramon, California and Munich, Germany.

In connection with the Apsylog Acquisition, the Company issued an aggregate
of approximately 1,916,000 shares of the Company's Common Stock to the
stockholders of Apsylog's parent corporation, United Software, Inc., including
shares issuable upon exercise of outstanding options held by employees of
Apsylog and assumed by the Company. Such shares (including outstanding options)
represent approximately 11.0% of the Company's presently outstanding Common
Stock. Approximately 186,000 shares of the Company's Common Stock issued in the
Apsylog Acquisition have been deposited into an escrow expiring in September
1998 for the protection of the Company in the event of any breach of
representations made by Apsylog and certain stockholders in the Merger
Agreement. The Common Stock issued in the Apsylog Acquisition was sold in
reliance on certain exemptions from the registration requirements the Securities
Act and is subject to restrictions on transfer under applicable securities laws.
The Company has agreed to certain registration rights for the benefit of the
recipients of the Common Stock in the Apsylog Acquisition. See "Description of
Capital Stock" and "Shares Eligible for Future Sale." All of the Shares offered
pursuant to this Prospectus represent shares held by former stockholders of
Apsylog are being registered for resale in accordance with the registration
rights granted to such stockholders

34
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information concerning the Company's
executive officers and directors as of the date of this Prospectus.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------
<S> <C> <C>
Alan H. Hunt.................. 55 President, Chief Executive Officer and
Director
David A. Farley............... 42 Vice President, Finance, Chief Financial
Officer and Director
David G. Fisher............... 39 Vice President, Marketing
Stephen P. Gardner............ 44 Vice President, Strategic Acquisitions
Douglas F. Garn............... 39 Vice President, North American Sales
William G. Holsten............ 61 Vice President, Professional Services
Richard T. Nelson............. 38 Vice President, Secretary, and General
Counsel
Douglas S. Powanda............ 41 Vice President, International Sales
Steven S. Spitzer............. 38 Vice President, Channel Sales
John J. Moores (1)............ 53 Chairman of the Board of Directors
Christopher A. Cole........... 43 Director
Richard A. Hosley II (1)...... 52 Director
Charles E. Noell III (1)(2)... 45 Director
Norris van den Berg (2)....... 59 Director
</TABLE>

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

ALAN H. HUNT has served as the Company's President and Chief Executive
Officer and as a member of the Board of Directors since October 1995. From July
1994 until November 1995, Mr. Hunt was President and Chief Executive Officer and
a director of XVT Software Inc., a development tools software company ("XVT").
From March 1991 until May 1994, Mr. Hunt was Senior Vice President of Sales and
Marketing (North America) for BMC Software, Inc., a vendor of software system
utilities for IBM mainframe computing environments ("BMC"). Mr. Hunt holds a
B.S. in Business Administration and Industrial Management from San Jose State
College.

DAVID A. FARLEY has served as the Company's Vice President, Finance, and
Chief Financial Officer and as a member of the Board of Directors since October
1995. Mr. Farley served as Secretary of the Company from October 1995 until
February 1997. From November 1994 to November 1995, Mr. Farley was Vice
President, Finance, and Chief Financial Officer and a director of XVT. From
December 1984 until October 1994, Mr. Farley held various accounting and
financial positions at BMC, most recently as Chief Financial Officer and as a
director. Mr. Farley holds a B.S. in Accounting from the University of Alabama.

DAVID G. FISHER has served as the Company's Vice President, Marketing since
April 1996. From March 1993 to April 1996, Mr. Fisher was Vice President of
Sales and Marketing for Restrac, Inc., a developer and vendor of recruitment and
staffing software applications. From February 1991 to March 1993, Mr. Fisher was
Vice President of Worldwide Marketing for Continuum, Inc., a developer and
vendor of insurance and banking software applications. Mr. Fisher holds a B.S.
in Business Administration and a B.A. in Political Science from the University
of California at Berkeley.

STEPHEN P. GARDNER has served as the Company's Vice President, Strategic
Acquisitions since May 1997. From May 1996 until May 1997, Mr. Gardner served as
president of Thunder & Lightning Company, an internet software start-up company.
From 1995 until May 1996 Mr. Gardner served as the president of Alpharel Inc., a
document management software company. From 1993 until 1995, Mr. Gardner served
as a vice president of Data General Corporation, a manufacturer of multiuser
computer systems, peripheral equipment, communications systems, and related
products. From 1988 to 1993, Mr. Gardner served in various

35
<PAGE>
capacities with Groupe Bull, most recently as founder and president of its
Integris Business Unit, a systems integration and software company owned by
Groupe Bull of France. Mr. Gardner holds an A.B. in Geochemistry from Princeton
University and an M.B.A. from Harvard University.

DOUGLAS F. GARN has served as the Company's Vice President, North American
Sales since April 1996. From July 1995 until April 1996, Mr. Garn was Vice
President of Sales with Syntax, Inc., a networking software company. From
November 1993 until July 1995, Mr. Garn was Regional Sales Manager with BMC.
From May 1992 until November 1993, Mr. Garn was Vice President and General
Manager of Sales with NYNEX Mobile Communications, a wireless communications
company. Mr. Garn holds a B.S. in Marketing from the University of Southern
California.

WILLIAM G. HOLSTEN has served as the Company's Vice President, Professional
Services since November 1995. From July 1994 until November 1995, Mr. Holsten
was Director of Professional Services for XVT. From August 1992 until June 1994,
he was a consultant with Engineering Software Solutions, a consulting firm
co-owned by Mr. Holsten and a partner, which provided consulting services to XVT
from May 1993 to June 1994. From October 1984 to July 1992, Mr. Holsten held a
variety of positions with Precision Visuals, Inc., a graphics software company,
most recently as Director of Professional Services. Mr. Holsten holds a B.A. in
Mathematics from the University of California at Santa Barbara.

RICHARD T. NELSON has served as the Company's General Counsel since November
1995, as Vice President since October 1996 and as Secretary since February 1997.
From August 1991 until November 1995, Mr. Nelson was an associate in the
Houston, Texas office of Jackson & Walker LLP, a law firm. Mr. Nelson holds a
B.S. in Accounting from Bentley College and a J.D. from the University of Iowa
College of Law.

DOUGLAS S. POWANDA has served as the Company's Vice President, International
Sales since September 1995. From June 1994 until September 1995, he served as
the Company's Vice President, North American Sales. He was the Company's
Director of Sales for Europe from September 1993 until June 1994, Regional Sales
Manager from December 1992 to August 1993, and Senior Accounts Manager from
February 1992 until December 1992. Mr. Powanda holds a B.S. in Business
Management from Trenton State University and an M.B.A. from Pepperdine
University.

STEVEN S. SPITZER has served as the Company's Vice President, Channel Sales
since August 1997. From 1986 until August 1997, Mr. Spitzer held various
positions with FileNet Corporation, a provider of workflow, document-imaging,
and electronic document management software solutions, most recently as Vice
President, Channel Sales. Mr. Spitzer holds a B.S. in Business Administration,
Computer Sciences from Long Beach State University.

JOHN J. MOORES has served as Chairman of the Company's Board of Directors
since March 1990 and as a Board member since March 1989. In 1980, Mr. Moores
founded BMC and served as its President and Chief Executive Officer from 1980 to
1986 and as Chairman of its Board of Directors from 1980 to 1992. Since December
1994, Mr. Moores has served as owner and Chairman of the Board of the San Diego
Padres Baseball Club, L.P. and since September 1991 as Chairman of the Board of
JMI Services, Inc., a private investment company. Mr. Moores also serves as a
director of Homegate Hospitality, Inc. Mr. Moores holds a B.S. in economics and
a J.D. from the University of Houston.

CHRISTOPHER A. COLE has served as a member of the Company's Board of
Directors since founding the Company in 1981. He also served as its President
and Chief Executive Officer from 1986 until 1989. Since 1992, Mr. Cole has
served as President and Chief Executive Officer of Questrel, Inc., a software
development company. Mr. Cole holds an A.B. and an A.M. in Physics from Harvard
University.

RICHARD A. HOSLEY II has served as a member of the Company's Board of
Directors since January 1992. Prior to retiring from full-time employment, Mr.
Hosley served as President and Chief Executive Officer of BMC. Mr. Hosley also
serves as a director of Logic Works, Inc. and as a director and member of the
compensation committee of Axent Technologies, Inc. Mr. Hosley holds a B.A. in
Economics from Texas A&M University.

36
<PAGE>
CHARLES E. NOELL III has served as a member of the Company's Board of
Directors since January 1992. Since January 1992, Mr. Noell has served as
President and Chief Executive Officer of JMI Services, Inc., a private
investment company, and as a General Partner of JMI Equity Fund, L.P., a venture
capital investment firm ("JMI Equity Fund"). Mr. Noell also serves as a director
of Expert Software, Inc. and Transaction Systems Architects, Inc. and as a
director and member of the compensation committee of Homegate Hospitality, Inc.
Mr. Noell holds a B.A. in History from the University of North Carolina at
Chapel Hill and an M.B.A. from Harvard University.

NORRIS VAN DEN BERG has served as a member of the Company's Board of
Directors since January 1992. Mr. van den Berg has served as a General Partner
of JMI Equity Fund since July 1991 and also serves as a member of the Board of
Directors of Prism Solutions, Inc. Mr. van den Berg holds a B.A. in Philosophy
and Mathematics from the University of Maryland.

DIRECTOR COMPENSATION

The Company reimburses each member of the Company's Board of Directors for
out-of-pocket expenses incurred in connection with attending Board meetings. No
member of the Company's Board of Directors currently receives any additional
cash compensation. The Company has granted each of directors Christopher A.
Cole, Richard A. Hosley II, Charles E. Noell III and Norris van den Berg options
to acquire 45,000 shares of Common Stock at an exercise price of $1.34 under the
Company's 1991 Nonqualified Stock Option Plan. All such options vested in annual
installments over four years, are now fully exercisable, and expire if not
exercised prior to May 2002. See "Principal and Selling Stockholders." In
addition, in December 1990, the Company granted Christopher A. Cole an option to
acquire 225,000 shares of Common Stock at an exercise price of $0.51 per share
under the Nonqualified Stock Option Plan. Following Mr. Cole's resignation as an
executive officer of the Company and in consideration of his continuing service
as a member of the Company's Board of Directors, the Company extended the
exercisability of such option with respect to 56,250 vested shares for so long
as Mr. Cole remains a member of the Board of Directors but no later than
December 2000. See "Certain Transactions."

The Company's 1997 Director Option Plan (the "Director Plan") provides that
options will be granted to non-employee directors, other than non-employee
directors who hold or are affiliated with a holder of three percent of the
Company's outstanding Common Stock, pursuant to an automatic nondiscretionary
grant mechanism. Each new non-employee director is automatically granted an
option to purchase 25,000 shares of Common Stock at the time he or she is first
elected to the Board of Directors. Each non-employee director will subsequently
be granted an option to purchase 5,000 shares of Common Stock at each annual
meeting of stockholders beginning with the 1998 Annual Meeting of Stockholders.
Each such option will be granted at the fair market value of the Common Stock on
the date of grant. Options granted to non-employee directors under the Director
Plan will become exercisable over four years, with 25% of the shares vesting
after one year and the remaining shares vesting in quarterly installments
thereafter. See "Stock Plans--1997 Director Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of directors Richard A.
Hosley II, John J. Moores and Charles E. Noell III. Alan H. Hunt, President,
Chief Executive Officer and director of the Company, participates in all
discussions and decisions regarding salaries and incentive compensation for all
employees and consultants of the Company, except that he is excluded from
discussions regarding his own salary and incentive compensation. No interlocking
relationship exists between any member of the Company's Compensation Committee
and any member of any other company's board of directors or compensation
committee.

37
<PAGE>
EXECUTIVE COMPENSATION

The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to the Company
in all capacities during the fiscal years ended March 31, 1997 and 1996 by (i)
the Company's President and Chief Executive Officer and (ii) the Company's next
four most highly compensated executive officers whose salary and bonus for
fiscal 1997 exceeded $100,000 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
----------------------
ANNUAL COMPENSATION SECURITIES
(1) RESTRICTED UNDERLYING
FISCAL ---------------------- STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS (#) COMPENSATION
- -------------------------------- --------- --------- ----------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alan H. Hunt (2)................ 1997 $ 225,000 $ 225,160(6) -- -- $ 4,862(11)
President and Chief Executive 1996 192,500 130,557(6) $ 936,000(10) 400,000 16,968(11)
Officer
David A. Farley (3)............. 1997 150,000 126,240(7) -- -- 2,712(12)
Vice President, Finance, and 1996 120,000 73,146(7) 468,000(10) 200,000 100,321(12)
Chief Financial Officer
Douglas F. Garn (4)............. 1997 150,000 197,324(8) -- 200,000 18,788(13)
Vice President, North American 1996 -- -- -- -- --
Sales
William G. Holsten (5).......... 1997 90,000 120,000 -- 50,000 4,481(14)
Vice President, Professional 1996 90,000 201,574 -- 100,000 35,387(14)
Services
Douglas S. Powanda.............. 1997 150,000 104,300(9) -- 50,000 2,885(15)
Vice President, International 1996 106,000 179,127(9) -- -- 7,704(15)
Sales
</TABLE>

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

(1) Other than the salary and bonus described herein, the Company did not pay
any executive officer named in the Summary Compensation Table any fringe
benefits, perquisites or other compensation in excess of 10% of such
executive officer's salary and bonus during either fiscal 1997 or fiscal
1996.

(2) Mr. Hunt became President and Chief Executive Officer of the Company in
October 1995. Mr. Hunt's salary and bonus for fiscal 1996 include amounts
paid to him as President and Chief Executive Officer of XVT. The Company
acquired XVT in October 1995. See "Certain Transactions."

(3) Mr. Farley became Vice President, Finance, and Chief Financial Officer of
the Company in October 1995. Mr. Farley's salary and bonus for fiscal 1996
include amounts paid to him as Vice President, Finance, and Chief Financial
Officer of XVT.

(4) Mr. Garn became the Company's Vice President, North American Sales, in April
1996.

(5) Mr. Holsten became Vice President, Professional Services of the Company in
November 1995. Mr. Holsten's salary and bonus for fiscal 1996 include
amounts paid to him as Director, Professional Services, of XVT.

(6) Bonus compensation for fiscal 1997 includes $136,500 earned in fiscal 1997
to be paid in fiscal 1998. Bonus compensation for fiscal 1996 includes
$65,000 earned in fiscal 1996 but paid in fiscal 1997.

(7) Bonus compensation for fiscal 1997 includes $126,240 earned in fiscal 1997
to be paid in fiscal 1998. Bonus compensation for fiscal 1996 includes
$35,000 earned in fiscal 1996 to be paid in fiscal 1998.

(8) Bonus compensation for fiscal 1997 consists of (i) $68,426 of bonus
compensation and $75,898 of commission income earned and paid in fiscal 1997
and (ii) $33,000 of bonus compensation and $20,000 of commission income
earned in fiscal 1997 to be paid in fiscal 1998.

38
<PAGE>
(9) Bonus compensation for fiscal 1997 consists of (i) $32,531 of bonus
compensation and $26,769 of commission income earned and paid in fiscal 1997
and (ii) $34,000 of bonus compensation and $11,000 of commission income
earned in fiscal 1997 to be paid in fiscal 1998. Bonus compensation for
fiscal 1996 consists of (i) $131,492 of bonus compensation and $4,725 of
commission income earned and paid in fiscal 1996 and (ii) $37,351 of bonus
compensation and $5,559 of commission income earned in fiscal 1996 but paid
in fiscal 1997.

(10) In November 1995, the Company issued Mr. Hunt an aggregate of 400,000 and
Mr. Farley an aggregate of 200,000 shares of Common Stock pursuant to
restricted stock agreements in connection with their initial employment. The
estimated fair value of such shares at the time of issuance was $2.34 per
share. Such shares vest incrementally over ten years subject to earlier
vesting over six years contingent upon the Company's achieving certain
financial milestones. As of March 31, 1997, based upon the April 1997
initial public offering price of $9.00 per share, the aggregate fair market
value of the shares held by Mr. Hunt was $3,600,000, and the aggregate fair
market value of the shares held by Mr. Farley was $1,800,000. See
"Employment Agreements and Change in Control Arrangements" and "Certain
Transactions."

(11) Represents $1,084 and $238 in group life insurance excess premiums paid by
the Company in fiscal 1997 and fiscal 1996, respectively; $3,778 and $844 in
matching contributions under the Company's 401(k) plan paid by the Company
in fiscal 1997 and fiscal 1996, respectively; and $15,886 in relocation
expenses paid by the Company in fiscal 1996.

(12) Represents $337 and $84 in group life insurance excess premiums paid by the
Company in fiscal 1997 and fiscal 1996, respectively; $2,375 and $1,875 in
matching contributions under the Company's 401(k) plan paid by the Company
in fiscal 1997 and fiscal 1996, respectively; and $98,362 in relocation
expenses paid by the Company in fiscal 1996.

(13) Represents $218 in group life insurance excess premiums, $4,604 in matching
contributions under the Company's 401(k) plan and $13,966 in relocation
expenses paid by the Company in fiscal 1997.

