PEREGRINE SYSTEMS INC, S-1/A, 1997-03-17

PEREGRINE SYSTEMS INC
S-1/A, 1997-03-17
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 1997

REGISTRATION NO. 333-21483
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------

AMENDMENT NO. 2
TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

PEREGRINE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
--------------------------

<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>

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

PEREGRINE SYSTEMS, INC.
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)
--------------------------

ALAN H. HUNT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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. FREDERICK T. MUTO, ESQ.
ROBERT F. KORNEGAY, ESQ. ERIC J. LOUMEAU, ESQ.
BETSEY SUE, ESQ. BLAKE T. BILSTAD, ESQ.
MARK B. BAUDLER, ESQ. COOLEY GODWARD LLP
WILSON SONSINI GOODRICH & ROSATI 4365 EXECUTIVE DRIVE
PROFESSIONAL CORPORATION SUITE 1100
650 PAGE MILL ROAD SAN DIEGO, CA 92121
PALO ALTO, CA 94304 (619) 550-6000
(415) 493-9300

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

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

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. / /

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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. / /

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, AS AMENDED, 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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<PAGE>
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 MARCH 17, 1997

PROSPECTUS

3,000,000 SHARES

[LOGO]

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

Of the 3,000,000 shares of Common Stock offered hereby, 2,100,000 are
being sold by Peregrine Systems, Inc. ("Peregrine" or the "Company") and 900,000
shares are being sold by the Selling Stockholders. The Company will not receive
any of the proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders." Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $10.00 and $12.00 per
share. See "Underwriting" for a discussion of factors to be considered in
determining the initial public offering price. The shares of Common Stock have
been approved for quotation on the Nasdaq National Market under the symbol
"PRGN."

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 5.
------------------

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 OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Stockholders
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total (3).................. $ $ $ $
</TABLE>

(1) For information regarding indemnification of the Underwriters, see
"Underwriting."

(2) Before deducting expenses of the offering payable by the Company, estimated
at $650,000.

(3) Certain of the Selling Stockholders have granted the Underwriters an
option, exercisable within 30 days from the date hereof, to purchase up to
450,000 additional shares of Common Stock on the same terms set forth above,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public will be $ , the Underwriting
Discounts and Commissions will be $ and the Proceeds to Selling
Stockholders will be $ . See "Underwriting."

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

The shares of Common Stock offered by the Underwriters are subject to
prior sale, receipt and acceptance by them and are subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of UBS Securities LLC, 299 Park Avenue, New York, New York, on or about
, 1997.
---------------------

UBS SECURITIES OPPENHEIMER & CO., INC.

, 1997
<PAGE>
[PEREGRINE SYSTEMS LOGO]
ENABLING THE ENTERPRISE SERVICE DESK

Peregrine's SERVICECENTER, a fully integrated suite of critical IT
management applications, works across all major hardware platforms, network
operating systems and protocols, effectively managing today's complex,
enterprise-wide IT infrastructure.

[Schematic depicting typical NT, UNIX or MVS server. Indicates that server
may be deployed over multiple hardware platforms, including LANs/WANs and
mainframes. The server identifies each the six applications available with the
Company's SERVICECENTER product. Also indicates that the Company's products may
be used on multiple operating systems and that intelligent agents permit
proactive system management.]

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

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER "RISK FACTORS." THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS."

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 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.

Today, IT is an integral part of many core business functions and is
critical to many new tactical and strategic initiatives, such as business
process reengineering, supply chain management and enhanced customer care. The
changing role of IT, combined with advances in enabling technology, has led to a
proliferation of diverse systems, platforms and applications within large
organizations. As a result, management of the IT infrastructure is becoming
increasingly complex. Organizations must grapple with a greater volume of
support activity while mastering a broader base of IT products, systems,
architectures and network environments. In a 1996 report, Gartner Group, a
leading industry information source, estimated that corporations spend on
average $10,400 annually to service and support every networked PC, representing
a significant multiple of the initial capital outlay for hardware and software.

Many companies have implemented internal help desk software solutions to
better manage their IT infrastructure. However, these solutions are limited in
their approach and design, primarily automating IT problem management and
resolution without integrating with other critical management functions, such as
inventory and change management. In addition, stand-alone internal help desk
solutions are generally designed only to manage a single platform or a specific
network environment. Consequently, these solutions are typically deployed on a
departmental or divisional level only. Their functionality is "reactive" in
orientation, focusing on problem resolution rather than prevention.

The Company's SERVICECENTER software offers capabilities that extend beyond
those of traditional internal help desk solutions to create an Enterprise
Service Desk, meeting the operational and strategic needs of today's enterprise.
SERVICECENTER'S fully integrated suite of six critical IT management
applications works across all major hardware platforms and network operating
systems and protocols, allowing it to effectively manage the complexity of
today's enterprise IT infrastructure. An important feature of SERVICECENTER is
its utilization of sophisticated agent technology to anticipate and prevent
problems before they occur, thereby keeping IT systems functioning efficiently
and with minimal downtime.

The Company's objective is to be the leading provider of Enterprise Service
Desk solutions worldwide. The Company's strategy is to maintain its functional
and technical leadership, expand its target market to the Global 2000, expand
its international sales efforts, continue to build customer partnerships and
expand its channels and third party relationships. In addition, the Company
believes it can continue to successfully leverage its unique product authorship
compensation model, a compensation system that rewards the Company's software
developers based on a percentage of license revenues of products they design and
develop.

The Company has licensed SERVICECENTER to over 200 customers worldwide,
including Bankers Trust, Bell Atlantic, Deere & Company, Dow Corning, EDS, GE
Capital, Lufthansa, Mitsubishi Electric, Northrop Grumman, Packard Bell NEC,
Philip Morris, Procter & Gamble, Shell Oil and Texas Instruments.

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, and its predecessor, Peregrine Systems, Inc., a California
corporation. The Company's executive offices are located at 12670 High Bluff
Drive, San Diego, California 92130 and its telephone number is (619) 481-5000.