(14) Represents $2,106 and $509 in group life insurance excess premiums paid by
the Company in fiscal 1997 and fiscal 1996, respectively; $2,375 and $594 in
matching contributions under the Company's 401(k) plan paid by the Company
in fiscal 1997 and fiscal 1996, respectively; and $34,284 in relocation
expenses paid by the Company in fiscal 1996.

(15) Represents $337 and $248 in group life insurance excess premiums paid by
the Company in fiscal 1997 and fiscal 1996, respectively; $2,548 and $2,340
in matching contributions under the Company's 401(k) plan paid by the
Company in fiscal 1997 and fiscal 1996, respectively; and $5,116 in
relocation expenses paid by the Company in fiscal 1996.

39
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1997

The following table sets forth certain information relating to stock options
awarded to each of the Named Executive Officers during the fiscal year ended
March 31, 1997. All such options were awarded under the Company's 1994 Stock
Option Plan.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUES AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTIONS TERM(1)
OPTIONS FISCAL PRICE PER EXPIRATION ----------------------
GRANTED 1997(2) SHARE(3)(4) DATE(5) 5% 10%
----------- ------------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alan H. Hunt.......................... -- -- -- -- -- --
David A. Farley....................... -- -- -- -- -- --
Douglas F. Garn....................... 200,000 21.5% $ 2.34 4/01/06 $ 294,323 $ 745,871
William G. Holsten.................... 50,000 5.4% 2.34 12/16/06 73,581 186,468
Douglas S. Powanda.................... 50,000 5.4% 2.34 12/16/06 73,581 186,468
</TABLE>

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

(1) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the ten year option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's estimate
of future stock price growth.

(2) Based on options to acquire 928,784 shares granted under the Company's 1994
Stock Option Plan during fiscal 1997. All options granted to the Named
Executive Officers during fiscal 1997 are governed by the Company's 1994
Stock Option Plan.

(3) Options were granted at an exercise price equal to not less than the fair
market value of the Company's Common Stock on the date of grant as
determined in good faith by the Board of Directors.

(4) Exercise price may be paid in cash, check, by delivery of already-owned
shares of the Company's Common Stock subject to certain conditions, or
pursuant to a cashless exercise procedure under which the optionee provides
irrevocable instructions to a brokerage firm to sell the purchased shares
and to remit to the Company, out of the sale proceeds, an amount equal to
the exercise price plus all applicable withholding taxes.

(5) Twenty-five percent (25%) of the shares issuable upon exercise of options
granted under the Company's 1994 Stock Option Plan become vested on the
first anniversary of the date of grant, and the remaining shares vest over
three years at the rate of 6.25% of the shares subject to option at the end
of each three-month period thereafter.

AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

No Named Executive Officer exercised any stock option during fiscal year
1997. The following table sets forth certain information regarding stock options
held as of March 31, 1997 by the Named Executive Officers.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT MARCH 31, 1997 AT MARCH 31, 1997*
------------------------- ------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Alan H. Hunt................................................. 125,000 275,000 $ 832,500 $1,831,500
David A. Farley.............................................. 62,500 137,500 416,250 915,750
Douglas F. Garn.............................................. -- 200,000 -- 1,332,000
William G. Holsten........................................... 32,194 118,750 212,618 790,875
Douglas S. Powanda........................................... 97,500 102,500 671,850 690,150
</TABLE>

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

* Based upon the April 1997 initial public offering price of $9.00 per share
minus the exercise price.

40
<PAGE>
STOCK PLANS

1994 STOCK OPTION PLAN. The Company's 1994 Stock Option Plan, as amended
(the "1994 Plan"), provides for the grant to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), and for the grant to employees and consultants of
nonstatutory stock options. The 1994 Plan was adopted by the Board of Directors
in January 1994 and approved by the Company's stockholders in April 1994. The
1994 Plan replaces the Company's Nonqualified Stock Option Plan and the 1991
Nonqualified Stock Option Plan (the "Prior Plans"). Options previously issued
under the Prior Plans shall be exercisable according to their terms. Unless
terminated sooner, the 1994 Plan will terminate automatically in January 2004. A
total of 3,148,000 shares of Common Stock had been reserved for issuance under
the 1994 Plan at September 30, 1997. In October 1997, the Company's Board of
Directors approved an increase by 1,824,000 in the number of shares reserved for
future issuance under the 1994 Plan.

The 1994 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Committee has the power to
determine the terms of the options granted, including the exercise price, the
number of shares subject to each option, the exercisability thereof, and the
form of consideration payable upon such exercise. In addition, the Committee has
the authority to amend, suspend or terminate the 1994 Plan, provided that no
such action may affect any share of Common Stock previously issued and sold or
any option previously granted under the 1994 Plan.

Options granted under the 1994 Plan are not generally transferable by the
optionee, and each option is generally exercisable during the lifetime of the
optionee only by such optionee. Options granted under the 1994 Plan must
generally be exercised within three months of the end of optionee's status as an
employee or consultant of the Company, within six months after such optionee's
termination by disability, or within 12 months after such optionee's termination
by death, but in no event later than the expiration of ten-years from the date
of grant of such option. The administrator of the 1994 Plan has the discretion
to extend the exercisability of options following a termination of the
optionee's employment but in no event for more than ten years after the date of
grant of such option. The exercise price of all incentive stock options granted
under the 1994 Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of nonstatutory stock
options granted under the 1994 Plan is determined by the Committee, but with
respect to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must at least be equal to the fair market value of the Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than ten percent of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of all other
options granted under the 1994 Plan may not exceed ten years.

The 1994 Plan provides that in the event of a merger or consolidation of the
Company with or into another corporation, a sale of substantially all of the
Company's assets or certain other changes in control of the Company, the
optionee shall have the right to exercise all of the optioned stock, including
shares as to which it would not otherwise be exercisable.

As of September 30, 1997, 46,000 shares of Common Stock had been issued upon
exercise of options outstanding under the Prior Plans and 91,659 shares of
Common Stock had been issued upon exercise of options outstanding under the 1994
Plan. Options to purchase 1,511,250 shares of Common Stock at a weighted average
exercise price of $1.04 were outstanding under the Prior Plans, and options to
purchase 2,675,726 shares of Common Stock at a weighted average exercise price
of $3.70 were outstanding under the 1994 Plan. In addition, options to acquire
15,204 shares of the Company's Common Stock assumed by the Company in connection
with the acquisition of XVT were outstanding with a weighted average exercise
price

41
<PAGE>
of $4.24, and options to acquire 32,021 shares assumed by the Company in
connection with the Apsylog Acquisition were outstanding with weighted average
exercise price of $0.32. At September 30, 1997, 380,615 shares remained
available for future issuance under the 1994 Plan, not including the 1,824,000
share reserve increase approved by the Company's Board of Directors in October
1997.

1997 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors
and approved by the Company's stockholders in February 1997 and became effective
May 1, 1997. A total of 250,000 shares of Common Stock has been reserved for
issuance under the 1997 Purchase Plan, and 235,987 shares remained available for
issuance under the 1997 Purchase Plan at September 30, 1997. The 1997 Purchase
Plan, which is intended to qualify under Section 423 of the Internal Revenue
Code, has four three-month offering periods each year beginning on the first
trading day on or after May 1, August 1, November 1 and February 1. The first
such offering period will commence on the first trading day on or after May 1,
1997 and will end on the last trading day on or before July 31, 1997. The 1997
Purchase Plan is administered by the Board of Directors or by a committee
appointed by the Board. Employees are eligible to participate if they are
customarily employed by the Company or any participating subsidiary; provided,
however, that officers of the Company are not eligible to participate in the
1997 Purchase Plan. The 1997 Purchase Plan permits participants to purchase
Common Stock through payroll deductions of up to 15% of an employee's
compensation, including commissions, but excluding overtime, bonuses and other
incentive compensation. The price of stock purchased under the 1997 Purchase
Plan is 85% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Shares purchased under the 1997
Purchase Plan may not be sold or otherwise transferred by a participant for a
period of 12 months after the date of their purchase. Employees may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with the Company.

Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, the Board of Directors
shall shorten the offering period then in progress (so that employees' rights to
purchase stock under the Plan are exercised prior to the merger or sale of
assets). In addition, the twelve-month restriction on transfers applicable to
shares purchased under the 1997 Purchase Plan shall lapse in such event. The
1997 Purchase Plan will terminate in February 2007. The Board of Directors has
the authority to amend or terminate the 1997 Purchase Plan, except that no such
action may adversely affect any outstanding rights to purchase stock under the
1997 Purchase Plan.

1997 DIRECTOR OPTION PLAN. Outside directors are entitled to participate in
the 1997 Director Option Plan (the "Director Plan"); provided, however, that no
outside director who is directly or indirectly the holder of more than three
percent of the Company's outstanding Common Stock may be granted an option under
the Director Plan. The Director Plan was adopted by the Board of Directors and
approved by the stockholders in February 1997. The Director Plan has a term of
ten years, unless terminated sooner by the Board. A total of 150,000 shares of
Common Stock have been reserved for issuance under the Director Plan.

The Director Plan provides for the automatic grant of 25,000 shares of
Common Stock (the "First Option") to each eligible outside director on the date
such person first becomes an outside director. After the First Option is granted
to the eligible outside director, he or she shall automatically be granted an
option to purchase 5,000 shares (a "Subsequent Option") each year on the date of
the annual shareholder's meeting of the Company, if on such date he or she shall
have served on the Board for at least six months. Each First Option and each
Subsequent Option shall have a term of ten years and the shares subject to the
option shall vest as to 25% of the shares on the first anniversary of the grant
date and as to 6 1/4% of the shares on the last day of each consecutive
three-month period thereafter. The exercise prices of the First Option and each
Subsequent Option shall be 100% of the fair market value per share of the Common
Stock, generally determined with reference to the closing price of the Common
Stock as reported on the Nasdaq National Market on the date of grant. In the

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<PAGE>
event of a merger of the Company or the sale of substantially all of the assets
of the Company, each option may be assumed or an equivalent option substituted
by the successor corporation. If an option is assumed or substituted for, it
shall remain exercisable and shall continue to vest as provided in the Director
Plan. However, if an eligible outside director's status as a director of the
Company or the successor corporation, as applicable, is terminated following
such assumption or substitution, other than upon a voluntary resignation by such
outside director, each option granted to such director shall become fully vested
and exercisable. If the successor does not agree to assume or substitute for the
option, each option shall also become fully vested and exercisable. Options
granted under the Director Plan must be exercised within three months of the end
of the optionee's tenure as a director of the Company, or within 12 months after
such director's termination by death or disability, but in no event later than
the expiration of the option's ten-year term. No option granted under the
Director Plan is transferable by the optionee other than by will or the laws of
descent and distribution, and each option is exercisable, during the lifetime of
the optionee, only by such optionee.

401(k) PLAN. The Company participates in a tax-qualified employee savings
and retirement plan (the "401(k) Plan") which covers all of the Company's
full-time employees. Pursuant to the 401(k) Plan, employees may elect to reduce
their current compensation by up to the lower of 20% or the statutorily
prescribed annual limit and have the amount of such reduction contributed to the
401(k) Plan. The Company makes matching contributions on behalf of all
participants in the 401(k) Plan in the amount of 25% of employee contributions.
The Company may also make additional discretionary contributions in such amounts
as determined by the Board of Directors, subject to statutory limitations on
contributions made by employees and employers under such plans. To date, the
Company has made no such additional discretionary contributions. The 401(k) Plan
is intended to qualify under Section 401 of the Internal Revenue Code of 1986,
as amended, so that contributions by employees or by the Company to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by the Company,
if any, will be deductible by the Company when made. The trustee under the
401(k) Plan, at the direction of each participant, invests the assets of the
401(k) Plan in any of a number of investment options. In connection with the
Apsylog Acquisition, the Company assumed Apsylog's 401(k) Plan which has similar
terms and is administered in substantially the same manner as the Company's
401(k) Plan as described above. The Company intends to consolidate the Apsylog
401(k) Plan into the Company's 401(k) Plan in the near future.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

The Company does not currently have any employment contracts in effect with
any Named Executive Officer. The Company and certain Named Executive Officers
are parties to separate agreements relating to restricted stock issuances,
severance arrangements and consulting arrangements. See "Certain Transactions."

The Company and Alan H. Hunt, its President and Chief Executive Officer, are
parties to a restricted stock agreement dated November 1, 1995 pursuant to which
the Company issued Mr. Hunt 400,000 shares of Common Stock. The Company and
David A. Farley, its Chief Financial Officer, are parties to a substantially
equivalent restricted stock agreement dated November 1, 1995 pursuant to which
the Company issued Mr. Farley 200,000 shares of Common Stock. The shares issued
to each of Messrs. Hunt and Farley vest incrementally over ten years, subject to
earlier vesting over six years contingent upon the Company's achieving certain
financial milestones. The restricted stock agreements permit either Mr. Hunt or
Mr. Farley to surrender shares to satisfy withholding tax obligations that arise
as the shares vest. In connection with the vesting of 66,000 shares in April
1997, Mr. Hunt surrendered 28,296 shares subject to his restricted stock
agreement. In the event of a merger or change in control of the Company, all
such shares will become automatically vested. In the event of a merger or change
in control of the Company, all such shares will become automatically vested. See
"Management--Executive Compensation."

Under the 1994 Plan, in the event of a merger or a change in control of the
Company, vesting of options outstanding under the 1994 Plan will automatically
accelerate such that outstanding options will become fully exercisable,
including with respect to shares for which such options would be otherwise
unvested. See "Stock Plans--1994 Stock Option Plan."

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<PAGE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company has adopted provisions in its Amended and Restated Certificate
of Incorporation that eliminate to the fullest extent permissible under Delaware
law the liability of its directors to the Company for monetary damages. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission. The Company's Bylaws provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law, including in circumstances in which indemnification
is otherwise discretionary under Delaware law. The Company has entered into
indemnification agreements with its officers and directors containing provisions
which may require the Company, among other things, to indemnify the officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.

There is no currently pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification would
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.

OTHER MANAGEMENT MATTERS

Certain of the Company's officers have been interviewed in connection with
an investigation being conducted by the Securities and Exchange Commission
regarding trading in the securities of a publicly held company. These officers
were previously employed by that company. Although these officers conducted
trades in securities of the company during the period covered by the
investigation, such trades were conducted subsequent to the termination of their
employment. No person or company has been accused of any wrongdoing in
connection with the investigation and the Staff of the Commission has stated
that the investigation should not be construed as an indication by the
Commission or its Staff that any violation of law has occurred, or considered as
a reflection upon any person, entity, or security.

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<PAGE>
CERTAIN TRANSACTIONS

John J. Moores, the Chairman of the Company's Board of Directors and the
majority stockholder of the Company, was party to a Continuing and Unconditional
Guaranty dated November 13, 1995 (as subsequently amended) with NationsBank of
Texas, N.A. ("NationsBank"), pursuant to which Mr. Moores guaranteed the
Company's obligations under its bank line of credit agreement and term loan with
NationsBank. As of March 31, 1997, the Company's outstanding obligations under
such credit line and term loan were $4.5 million and $1.6 million, respectively.
Both the credit and term loan were repaid from proceeds of the Company's April
1997 initial public offering, and the Company terminated the line of credit
agreement with NationsBank in September 1997. The Company's current line of
credit agreement with Wells Fargo Bank, N.A. is not guaranteed by Mr. Moores.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 6 of Notes to Consolidated
Financial Statements.

From time to time since becoming a stockholder of the Company, Mr. Moores
has made short-term working capital loans to the Company on an as-needed basis,
each such loan bearing interest at the prime rate announced by major commercial
banks. Mr. Moores became a stockholder of the Company in 1989. In September
1995, Mr. Moores made a loan to the Company in the amount of $250,000, which was
repaid in November 1995. In July 1996, Mr. Moores made a loan to the Company in
the amount of $2,000,000, which was repaid three days later. The Company used
the proceeds of the $2,000,000 loan to make a capital contribution to its
subsidiary in the United Kingdom, which, in turn, repaid certain advances owed
to the Company. In December 1996, Mr. Moores loaned the Company $250,000, which
was repaid in February 1997.

The Company and JMI Services, Inc., an investment management company ("JMI
Services"), are parties to a sublease pursuant to which the Company subleases
approximately 13,310 square feet of office space at its San Diego headquarters
to JMI Services. The term of the sublease is from June 1, 1996 through October
21, 2003. The sublease provides for initial monthly rental payments of $16,638
to increase by $666 per month on each anniversary of the sublease. Mr. Moores
serves as Chairman of the Board of JMI Services, and Charles E. Noell, III, a
director of the Company, serves as President and Chief Executive Officer. The
Company believes that the terms of the sublease are at competitive market rates.

The Company leases a suite at San Diego's Qualcomm Stadium at competitive
rates and on an informal basis from the San Diego Padres Baseball Club, L.P.
(the "Padres"). Mr. Moores has served as owner and Chairman of the Board of the
Padres since December 1994. The Company's annual payments for such suite total
approximately $45,000.

Pursuant to an Acquisition Agreement dated November 29, 1995 among the
Company, Skunkware, Inc. ("Skunkware") and Peregrine/Bridge Transfer
Corporation, a database software subsidiary of the Company ("PBTC"), the Company
sold all the outstanding shares of PBTC to Skunkware for an aggregate purchase
price of approximately $559,000. In addition, under the Acquisition Agreement,
the Company receives a royalty on certain license sales of PBTC. The royalty
payments to the Company are limited to an aggregate of $677,000. The Company had
acquired the business assets of PBTC in a March 1995 acquisition for an
aggregate consideration consisting of $181,000 in cash and 225,000 shares of the
Company's Common Stock, which were valued for purposes of the transaction at
$2.34 per share or an aggregate of $526,500. The related acquisition agreement
included an earn-out provision pursuant to which the Company issued an
additional 12,000 shares of Common Stock in July 1996. JMI Equity Fund L.P.
("JMI Equity Fund") is the controlling stockholder of Skunkware. Mr. Noell and
Norris van den Berg, a director of the Company, are general partners of JMI
Equity Fund, and Mr. Moores is a limited partner of JMI Equity Fund. Pursuant to
the Acquisition Agreement, the Company provides certain computer and
administrative resources to PBTC for a monthly fee of $37,500.

Pursuant to an Agreement and Plan of Merger dated as of November 30, 1995,
the Company acquired XVT Software Inc., a development tools software company
("XVT"). In connection with the acquisition, the Company issued approximately
2,018,808 shares of its Common Stock, which were then valued for purposes

45
<PAGE>
of the transaction at $2.34 per share or an aggregate of $4,724,010, in exchange
for all of XVT's issued and outstanding preferred and common stock. The terms of
the Company's acquisition of XVT, including the aggregate consideration paid,
were determined by negotiations among officers of the Company and XVT, including
the companies' respective financial and accounting advisors. The fairness of
such terms was not determined by any independent third party. JMI Equity Fund
held voting control of XVT's outstanding capital stock, and trusts for which Mr.
Moores serves as trustee owned also owned 131,332 shares of XVT's Series C
Preferred Stock. The shares of Common Stock issued by the Company in connection
with the acquisition included 1,579,436 shares issued to JMI Equity Fund and
such trusts. JMI and such trusts had acquired their shares of XVT in a series of
financing transactions between June 1992 and September 1994 for an aggregate
consideration of $3,466,333. In addition, in December 1994, David A. Farley, the
Company's Vice President, Finance, and Chief Financial Officer, had purchased
approximately 32,833 shares of XVT's outstanding Series C Preferred Stock for an
aggregate consideration of $350,000. In consideration of such shares and in
payment for certain accumulated dividends owing on the Series C Preferred, the
Company issued Mr. Farley 149,408 shares of its Common Stock in connection with
the acquisition of XVT. The Company also assumed all outstanding options to
acquire XVT's Common Stock, including outstanding options to William G. Holsten,
the Company's Vice President, Professional Services, and Christopher A. Cole, a
director of the Company. Following such assumption and after adjustment of the
number of shares subject to such options to reflect the applicable exchange
ratio, Messrs. Cole and Holsten received options to acquire 2,828 and 944
shares, respectively, of the Company's Common Stock. Outstanding options to
acquire XVT's Common Stock held by Alan H. Hunt, the Company's President and
Chief Executive Officer, and Mr. Farley were canceled in connection with their
becoming executive officers of the Company.

The Company is a party to restricted stock agreements with Messrs. Hunt and
Farley pursuant to which the Company issued a total of 600,000 shares of its
Common Stock. See "Management--Employment Agreements and Change in Control
Arrangements."

The Company and James W. Butler are parties to an agreement dated December
13, 1995 (the "Butler Agreement") governing Mr. Butler's resignation as an
executive officer and member of the Company's Board of Directors. Mr. Butler
resigned as President and Chief Executive Officer of the Company in July 1995
and as Vice Chairman of the Company's Board of Directors in October 1995.
Pursuant to the Butler Agreement, the Company retained Mr. Butler's services as
a consultant to the Company from January 1996 through December 1996 in
consideration of a monthly consulting fee of $10,000. In addition, the Company
forgave an outstanding advance of $120,000 paid to Mr. Butler in anticipation of
his transfer to a Texas-based operating subsidiary of the Company. In connection
with such forgiveness, the Company also paid Mr. Butler an additional $130,251
to cover Mr. Butler's tax obligations. In addition, pursuant to the Butler
Agreement, Mr. Butler conveyed certain residential property in San Diego County,
California to the Company in satisfaction of an outstanding loan from the
Company in the amount of $454,331 plus $85,000 in accrued interest. The Company
also assumed Mr. Butler's obligations under a note and mortgage in the amount of
$1,059,665 relating to such property. In connection with Mr. Butler's
resignation, the Company agreed to extend the exercisability of options to
acquire 825,000 vested shares of the Company's Common Stock through October 23,
2000. The Butler Agreement also contains certain non-competition and
confidentiality provisions. See "Management--Executive Compensation."

In October 1995, the Company agreed to extend the exercisability of the
vested portion of an option granted to Christopher A. Cole in December 1990 for
so long as Mr. Cole remains a member of the Company's Board of Directors. The
option was originally granted under the Company's Nonqualified Stock Option Plan
and, in accordance with the form of stock option agreement used in connection
with such plan, would otherwise have terminated following a termination of Mr.
Cole's continuous employment with the Company. At the time of Mr. Cole's
resignation as an executive officer of the Company, such option was vested with
respect to 56,250 shares. See "Management--Director Compensation."

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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by (i) each person or entity who is
known by the Company to own beneficially 5% or more of the Company's outstanding
Common Stock; (ii) each director of the Company; (iii) each of the Named
Executive Officers; (iv) all directors and executive officers of the Company as
a group; (v) each Selling Stockholder holding more than 1% of the Company's
outstanding, and (vi) all other Selling Stockholders as a group. All information
contained in the table below is based on beneficial ownership as of September
30, 1997. Prior to the Apsylog Acquisition, each of the Selling Stockholders was
a stockholder of Apsylog's parent, United Software, Inc.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING (2) NUMBER OF AFTER OFFERING (2)
------------------------- SHARES -------------------------
NAME AND ADDRESS OF STOCKHOLDER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
John J. Moores (3).................................... 10,110,707 58.9% -- 10,110,707 58.9%
Charles E. Noell III (4).............................. 129,857 * -- 129,857 *
Norris van den Berg (5)............................... 102,336 * -- 102,336 *
Christopher A. Cole (6)............................... 630,821 3.7 -- 630,821 3.7
Alan H. Hunt (7)...................................... 571,704 3.3 -- 571,704 3.3
David A. Farley (8)................................... 449,408 2.6 -- 449,408 2.6
Douglas S. Powanda (9)................................ 120,101 * -- 120,101 *
Douglas F. Garn (10).................................. 75,000 * -- 75,000 *
Richard A. Hosley II (11)............................. 45,000 * -- 45,000 *
William G. Holsten (12)............................... 51,944 * -- 51,944 *
All executives officers and directors as a group
(14 persons) (13)................................... 12,419,878 68.7% 12,419,878 68.7%
SELLING STOCKHOLDERS
Leo Apotheker......................................... 6,664 * 6,006 658 --
Joel Armengaud (14)................................... 31,155 * 17,695 13,460 *
Patrick Bamas (14).................................... 10,469 * 9,436 1,033 --
Thomas Boudalier (14)................................. 53,245 * 30,247 22,998 *
Jacques Chatain....................................... 3,803 * 3,428 375 --
Coparis............................................... 161,425 * 145,498 15,927 --
Bernard Daugeras...................................... 3,803 * 3,428 375 --
Stephan Dehoche (14).................................. 68,025 * 38,642 29,383 *
Pierre Dubois (14).................................... 53,245 * 30,247 22,998 *
Finovelec............................................. 131,959 * 118,940 13,019 --
Philippe Haustete..................................... 16,184 * 14,587 1,597 --
IDI................................................... 7,299 * 6,579 720 --
Innovacom II.......................................... 163,020 * 146,936 16,084 --
Jean Jacquin.......................................... 3,803 * 3,428 375 --
Alain Lacoste......................................... 644 * 580 64 --
Christian Lanlois-Meurinne............................ 4,124 * 3,717 407 --
Francois Marmissolle.................................. 2,420 * 2,181 239 --
Jacques Meheut........................................ 2,420 * 2,181 239 --
Multinvest Limited.................................... 6,538 * 5,893 645 --
Par SF II, LLC........................................ 6,664 * 6,006 658 --
Parvest Europe Investment II C.V...................... 100,948 * 90,988 9,960 --
Parvest US Partners II C.V............................ 202,292 1.2% 182,333 19,959 --
Jean-Marc Patouillaud................................. 475 * 428 47 --
Bruno Paulet (14)..................................... 140,073 * 126,252 13,821 *
Laurent Pontegnier (14)............................... 46,145 * 41,592 4,553 --
PTI's Profit Sharing McKinley......................... 3,224 * 2,906 318 --
Gilles Queru (14)..................................... 439,306 2.6% 249,559 189,747 1.1
Tradeinvest Limited................................... 12,987 * 11,706 1,281 --
</TABLE>

- ------------------------
* Less than 1%.

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<PAGE>
(1) Unless otherwise indicated, the address for each listed stockholder is c/o
Peregrine Systems, Inc., 12670 High Bluff Drive, San Diego, California
92130. Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock held by them.

(2) Applicable percentage ownership is based on 17,175,094 shares of Common
Stock outstanding as of September 30, 1997, which reflects the issuance of
1,884,199 shares in connection with the Apsylog Acquisition (excluding,
32,021 shares of Common Stock issuable upon exercise of stock options
assumed by the Company in connection with the Apsylog Acquisition) together
with applicable options for such stockholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities, subject to community property laws, where applicable. Shares of
Common Stock subject to options that are presently exercisable or
exercisable within 60 days of September 30, 1997 are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person but are not treated as
outstanding for the purpose of computing the percentage of any other person.
To the extent that any shares are issued upon exercise of options, warrants
or other rights to acquire the Company's capital stock that are presently
outstanding or granted in the future or reserved for future issuance under
the Company's stock plans, there will be further dilution to new public
investors.

(3) Includes 3,878,216 shares held by Mr. Moores as trustee under various
trusts, substantially all of which were established for members of Mr.
Moores's family. Mr. Moores is Chairman of the Company's Board of Directors.

(4) Includes 45,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997.

(5) Includes 45,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997.

(6) Includes 104,087 of Common Stock issuable upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days of
September 30, 1997. Mr. Cole is a member of the Company's Board of
Directors.

(7) Includes 200,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997 and 371,704 shares subject
to a restricted stock agreement. Mr. Hunt is the Company's President and
Chief Executive Officer and a member of its Board of Directors. See
"Management--Employment Agreements and Change in Control Arrangements."

(8) Includes 100,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997 and 200,000 shares subject
to a restricted stock agreement. Mr. Farley is the Company's Vice President,
Finance, and Chief Financial Officer and a member of its Board of Directors.
See "Management--Employment Agreements and Change in Control Arrangements."

(9) Includes 120,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Mr. Powanda is the
Company's Vice President, International Sales.

(10) Includes 75,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Mr. Garn is the Company's
Vice President, North American Sales.

(11) Includes 45,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Mr. Hosley is a member of
the Company's Board of Directors.

(12) Includes 50,944 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997. Mr. Holsten is the
Company's Vice President, Professional Services.

(13) Includes 910,022 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1997.

(14) Prior to the Apsylog Acquisition, the identified person was an officer
and/or director of either United Software, Inc. or Apsylog S.A.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company is authorized to issue 50,000,000 shares of Common Stock, $0.001
par value, and 5,000,000 shares of undesignated Preferred Stock, $0.001 par
value. As of September 30, 1997, the Company had an aggregate of 17,175,094
shares of Common Stock outstanding, 4,234,201 shares of Common Stock were
issuable upon exercise of outstanding options, and no shares of Preferred Stock
were issued and outstanding.

The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of applicable Delaware law.

The Amended and Restated Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and which may have the
effect of delaying, deferring, or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved by
the Board of Directors.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of Common Stock do not have
cumulative voting rights, and, therefore, holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors.

Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or paid
cash dividends on its capital stock, expects to retain future earnings, if any,
for use in the operation and expansion of its business, and does not anticipate
paying any cash dividends in the foreseeable future. In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of any holders of Preferred Stock then outstanding.

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the stockholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of Common Stock. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of Common
Stock, including the loss of voting control to others. The Company has no
current plans to issue any shares of Preferred Stock.

REGISTRATION RIGHTS

In connection with the Apsylog Acquisition, the Company agreed to file with
the Securities and Exchange Commission within 45 days following the completion
date of the acquisition a registration statement under the Securities Act
covering that number of shares of the Company's Common Stock received by the
former Apsylog stockholders in the acquisition as may be requested by such
stockholders, and thereafter to

49
<PAGE>
use its best efforts to cause such registration statement to become effective.
The shares of Common Stock offered by this Prospectus consist of shares of the
former Apsylog stockholders, and upon completion of this offering, will
satisfying this particular obligation to register such shares. In addition, the
Company has granted an additional right to the former Apsylog stockholders to
request registration of any unsold portion of shares of the Company's Common
Stock received in connection with the Apsylog Acquisition. Any such registration
so requested may not be undertaken prior to April 1998, when the Company expects
to be eligible to file an abbreviated form of registration statement on Form
S-3. The former Apsylog stockholders have no further registration rights after
July 1998. See "Shares Eligible for Future Sale."

ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS

The Company's Amended and Restated Certificate of Incorporation provides
that all stockholder actions must be effected at a duly called annual or special
meeting and may not be effected by written consent. The Company's Bylaws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called by the Board of Directors, the Chairman of the Board of
Directors, the Chief Executive Officer of the Company or stockholders holding
shares in the aggregate entitled to cast not less than 10% of the votes at such
meeting. In addition, the Company's Bylaws establish an advance notice procedure
for stockholder proposals to be brought before an annual meeting of
stockholders, including proposed nominations of persons for election to the
Board. Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board of Directors or by a stockholder who was a
stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting and who has delivered timely written notice in proper form
to the Company's Secretary of the stockholder's intention to bring such business
before the meeting.

The foregoing provisions of the Company's Amended and Restated Certificate
of Incorporation and Bylaws are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such provisions are designed to reduce the vulnerability of the Company
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company. See "Risk Factors--Effect of Certain Charter Provisions; Limitation
of Liability of Directors; Antitakeover Effects of Delaware Law."

EFFECT OF DELAWARE ANTITAKEOVER STATUTE

The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
the Company and the interested shareholder and the sale of more than ten percent
(10%) of the Company's assets. In general, the Antitakeover Law defines an
"interested stockholder" as any entity or person beneficially owning 15% or more
the outstanding voting stock of the Company and any entity or person affiliated
with or controlling or controlled by such entity or person. A Delaware
corporation may "opt out" of the Antitakeover Law with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from amendments approved by the
holders of at least a majority of the Company's outstanding voting shares. The
Company has not "opted out" of the provisions of the Antitakeover

50
<PAGE>
Law. See "Risk Factors--Effect of Certain Charter Provisions; Limitation of
Liability of Directors; Antitakeover Effects of Delaware Law."

TRANSFER AGENT

The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, LLC.

51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act of
1933, as amended (the "Securities Act").

As of September 30, 1997, the Company had outstanding 17,195,094 shares of
Common Stock. Immediately following this offering, the 1,301,419 shares of
Common Stock offered hereby, the 2,300,000 shares of Common Stock issued by the
Company in connection with its initial public offering in April 1997 and 497,120
shares that were previously restricted but have since the Company's initial
public offering been sold into the public market in reliance on Rule 144,
approximately 436,500 will be freely tradeable without restriction on the date
of this Prospectus pursuant to Rule 144(k) under the Securities Act, and
approximately 11,082,701 shares will be eligible for sale under Rule 144,
subject to volume limitations and manner of sale requirements. In addition, in
October 1997, the Company filed a Registration Statement on Form S-8/S-3
covering 1,088,991 shares of outstanding Common Stock and 5,000,803 shares of
Common Stock issuable upon exercise of outstanding options, all of which will be
freely tradeable on the date of this Prospectus to the extent vested. Of the
outstanding shares and shares issuable upon exercise of outstanding options
registered on the Form S-8/S-3, 2,537,585 shares were vested as of September 30,
1997.

In addition, in connection with the Apsylog Acquisition, the Company issued
1,884,192 shares of Common Stock, all of which were restricted securities under
the Securities Act at the time of issuance. Of the shares issued in the Apsylog
Acquisition, 396,865 shares were issued pursuant to Apsylog's stock incentive
plans, have been registered for resale pursuant to a resale prospectus included
in the Company's Registration Statement on Form S-8/S-3 and will be available
for sale on the date of this Prospectus, subject until at least April 1997 to
the volume and manner of sale requirements of Rule 144. Of the remaining shares
issued in the Apsylog Acquisition and excluding the 1,301,419 shares being
registered for sale hereunder, 29,139 shares were issued pursuant to Regulation
D under the Securities Act and will not be available for sale, absent
registration, until September 1997, and 156,776 shares were issued in reliance
on Regulation S under the Securities Act. Notwithstanding any resale
restrictions under applicable securities laws, all of such remaining shares are
currently subject to an escrow provision of the Merger Agreement and may be
surrendered to the Company in the event of certain breaches of representations
and warranties made by Apsylog in the Merger Agreement. The escrow will
terminate in September 1997, and the shares then available for distribution will
be delivered to the former stockholders of Apsylog. The Company granted the
stockholders of Apsylog certain rights to sell shares pursuant to this
Prospectus and certain additional rights to have their shares registered for
resale on Form S-3 beginning in April 1997. See "Description of Capital
Stock--Registration Rights."