3
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company......... 2,100,000 shares
Common Stock offered by the Selling
Stockholders.............................. 900,000 shares
Total Common Stock offered.................. 3,000,000 shares
Common Stock to be outstanding after the
offering.................................. 15,120,019 shares (1)
Use of proceeds............................. For working capital and other general
corporate purposes, including repayment of
bank debt. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... PRGN
</TABLE>

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

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
--------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1995 1996
--------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues......................... $ 7,414 $ 12,844 $ 15,760 $ 19,628 $ 23,766 $ 17,638 $ 24,527
Gross profit........................... 5,389 10,376 11,981 15,662 19,825 14,650 20,949
Operating income (loss)................ (5,883) (664) (705) (3,919) (4,266) (2,879) 2,730
Net income (loss)...................... (6,004) (736) (735) 51(2) (6,411) (3,736) 2,364
Net income (loss) per share............ $ (0.52) $ 0.16
Shares used in per share calculation... 12,331 14,438
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Total revenues............................................................ $ 6,128 $ 7,500 $ 7,500 $ 9,527
Gross profit............................................................. 5,175 6,290 6,326 8,333
Operating income (loss).................................................. (1,387) 401 525 1,804
Net income (loss)........................................................ (1,499) 289 408 1,667
Net income (loss) per share.............................................. $ (0.11) $ 0.02 $ 0.03 $ 0.11
Shares used in per share calculation..................................... 13,552 14,330 14,330 14,519
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
AS ADJUSTED
ACTUAL (3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................................................. $ 1,271 $ 17,790
Working capital (deficit)............................................................. (7,300) 13,533
Total assets.......................................................................... 19,034 35,553
Borrowings under bank line of credit.................................................. 4,314 --
Stockholders' equity (deficit)........................................................ (6,353) 14,480
</TABLE>

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(1) Based upon shares outstanding as of December 31, 1996. Excludes 3,830,408
shares of Common Stock issuable upon exercise of options outstanding at
December 31, 1996 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 $1.85. See "Management--Stock Plans," "Description
of Capital Stock" and Notes 10 and 13 of Notes to Consolidated Financial
Statements. Also excludes (i) 144,400 shares reserved at December 31, 1996
for future issuance under the 1994 Stock Option Plan and (ii) 1,000,000
shares reserved after December 31, 1996 for future issuance under the 1994
Stock Option Plan, the 1997 Director Option Plan and the 1997 Employee Stock
Purchase Plan. See Note 13 of Notes to Consolidated Financial Statements.

(2) 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.

(3) Adjusted to give effect to the estimated net proceeds of this offering based
on an assumed initial public offering price of $11.00 and the application of
the estimated net proceeds therefrom, including the repayment of bank debt.
See "Use of Proceeds."

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

EXCEPT AS SET FORTH IN THE CONSOLIDATED FINANCIAL STATEMENTS OR OTHERWISE
INDICATED HEREIN, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "DESCRIPTION OF
CAPITAL STOCK" AND "UNDERWRITING." EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN
THIS PROSPECTUS (I) 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 AND (II) REFLECTS THE EXERCISE OF OPTIONS TO ACQUIRE UP TO 116,000
SHARES BY CERTAIN SELLING STOCKHOLDERS IN CONNECTION WITH THIS OFFERING. SEE
"PRINCIPAL AND SELLING STOCKHOLDERS," "DESCRIPTION OF CAPITAL STOCK" AND NOTE 10
OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4
<PAGE>
RISK FACTORS

PROSPECTIVE INVESTORS IN THE SHARES OF COMMON STOCK OFFERED HEREBY SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS.

LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES

The Company has recorded cumulative net losses of approximately $19.2
million through December 31, 1996, including a net loss of approximately $6.4
million in fiscal 1996. In recent years, the Company's product line has changed
substantially. The Company's SERVICECENTER product, from which the Company
derived substantially all of its license revenues for the nine months ended
December 31, 1996, only began shipping in mid-1995. As a result, prediction of
the Company's future operating results is difficult, if not impossible. Although
the Company achieved limited profitability during each of the quarters in the
nine months ended December 31, 1996, there can be no assurance that the Company
will be able to remain profitable on a quarterly basis or achieve profitability
on an annual basis. In addition, the Company does not believe that the growth in
revenues it has experienced in recent years is indicative of future operating
results. See "--Product Concentration; Dependence on Market Acceptance of
Enterprise Service Desk Software," "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;
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 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. See
"--International Operations; Currency Fluctuations" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

5
<PAGE>
PRODUCT CONCENTRATION; DEPENDENCE ON MARKET ACCEPTANCE OF ENTERPRISE SERVICE
DESK SOFTWARE

The Company currently derives substantially all of its license revenues from
the sale of SERVICECENTER and expects SERVICECENTER to account for a significant
portion of the Company's revenues for the foreseeable future. As a result, the
Company's future operating results are dependent upon continued market
acceptance of SERVICECENTER, including future enhancements. Factors adversely
affecting the pricing of, demand for, or market acceptance of SERVICECENTER,
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.

DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT TEAM; ABILITY TO RECRUIT PERSONNEL

The Company's success will depend to a significant extent on the continued
service of its senior management and certain other key employees of the Company,
including selected sales, consulting, technical and marketing personnel. 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,
several of the Company's executive officers, including its President and Chief
Executive Officer, Chief Financial Officer, and certain operating vice
presidents, have been employed by the Company for a relatively short period of
time. Since joining the Company, the new management team has devoted substantial
effort in refocusing the Company's product, sales and marketing strategies. In
connection with such changes, the Company restructured its sales and marketing
departments, which resulted in the replacement of a significant number of
employees. Although management believes that this restructuring has benefitted
the Company, many of the Company's current employees have been with the Company
for only a limited period of time.

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. There can be no assurance that the
Company will be successful in attracting and retaining such personnel, and the
failure to do so could have a material adverse effect on the Company's business,
operating results and financial condition.

COMPETITION

6
<PAGE>
Enterprise Service Desk applications expands. In addition, current and potential
competitors have established or may in the future establish cooperative
relationships among themselves or with third parties. The Company expects
software industry consolidation to occur in the future, and it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. 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 $15.8 million in fiscal 1994 to $23.8 million in fiscal
1996 and to $24.5 million for the nine months ended December 31, 1996. In
addition, in connection with an internal restructuring of the Company that
occurred in the latter half of fiscal 1996 and the beginning of fiscal 1997, the
Company replaced its senior management and a significant portion of its sales
staff employed at that time in an effort to improve sales productivity and
revenue growth. As a result of the restructuring, a number of the key members of
the Company's management, including its President and Chief Executive Officer
and Chief Financial Officer, have been employed with the Company for only a
limited period of time. If the Company is successful in achieving its growth
plans, 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.
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; New Management Team; Ability to Recruit Personnel" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

LENGTHY SALES CYCLES

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

7
<PAGE>
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," "Business--Strategy" and "Business--Sales
and Marketing."

INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS

International sales represented approximately 29% and 28% of the Company's
total revenues in fiscal 1996 and for the nine months ended December 31, 1996,
respectively. The Company currently has international sales offices in London,
Paris, Frankfurt and Amsterdam. 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. 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 not
previously undertaken hedging transactions to cover its currency exposure but
may hedge a portion of its currency exposure in the future as management deems
appropriate. See "--Management of Growth," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Business-- Sales and
Marketing."

CONTROL BY EXISTING STOCKHOLDERS; BENEFITS OF THE OFFERING TO CURRENT
STOCKHOLDERS

Upon completion of this offering, the Company's officers, directors and
their affiliates together will beneficially own approximately 75.9% of the
outstanding shares of Common Stock (73.1% if the Underwriters' over-allotment
option is exercised in full). In particular, John J. Moores, Chairman of the
Company's Board of Directors, and entities affiliated with Mr. Moores
collectively will own approximately 67.0% of the outstanding shares of Common
Stock (64.3% if the Underwriters' over-allotment option is exercised in full).
As a result, these stockholders will be able to control most matters requiring
stockholder approval, including

8
<PAGE>

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."

Completion of this offering will result in substantial benefits to the
Company's existing stockholders and optionholders, including the creation of a
liquid trading market and the ability, subject to restrictions under applicable
securities laws and market stand-off agreements among such security holders, the
underwriters and the Company, to sell shares in a public market. There can be no
assurance that an active public market will develop or be sustained after this
offering, however. Upon the completion of this offering, assuming no exercise of
the Underwriters' over-allotment option, the aggregate market value of Common
Stock held by existing stockholders, assuming an initial public offering price
of $11.00 per share and without regard to possible regulatory or contractual
restrictions on transfer, will be $133,320,209, representing a substantial
unrealized gain to existing stockholders. See "--No Prior Market; Possible
Volatility of Stock Price" and "--Shares Eligible for Future Sale." In addition,
Mr. Moores currently guarantees the Company's outstanding indebtedness under a
credit line and term loan with NationsBank of Texas, N.A. ("NationsBank"). As of
December 31, 1996, the Company's outstanding obligations under such credit line
and term loan were $4.3 million and $1.7 million, respectively. The Company
intends to repay the outstanding balance of the revolving line of credit with a
portion of the proceeds from this offering, thereby releasing Mr. Moores from
his obligations with respect to the credit line. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Certain Transactions" and Note 6
of Notes to Consolidated Financial Statements.

Certain stockholders and optionholders of the Company, including certain
officers, directors and affiliates of the Company, will also benefit by
participating as Selling Stockholders in the offering. Of the 900,000 shares of
Common Stock being sold by the Selling Stockholders, 384,000 shares are being
sold by Mr. Moores, 238,550 shares are being sold by Mr. Moores as trustee of
various trusts, substantially all of which were established for members of Mr.
Moores's family, and 84,000 shares are being sold by JMI Equity Fund, L.P.
("JMI"). Mr. Moores is a limited partner of JMI, and Charles E. Noell III and
Norris van den Berg, each of whom serve as directors of the Company, are general
partners of JMI. At an assumed initial public offering price of $11.00 per
share, the foregoing sales will result in aggregate gross proceeds of $4,224,000
to Mr. Moores, $2,623,500 to trusts of which Mr. Moores serves as trustee and
$924,000 to JMI. Mr. Moores and related entities acquired shares of Common Stock
from 1989 through 1995 at prices ranging from $1.33 to $2.34 in transactions
directly with the Company and in third-party transactions with former
stockholders of the Company. As a result of the sizable difference between the
acquisition cost for such shares and the assumed initial public offering price,
Mr. Moores and related entities will realize substantial gains upon the sale of
their shares. Mr. Moores and related entities have also granted the underwriters
an option, exercisable within 30 days of the date of the Prospectus, to acquire
up to 409,150 shares of Common Stock at the initial public offering price.
Christopher A. Cole, a director of the Company, will sell 35,000 shares in the
offering, resulting in aggregate gross proceeds to Mr. Cole of $385,000 at an
assumed initial public offering price of $11.00. In addition, Mr. Cole has
granted the underwriters an option, exercisable with 30 days of the date of this
prospectus, to acquire up to an additional 20,000 shares of Common Stock at the
initial public offering price. All outstanding shares held by Mr. Cole were
issued in 1981 in connection with his founding the Company. As a result, Mr.
Cole has a nominal basis in the shares to be sold in the offering and will
realize a substantial gain upon their sale.

Of the remaining 193,450 shares being sold by Selling Stockholders, 77,450
shares are being sold by certain stockholders who are not affiliates of the
Company, resulting in aggregate gross proceeds to such stockholders of $851,950.
Such Selling Stockholders have also granted the underwriters an option,
exercisable within 30 days of the date of this Prospectus, to acquire up to an
additional 850 shares of Common Stock at the initial public offering price. Such
shares were acquired either in gift transactions from Mr. Moores or at purchase
prices substantially below the assumed initial public offering price. The
remaining 116,000 shares are being sold in connection with the exercise of
outstanding options held by an officer, a former officer and certain

9
<PAGE>

employees of the Company and will result in aggregate gross proceeds to such
individuals of $1,276,000. In addition, an officer of the Company, who is not
participating as a Selling Stockholder in the offering, has granted the
underwriters an option, exercisable within 30 days of the date of this
Prospectus, to acquire up to 20,000 shares of Common Stock to be issued upon
such officer's exercise of an outstanding option. The applicable exercise prices
for the shares being sold upon exercise of outstanding options range from $0.51
to $2.34, and the aggregate exercise price for such options is approximately
$182,590. Such non-affiliated stockholders and optionholders will realize
substantial gains in connection with their sales of shares in the offering.

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 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

10
<PAGE>
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

Effective upon completion of this offering, the Company will be 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 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

11
<PAGE>
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
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"), and lock-up agreements under which the
holders of such shares have agreed not to sell or otherwise dispose of any of
their shares for a period of 180 days after the date of this Prospectus without
the prior written consent of UBS Securities LLC. UBS Securities LLC may,
however, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to lockup agreements. As a result of these
restrictions, based on shares outstanding as of December 31, 1996, other than
the 3,000,000 shares offered hereby, no shares will be eligible for sale on the
date of this Prospectus pursuant to Rule 144(k) under the Securities Act.
Approximately 10,200,000 shares will become eligible for sale 180 days after the
date of this Prospectus (the "Release Date"), and approximately 1,900,000 shares
will become available at various times after the Release Date pursuant to Rule
144 under the Securities Act. On or prior to the Release Date, the Company
intends to register on Form S-8 an additional 5,611,308 shares of Common Stock
reserved for issuance under the Company's Nonqualified Stock Option Plan, 1991
Nonqualified Stock Option Plan, 1994 Stock Option Plan, 1997 Director Option
Plan and 1997 Employee Stock Purchase Plan, as well as 600,000 shares of Common
Stock issued under restricted stock agreements with certain employees of the
Company. Of the shares isssuable upon exercise of outstanding options to be
registered on the Form S-8, approximately 2,462,250 shares will be vested and
eligible for sale on the Release Date. See "Shares Eligible for Future Sale."