In general, under Rule 144, an affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year, will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Common Stock (approximately 171,951 shares as of
September 30, 1997) or (ii) the average weekly trading volume during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission (the "Commission"). Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned his or her shares for at least two years
is entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above. Under Rule 701, shares issued under certain
compensatory stock-based plans, such as the Company's option plan, may be resold
under Rule 144 by non-affiliates subject only to the manner of sale
requirements, and by affiliates without regard to the two-year holding period
requirements, commencing 90 days after the date of this offering.

52
<PAGE>
Rule 144A under the Securities Act would permit the immediate sale of
Restricted Shares to qualified institutional buyers, subject to compliance with
conditions of the Rule.

In general, under Regulation S as currently in effect, securities issued and
sold by a reporting issuer under the Exchange Act in reliance on the exemption
under Regulation S will be eligible for resale in the United States or to U.S.
Persons (as defined in Regulation S) if the securities have been held for at
least 40 days from the date of purchase in a transaction meeting the
requirements of Regulation S. The Commission is currently evaluating a proposal
that would, among other things, classify all equity securities of domestic
issuers placed offshore under Regulation S as "restricted securities" under Rule
144 of the Securities Act. Such a proposal, if adopted, would reinforce the
Commission's current view that any person who would be considered an
"underwriter" within the meaning of the U.S. Securities Act may not resell
securities sold in reliance on Regulation S following expiration of the
applicable Rule 144 restricted period in the absence of registration or an
exemption therefrom. In particular, such persons may not assume the availability
of the exemption set forth in Section 4(1) of the U.S. Securities Act with
respect to resales of securities in the United States or to U.S. Persons. The
determination as to the applicable restricted period is subject to change in the
event of further regulation or guidance from the Commission. In the event the
Commission determines not to impose the longer Rule 144 holding period, the
shares of Common Stock issued in the Apsylog Acquisition in reliance on
Regulation S could become available for sale prior to April 1998.

OPTIONS

On September 30, 1997, options to purchase 4,234,201 shares of Common Stock
were outstanding, of which options to purchase approximately 2,537,585 shares
were then exercisable. See "Management--Stock Plans." The Company has filed a
Form S-8 registration statement under the Securities Act to register shares
reserved for issuance under all stock plans and upon exercise of outstanding
options. Shares of Common Stock issued upon exercise of options after the
effective date of the Form S-8 will be available for sale in the public market,
subject to Rule 144 volume limitations applicable to affiliates and lock-up
agreements.

53
<PAGE>
PLAN OF DISTRIBUTION

The Company will not receive any proceeds from the sale of the Shares. Each
of the Selling Stockholders may sell his or its Shares directly or through
broker-dealers or underwriters who may act solely as agents, or who may acquire
shares as principals. The distribution of the Shares may be effected in one or
more transactions that may take place through the Nasdaq National Market,
including block trades or ordinary broker's transactions, or through privately
negotiated transactions, or through an underwritten public offering, or through
a combination of any such methods of sale, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Stockholders in connection with such
sales.

The aggregate proceeds to the Selling Stockholders from the sale of the
Shares will be the purchase price of the Common Stock sold less the aggregate
agents' commissions and underwriters' discounts, if any, and other expenses of
issuance and distribution not borne by the Company. The Selling Stockholders and
any dealers or agents that participate in the distribution of the Shares may be
deemed to be "underwriters" within the meaning of the Securities Act, and any
profit on the sale of the Shares by them and any commissions received by any
such dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act.

The Selling Stockholders may effect transactions by selling the Shares
directly or through broker-dealers acting either as principal or as agent, and
such broker-dealers may receive compensation in the form of usual and customary
or specifically negotiated underwriting discounts, concessions or commissions
from the Selling Stockholders.

To the extent required, the specific Shares of Common Stock to be sold, the
names of the Selling Stockholders, purchase price, public offering price, the
names of any such agent, dealer or underwriter and any applicable commission or
discount with respect to a particular offering will be set forth in an
accompanying Prospectus Supplement.

The Company has agreed to bear certain expenses of registration of the
Common Stock under the federal and state securities laws and of any offering and
sale hereunder not including certain expenses such as commissions or discounts
of underwriters, dealers or agents and fees attributable to the sale of the
Shares. The Company has agreed to indemnify the Selling Stockholders against
certain liabilities, including certain potential liabilities under the
Securities Act. See "Description of Capital Stock--Registration Rights."

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.

EXPERTS

The audited consolidated financial statements of Peregrine Systems, Inc. as
of March 31, 1996 and 1997 and for each of the three years in the period ended
March 31, 1997 and the audited consolidated financial statements of United
Software Inc. as of December 31, 1995 and 1996 and for each of the years then
ended included in this Prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

54
<PAGE>
PEREGRINE SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Peregrine Systems, Inc. Consolidated Financial Statements:

Report of Independent Public Accountants................................................................. F-2

Consolidated Balance Sheets.............................................................................. F-3

Consolidated Statements of Operations.................................................................... F-4

Consolidated Statements of Stockholders' Equity (Deficit)................................................ F-5

Consolidated Statements of Cash Flows.................................................................... F-6

Notes to Consolidated Financial Statements............................................................... F-7

United Software, Inc. Consolidated Financial Statements:

Report of Independent Public Accountants................................................................. F-20

Consolidated Balance Sheets.............................................................................. F-21

Consolidated Statements of Operations.................................................................... F-22

Consolidated Statements of Shareholders' Deficit......................................................... F-23

Consolidated Statements of Cash Flows.................................................................... F-24

Notes to Consolidated Financial Statements............................................................... F-25

Peregrine Systems, Inc. Unaudited Pro Forma Combined Financial Statements:

Unaudited Pro Forma Combined Financial Information....................................................... F-34

Unaudited Pro Forma Combined Statement of Operations for the six months ended September 30, 1997......... F-35

Unaudited Pro Forma Combined Statement of Operations for the year ended March 31, 1997................... F-36

Unaudited Notes to Pro Forma Combined Financial Statements............................................... F-37
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Peregrine Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Peregrine
Systems, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1996 and
1997, and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Peregrine Systems, Inc. and
subsidiaries as of March 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Diego, California
April 21, 1997

(except with respect to the matter discussed
in Note 13 as to which the date is September 19, 1997)

F-2
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1996 1997 1997
--------- --------- -------------
(AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 437 $ 305 $ 16,754
Accounts receivable, net of allowance for doubtful accounts of $130, $220
and $452, respectively.................................................. 6,255 10,191 11,496
Financed receivables...................................................... -- 1,182 965
Deferred tax assets....................................................... -- 1,752 337
Other current assets...................................................... 1,461 924 1,782
--------- --------- -------------
Total current assets.................................................. 8,153 14,354 31,334
Property and equipment, net............................................... 5,349 4,364 4,735
Goodwill.................................................................. -- -- 3,842
Other assets.............................................................. 315 1,020 432
--------- --------- -------------
$ 13,817 $ 19,738 $ 40,343
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank line of credit....................................................... $ 2,829 $ 1,974 $ 1,413
Accounts payable.......................................................... 1,415 916 2,556
Accrued expenses.......................................................... 3,621 6,079 9,371
Deferred revenue.......................................................... 7,568 8,419 8,028
Current portion of long-term debt......................................... 537 497 719
Current portion of capital lease obligation............................... 407 364 146
Net liabilities of discontinued operation................................. 1,473 170 --
--------- --------- -------------
Total current liabilities............................................. 17,850 18,419 22,233
Capital lease, net of current portion....................................... 332 -- 42
Long-term debt, net of current portion...................................... 1,842 1,395 1,052
Deferred revenue, net of current portion.................................... 2,243 2,773 2,956
--------- --------- -------------
Total liabilities..................................................... 22,267 22,587 26,283
--------- --------- -------------

Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares
issued or outstanding................................................... -- -- --
Common stock, $0.001 par value, 50,000 shares authorized, 12,898, 12,920
and 17,175 shares issued and outstanding, respectively.................. 13 13 17
Additional paid-in capital................................................ 14,413 15,081 63,852
Accumulated deficit....................................................... (21,609) (15,807) (47,384)
Unearned portion of deferred compensation................................. (1,404) (1,748) (1,602)
Cumulative translation adjustment......................................... 137 (388) (561)
Treasury stock, at cost................................................... -- -- (262)
--------- --------- -------------
Total stockholders' equity (deficit).................................. (8,450) (2,849) 14,060
--------- --------- -------------
$ 13,817 $ 19,738 $ 40,343
--------- --------- -------------
--------- --------- -------------
</TABLE>

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

F-3
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses................................................. $ 9,137 $ 11,642 $ 20,472 $ 7,856 $ 13,367
Maintenance and services................................. 10,491 12,124 14,563 7,144 9,851
--------- --------- --------- --------- ---------
Total revenues......................................... 19,628 23,766 35,035 15,000 23,218
--------- --------- --------- --------- ---------
Costs and Expenses:
Cost of licenses......................................... 393 415 215 105 128
Cost of maintenance and services......................... 3,573 3,526 4,661 2,279 3,876
Sales and marketing...................................... 9,549 11,820 15,778 7,322 8,925
Research and development................................. 6,483 7,742 5,877 2,800 3,303
General and administrative............................... 2,943 4,529 3,816 1,685 2,312
Acquired in-process research and development costs....... 606 -- -- -- 34,775
--------- --------- --------- --------- ---------
Total costs and expenses............................... 23,547 28,032 30,347 14,191 53,319
--------- --------- --------- --------- ---------
Operating income (loss)................................ (3,919) (4,266) 4,688 809 (30,101)
Interest income (expense), and other, net.................. 3,970 (286) (478) (229) 404
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before income
taxes.................................................... 51 (4,552) 4,210 580 (29,697)
Income tax benefit (expense)............................... -- -- 1,592 -- (1,880)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations................... 51 (4,552) 5,802 580 (31,577)
--------- --------- --------- --------- ---------
Loss from discontinued business:
Loss from operations..................................... -- (781) -- -- --
Loss on disposal......................................... -- (1,078) -- -- --
--------- --------- --------- --------- ---------
Loss from discontinued business............................ -- (1,859) -- -- --
--------- --------- --------- --------- ---------
Net income (loss)...................................... $ 51 $ (6,411) $ 5,802 $ 580 $ (31,577)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share:
Income (loss) from continuing operations................. $ -- $ (0.37) $ 0.39 $ 0.04 $ (2.14)
Loss from discontinued operations........................ -- (0.15) -- -- --
--------- --------- --------- --------- ---------
Net income (loss)...................................... $ -- $ (0.52) $ 0.39 $ 0.04 $ (2.14)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common equivalent shares
outstanding.............................................. 12,250 12,331 14,964 14,330 14,777
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

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

F-4
<PAGE>
PEREGRINE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
NUMBER OF ADDITIONAL PORTION OF CUMULATIVE
SHARES PAID-IN ACCUMULATED STOCK TRANSLATION TREASURY
OUTSTANDING COMMON STOCK CAPITAL DEFICIT COMPENSATION ADJUSTMENT STOCK
------------- ------------- ----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994...... 10,012 $ 10 $ 8,519 $ (11,324) $ -- $ (64) $ --
Net income................. -- -- -- 51 -- -- --
Issuance of common stock... 225 -- 525 -- -- -- --
Equity adjustment from
foreign currency
translation.............. -- -- -- -- -- 86 --
--
------ ----------- ----------- ------ ----- -----
Balance, March 31, 1995...... 10,237 10 9,044 (11,273) -- 22 --
Net loss................... -- -- -- (6,411) -- -- --
Issuance of shares for
XVT...................... 2,018 2 3,923 (3,925) -- -- --
Issuance of common stock... 43 -- 43 -- -- -- --
Restricted stock shares
granted.................. 600 1 1,403 -- (1,404) -- --
Equity adjustment from
foreign currency
translation.............. -- -- -- -- -- 115 --
--
------ ----------- ----------- ------ ----- -----
Balance, March 31, 1996...... 12,898 13 14,413 (21,609) (1,404) 137 --
Net income................. -- -- -- 5,802 -- -- --
Issuance of common stock... 22 -- 37 -- -- -- --
Compensation expense
related to restricted
stock and options........ -- -- -- -- 287 -- --
Deferred compensation
related to options
granted.................. -- -- 631 -- (631) -- --
Equity adjustment from
foreign currency
translation.............. -- -- -- -- -- (525) --
--
------ ----------- ----------- ------ ----- -----
Balance, March 31, 1997...... 12,920 13 15,081 (15,807) (1,748) (388) --
--
------ ----------- ----------- ------ ----- -----
Net loss (unaudited)....... -- -- -- (31,577) -- -- --
Issuance of common stock
(unaudited).............. 2,371 2 18,267 -- -- -- --
Compensation expense
related to restricted
stock and options
(unaudited).............. -- -- -- -- 146 -- --
Equity adjustment from
foreign currency
translation
(unaudited).............. -- -- -- -- -- (173) --
Common stock reacquired on
market (unaudited)....... -- -- -- -- -- -- (262)
Issuance of stock in
connection with
acquisitions
(unaudited).............. 1,884 2 30,504 -- -- -- --
--
------ ----------- ----------- ------ ----- -----
Balance, September 30, 1997
(unaudited)................ 17,175 $ 17 $ 63,852 $ (47,384) $ (1,602) $ (561) $ (262)
--
--
------ ----------- ----------- ------ ----- -----
------ ----------- ----------- ------ ----- -----

<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance, March 31, 1994...... $ (2,859)
Net income................. 51
Issuance of common stock... 525
Equity adjustment from
foreign currency
translation.............. 86

-------------
Balance, March 31, 1995...... (2,197)
Net loss................... (6,411)
Issuance of shares for
XVT...................... --
Issuance of common stock... 43
Restricted stock shares
granted.................. --
Equity adjustment from
foreign currency
translation.............. 115

-------------
Balance, March 31, 1996...... (8,450)
Net income................. 5,802
Issuance of common stock... 37
Compensation expense
related to restricted
stock and options........ 287
Deferred compensation
related to options
granted.................. --
Equity adjustment from
foreign currency
translation.............. (525)

-------------
Balance, March 31, 1997...... (2,849)

-------------
Net loss (unaudited)....... (31,577)
Issuance of common stock
(unaudited).............. 18,269
Compensation expense
related to restricted
stock and options
(unaudited).............. 146
Equity adjustment from
foreign currency
translation
(unaudited).............. (173)
Common stock reacquired on
market (unaudited)....... (262)
Issuance of stock in
connection with
acquisitions
(unaudited).............. 30,506

-------------
Balance, September 30, 1997
(unaudited)................ $ 14,060

-------------
-------------
</TABLE>

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

F-5
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30
------------------------------------- ----------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flow from operating activities:
Net income (loss)........................................ 51 $ (6,411) $ 5,802 $ 580 $ (31,577)
Adjustments to reconcile net income (loss) to net cash,
excluding effects of acquisitions, provided by (used
in) operating activities:
Depreciation and amortization............................ 952 1,540 1,838 679 391
Loss from discontinued business........................ -- 1,859 -- -- --
Gain on sale of product line........................... (4,025) -- -- -- --
Gain on sale of fixed assets........................... -- (93) -- -- --
Charge for acquired in-process research and
development.......................................... -- -- -- -- 34,775
Increase (decrease) in cash resulting from changes in:
Accounts receivable.................................. (305) (2,416) (3,936) (677) (1,899)
Financed receivables................................. -- -- (1,182) (915) 217
Deferred tax asset................................... -- -- (1,752) -- 1,415
Other current assets................................. (480) 311 (163) (4) 7
Accounts payable..................................... 744 714 (499) (214) 893
Accrued expenses..................................... 101 2,464 2,458 (694) (1,425)
Deferred revenue..................................... 1,282 2,364 1,381 343 (1,027)
Other................................................ 113 252 (705) (328) 588
----------- ----------- ----------- ----------- ---------
(1,567) 584 3,242 158 2,358
----------- ----------- ----------- ----------- ---------
Net cash used by discontinued business................... -- (738) (1,303) (692) (170)
----------- ----------- ----------- ----------- ---------
Total cash provided by (used in) operating
activities....................................... (1,567) (154) 1,939 (534) 2,188
----------- ----------- ----------- ----------- ---------
Cash flows from investing activities:
Purchases of property and equipment...................... (1,775) (3,516) (566) (34) (280)
Proceeds from sale of product line....................... 2,925 -- 700 700 --
Proceeds from sale of subsidiary and fixed assets, net... -- 653 -- -- --
Acquisition of certain business assets................... (304) -- -- -- 582
----------- ----------- ----------- ----------- ---------
Net cash provided by (used in) investing
activities....................................... 846 (2,863) 134 666 302
----------- ----------- ----------- ----------- ---------
Cash flows from financing activities:
Proceeds (repayments) on bank line of credit, net........ 657 1,514 (855) 1,207 (1,974)
Proceeds from long-term debt............................. -- 3,508 287 -- --
Repayments of long-term debt............................. (463) (1,354) (774) (204) (1,683)
Issuance of common stock................................. -- 15 37 2 18,269
Treasury stock purchased................................. -- -- -- -- (262)
Principal payments under capital lease obligation........ (89) (401) (375) (188) (218)
----------- ----------- ----------- ----------- ---------
Net cash provided by (used in) financing
activities....................................... 105 3,282 (1,680) 817 14,132
----------- ----------- ----------- ----------- ---------
Effect of exchange rate changes on cash.................... 86 115 (525) (217) (173)
----------- ----------- ----------- ----------- ---------
Net increase (decrease) in cash............................ (530) 380 (132) 732 16,449
Cash and equivalents, beginning of period.................. 587 57 437 437 305
----------- ----------- ----------- ----------- ---------
Cash and equivalents, end of period........................ 57 $ 437 $ 305 $ 1,169 $ 16,754
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ 131 $ 389 $ 400 $ 229 $ 23
Income taxes........................................... $ 99 $ 36 $ 27 $ -- $ 567
Supplemental disclosure of non-cash investing and financing
activities:
Common stock issued and other non-cash consideration for
acquisitions........................................... 525 $ 3,925 $ -- $ -- $ 38,617
Liabilities assumed in acquisition of certain business
assets................................................. $ 103 $ -- $ -- $ -- $ --
Fixed assets acquired under capital lease................ $ 1,229 $ -- $ -- $ -- $ --
</TABLE>

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

F-6
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Peregrine Systems, Inc. ("Peregrine" or the "Company") is a leading provider
of Enterprise Service Desk software. The Company develops, markets and supports
SERVICECENTER, an integrated suite of applications that automates the management
of complex, enterprise-wide information technology ("IT") infrastructures.
SERVICECENTER is specifically designed to address the IT management requirements
of large organizations and is distinguished by its breadth of functionality and
its ability to be deployed across all major hardware platforms and network
operating systems and protocols. SERVICECENTER utilizes advanced client/server
and sophisticated intelligent agent technologies as well as a unique modular
architecture to enable customers to meet their strategic objectives, effectively
leverage existing IT investments and reduce the cost of IT management. The
Company sells its software and services in both North America and
internationally primarily through a direct sales force.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Peregrine
Systems, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

INTERIM FINANCIAL INFORMATION (UNAUDITED)

The unaudited interim balance sheet as of September 30, 1997 and the
statements of operations and cash flows and related notes for the six months
ended September 30, 1996 and 1997 have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations in
accordance with generally accepted accounting principles. Results for the
interim periods are not necessarily indicative of results to be expected for the
full fiscal year.

USE OF ESTIMATES

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

REVENUE RECOGNITION

The Company recognizes revenue in accordance with the provisions of
Statement of Position 97-1 "Software Revenue Recognition." The Company generates
revenues from licensing the rights to use its software products primarily to end
users. The Company also generates revenues from post-contract support
(maintenance), consulting and training services performed for customers who
license its products.

Revenues from software license agreements are recognized currently, provided
that all of the following conditions are met: a noncancelable license agreement
has been signed, the software has been delivered, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable, and no other significant vendor obligations
exist. Revenues from maintenance services are recognized ratably over the term
of the maintenance period, generally one year. Maintenance revenues which are
bundled

F-7
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
with license agreements are unbundled using vendor specific objective evidence.
Consulting revenues are primarily related to implementation services performed
on a time and material basis under separate service agreements for the
installation of the Company's software products. Revenues from consulting and
training services are recognized as the respective services are performed.

Cost of license revenues consists primarily of amounts paid to third-party
vendors, product media, manuals, packaging materials, personnel and related
shipping costs. Cost of maintenance and service revenues consists primarily of
salaries, benefits, and allocated overhead costs incurred in providing telephone
support, consulting services, and training to customers.

BUSINESS RISK AND CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of trade and other
receivables. The Company performs ongoing credit evaluations of its customers
financial condition. Management believes that the concentration of credit risk
with respect to trade receivables is further mitigated as the Company's customer
base consists primarily of Fortune 1000 companies. The Company maintains
reserves for credit losses and such losses historically have been within
management expectations.

A significant portion of the Company's revenues are from its SERVICECENTER
product and related services. Any factor adversely affecting the pricing of,
demand for or market acceptance of, the SERVICECENTER product could have a
material adverse effect on the Company's business, financial condition and
results of operations.

See "Risk Factors" for a more complete analysis of risks affecting the
Company's business.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its notes payable, capital lease obligations and borrowings under the
Company's line of credit approximates fair value.

CASH AND CASH EQUIVALENTS

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

FINANCED RECEIVABLES

Financed receivables represent trade accounts receivable for which the
original payment terms extend beyond the Company's customary payment terms.
These receivables are substantially all due within the next twelve months.
Amounts due greater than one year from the balance sheet date are included in
other assets in the accompanying consolidated financial statements. The majority
of these long term receivables relate to items included in long-term deferred
revenues.

F-8
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over estimated useful lives, generally
three to five years for furniture and equipment. Amortization of leasehold
improvements is determined using the straight-line method over the lesser of the
useful lives of the assets or the terms of the related leases.

Maintenance and repairs are charged to operations as incurred. When assets
are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
operations for the applicable period.

CAPITALIZED COMPUTER SOFTWARE

In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", software development costs are capitalized from the time the
product's technological feasibility has been established until the product is
released for sale to the general public. During the three years in the period
ended March 31, 1996 and during the six months ended September 30, 1997 no
software development costs were capitalized as the costs incurred between
achieving technological feasibility and product release were minimal. Research
and development costs, including the design of product enhancements, are
expensed as incurred.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's foreign operations are translated
into United States dollars at the exchange rate in effect at the balance sheet
date, and revenue and expenses are translated at the average exchange rate for
the period. Translation gains or losses of the Company's foreign subsidiaries
are not included in operations but are reported as a separate component of
stockholders' equity/deficit. The functional currency of those subsidiaries is
the primary currency in which the subsidiary operates. Gains and losses on
transactions in denominations other than the functional currency of the
Company's foreign operations, while not significant in amount, are included in
the results of operations through March 31, 1997. The Company did not enter into
foreign exchange transactions to hedge its balance sheet exposures or
intercompany balances against movements in foreign exchange rates.

INCOME TAXES

Deferred taxes are provided utilizing the liability method as prescribed by
SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are
recognized for deductible temporary differences and operating loss
carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.

F-9
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTATION OF NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the periods. Common
equivalent shares are included in the per share calculations where the effect of
their inclusion would be dilutive. In March 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), which changes the method of calculating
earnings per share. SFAS is effective for financial statements issued after
December 15, 1997. The earnings per share of the Company for the years ended
March 31, 1995, 1996, 1997 and the six-month periods ended September 30, 1997
and 1996 would not be materially different under SFAS 128 as that presented
herein.

As a result of the write-off of approximately $34.8 million for in-process
research and development, the Company reported a net loss for the six month
period ended September 30, 1997. Accordingly, common stock equivalents of 3,240
were not included in the per share calculations for the six month period ended
September 30, 1997.

2. DISCONTINUED OPERATION

During fiscal 1996, the Company acquired XVT Software Inc. ("XVT"), with the
Company issuing approximately 2,019,000 shares of its common stock in exchange
for all of XVT's issued and outstanding shares of common and preferred stock.
Effective June 1, 1995 the majority stockholder of the Company controlled
substantially all of the issued and outstanding shares of XVT. Due to the common
majority ownership of the two companies, XVT's results of operations were
consolidated with Peregrine effective June 1, 1995. XVT's acquired assets and
liabilities were accounted for at historical cost. On the date of the
acquisition, XVT's liabilities exceeded its assets by approximately $915,000.

In January 1996, management of the Company determined that maintaining an
interest in XVT was not consistent with the Company's business strategy,
primarily as a result of, among other things, the dissimilarity of the companies
business operations, customer bases, technology, products and services.
Accordingly, at that time, the Company's Board of Directors adopted a plan to
discontinue the operations of XVT. As a result of this decision, XVT has been
presented as a discontinued operation in the accompanying consolidated financial
statements.

In September 1996, the Company sold substantially all of the net assets of
XVT (including $200,000 in cash transferred to the buyer at closing) in exchange
for a $600,000, 9.25% nonrecourse note receivable. Due to thin capitalization of
XVT and XVT's poor historical financial performance, the Company has provided a
full valuation allowance against this note receivable. The Company will reduce
this valuation allowance as cash is received. In order to secure its interest in
this note the Company has retained a right of first refusal in the event any
subsequent changes in control over XVT's assets or business. This right expires
in September 2001. The loss on disposal of approximately $1,100,000, as
reflected in the accompanying consolidated statement of operations, includes the
loss on the sale of the net assets of approximately $1,200,000 reduced by the
results of operations from February 1, 1996 through the date of disposal.

F-10
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. DISCONTINUED OPERATION (CONTINUED)
The operating results of the discontinued operation are summarized as
follows (in thousands):

<TABLE>
<CAPTION>
JUNE 1, 1995-
JANUARY 31,
1996
---------------
<S> <C>
Revenues................................................................... $ 8,483
------
------
Net loss................................................................... $ (781)
------
------
</TABLE>

The net liabilities of the discontinued operation as of March 31, 1996,
1997, and September 30, 1997 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1997
----------- ----------- SEPTEMBER 30,
1997
---------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets, primarily accounts receivable......... $ 1,600 $ -- $ --
Non current assets.................................... 1,053 -- --
Current liabilities, primarily deferred revenue and
accrued expenses.................................... 4,126 170 --
----------- --- ---
Net liabilities of discontinued operation............. $ 1,473 $ 170 $ --
----------- --- ---
----------- --- ---
</TABLE>

3. BALANCE SHEET COMPONENTS

Other current assets consist of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1996 1997 1997
----------- ----------- -------------
<S> <C> <C> <C>
Receivable from sale of product line (Note 4)........... $ 950 $ 400 $ 150
Prepaid expenses and other.............................. 393 326 1,389
Employee advances....................................... 118 198 243
----------- ----------- ------
1,461 $ 924 $ 1,782
----------- ----------- ------
----------- ----------- ------
</TABLE>

Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1996 1997 1997
----------- ----------- -------------
<S> <C> <C> <C>
Furniture and equipment................................. $ 6,835 $ 7,319 $ 8,769
Leasehold improvements.................................. 1,881 1,963 1,971
----------- ----------- ------
8,716 9,282 10,740
Less accumulated depreciation........................... (3,367) (4,918) (6,005)
----------- ----------- ------
$ 5,349 $ 4,364 $ 4,735
----------- ----------- ------
----------- ----------- ------
</TABLE>

F-11
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

3. BALANCE SHEET COMPONENTS (CONTINUED)
Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1996 1997 1997
----------- ----------- -------------
<S> <C> <C> <C>
Salaries and benefits................................... $ 888 $ 1,631 $ 2,018
Commissions............................................. 834 2,499 2,093
Deferred rent........................................... 290 356 396
Taxes................................................... 227 558 249
Accrued Acquisition Cost................................ -- -- 3,500
Other................................................... 1,382 1,035 1,115
----------- ----------- ------
$ 3,621 $ 6,079 $ 9,371
----------- ----------- ------
----------- ----------- ------
</TABLE>

4. SALE OF PRODUCT LINE

In April 1994, the Company sold the rights to one of its products for
$4,025,000. The gain on the sale of the software product right of $4,025,000 is
included in other income in the March 31, 1995 consolidated statement of
operations. Amounts due the Company from the sale at March 31, 1996, March 31,
1997, and September 30, 1997 were $1,100,000, $400,000, and $150,000,
respectively.

5. EMPLOYEE ADVANCES

During fiscal 1995, the Company advanced its former President and Chief
Executive Officer and another employee amounts which were expected to be repaid
from future bonuses and commissions, as earned. During fiscal 1996, all advances
to the former President and Chief Executive Officer totaling $420,000 were
forgiven and charged to operations.

6. DEBT

LINE OF CREDIT

At March 31, 1997, the Company had a line of credit agreement which expires
November 30, 1997. The line of credit facility provides for maximum borrowings
of $4,500,000. The maximum available commitment is reduced by outstanding
letters of credit ($128,000 at March 31, 1997). Borrowings under the agreement
bear interest at the bank's prime rate (8.5% at March 31, 1997). During the year
ended March 31, 1997, the weighted average interest rate under the agreement was
approximately 8.4%, with interest only payable monthly. The line of credit is
personally guaranteed by the Company's majority stockholder and is
collateralized by the Company's accounts receivable, equipment and certain other
assets. Amounts outstanding under the line of credit were repaid in April 1997
using the proceeds received from the Company's initial public offering. See Note
13.

Effective July 1, 1997, the Company entered into an agreement to replace the
above line of credit facility with one which provides for maximum borrowings of
$5,000,000 and expires on July 31, 1998. Borrowings under the line of credit
bear interest at the bank's prime rate (8.5% at June 30, 1997). The line of
credit is collateralized by the Company's accounts receivable, equipment, and
certain other assets. In addition, the debt agreement contains certain
covenants, the most significant of which places certain restrictions on future

F-12
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. DEBT (CONTINUED)
borrowings and acquisitions above specified levels. The Company is required to
maintain certain financial ratios and minimum equity balances. The agreement
also provides for a foreign exchange facility, under which the maximum principal
amount of foreign exchange transactions which may mature during any two day
period is $2,000,000.

At September 30, 1997, there were no amounts outstanding under either the
line of credit or foreign exchange facilities. The outstanding line of credit
balance at September 30, 1997 of $1.4 million is entirely attributable to the
Company's wholly owned subsidiary, Apsylog SA, acquired in September 1997 in the
United Software, Inc. acquisition. See Note 13. All amounts outstanding under
this line were repaid in October, 1997.

LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1997 1997
--------- --------- -------------
<S> <C> <C> <C>
Note payable to bank. Note secured by trade receivables, fixed assets and
guaranteed by the majority stockholder. Interest at prime (8.5% as of June 30,
1997). Equal monthly installments of principal of $37,000 plus interest, due
November 13, 2000............................................................. $ 2,017 $ 1,612 $ --
Note Payable to French Government Import and Export Insurance Administrator.
Unsecured; note is interest free. Due in full before year 2001................ -- -- 1,052
Note Payable to certain shareholders of Apsylog. Unsecured; Note is interest
free. Due in full on change of control........................................ -- -- 510
Note payable to lessor. Unsecured; interest at 8%. Monthly payments of principal
and interest of $4,200 through November 2003.................................. 285 234 --
Other........................................................................... 77 46 209
--------- --------- ------
2,379 1,892 1,771
Less current portion............................................................ (537) (497) (719)
--------- --------- ------
$ 1,842 $ 1,395 $ 1,052
--------- --------- ------
--------- --------- ------
</TABLE>

Amounts outstanding under the Note payable to bank were repaid in April
1997, using the proceeds received from the Company's Initial Public Offering.
See Note 13.

F-13
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

7. INCOME TAXES

The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................................................... $ 2,942 $ 1,356
Deferred maintenance revenue.............................................................. 1,158 1,148
Other..................................................................................... 617 960
----------- -----------
4,717 3,464
Deferred tax liabilities:
Depreciation.............................................................................. (135) (295)
Deferred revenue.......................................................................... (440) (160)
----------- -----------
4,142 3,009
Valuation allowance......................................................................... (4,142) (1,257)
----------- -----------
$ -- $ 1,752
----------- -----------
----------- -----------
</TABLE>

A reconciliation between expected income taxes using the statutory federal
income tax rate to the effective income tax provision is as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate........................................... $ 31 $ (2,180) $ 980
State tax, net of federal benefit................................ 5 (385) 173
Imputed interest................................................. 85 75 108
Foreign losses (not benefited)................................... 759 418 --
Other............................................................ (27) 152 32
Change in valuation allowance.................................... (853) 1,920 (2,885)
--------- --------- ---------
$ -- $ -- $ (1,592)
--------- --------- ---------
--------- --------- ---------
</TABLE>

As of March 31, 1997, the Company had net operating loss carryforwards of
approximately $290,000 for federal tax reporting purposes, which expire
beginning in 2004. In certain circumstances, as specified in the Internal
Revenue Code, a fifty percent or more ownership change by certain combinations
of the Company's stockholders during any three year period could result in a
limitation on the Company's ability to utilize its net operating loss
carryforwards. As of March 31, 1997 the Company also had foreign net operating
loss carryforwards of approximately $3,698,000. See Note 12 for breakout of
foreign and domestic components of operating income (loss).