The foregoing analysis reflects recent amendments, effective April 29, 1997,
to certain provisions of Rule 144 under the Securities Act. Such amendments
resulted in the shortening of the initial Rule 144 holding period from two years
to one year and the shortening of the Rule 144(k) holding period from three
years to two years.

IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing Common Stock in this
offering will, therefore, incur immediate dilution of $10.04 in net tangible
book value per share of Common Stock (based upon the assumed initial public
offering price of $11.00 per share and after deducting estimated underwriting
discounts and commissions and estimated

12
<PAGE>
offering expenses payable by the Company) from the initial public offering price
and will incur additional dilution upon the exercise of outstanding stock
options.

NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined by
negotiations between the Company and the representatives of the Underwriters.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. There can be no assurance that an
active public market will develop or be sustained after this offering or that
the market price of the Common Stock will not decline below the initial public
offering price. Future announcements concerning the Company or its competitors,
quarterly or annual variations in results of operations, announcements of
technological innovations, the introduction of new products or changes in
pricing policies by the Company or its competitors, proprietary rights or other
litigation, changes in earnings estimates by analysts, the Company's failure to
meet analysts' estimates or other factors could cause the market price of the
Common Stock to fluctuate substantially. In addition, stock prices for many
technology companies fluctuate widely for reasons which may be unrelated to
results of operations. These fluctuations, as well as general economic, market
and political conditions, could have a material adverse effect on the market
price of the Company's Common Stock.

DISCRETION AS TO USE OF PROCEEDS

The primary purposes of this offering are to create a public market for the
Company's Common Stock, to facilitate future access to public markets and to
obtain additional working capital. As of the date of this Prospectus, the
Company has no specific plans to use the net proceeds from this offering other
than for working capital and general corporate purposes, including repayment of
bank debt. Accordingly, the Company's management will retain broad discretion as
to the allocation of the net proceeds from this offering. Pending any such uses,
the Company plans to invest the net proceeds in investment grade,
interest-bearing securities. See "Use of Proceeds."

13
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,100,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$20,833,000 assuming an initial public offering price of $11.00 per share and
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company.

The primary purposes of this offering are to create a public market for the
Common Stock, to facilitate future access to public markets and to obtain
additional working capital. The Company expects to use the net proceeds of this
offering for working capital and other general corporate purposes, including the
repayment of outstanding bank debt under the Company's line of credit, which
totaled $4,314,000 at December 31, 1996. The Company's line of credit bears
interest at the prime rate announced by NationsBank and terminates as of
November 30, 1997. John J. Moores, the Company's majority stockholder, currently
guarantees the Company's indebtedness under the line of credit. A portion of the
net proceeds may also be used for the acquisition of businesses, products and
technologies that are complementary to those of the Company. The Company has no
present plans, agreements or commitments and is not currently engaged in any
negotiations with respect to any such transactions. Pending such uses, the net
proceeds of this offering will be invested in investment-grade, interest-bearing
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Certain Transactions"
and Note 6 of Notes to Consolidated Financial Statements.

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

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.

14
<PAGE>
CAPITALIZATION

The following table sets forth at December 31, 1996 the capitalization
(deficit) of the Company after giving effect to a two-for-one stock split in the
form of a stock dividend effected in February 1997, and as adjusted to reflect
the Company's receipt of net proceeds from the sale of 2,100,000 shares of
Common Stock at an assumed initial public offering price of $11.00 per share and
the application of the net proceeds therefrom. 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>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under line of credit (1)...................................................... $ 4,314 $ --
---------- -----------
---------- -----------
Notes payable and capital lease obligations, net of current portion (1).................. $ 1,553 $ 1,553
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 2,000,000 shares authorized, no shares issued and
outstanding, actual; 5,000,000 shares authorized, no shares issued and outstanding,
as adjusted.......................................................................... -- --
Common Stock, $0.001 par value, 20,000,000 shares authorized, 12,904,000 shares issued
and outstanding, actual; 50,000,000 shares authorized, 15,120,000 shares issued and
outstanding, as adjusted (2)......................................................... 13 15
Additional paid-in capital............................................................... 13,540 34,371
Accumulated deficit...................................................................... (19,245) (19,245)
Unearned portion of restricted stock compensation........................................ (473) (473)
Cumulative translation adjustment........................................................ (188) (188)
---------- -----------
Total stockholders' equity (deficit)................................................. (6,353) 14,480
---------- -----------
Total capitalization (deficit)....................................................... $ (4,800) $ 16,033
---------- -----------
---------- -----------
</TABLE>

- --------------------------
(1) See Note 6 of Notes to Consolidated Financial Statements.

(2) Based upon shares outstanding as of December 31, 1996. Excludes 3,830,408
shares of Common Stock issuable upon exercise of options outstanding at
December 31, 1996 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 $1.85. See "Management--Stock Plans," "Description
of Capital Stock" and Notes 10 and 13 of Notes to Consolidated Financial
Statements. Also excludes (i) 144,400 shares reserved at December 31, 1996
for future issuance under the 1994 Stock Option Plan and (ii) 1,000,000
shares reserved after December 31, 1996 for future grant under the 1994
Stock Option Plan, the 1997 Director Option Plan and the 1997 Employee Stock
Purchase Plan. See Note 13 of Notes to Consolidated Financial Statements.