A valuation allowance has been recorded to properly reflect the carrying
value of the deferred tax asset due to the uncertainty surrounding its
realization. Management evaluates on a quarterly basis the recoverability of the
deferred tax assets and the amount of the valuation allowance. At such time as
it is determined

F-14
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

7. INCOME TAXES (CONTINUED)
that it is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced.

Income tax benefit for the year ended March 31, 1997 consisted of the
following:

<TABLE>
<CAPTION>
<S> <C>
Current
Federal....................................................................... $ 76,000
State......................................................................... 84,000
------------
160,000

Deferred
Federal....................................................................... (1,523,000)
State......................................................................... (229,000)
------------
Deferred tax asset.............................................................. (1,752,000)
------------
Total benefit................................................................. (1,592,000)
------------
------------
</TABLE>

8. SALE OF DATABASE SOFTWARE SUBSIDIARY

On October 31, 1995, the Company sold all of the issued and outstanding
shares of common stock of its database software subsidiary ("the Subsidiary")
for approximately $560,000, to a company which was controlled by the Company's
majority stockholder. In accordance with the terms of the Acquisition Agreement
(the Agreement), the Company will receive a royalty of 7 percent of gross
license revenue derived from certain licensed sales of the Subsidiary, as
defined in the Agreement, commencing November 1, 1995. The royalty payments to
be received by the Company under the Agreement will be limited to $600,000 in
any single calendar period, as defined, and will be limited to an aggregate of
$677,000. There were no royalties earned during the years ended March 31, 1996,
1997, or the six months ended September 30, 1997. There was no material gain or
loss realized on the sale of the Subsidiary. The Company provides certain
computer and administrative services to the former subsidiary for a monthly fee
of $37,500.

9. COMMITMENTS AND CONTINGENCIES

The Company leases certain buildings and equipment under noncancelable
operating lease agreements. The leases generally require the Company to pay all
executory costs such as taxes, insurance and maintenance related to the leased
assets. Certain of the leases contain provisions for periodic rate escalations
to reflect cost-of-living increases. Rent expense for such leases totaled
approximately $855,000, $1,961,000, and $2,051,000 in fiscal 1995, 1996, and
1997 and $1,106,000 and $1,069,000 for the six months ended September 30, 1996
and 1997, respectively.

F-15
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments for capital and operating leases, excluding
sublease income, at March 31, 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- -----------
<S> <C> <C>
1998.................................................................... $ 1,397 $ 378
1999.................................................................... 1,420 --
2000.................................................................... 1,379 --
2001.................................................................... 1,401 --
2002.................................................................... 1,469 --
Thereafter.............................................................. 1,528 --
----------- -----
Total minimum lease payments.......................................... $ 8,604 378
-----------
-----------
Amount representing interest............................................ 14
-----
$ 364
-----
-----
</TABLE>

In January, 1995, the Company entered into a three year capital lease with a
8.2% interest rate for computer equipment. At March 31, 1997, $332,000 of such
leased equipment is included in property and equipment, net of accumulated
depreciation of $862,000.

The Company subleases office space at its corporate headquarters to an
affiliated company. The term of the sublease is from June, 1996 to October, 2003
and requires monthly rental payments of approximately $17,000.

During fiscal 1995, the Company acquired the assets of a company for
$181,000 in cash plus 225,000 shares of the Company's common stock. The
acquisition was accounted for as a purchase. The acquisition agreement included
provisions for additional shares to be issued to the seller over a three year
period if revenue generated from certain of the products acquired achieve
stipulated amounts, as defined in the acquisition agreement. During fiscal 1996,
12,000 shares of common stock were issued in accordance with the provisions of
the agreement and expensed accordingly. No shares were required to be issued
during the year ended March 31, 1997 or the six months ended September 30, 1997.
Up to an additional 90,000 shares of common stock may be earned in the future.
In connection with the acquisition, the Company recorded a one-time charge to
fiscal 1995 operations of $606,000 for acquired in-process research and
development. The remaining net assets acquired were not significant.

The Company pays commissions to employees who have authored certain of the
Company's products based on a percentage of the respective product's sales.
Commissions paid under such agreements are included in research and development
expense in the accompanying consolidated statements of operations and were
approximately $700,000, $600,000, and $1,100,000 for fiscal 1995, 1996, and
1997, and $307,000 and $614,000 for the six months ended September 30, 1996 and
1997, respectively.

The Company is involved in various legal proceedings and claims arising in
the ordinary course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.

F-16
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

10. STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Company has authorized 5,000,000, $0.001 par value, undesignated
preferred shares, none of which were issued or outstanding at March 31, 1996 and
1997 and June 30, 1997. The Board of Directors has the authority to issue the
preferred stock in one or more series and to fix the price, rights, preferences,
privileges, and restrictions, including dividend rights and rates, conversion
and voting rights, and redemption terms and pricing without any further vote or
action by the Company's stockholders.

STOCK OPTIONS

The Company has three stock option plans, the Nonqualified Stock Option Plan
("1990 Plan"), the 1991 Nonqualified Stock Option Plan ("1991 Plan"), and the
1994 Stock Option Plan ("1994 Plan").

The Company may no longer grant options under the 1990 and 1991 Plans. The
Company may grant up to 3,163,204 options under the 1994 Plan. Through March 31,
1997 the Company has granted options to purchase 536,250, 975,000, and 2,550,033
shares, respectively, under these plans. Under the Plans, the option exercise
price is determined by the Board of Directors on a per-grant basis, but shall
not be less than fair market value. Option grants under all three stock option
plans generally vest over four years. During December 1996, the Company recorded
$631,000 in deferred compensation related to the grant of 185,000 options. This
deferred compensation will be amortized on a straight line basis to expense over
the options' four year vesting period.

A summary of the status of the Company's three stock option plans at March
31, 1995, 1996, and 1997 as well as changes during the periods then ended is as
follows:

<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997
---------------------------- ---------------------------- ----------------------------
SHARES WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
--------- ----------------- --------- ----------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year.......................... 2,411.2 $ 1.18 3,041.2 $ 1.42 3,597.4 $ 1.79
--------- ----- --------- ----- --------- -----
Granted............................ 945.0 2.34 1,440.4 2.37 989.9 3.24
Exercised.......................... -- -- (30.0) 1.01 (22.8) 1.64
Forfeited.......................... -- -- -- -- -- --
Expired............................ (315.0) 0.51 (854.2) 1.18 (503.2) 1.44
--------- ----- --------- ----- --------- -----
Outstanding, end of year........... 3,041.2 $ 1.42 3,597.4 $ 1.79 4,061.3 $ 2.08
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Exercisable, end of year........... 1,481.2 $ 1.26 1,786.0 $ 1.34 2,171.7 $ 1.48
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted.................. $ -- $ -- $ --
----- ----- -----
----- ----- -----
</TABLE>

Because certain of the options awarded to date have been granted at
significant premiums, under the minimum value pricing model the options were
determined to collectively have no value. As a result, had compensation cost for
stock options granted during the years ended March 31, 1996 and 1997 been
determined consistent with SFAS No. 123, the Company's net income (loss) and
related per share amounts on

F-17
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

10. STOCKHOLDERS' EQUITY (CONTINUED)
a pro forma basis would not be materially different from that reported in the
accompanying consolidated statements of operations for the years ended March 31,
1996 and 1997.

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to March 31, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

The fair value of each option grant is estimated on the date of grant using
the minimum value method of option pricing model with the following assumptions
used for the twenty-one option grants in fiscal 1996 and 1997; weighted average
risk-free interest rate of 6.63 percent; expected dividend yields of 0.00
percent; and an expected life of 10 years.

RESTRICTED STOCK

During fiscal 1996, the Company granted 600,000 shares of nontransferable
common stock under restricted stock agreements to certain employees. These
shares were valued at a fair value of $2.34. The restrictions lapse on the
shares ten years from the date of grant or, if the Company achieves certain
objectives for earnings growth from fiscal 1997 through fiscal 2002, or, on a
change in control of the Company. The unearned portion of restricted stock is
included in stockholders' deficit and is being amortized as compensation expense
on a straight-line basis over the vesting period.

1997 EMPLOYEE STOCK PURCHASE PLAN

In February 1997, the Board adopted, and the stockholders approved, the 1997
Employee Stock Purchase Plan ("Purchase Plan"). The Company has reserved 250,000
shares of common stock for issuance under the Purchase Plan. The Purchase Plan
will enable eligible employees to purchase common stock at 85% of the lower of
the fair market value of the Company's common stock on the first or last day of
each option purchase period, as defined. No shares were issued under the
Purchase Plan during fiscal 1997.

DIRECTOR OPTION PLAN

In February 1997, the Board adopted, and the stockholders approved, the 1997
Director Option Plan ("Director Plan"). The Company has reserved 150,000 shares
of common stock for issuance under the Director Plan. The Director Plan provides
an initial grant of options to purchase 25,000 shares of common stock to each
new eligible outside director of the Company upon election to the Board. In
addition, commencing with the 1998 Annual Stockholders meeting, such eligible
outside directors are granted an option to purchase 5,000 shares of common stock
at each annual meeting. The exercise price per share of all options granted
under the Director Plan will be equal to the fair market value of the Company's
common stock on the date of grant. Options may be granted for periods up to ten
years and generally vest over four years. No grants were made under the Director
Plan in fiscal 1997.

INITIAL PUBLIC OFFERING

On April 8, 1997, the Company offered and sold 2,300,000 shares of its
common stock generating net proceeds of $19,251,000 after underwriting discounts
and commissions. The Company used the proceeds for, among other things, the
payoff of all bank debt.

F-18
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

11. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Employee Savings Plan ("Plan") covering
substantially all employees. The Plan provides for savings and pension benefits
and is subject to the provisions of the Employee Retirement Income Security Act
of 1974. Those employees who participate in the Plan are entitled to make
contributions of up to 20 percent of their compensation, limited by IRS
statutory contribution limits. In addition to employee contributions, the
Company also contributes to the Plan by matching 25% of employee contributions.
Amounts contributed to the Employee Savings Plan by the Company during fiscal
1995, 1996 and 1997, and the six months ended September 30, 1996 and 1997, were
$170,000, $203,000, $189,000, $84,000, and $149,000, respectively.

12. GEOGRAPHIC OPERATIONS

The Company operates exclusively in the computer software industry. A
summary of the Company's continuing operations by geographic area is presented
below (in thousands):

<TABLE>
<CAPTION>
UNITED
STATES EUROPE CONSOLIDATED
--------- --------- -----------
<S> <C> <C> <C>
Year ended March 31, 1995
Revenues............................................. $ 16,216 $ 3,412 $ 19,628
Operating profit (loss).............................. 481 (430) 51
Identifiable assets.................................. 6,855 2,932 9,787
Year ended March 31, 1996
Revenues............................................. $ 16,818 $ 6,948 $ 23,766
Operating profit (loss).............................. (5,010) 458 (4,552)
Identifiable assets.................................. 9,427 4,390 13,817
Six months ended September 30, 1996 (unaudited)
Revenues............................................. $ 10,599 $ 4,401 $ 15,000
Operating profit..................................... 409 400 809
Identifiable assets.................................. 9,648 4,501 14,149
Year ended March 31, 1997
Revenues............................................. $ 24,925 $ 10,110 $ 35,035
Operating profit..................................... 3,513 697 4,210
Identifiable assets.................................. 14,353 5,385 19,738
Six months ended September 30, 1997 (unaudited)
Revenues............................................. $ 15,651 $ 7,567 $ 23,218
Operating profit (loss).............................. (30,789) 688 (30,101)
Identifiable assets.................................. 30,082 10,261 40,343
</TABLE>

F-19
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

13. SUBSEQUENT EVENT (UNAUDITED)

ACQUISITION

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

The acquisition was accounted for as a purchase. Accordingly, the purchase
price was allocated to the net assets acquired based on their estimated fair
market values. A summary of the net assets acquired, after allocation of
purchase price, at September 19, 1997 is as follows (in thousands):

<TABLE>
<S> <C>
TANGIBLE ASSETS:
Current assets (including cash of approximately $582)............ $ 4,276
Property and equipment........................................... 335
---------
4,611
INTANGIBLE ASSETS:
Acquired in-process research and development..................... 34,775
Goodwill......................................................... 3,842
---------
38,617
---------
Total assets acquired.......................................... 43,228
---------
Liabilities assumed................................................ 4,611
---------
Net assets acquired............................................ $ 38,617
---------
---------
</TABLE>

Acquired in-process research and development represents the present value of
the estimated cash flows expected to be generated by the United Software related
technology, which at the acquisition date had not yet reached the point of
technological feasibility and does not have an alternative future use.
Therefore, in accordance with generally accepted accounting principles, acquired
in-process research and development of $34,775,000 was written off and charged
to operations during the three and six month period ended September 30, 1997.

The remaining excess of the purchase price over the estimated fair values of
net assets acquired amounted to approximately $3.8 million, which has been
accounted for as goodwill and is being amortized over five years using the
straight line method.

The accompanying consolidated statements of operations reflect the operating
results of United Software since September 19, 1997. Pro forma unaudited
consolidated operating results (as though the acquisition took

F-20
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

13. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
place on April 1, 1996 and April 1, 1997) of the Company and United Software for
the six months ended September 30, 1996 and 1997, respectively, are summarized
below (in thousands):

<TABLE>
<CAPTION>
1996 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenue................................................................. $ 18,107 $ 27,697
Operating income (loss)................................................. (1,493) 2,563
Net income (loss)....................................................... (1,496) 1,077
</TABLE>

These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as the expensing of
additional goodwill amortization. However, they do not include the impact of the
write-off of $34.8 million of acquired in-process research and development
costs. They do not purport to be indicative of the results of operations that
actually would have resulted had the acquisitions been in effect on April 1,
1996 and 1997, or of future results of operations of the consolidated entities.

F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To United Software, Inc.:

We have audited the accompanying consolidated balance sheets of United
Software, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996 and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Software, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Diego, California
September 19, 1997

F-22
<PAGE>
UNITED SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------- ------------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash.................................................................. $ 168 $ 1,114 $ 896
Accounts receivable, net of allowance for doubtful accounts of $70,
$45 and $97, respectively........................................... 2,352 3,297 4,030
Other current assets.................................................. 290 370 258
------------- ------------- -----------
Total current assets................................................ 2,810 4,781 5,184
Property and equipment, net........................................... 240 322 348
Other assets.......................................................... 94 875 887
------------- ------------- -----------
$ 3,144 $ 5,978 $ 6,419
------------- ------------- -----------
------------- ------------- -----------

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank line of credit................................................... $ 439 $ 675 $ 1,486
Accounts payable...................................................... 933 1,854 1,701
Accrued expenses...................................................... 1,957 5,702 3,993
Deferred revenue...................................................... 92 1,033 2,315
Notes payable......................................................... -- 1,218 1,329
------------- ------------- -----------
Total current liabilities........................................... 3,421 10,482 10,824
------------- ------------- -----------
------------- ------------- -----------
Commitments and Contingencies
Stockholders' Deficit:
Series A, preferred stock............................................. 2,182 2,589 2,974
Series B, preferred stock............................................. -- -- 1,455
Accumulated deficit................................................... (2,429) (7,141) (8,878)
Cumulative translation adjustment..................................... (30) 48 44
------------- ------------- -----------
Total stockholders' deficit......................................... (277) (4,504) (4,405)
------------- ------------- -----------
$ 3,144 $ 5,978 $ 6,419
------------- ------------- -----------
------------- ------------- -----------
</TABLE>

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

F-23
<PAGE>
UNITED SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Licenses............................................................... $ 5,422 $ 4,168 $ 1,875 $ 2,672
Maintenance and services............................................... 1,537 2,300 1,232 1,807
--------- --------- --------- ---------
Total revenues....................................................... 6,959 6,468 3,107 4,479
--------- --------- --------- ---------
Costs and Expenses:
Cost of licenses....................................................... 909 1,179 475 605
Cost of maintenance and services....................................... 1,417 2,334 1,165 1,349
Sales and marketing.................................................... 2,289 2,961 1,317 1,616
Research and development............................................... 2,706 3,001 1,165 1,529
General and administrative............................................. 1,569 2,030 903 1,107
--------- --------- --------- ---------
Total costs and expenses............................................. 8,890 11,505 5,025 6,206
--------- --------- --------- ---------
Operating loss....................................................... (1,931) (5,037) (1,918) (1,727)
Interest income (expense) and other, net................................. 328 325 226 (10)
--------- --------- --------- ---------
Net loss................................................................. $ (1,603) $ (4,712) $ (1,692) $ (1,737)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

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

F-24
<PAGE>
UNITED SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
NO. OF SERIES A
PREFERRED SERIES A NO. OF SERIES B SERIES B CUMULATIVE
SHARES PREFERRED PREFERRED PREFERRED COMMON ACCUMULATED TRANSLATION
OUTSTANDING STOCK SHARES SHARES STOCK DEFICIT ADJUSTMENT
--------------- ----------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994...................... 2,000 $ 1,500 -- $ -- $ -- $ (826) $ --
Net Loss.................... -- -- -- -- -- (1,603) --
Issuance of Series A
Preferred Stock........... 909 682 -- -- -- -- --
Equity adjustment from
foreign currency
translation............... -- -- -- -- -- -- (30)
----- ----------- ------ ----------- ----------- ----------- -----------
Balance, December 31,
1995...................... 2,909 2,182 -- -- -- (2,429) (30)
Net Loss.................... -- -- -- -- -- (4,712) --
Issuance of Series A
Preferred Stock........... 543 407 -- -- -- -- --
Equity adjustment from
foreign currency
translation............... -- -- -- -- -- -- 78
----- ----------- ------ ----------- ----------- ----------- -----------
Balance, December 31,
1996...................... 3,452 2,589 -- -- -- (7,141) 48
Net Loss (Unaudited)........ -- -- -- -- -- (1,737) --
Issuance of Series A
Preferred Stock
(Unaudited)............... 514 385 -- -- -- -- --
Issuance of Series B
Preferred Stock
(Unaudited)............... -- -- 2,010 1,455 -- -- --
Equity adjustment from
foreign currency
translation (Unaudited)... -- -- -- -- -- -- (4)
----- ----------- ------ ----------- ----------- ----------- -----------
Balance, June 30, 1997
(Unaudited)............... 3,966 $ 2,974 2,010 $ 1,455 $ -- $ (8,878) $ 44
----- ----------- ------ ----------- ----------- ----------- -----------
----- ----------- ------ ----------- ----------- ----------- -----------