15
<PAGE>
DILUTION

As of December 31, 1996, the net tangible book value of the Company's Common
Stock was $(6.4) million or $(0.49) per share of Common Stock. Net tangible book
value per share represents the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock then outstanding.
Dilution per share represents the difference between the amount per share paid
by investors in the offering and the pro forma net tangible book value per share
after the offerings. After giving effect to the sale by the Company of 2,100,000
shares in the offering (at an assumed initial public offering price of $11.00
per share and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company), the Company's pro
forma net tangible book value as of December 31, 1996 would have been
$14,480,000 or $0.96 per share of Common Stock. This represents an immediate
increase of pro forma net tangible book value of $1.45 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$10.04 per share to new investors.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 11.00
Net tangible book value per share as of December 31, 1996........ $ (0.49)
---------
Increase in net tangible book value per share attributable to new
investors...................................................... 1.45
---------
Pro forma net tangible book value per share after offering......... 0.96
---------
Dilution per share to new investors................................ $ 10.04
---------
---------
</TABLE>

The following table summarizes, on a pro forma basis as of December 31,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors purchasing shares in this offering (at an
assumed initial public offering price of $11.00 per share and before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)............. 13,020,000 86.1% $ 13,709,000 37.2% $ 1.05
New investors (1)..................... 2,100,000 13.9 23,100,000 62.8 11.00
------------- ----- -------------- -----
Total............................. 15,120,000 100.0% $ 36,809,000 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>

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

(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares of Common Stock held by existing stockholders to 12,120,019 or
approximately 80.2% (11,670,019 shares, or approximately 77.2%, if the
Underwriters' over-allotment option is exercised in full) and will increase
the number of shares held by new investors to 3,000,000 or approximately
19.8% (3,450,000 shares, or approximately 22.8%, if the Underwriters
over-allotment option is exercised in full) of the total number of shares of
Common Stock outstanding after this offering. See "Principal and Selling
Stockholders."

The foregoing computations assume no exercise of stock options after
December 31, 1996 other than options to acquire 116,000 shares to be exercised
by Selling Stockholders in connection with this offering. As of December 31,
1996, excluding options being exercised by Selling Stockholders, there were
outstanding options to purchase 3,830,408 shares of Common Stock under the
Company's Nonqualified Stock Option Plan, 1991 Nonqualified Stock Option Plan
and 1994 Stock Option Plan at a weighted average price of $1.85 per share and
144,400 shares reserved for future issuance under the 1994 Stock Option Plan.
After December 31, 1996, an additional 1,000,000 shares of Common Stock were
reserved for future issuance under the 1994 Stock Option Plan, 1997 Director
Option Plan and 1997 Employee Stock Purchase Plan. See Note 13 of Notes to
Consolidated Financial Statements. To the extent that any shares are issued upon
exercise of options, warrants or rights 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 investors. 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, 1992, 1994, 1995 and 1996 and December 31, 1996, for the
year ended March 31, 1992, for each of the years in the three-year period ended
March 31, 1996, and for the nine-month period ended December 31, 1996, 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
financial statements as of March 31, 1995 and 1996 and December 31, 1996, for
each of the years in the two-year period ended March 31, 1996, and for the
nine-month period ended December 31, 1996, and the report thereon, are included
elsewhere in this Prospectus. The consolidated statement of operations data for
the nine-month period ended December 31, 1995 are derived from 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 Company's results of
operations for that period. 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>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses............................... $ 4,051 $ 6,311 $ 6,714 $ 9,137 $ 11,642 $ 8,791 $ 13,932
Maintenance............................ 3,115 5,629 6,857 7,918 8,967 6,765 7,659
Services............................... 248 904 2,189 2,573 3,157 2,082 2,936
--------- --------- --------- --------- --------- --------- ---------
Total revenues....................... 7,414 12,844 15,760 19,628 23,766 17,638 24,527
Costs of revenues:
Cost of licenses....................... 194 303 322 393 415 320 155
Cost of maintenance and services....... 1,831 2,165 3,457 3,573 3,526 2,668 3,423
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenues............... 2,025 2,468 3,779 3,966 3,941 2,988 3,578
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 5,389 10,376 11,981 15,662 19,825 14,650 20,949
Operating expenses:
Sales and marketing.................... 4,533 5,218 6,118 9,549 11,820 8,392 11,217
Research and development............... 4,737 3,983 4,670 7,089 7,742 6,166 4,368
General and administrative............. 2,002 1,839 1,898 2,943 4,529 2,971 2,634
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............. 11,272 11,040 12,686 19,581 24,091 17,529 18,219
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).................. (5,883) (664) (705) (3,919) (4,266) (2,879) 2,730
Interest expense......................... (141) (122) (118) (112) (389) (275) (337)
Other income (expense)................... 20 50 88 4,082 103 101 (29)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes.................... (6,004) (736) (735) 51 (4,552) (3,053) 2,364
Provision for income taxes............... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations............................. (6,004) (736) (735) 51 (4,552) (3,053) 2,364
Loss from discontinued operations:
Loss from operations................... -- -- -- -- (781) (683) --
Loss on disposal....................... -- -- -- -- (1,078) -- --
--------- --------- --------- --------- --------- --------- ---------
Loss from discontinued operations.... -- -- -- -- (1,859) (683) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ $ (6,004) $ (736) $ (735) $ 51 $ (6,411) $ (3,736) $ 2,364
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share.............. $ (0.52) $ 0.16
--------- ---------
--------- ---------
Shares used in per share calculation..... 12,331 14,438
--------- ---------
--------- ---------
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------- DEC. 31,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $ 209 $ 385 $ 587 $ 57 $ 437 $ 1,271
Working capital (deficit)............................ (2,604) (2,300) (3,045) (4,118) (9,442) (7,300)
Total assets......................................... 4,739 4,267 6,689 9,787 13,817 19,034
Borrowings under bank line of credit................. 600 300 658 1,315 2,829 4,314
Stockholders' deficit................................ (1,332) (2,120) (2,859) (2,197) (8,450) (6,353)
</TABLE>

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 nine months ended December 31, 1996, over 80% of
the Company's license sales of SERVICECENTER have been 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'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 and 1996 and for the nine months
ended December 31, 1996, maintenance revenues represented 40%, 38% and 31% of
total revenues, respectively. The Company has sold its original PNMS software to
a sizable installed base of customers, many of whom have recently transitioned
to SERVICECENTER. The Company's large installed customer base has generated a
high level of maintenance revenues. In fiscal 1995 and 1996 and for the nine
months ended December 31, 1996, 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 growing 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 non-cancelable license agreement has been
signed, the product has been delivered, there are no material uncertainties
regarding customer acceptance, collection of the resulting receivable is deemed
probable, and no other significant vendor obligations exist. Revenues from
post-contract support services are recognized ratably over the term of the
support period, generally one year. Maintenance revenues which are bundled with
license agreements are unbundled using vendor-specific 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.