TOTAL
STOCKHOLDERS
DEFICIT
-----------
<S> <C>
Balance, December 31,
1994...................... $ 674
Net Loss.................... (1,603)
Issuance of Series A
Preferred Stock........... 682
Equity adjustment from
foreign currency
translation............... (30)
-----------
Balance, December 31,
1995...................... (277)
Net Loss.................... (4,712)
Issuance of Series A
Preferred Stock........... 407
Equity adjustment from
foreign currency
translation............... 78
-----------
Balance, December 31,
1996...................... (4,504)
Net Loss (Unaudited)........ (1,737)
Issuance of Series A
Preferred Stock
(Unaudited)............... 385
Issuance of Series B
Preferred Stock
(Unaudited)............... 1,455
Equity adjustment from
foreign currency
translation (Unaudited)... (4)
-----------
Balance, June 30, 1997
(Unaudited)............... $ (4,405)
-----------
-----------
</TABLE>

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

F-25
<PAGE>
UNITED SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss............................................................... $ (1,603) $ (4,712) $ (1,692) $ (1,737)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 65 81 38 47
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net............................................... 186 (945) (235) (733)
Other current assets................................................... 359 (80) (353) 112
Other assets........................................................... (22) (59) (10) (12)
Accounts payable....................................................... (114) 921 905 (153)
Accrued expenses....................................................... 463 4,255 645 (2,219)
Deferred revenue....................................................... 76 941 54 1,282
--------- --------- --------- ---------
Net cash provided by (used in) operating activities.................. (590) 402 (648) (3,413)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................................... (222) (163) (52) (73)
Cash paid for goodwill................................................. -- (212) (212) --
--------- --------- --------- ---------
Net cash (used in) investing activities................................ (222) (375) (264) (73)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds (repayments) from bank line of credit, net.................... 164 236 (79) 811
Notes payable.......................................................... (64) 198 385 621
Issuance of preferred stock............................................ 682 407 407 1,840
--------- --------- --------- ---------
Net cash provided by financing activities............................ 782 841 713 3,272
--------- --------- --------- ---------
Effect of exchange rate changes on cash................................ (30) 78 31 (4)
--------- --------- --------- ---------
Net increase (decrease) in cash.......................................... (60) 946 (168) (218)
--------- --------- --------- ---------
Cash, beginning of year.................................................. 228 168 168 1,114
--------- --------- --------- ---------
Cash, end of year........................................................ 168 $ 1,114 $ -- $ 896
--------- --------- --------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for: Interest................................ $ -- $ 17 $ 7 $ 61
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplemental Disclosure of Non Cash Investing and Financing Activities:
Issuance of note payable in connection with acquisition................ $ -- $ 510 $ 510 $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

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

F-26
<PAGE>
UNITED SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

On May 30, 1997, Apsylog S.A., a French corporation organized under the laws
of the Republic of France, became a majority-owned subsidiary of United
Software, Inc., a Delaware corporation. United Software, Inc. is a worldwide
leader in IT Asset Management software and services. Apsylog Asset Manager is a
comprehensive decision support software solution that manages the entire IT
asset lifecycle, from asset acquisition, through asset deployment and tracking,
to asset retirement. Designed to meet the requirements of some of the world's
most sophisticated users of information technology, Asset Manager combines
procurement, asset tracking, and help desk modules into a powerful enterprise
information resource. The company sells its software and services in both Europe
and the United States through both a direct and indirect sales force.

Pursuant to an Agreement and Plan of Reorganization dated effective as of
August 29, 1997, on September 19, 1997, the Company completed the sale of all of
its outstanding capital stock to Peregrine Systems, Inc. ("Peregrine"). See Note
10.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements have been prepared in accordance with
U.S. Generally Accepted Accounting Principles and include the accounts of United
Software, Inc. and its wholly owned subsidiaries (collectively, "the Company").
All significant intercompany accounts and transactions have been eliminated.

INTERIM FINANCIAL INFORMATION (UNAUDITED)

The unaudited interim balance sheet as of June 30, 1997 and the statements
of operations and cash flows and related notes for the six months ended June 30,
1997 and 1996 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations in accordance
with generally accepted accounting principles. Results for the interim periods
are not necessarily indicative of results to be expected for the full fiscal
year.

USE OF ESTIMATES

REVENUE RECOGNITION

The Company generates revenues from licensing the rights to use its software
products primarily to end users. The Company also generates revenues from
post-contract support (maintenance), consulting and training services performed
for customers who license its products.

Revenues from software license agreements are recognized currently, provided
that all of the following conditions are met: a legally binding agreement has
been signed, the software has been delivered, there are no

F-27
<PAGE>
UNITED SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
material uncertainties regarding customer acceptance, collection of the
resulting receivable is deemed probable, and no other significant vendor
obligations exist. Revenues from maintenance services are recognized ratably
over the term of the maintenance period, generally one year. Maintenance
revenues which are bundled with license agreements are unbundled using vendor
specific objective evidence. Consulting revenues are primarily related to
implementation services performed on a time and material basis under separate
service agreements for the installation of the Company's software products.
Revenues from consulting and training services are recognized as the respective
services are performed.

Cost of license revenues consist primarily of amounts to be paid to
third-party vendors, product media, manuals, packaging materials, personnel and
related shipping costs. Cost of maintenance and service revenues consists
primarily of salaries, benefits, and allocated overhead costs incurred in
providing telephone support, consulting services, and training to customers.

BUSINESS RISK AND CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of trade receivables. The
Company performs ongoing credit evaluations of its customers financial
condition. Management believes that the concentration of credit risk with
respect to trade receivables is further mitigated as the Company's customer base
consists primarily of large companies. The Company maintains reserves for credit
losses and such losses historically have been within management expectations.

A significant portion of the Company's revenues are from its Apsylog Asset
Manager product and related services. Any factor adversely affecting the pricing
of, demand for or market acceptance of, the Apsylog Asset Manager product could
have a material adverse affect on the Company's business, financial condition
and results of operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its term debt and borrowings under the Company's line of credit
approximates fair value.

FOREIGN CURRENCY RISK

The Company conducts business principally in French francs. As a result, the
Company is subject to the risk of foreign currency fluctuations. To date, the
Company has not experienced any material losses as a result of foreign currency
fluctuations.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over estimated useful lives, generally
three to five years for furniture and equipment. Amortization of leasehold
improvements is provided using the straight-line method over the lesser of the
useful lives of the assets or the terms of the related leases.

F-28
<PAGE>
UNITED SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Maintenance and repairs are charged to operations as incurred. When assets
are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
operations for the applicable period.

GOODWILL

The excess of acquisition cost over the fair value of net assets of
businesses acquired (goodwill) is being amortized using the straight-line
method, generally over five years.

CAPITALIZED COMPUTER SOFTWARE

In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", software development costs are capitalized from the time the
product's technological feasibility has been established until the product is
released for sale to the general public. During the two years ended December 31,
1995 and 1996 and the six months ended June 30, 1997 no software development
costs were capitalized as the costs incurred between achieving technological
feasibility and product release were minimal. Research and development costs,
including the design of product enhancements, are expensed as incurred.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company is the French franc. Assets and
liabilities of the Company's foreign operations are translated into United
States dollars at the exchange rate in effect at the balance sheet date, and
revenue and expenses are translated at the average exchange rate for the period.
Translation gains or losses of the Company's foreign subsidiaries are not
included in operations but are reported as a separate component of stockholders'
deficit. Gains and losses on transactions in denominations other than the
functional currency of the Company's foreign operations, while not significant
in amount, are included in the results of operations. The Company does not enter
into foreign exchange transactions to hedge its balance sheet exposures or
intercompany balances against movements in foreign exchange rates.

INCOME TAXES

F-29
<PAGE>
UNITED SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

2. BALANCE SHEET COMPONENTS

Other current assets consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Inventory.......................................... $ 197 $ 177 $ 136
Prepaids and other................................. 93 193 122
--- --- ---
$ 290 $ 370 $ 258
--- --- ---
--- --- ---
</TABLE>

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Furniture and Equipment............................ $ 328 $ 435 $ 487
Leasehold improvements............................. 1 57 78
--- ----- -----
329 492 565
Accumulated depreciation........................... (89) (170) (217)
--- ----- -----
$ 240 $ 322 $ 348
--- ----- -----
--- ----- -----
</TABLE>

Other assets consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1995 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill, net...................................... $ 9 $ 731 $ 753
Other long-term assets............................. 85 144 134
--- --- ---
$ 94 $ 875 $ 887
--- --- ---
--- --- ---
</TABLE>

Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1995 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Salaries and benefits.............................. $ 242 $ 370 $ 254
Legal and professional............................. -- 77 77
Foreign taxes...................................... 733 1,295 1,311
Other.............................................. 982 3,960 2,351
------ ------ ------
$ 1,957 $ 5,702 $ 3,993
------ ------ ------
------ ------ ------
</TABLE>

F-30
<PAGE>
UNITED SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

3. SALE OF SUBSIDIARIES

Subsequent to June 30, 1997, the Company sold the operations of its SMI and
Apsydoc subsidiaries. These subsidiaries were engaged in software related
services and hardware distribution. These companies were sold to their
respective management. The sales of these companies did not result in any
significant gains or losses. The assets of these companies have been included in
the June 30, 1997 balance sheet at their respective net realizable values.

Additionally, as part of the acquisition of the Company by Peregrine (see
Note 10), the management of its Netform and Apsynet subsidiaries are in the
process of negotiating the acquisition of these units from Peregrine.
Accordingly, net assets of these companies have been stated at their anticipated
net realizable value as of June 30, 1997.

The operations of SMI, Apsydoc, Apsynet and Netform were not significant
either individually or collectively during the years ended December 31, 1995 and
1996 or during the six months ended June 30, 1997 and 1996.

4. DEBT

LINE OF CREDIT

The Company has a demand line of credit with a bank which provides for
maximum borrowings of 7 million French francs ($1,180,339 U.S. Dollars). The
maximum commitment is based on 100 percent of available accounts receivable and
are secured by commercial notes. Borrowings under the agreement bear interest at
the bank's French federal funds rate (6.3% at June 30, 1997) plus 3.25 percent
and are collateralized by trade receivables. At June 30, 1997, the Company had
exceeded its borrowing limit.

The Company's U.S. subsidiary had a demand line of credit with a bank for up
to $80,000 in support of trade accounts receivable. These advances bear interest
at prime plus 3 percent. These borrowings are secured by U.S. accounts
receivable. At June 30, 1997 the line was inactive. As of December 31, 1995 and
1996 and June 30, 1997, there was $80,000, $0, and $0 outstanding, respectively.

NOTES PAYABLE

During 1993, Apsylog S.A. entered into agreements totaling 11,000,000 French
Francs ($2,059,926) with the French Government Export and Export Insurance
Administrator for the development of export products. These funds are to be
spent only for the development of export related products and are due upon a
change in control of the Company. These advances do not bear interest and are to
be repaid before 2001. At December 31, 1995 and 1996 and at June 30, 1997, the
following were outstanding $0, $708,000 and $819,000, respectively.

Additionally, during January 1996, the Company acquired the operations of
another company for approximately $1,000,000, of which approximately 50% was
paid at closing. The Company has allocated this purchase price to the net assets
acquired based on fair market value. The Company is obligated to pay the
remaining balance should the Company be acquired. Accordingly, the unpaid
balance of approximately $510,000 has been recorded as non-interest bearing
notes payable in the accompanying financial statements as of December 31, 1996
and June 30, 1997. The operations of this company were not significant in the
year ended December 31, 1996 or during the six months ended June 30, 1997.

F-31
<PAGE>
UNITED SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

5. INCOME TAXES

The Company has incurred losses since its inception. Net operating loss
carryforwards for foreign income tax purposes as of December 31, 1996 were
approximately $3,600,000. Net operating loss carryforwards for U.S. federal
income tax purposes as of December 31, 1996 were approximately $1,500,000. All
operating loss carryforwards are subject to certain limitations. In accordance
with SFAS 109, the Company has recorded a full valuation allowance against its
deferred tax asset since the Company cannot currently demonstrate that it is
more likely than not that its deferred tax asset will be realizable in future
periods.

6. COMMITMENTS AND CONTINGENCIES

The Company leases certain buildings and equipment under noncancellable
operating lease agreements. The leases generally require the Company to pay all
executory costs such as taxes, insurance, and maintenance related to the assets.
Certain of the leases contain provisions for periodic rate escalations to
reflect cost-of-living increases. Rent expense for such leases totaled
approximately $524,000 and $521,000 in 1995 and 1996, and $280,000 and $293,000
for the six months ended June 30, 1996 and 1997, respectively. Future minimum
lease payments for operating leases at June 30, 1997 are as follows (in
thousands):

<TABLE>
<CAPTION>
OPERATING
LEASES
--------
<S> <C>
July 1, 1997 - December 31, 1997................................................... $ 75
1998............................................................................... 121
1999............................................................................... 66
2000............................................................................... 2
Thereafter......................................................................... --
---
Total minimum lease payments................................................... $ 264
---
---
</TABLE>

7. STOCKHOLDERS' DEFICIT

On May 30, 1997, Apsylog S.A. was reorganized to become a majority-owned
subsidiary of United Software, Inc., a Delaware corporation. In connection
therewith, substantially all of the shares of common stock of Apsylog were
exchanged for a similar number of Preferred A shares of United Software, Inc.
Additionally, 3,078,983 common shares of Apsylog S.A. are subject to put/call
arrangements at a similar exchange rate. Accordingly, the common stock of
Apsylog S.A. is considered Preferred A shares of United Software, Inc. for all
periods presented.

United Software, Inc. has no operations apart from holding its investment in
Apsylog S.A.

In connection with the reincorporation of Apsylog discussed above, United
Software established the following capital structure:

Common Stock: 15,000,000 authorized of which 1,000,000 have been reserved
for issuance under the Company's 1997 Stock plan. There are no outstanding
common shares at June 30, 1997.

F-32
<PAGE>
UNITED SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

7. STOCKHOLDERS' DEFICIT (CONTINUED)
PREFERRED STOCK

In connection with the reincorporation, 10,000,000 shares of preferred stock
have been authorized of which two series, A and B, have been designated.

Series A

3,966,084 shares of preferred stock have been designated Series A. These shares
are junior to Series B in liquidation and carry a $.075 annual non-cumulative
dividend. The common shares outstanding are considered Series A Preferred for
all periods presented. These shares are convertible into an equal number of
common shares at the option of the holder or upon the occurrence of an initial
public offering or upon a change of control.

Series B

2,009,530 shares have been designated Series B preferred stock. These shares
have a liquidation preference before Series A and carry an annual non-cumulative
dividend rate of $.075 per share. These shares are convertible at the option of
the holder into an equal number of common shares. The conversion is mandatory
upon the occurrence of an initial public offering or upon a change of control.

The remaining 4,024,386 preferred shares are undesignated.

STOCK OPTIONS

During July 1997, the Company established the 1997 United Software, Inc.
Stock Plan. The Company has reserved 1,000,000 shares of common stock for grant
under this plan. This plan provides for the grant of options or stock at a
current price as determined by the Company's Board of Directors. Option and
stock grants generally vest over four years.

There have been no grants of stock options through June 30, 1997. See Note
10.

8. PROFIT SHARING PLAN

The Company maintains a profit sharing plan covering substantially all
employees in France. This plan provides for payments to employees by the
attainment of certain revenue and income targets. During the year ended December
31, 1995 and during the six-month periods ended June 30, 1996 and 1997 the
Company did not reach the revenue and income targets and therefore made no
payments during the respective periods. However, for the year ended December 31,
1996, the Company provided $111,674.

F-33
<PAGE>
UNITED SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

9. GEOGRAPHIC OPERATIONS

The Company operates exclusively in the computer software industry. A
summary of the Company's operations by geographic area is presented below (in
thousands):

<TABLE>
<CAPTION>
UNITED STATES EUROPE CONSOLIDATED
------------- --------- -----------
<S> <C> <C> <C>
Year ended December 31, 1995
Revenues.................................................................. $ 273 $ 6,686 $ 6,959
Operating (loss).......................................................... (290) (1,641) (1,931)
Identifiable assets....................................................... 65 3,079 3,144
Year ended December 31, 1996
Revenues.................................................................. $ 636 $ 5,832 $ 6,468
Operating (loss).......................................................... (681) (4,356) (5,037)
Identifiable assets....................................................... 1,147 4,831 5,978
Six months ended June 30, 1996
Revenues.................................................................. $ 38 $ 3,069 $ 3,107
Operating (loss).......................................................... (387) (1,531) (1,918)
Identifiable assets....................................................... 640 3,670 4,310
Six months ended June 30, 1997
Revenues.................................................................. $ 464 $ 4,015 $ 4,479
Operating (loss).......................................................... (492) (1,235) (1,727)
Identifiable assets....................................................... 1,658 4,761 6,419
</TABLE>

10. SUBSEQUENT EVENTS

In July 1997, the Company granted 511,858 options at $0.075 per share and
stock grants for 1,563,708 shares at $0.075 per share, all of which vested 100%
at the date of grant. Accordingly, the Company will take a charge in the
relevant period for the fair value of the grants.