18
<PAGE>
SERVICECENTER, including future enhancements. Factors adversely affecting the
pricing of, demand for or market acceptance of SERVICECENTER, 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. Management does not currently have an active foreign exchange hedging
program. Accordingly, to the extent not hedged by obligations denominated in
local currencies, the Company's foreign operations are subject to the risks of
future foreign currency fluctuations. The Company may implement a foreign
currency forward hedging program to mitigate the foreign currency transaction
risk in the future.

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>
YEAR ENDED MARCH 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ---------- -----------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.................................................. 54.7 % 49.2 % 42.6 % 46.6% 49.0 %
Maintenance............................................... 42.0 43.8 43.5 40.3 37.7
Services.................................................. 3.3 7.0 13.9 13.1 13.3
----- ----- ----- ----- -----
Total revenues.......................................... 100.0 100.0 100.0 100.0 100.0
Costs of revenues:
Cost of licenses.......................................... 2.6 2.4 2.0 2.0 1.7
Cost of maintenance and services.......................... 24.7 16.8 22.0 18.2 14.9
----- ----- ----- ----- -----
Total cost of revenues.................................. 27.3 19.2 24.0 20.2 16.6
----- ----- ----- ----- -----
Gross profit................................................ 72.7 80.8 76.0 79.8 83.4

Operating expenses:
Sales and marketing....................................... 61.1 40.7 38.8 48.7 49.7
Research and development.................................. 64.0 31.0 29.6 36.1 32.6
General and administrative................................ 27.0 14.3 12.1 15.0 19.1
----- ----- ----- ----- -----
Total operating expenses................................ 152.1 86.0 80.5 99.8 101.4
----- ----- ----- ----- -----
Operating income (loss)..................................... (79.4) (5.2) (4.5) (20.0) (18.0)
Interest expense............................................ (1.9) (0.9) (0.8) (0.5) (1.6)
Other income (expense)...................................... 0.3 0.4 0.6 20.8 0.4
----- ----- ----- ----- -----
Income (loss) from continuing operations before income
taxes..................................................... (81.0) (5.7) (4.7) 0.3 (19.2)
Provision for income taxes.................................. 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Income (loss) from continuing operations.................... (81.0) (5.7) (4.7) 0.3 (19.2)
Loss from discontinued operations:
Loss from operations...................................... 0.0 0.0 0.0 0.0 (3.3)
Loss on disposal.......................................... 0.0 0.0 0.0 0.0 (4.5)
----- ----- ----- ----- -----
Loss from discontinued operations....................... 0.0 0.0 0.0 0.0 (7.8)
----- ----- ----- ----- -----
Net income (loss)........................................... (81.0)% (5.7)% (4.7)% 0.3% (27.0)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----

NINE MONTHS ENDED
DECEMBER 31,
-----------------------
1995 1996
----------- ----------

<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.................................................. 49.8 % 56.8%
Maintenance............................................... 38.4 31.2
Services.................................................. 11.8 12.0
----- -----
Total revenues.......................................... 100.0 100.0
Costs of revenues:
Cost of licenses.......................................... 1.8 0.6
Cost of maintenance and services.......................... 15.1 14.0
----- -----
Total cost of revenues.................................. 16.9 14.6
----- -----
Gross profit................................................ 83.1 85.4
Operating expenses:
Sales and marketing....................................... 47.6 45.8
Research and development.................................. 35.0 17.8
General and administrative................................ 16.8 10.7
----- -----
Total operating expenses................................ 99.4 74.3
----- -----
Operating income (loss)..................................... (16.3) 11.1
Interest expense............................................ (1.6) (1.4)
Other income (expense)...................................... 0.6 (0.1)
----- -----
Income (loss) from continuing operations before income
taxes..................................................... (17.3) 9.6
Provision for income taxes.................................. 0.0 0.0
----- -----
Income (loss) from continuing operations.................... (17.3) 9.6
Loss from discontinued operations:
Loss from operations...................................... (3.9) 0.0
Loss on disposal.......................................... 0.0 0.0
----- -----
Loss from discontinued operations....................... (3.9) 0.0
----- -----
Net income (loss)........................................... (21.2)% 9.6%
----- -----
----- -----
</TABLE>

19
<PAGE>
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995

REVENUES

The Company's revenues are derived primarily from the licensing and
maintenance of its software products and to a lesser extent the providing of
services to customers. The Company's revenues increased 39% from $17.6 million
for the nine months ended December 31, 1995 to $24.5 million for the nine months
ended December 31, 1996.

LICENSES. Software license revenues increased 58% from $8.8 million for the
nine months ended December 31, 1995 to $13.9 million for the nine months ended
December 31, 1996, representing 50% and 57% of total revenues in the respective
periods. International license revenues increased 43% from $3.1 million for the
nine months ended December 31, 1995 to $4.5 million for the nine months ended
December 31, 1996, representing 36% and 32% of total license 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, a substantial increase in sales force
productivity and expansion of the Company's international sales force.

MAINTENANCE. Maintenance revenues consist of charges for both renewed
annual agreements and unbundled amounts included as part of initial license
agreements. Maintenance revenues increased 13% from $6.8 million for the nine
months ended December 31, 1995 to $7.7 million for the nine months ended
December 31, 1996, representing 38% and 31% of total revenues in the respective
periods. The dollar increase is attributable to renewal of ongoing maintenance
agreements by a high percentage of the Company's installed customer base and to
an increase in revenues from new license agreements.

SERVICES. Service revenues consist of fees for consulting services and
customer training. Consulting services typically arise from facilitating
customer implementation of purchased products under a separate consulting
agreement. Service revenues increased 38% from $2.1 million for the nine months
ended December 31, 1995 to $2.9 million for the nine months ended December 31,
1996, representing 12% of total revenues in both periods. The dollar increase is
attributable to consulting work associated with the increase in new license
revenues.

COST OF REVENUES

COST OF LICENSES. Cost of license revenues consists of product media and
manuals, packaging and related distribution costs as well as amounts paid to
third party software providers. Cost of license revenues was $320,000 and
$155,000 for the nine months ended December 31, 1995 and 1996, respectively,
representing 4% and 1% of total license revenues in the respective periods.

COST OF MAINTENANCE AND SERVICES. Cost of maintenance and service revenues
consists primarily of salaries, benefits, and other costs incurred in providing
customer support, consulting and training. Cost of maintenance and services
revenues was $2.7 million and $3.4 million for the nine months ended December
31, 1995 and 1996, respectively, representing 30% and 32% of total maintenance
and service revenues in the respective periods. The increases were due primarily
to personnel additions required to perform the increased number of consulting
engagements.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses include salaries,
commissions and other related sales and marketing expenses. Sales and marketing
expenses were $8.4 million and $11.2 million for the nine months ended December
31, 1995 and 1996, respectively, representing 48% and 46% of total revenues in
the respective periods. The dollar increase is attributable primarily to the
expansion of the Company's direct sales force, increased commission expenses
resulting from increased license revenues and the implementation of

20
<PAGE>
enhanced corporate marketing programs. The Company believes that substantial
sales and marketing expenditures are essential to revenue growth and expects to
continue to invest in and expand its sales and marketing organization.

RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation and related costs of product development personnel and
also include commissions paid to product authors employed by the Company. Upon
completion of a new product, a commission rate is established and used to
calculate product author commissions based on license revenues attributable to
such author's products. The Company views its product author commissions as an
important incentive to its product development personnel and intends to continue
these commissions for the foreseeable future. Research and development expenses
were $6.2 million and $4.4 million for the nine months ended December 31, 1995
and 1996, respectively, representing 35% and 18% of total revenues in the
respective periods. The decreases are attributable primarily to the October 1995
divestiture of a mainframe software development business. See "Certain
Transactions" and Note 8 of Notes to Consolidated Financial Statements.

GENERAL AND ADMINISTRATIVE. General and administrative expenses are
comprised primarily of personnel costs and professional fees associated with the
Company's executive, financial, legal and administrative functions and other
related costs. General and administrative costs were $3.0 million and $2.6
million for the nine months ended December 31, 1995 and 1996, respectively,
representing 17% and 11% of total revenues in the respective periods. General
and administrative costs were higher for the nine months ended December 31, 1995
primarily due to costs associated with a management restructuring.

INTEREST EXPENSE

Interest expense consists of interest paid on the Company's bank debt.
Interest expense totaled $275,000 and $337,000 for the nine months ended
December 31, 1995 and 1996, respectively.

PROVISION FOR INCOME TAXES

The Company experienced an operating loss for the nine months ended December
31, 1995 and, accordingly, recorded no income taxes. The Company did not record
any provision for income taxes for the nine months ended December 31, 1996 due
to the utilization of the Company's available net operating loss carry-forwards
as an offset against net income. As of December 31, 1996, the Company had net
operating loss carry-forwards of approximately $1,100,000 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 completely 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 the deferred tax assets are realizable, the valuation allowance
will be reduced.

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 loss from
the discontinued operation of XVT for the nine months ended December 31, 1995
was $683,000.

21
<PAGE>
FISCAL YEARS ENDED MARCH 31, 1994, 1995 AND 1996

REVENUES

Total revenues were $15.8 million, $19.6 million and $23.8 million in fiscal
1994, 1995 and 1996, respectively, representing year-to-year increases of 24%
between 1994 and 1995 and 21% between 1995 and 1996.

LICENSES. License revenues were $6.7 million, $9.1 million and $11.6
million in fiscal 1994, 1995 and 1996, respectively, representing 43%, 47% and
49% of total revenues in the respective periods. The increases resulted
primarily from licenses to new customers, purchases of product upgrades by
existing customers and sales of SERVICECENTER following its commercial
introduction in July 1995.

MAINTENANCE. Maintenance revenues were $6.9 million, $7.9 million and $9.0
million in fiscal 1994, 1995 and 1996, respectively, representing 44%, 40% and
38% 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.

SERVICES. Services revenues were $2.2 million, $2.6 million and $3.2
million in fiscal 1994, 1995 and 1996, respectively, representing 14%, 13% and
13% of total revenues in the respective periods. The dollar increases are
attributable to 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 $322,000, $393,000 and
$415,000 for fiscal 1994, 1995 and 1996, respectively, representing 5%, 4% and
4% of total license revenues in the respective periods.

COST OF MAINTENANCE AND SERVICES. Cost of maintenance and service revenues
was $3.5 million, $3.6 million and $3.5 million in fiscal 1994, 1995 and 1996,
respectively, representing 38%, 34% and 29% of total maintenance and service
revenues in the respective periods. Cost of maintenance and services remained
relatively constant in dollar amounts throughout the periods but decreased as a
percentage of related revenues because of improved operating efficiencies.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses were $6.1 million, $9.5
million and $11.8 million in fiscal 1994, 1995 and 1996, respectively,
representing 39%, 49% and 50% of total revenues in the respective periods. The
increase from fiscal 1994 to fiscal 1995 is 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 $4.7
million, $7.1 million and $7.7 million in fiscal 1994, 1995 and 1996,
respectively, representing 30%, 36% and 33% of total revenues in the respective
periods. The increase from fiscal 1994 to fiscal 1995 is attributable primarily
to an acquisition in fiscal 1995 which resulted in a one-time charge of $606,000
for purchased research and development, increased expenses including the hiring
of additional personnel incurred in conjunction with the development of
SERVICECENTER and the hiring of a significant number of mainframe software
developers. 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 the entire mainframe software development
portion of its business in October 1995.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.9
million, $2.9 million and $4.5 million in fiscal 1994, 1995 and 1996,
respectively, representing 12%, 15% and 19% of total revenues in

22
<PAGE>
the respective periods. The increases are attributable primarily to
administrative personnel additions to support growth and costs associated with a
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. See
Note 4 of Notes to Consolidated Financial Statements.

PROVISION FOR INCOME TAXES

The Company has not incurred any significant income taxes during fiscal
1994, 1995 and 1996 due to operating losses or the existence of net operating
losses available to offset taxes payable.

DISCONTINUED OPERATIONS

As a result of the Company's discontinuation of the operations of XVT in
January 1996, the Company incurred a loss from discontinued operations of $1.9
million.

QUARTERLY RESULTS

In each of the first three quarters of fiscal 1997, the Company reported
both operating income and margin improvement. The enhanced operating performance
for the first three quarters of fiscal 1997 is attributable primarily to
significant license revenue growth resulting from improved sales force
productivity combined with a slower growth rate in fixed operating expenses,
resulting in an improvement in operating margins. Total revenues increased from
$7.5 million for the quarter ended June 30, 1996 to $9.5 million for the quarter
ended December 31, 1996. License revenues also increased 57% from $3.9 million
to $6.1 million in the quarter ended December 31, 1996 from the prior year. In
addition, operating expenses have been reduced as a percentage of total revenues
from 79% in the quarter ended June 30, 1996 to 69% in the quarter ended December
31, 1996.