On August 29, 1997 the Company's Board of Directors approved, and pursuant
to an Agreement and Plan of Reorganization dated effective as of August 29,
1997, on September 19, 1997, the Company completed the sale of all of its
outstanding equity interest, including outstanding options, to Peregrine for
1,916,213 shares of Peregrine common stock valued at approximately $30,506,000.

F-34
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial information
and explanatory notes give effect to the acquisition of United Software, Inc. by
Peregrine Systems, Inc. pursuant to an Agreement and Plan of Reorganization
dated effective as of August 29, 1997 and are based on the estimates and
assumptions set forth in the notes to such statements. This pro forma
information has been prepared utilizing the historical financial statements of
Peregrine and United Software and should be read in conjunction with the
historical statements and notes thereto included elsewhere herein.

The unaudited pro forma combined statements of operations for the year ended
March 31, 1997 and the six months ended September 30, 1997 assumes the
acquisition was consummated at the beginning of such periods, April 1, 1996 and
April 1, 1997, respectively.

The unaudited pro forma combined statements of operations do not purport to
be indicative of the operating results which would have been achieved had the
acquisition been consummated on the above dates and should not be construed as
representative of future operating results. The allocation of the purchase price
in the accompanying pro forma statements is based on management's preliminary
estimates and is subject to revision based on further studies and valuations.

F-35
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

(ALL AMOUNTS IN THOUSANDS, EXCEPT NET INCOME (LOSS) PER SHARE DATA)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
PEREGRINE UNITED
SYSTEMS, SOFTWARE, PRO FORMA
INC. INC. ADJUSTMENTS PRO FORMA
--------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Licenses...................................................... $ 13,367 $ 2,672 $ -- $ 16,039
Maintenance and services...................................... 9,851 1,807 -- 11,658
--------- ----------- ------------- -----------
Total revenues.............................................. 23,218 4,479 -- 27,697
Costs and Expenses
Cost of licenses.............................................. 128 605 -- 733
Cost of maintenance and services.............................. 3,876 1,349 -- 5,225
Sales and marketing........................................... 8,925 1,616 -- 10,541
Research and development...................................... 3,303 1,529 384(A) 5,216
General and administrative.................................... 2,312 1,107 -- 3,419
Acquired in-process research and development costs............ 34,775 -- (34,775)(B) --
--------- ----------- ------------- -----------
Total costs and expenses.................................... 53,319 6,206 (34,391) 25,134
--------- ----------- ------------- -----------
Operating income (loss)....................................... (30,101) (1,727) 34,391 2,563
Interest income (expense), other, net......................... 404 (10) -- 394
--------- ----------- ------------- -----------
Income (loss) from continuing operations before income taxes.. (29,697) (1,737) 34,391 2,957
Income tax expense............................................ 1,880 -- -- 1,880
--------- ----------- ------------- -----------
Net income (loss)............................................. $ (31,577) $ (1,737) $ (34,391) $ 1,077
--------- ----------- ------------- -----------
--------- ----------- ------------- -----------
Net income (loss) per share................................... $ (2.14) $ 0.05
Weighted average common and common equivalent shares
outstanding................................................. 14,777 19,933
--------- -----------
--------- -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA COMBINED
FINANCIAL STATEMENTS.

F-36
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

(ALL AMOUNTS IN THOUSANDS, EXCEPT NET INCOME PER SHARE DATA)
FOR THE YEAR ENDED MARCH 31, 1997

<TABLE>
<CAPTION>
UNITED PRO FORMA
SOFTWARE, ADJUSTMENTS PRO FORMA
INC. ------------- -----------
PEREGRINE -----------
SYSTEMS, (UNAUDITED) (UNAUDITED)
INC. (AUDITED)
-----------
(AUDITED)
<S> <C> <C> <C> <C>
Revenues:
Licenses..................................................... $ 20,472 $ 4,168 $ -- $ 24,640
Maintenance and services..................................... 14,563 2,300 -- 16,863
----------- ----------- ----- -----------
Total revenues............................................. 35,035 6,468 -- 41,503
----------- ----------- ----- -----------
Costs and Expenses:
Cost of licenses............................................. 215 1,179 -- 1,394
Cost of maintenance and services............................. 4,661 2,334 -- 6,995
Sales and marketing.......................................... 15,778 2,961 -- 18,739
Research and development..................................... 5,877 3,001 768(A) 9,646
General and administrative................................... 3,816 2,030 -- 5,846
----------- ----------- ----- -----------
Total costs and expenses................................... 30,347 11,505 768 42,620
----------- ----------- ----- -----------
Operating income (loss)...................................... 4,688 (5,037) (768) (1,117)
----------- ----------- ----- -----------
Interest income (expense) and other, net..................... (478) 325 -- (153)
Income from continuing operations before income taxes........ 4,210 (4,712) (768) (1,270)
Income tax benefit........................................... 1,592 -- -- 1,592
----------- ----------- ----- -----------
Net income (loss)............................................ $ 5,802 $ (4,712) $ (768) $ 322
----------- ----------- ----- -----------
----------- ----------- ----- -----------
Net income per share......................................... $ 0.39 $ 0.02
----------- -----------
----------- -----------
Weighted average common and common equivalent shares
outstanding.................................................. 14,964 16,880
----------- -----------
----------- -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA COMBINED
FINANCIAL STATEMENTS.

F-37
<PAGE>
NOTES AND MANAGEMENT ASSUMPTIONS TO THE UNAUDITED

PRO FORMA COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

The unaudited pro forma combined financial statements of Peregrine have been
prepared based on the historical financial statements of Peregrine for the
year ended March 31, 1997 and the six months ended September 30, 1997, and
for United Software for the year ended December 31, 1996 and the six months
ended June 30, 1997, considering the effects of the acquisition under the
purchase method. The pro forma statement of operations for the year ended
March 31, 1997 and for the six months ended September 30, 1997 has been
prepared as if the acquisition had been consummated on April 1, 1996 and
April 1, 1997, respectively. The September 30, 1997 balance sheet of
Peregrine, presented elsewhere herein, includes the financial position of
United Software, Inc. at September 30, 1997. Accordingly, a pro forma
balance sheet is not presented herein.

In management's opinion, all material adjustments necessary to reflect the
effects of the acquisition have been made. The unaudited pro forma combined
statements of operations are not necessarily indicative of the actual
results of operations of Peregrine would have been assuming the acquisition
had been completed as of April 1, 1996 or April 1, 1997, nor are they
indicative of the financial position or results of operations for future
periods. The pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto of
Peregrine and United Software.

2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS

(A) Amortization of the goodwill for United Software will be on the
straight-line method over five years and is included in depreciation and
amortization expense.

(B) The pro forma combined statement of operations excludes the charge of
$34.8 million for acquired research and development, which arose from the
acquisition. These charges are included in the Company's consolidated
financial statements for the six-month period ended September 30, 1997.

(C) Fully diluted shares, including common stock equivalents, required to be
included in calculation of net income per share.

The purchase price for the United Software acquisition was allocated to the
tangible and intangible assets of United Software based on the fair values of
those assets. The evaluation of the underlying technology acquired considered
the inherent difficulties and uncertainties in completing the development, and
thereby achieving technological feasibility, and the risks related to the
viability of and potential changes in future target markets.

F-38
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable by
the Company in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fee.

<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 6,617
---------
Printing Fees and Expenses..................................... 20,000
---------
Legal Fees and Expenses........................................ 75,000
---------
Accounting Fees and Expenses................................... 40,000
---------
Transfer Agent and Registrar Fees.............................. 5,000
---------
Miscellaneous.................................................. 2,000
---------
Total...................................................... $ 148,617*
---------
---------
</TABLE>

- ------------------------
* The Registrant also paid a fee of $17,500 to the Nasdaq National Market in
connection with the issuance of 1,884,182 shares of common stock in connection
with the Apsylog Acquisition.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.

Article IX of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.

Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation if
such person acted in good faith and in a manner reasonably believed to be in and
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.

The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since January 1, 1994, the Registrant has issued and sold the following
unregistered securities:

1. From January 1, 1994 to September 30, 1997, the Registrant issued
and sold 36,500 shares of Common Stock to employees at prices ranging from
$1.34 to $2.34 upon exercise of stock options pursuant to Registrant's
Nonqualified Stock Option Plan, 1991 Nonqualified Stock Option Plan and its
1994 Stock Option Plan.

2. Pursuant to an Agreement and Plan of Reorganization dated March 16,
1995, whereby the Company acquired Bridge Technology, Inc. ("Bridge
Technology"), the Company issued 237,000 shares of its Common Stock to the
selling stockholder of Bridge Technology.

II-1
<PAGE>
3. On November 1, 1995 the Registrant issued Alan H. Hunt, the
Company's President and Chief Executive Officer, an aggregate of 400,000
shares of Common Stock and David A. Farley, the Company's Vice President,
Finance, and Chief Financial Officer, an aggregate of 200,000 shares under
Restricted Stock Agreements. The shares under these agreements vest
incrementally over ten years, subject to earlier vesting over six years
contingent upon the Company's achieving certain financial milestones.

4. Pursuant to an Agreement and Plan of Reorganization dated as of
November 30, 1995, whereby the Company acquired XVT Software Inc. ("XVT"),
the Company issued 2,018,808 shares of its Common Stock to the selling
stockholders of XVT.

5. Pursuant to an Agreement and Plan of Reorganization dated effective
as of August 29, 1997, whereby the Company acquired United Software, Inc.
("United"), the Company issued 1,884,194 shares of its Common Stock to the
stockholders of United.

The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Regulation S under the Securities Act,
Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or
Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by
an issuer not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
- -------------------- ----------------------------------------------------------------------------------------------
<C> <C> <S>
3.1 (b) Amended and Restated Certificate of Incorporation filed with the Secretary of State of
Delaware on February 11, 1997.
3.2 (b) Bylaws, as amended.
4.1 (b) Specimen Common Stock Certificate.
4.2 (e) Declaration of Registration Rights, dated September 19, 1997, granted by the Registrant to
Stockholders of United Software, Inc.
5.1 (a) Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 (b) Nonqualified Stock Option Plan, as amended, and forms of Stock Option Agreement and Stock
Buy-Sell Agreement.
10.2 (b) 1991 Nonqualified Stock Option Plan, as amended, and forms of Stock Option Agreement and Stock
Buy-Sell Agreement.
10.3 (d) 1994 Stock Option Plan, as amended through February 6, 1997, including 1995 Stock Option Plan
for French Employees.
10.4 (d) Form of Stock Option Agreement under 1994 Stock Option Plan, as amended through February 6,
1997
10.5 (d) 1997 Employee Stock Purchase Plan and forms of participation agreement thereunder.
10.6 (d) 1997 Director Option Plan.
10.7 (b) Form of Indemnification Agreement for directors and officers.
10.8 (e) Credit Agreement dated as of July 1, 1997 by and between the Registrant and Wells Fargo Bank,
N.A.
10.9 (b) Sublease between the Registrant and JMI Services, Inc.
</TABLE>

II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
- -------------------- ----------------------------------------------------------------------------------------------
<C> <C> <S>
10.10 (b) Lease between the Registrant and the Mutual Life Insurance Company of New York dated October
26, 1994, as amended in August 1995, and Notifications of Assignment dated June 14, 1996 and
December 9, 1996 for the Registrant's headquarters at 12670 High Bluff Drive, San Diego, CA.
10.11 (b) Lease between the Registrant and the Mutual Life Insurance Company of New York dated October
26, 1994, as amended in August 1995, and Notification of Assignment dated December 9, 1996
for the Registrant's headquarters at 12680 High Bluff Drive, San Diego, CA.
10.14 (b) XVT Stock Option Agreement dated January 18, 1995 between the Registrant and Christopher Cole,
as amended on October 3, 1996.
10.15 (c) Restricted Stock Agreement dated November 1, 1995 between the Registrant and Alan Hunt.
10.16 (c) Restricted Stock Agreement dated November 1, 1995 between the Registrant and David Farley.
10.17 (b) Stock Option Agreement dated as of December 7, 1990 between the Registrant and Christopher
Cole as amended on October 26, 1995.
10.18 (b) Form of Stock Option Agreement under the 1995 Stock Option Plan for French Employees.
10.19 (b) Form of Stock Option Agreement under the 1997 Director Option Plan.
10.20 (e) Special Limited Lease dated November 15, 1995 between Central Monceau and Apsylog S.A.
(Translation from French original).
10.21 (e) Lease dated January 19, 1995 between Central Monceau and Apsylog S.A. (translation from French
original).
21.1 (e) List of Subsidiaries of the Registrant.
23.1 (a) Consent of Arthur Andersen LLP, independent public accountants
23.2 (a) Consent of Arthur Andersen LLP, independent public accountants
23.3 (a) Consent of counsel (included in Exhibit 5.1)
24.1 (a) Power of Attorney (see II-4)
</TABLE>

- ------------------------
(a) Filed herewith.

(b) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration No.
333-21483), which the Securities and Exchange Commission declared effective
on April 8, 1997.

(c) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration No.
333-21483), which the Securities and Exchange Commission declared effective
on April 8, 1997. The Registrant has received confidential treatment with
respect to certain portions of this exhibit. Such portions have been omitted
from this exhibit and have been filed separately with the Securities and
Exchange Commission.

(d) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for the year ended March 31,
1997.

(e) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.

(b) Financial Statement Schedule

Schedules not listed above have been omitted because the information
required to be set forth therein is not, applicable or is shown in the financial
statements or notes thereto.

II-3
<PAGE>
ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereto, which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.

(4) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on the 7th day of November, 1997.

PEREGRINE SYSTEMS, INC.

By: /s/ ALAN H. HUNT
-----------------------------------------
Alan H. Hunt
PRESIDENT AND CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Alan H. Hunt and David A. Farley and each
one of them, acting individually and without the other, as his attorney-in-fact,
each with full power of substitution, for him in any and all capacities, to sign
any and all amendments to this Registration Statement (including post-effective
amendments), and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all
post-effective amendments thereto, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes may do or cause to be done
by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED. SIGNATURE

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>

/s/ ALAN H. HUNT President and Chief Executive November 7, 1997
------------------------------------------- Officer (Principal Executive
(Alan H. Hunt) Officer) and Director

/s/ DAVID A. FARLEY Chief Financial Officer November 7, 1997
------------------------------------------- (Principal Financial and
(David A. Farley) Accounting Officer) and
Director

/s/ JOHN J. MOORES Chairman of the Board of November 7, 1997
------------------------------------------- Directors
(John J. Moores)

/s/ CHRISTOPHER A. COLE Director November 7, 1997
-------------------------------------------
(Christopher A. Cole)

/s/ RICHARD A. HOSLEY II Director November 7, 1997
-------------------------------------------
(Richard A. Hosley II)

/s/ CHARLES E. NOELL III Director November 7, 1997
-------------------------------------------
(Charles E. Noell III)

/s/ NORRIS VAN DEN BERG Director November 7, 1997
-------------------------------------------
(Norris van den Berg)
</TABLE>

II-5

<PAGE>

EXHIBIT 5.1

WILSON SONSINI GOODRICH & ROSATI
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE: (650) 493-9300 FACSIMILE: (650) 493-6811

November 10, 1997

Peregrine Systems, Inc.
12670 High Bluff Drive
San Diego, California 92130

RE: Peregrine Systems, Inc. (the "Company"): Registration Statement on
Form S-1

Ladies and Gentlemen:

We have examined the Registration Statement on Form S-1 to be filed by
you with the Securities and Exchange Commission on November 10, 1997 (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of 1,301,419 shares of your Common Stock,
$0.001 par value (the "Shares"), all of which are authorized and have been
previously issued to the Selling Stockholders named therein in connection
with the Company's acquisition of United Software, Inc. ("United") pursuant
to the merger of a wholly owned subsidiary of the Company with and into
United. The Selling Stockholders are all former stockholders of United. The
Shares are to be offered by the Selling Stockholders for sale to the public
as described in the Registration Statement. As your counsel in connection
with this transaction, we have examined the proceedings taken and proposed to
be taken in connection with the sale of the Shares.

It is our opinion that the Shares are legally and validly issued, fully
paid and nonassessable.

We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in
the Registration Statement, including the Prospectus constituting a part
thereof, and any amendment thereto.

Very truly yours,

/s/ WILSON, SONSINI, GOODRICH & ROSATI

WILSON SONSINI GOODRICH & ROSATI
Professional Corporation

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the inclusion in
this registration statement of our Report dated April 21, 1997 for Peregrine
Systems, Inc. and to all references to our firm included in this registration
statement.

/s/ Arthur Andersen LLP

San Diego, California
November 7, 1997

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the inclusion in
this registration statement of our Report dated September 19, 1997 for United
Software, Inc. and to all references to our firm included in this registration
statement.

/s/ Arthur Andersen LLP

San Diego, California
November 7, 1997