The Company has reported substantial year-to-year revenue increases in
recent quarters but does not believe this rate of growth will be indicative of
future growth rates. The Company's revenues and operating results in its
December quarter typically benefit from purchase decisions made by the large
concentration of customers with calendar year-end budgeting requirements, while
revenues and operating results in the March quarter typically benefit from the
efforts of the Company's sales force to meet fiscal year-end sales quotas. The
Company believes that sales during the June quarter may be negatively affected
by adjustments and reassignments of sales territories implemented at the
beginning of each fiscal year. The Company also believes that because of summer
vacations taken by both sales personnel and customers, the typical sales cycle
is lengthened within the September quarter, especially in Europe. The Company
has no material backlog of unfilled orders since substantially all revenues
reported in any given quarter are generally the result of sales made within that
quarter.

23
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth selected consolidated statement of operations
data for the seven quarters ended December 31, 1996, 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
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1996 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.............................. $ 2,910 $ 2,020 $ 3,861 $ 2,851 $ 3,760 $ 4,096
Maintenance........................... 2,142 2,320 2,303 2,202 2,468 2,590
Services.............................. 835 537 710 1,075 1,272 814
----------- ----------- ----------- ----------- ----------- -----------
Total revenues...................... 5,887 4,877 6,874 6,128 7,500 7,500
Cost of revenues:
Cost of licenses...................... 110 69 141 95 61 44
Cost of maintenance and services...... 828 827 1,013 858 1,149 1,130
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues.............. 938 896 1,154 953 1,210 1,174
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................ 4,949 3,981 5,720 5,175 6,290 6,326
Operating expenses:
Sales and marketing................... 2,687 2,442 3,263 3,428 3,725 3,597
Research and development.............. 2,007 1,944 2,215 1,576 1,415 1,385
General and administrative............ 619 742 1,610 1,558 749 819
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............ 5,313 5,128 7,088 6,562 5,889 5,801
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)................. (364) (1,147) (1,368) (1,387) 401 525
Interest expense........................ (64) (80) (131) (114) (113) (108)
Other income (expense).................. 9 4 88 2 1 (9)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes................... (419) (1,223) (1,411) (1,499) 289 408
Provision for income taxes.............. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations............................ $ (419) $ (1,223) $ (1,411) $ (1,499) $ 289 $ 408
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

DEC. 31,
1996
-----------

<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.............................. $ 6,076
Maintenance........................... 2,601
Services.............................. 850
-----------
Total revenues...................... 9,527
Cost of revenues:
Cost of licenses...................... 50
Cost of maintenance and services...... 1,144
-----------
Total cost of revenues.............. 1,194
-----------
Gross profit............................ 8,333
Operating expenses:
Sales and marketing................... 3,895
Research and development.............. 1,568
General and administrative............ 1,066
-----------
Total operating expenses............ 6,529
-----------
Operating income (loss)................. 1,804
Interest expense........................ (116)
Other income (expense).................. (21)
-----------
Income (loss) from continuing operations
before income taxes................... 1,667
Provision for income taxes.............. --
-----------
Income (loss) from continuing
operations............................ $ 1,667
-----------
-----------
</TABLE>

24
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1996 1996
------------ ------------ ------------ ------------- ------------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses............................................ 49.4 % 41.4 % 56.2 % 46.5 % 50.1%
Maintenance......................................... 36.4 47.6 33.5 35.9 32.9
Services............................................ 14.2 11.0 10.3 17.6 17.0
----- ----- ----- ----- -----
Total revenues.................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of licenses.................................... 1.9 1.4 2.1 1.5 0.8
Cost of maintenance and services.................... 14.0 17.0 14.7 14.0 15.3
----- ----- ----- ----- -----
Total cost of revenues............................ 15.9 18.4 16.8 15.5 16.1
----- ----- ----- ----- -----
Gross profit.......................................... 84.1 81.6 83.2 84.5 83.9
Operating expenses:
Sales and marketing................................. 45.7 50.0 47.5 56.0 49.7
Research and development............................ 34.1 39.9 32.2 25.7 18.9
General and administrative.......................... 10.5 15.2 23.4 25.4 10.0
----- ----- ----- ----- -----
Total operating expenses.......................... 90.3 105.1 103.1 107.1 78.6
----- ----- ----- ----- -----
Operating income (loss)............................... (6.2) (23.5) (19.9) (22.6) 5.3
Interest expense...................................... (1.1) (1.7) (1.9) (1.8) (1.5)
Other income (expense)................................ 0.2 0.1 1.3 0.0 0.0
----- ----- ----- ----- -----
Income (loss) from continuing operations before income
taxes............................................... (7.1) (25.1) (20.5) (24.4) 3.8
Provision for income taxes............................ 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Income (loss) from continuing operations.............. (7.1)% (25.1)% (20.5)% (24.4)% 3.8%
----- ----- ----- ----- -----
----- ----- ----- ----- -----

SEPT. 30, DEC. 31,
1996 1996
------------ ------------

<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses............................................ 54.6% 63.8%
Maintenance......................................... 34.5 27.3
Services............................................ 10.9 8.9
----- -----
Total revenues.................................... 100.0 100.0
Cost of revenues:
Cost of licenses.................................... 0.6 0.5
Cost of maintenance and services.................... 15.1 12.0
----- -----
Total cost of revenues............................ 15.7 12.5
----- -----
Gross profit.......................................... 84.3 87.5
Operating expenses:
Sales and marketing................................. 48.0 40.9
Research and development............................ 18.5 16.5
General and administrative.......................... 10.9 11.2
----- -----
Total operating expenses.......................... 77.4 68.5
----- -----
Operating income (loss)............................... 6.9 18.9
Interest expense...................................... (1.4) (1.2)
Other income (expense)................................ (0.1) (0.2)
----- -----
Income (loss) from continuing operations before income
taxes............................................... 5.4 17.5
Provision for income taxes............................ 0.0 0.0
----- -----
Income (loss) from continuing operations.............. 5.4% 17.5%
----- -----
----- -----
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations through bank
borrowings and private sales of Common Stock. In fiscal 1994, 1995 and 1996 and
for the nine months ended December 31, 1996, the Company received net proceeds
from bank borrowings of $73,000, $194,000, $3.7 million and $1.4 million,
respectively. In fiscal 1995 and for the nine months ended December 31, 1996,
the Company received proceeds of $2.9 million and $700,000, respectively, from
the sale of a product line. In fiscal 1994, 1995 and 1996 and for the nine
months ended December 31, 1996, the Company invested cash in the amounts of
$905,000, $1.8 million, $3.5 million, and $382,000, respectively, for purchases
of property and equipment including computer hardware and software to support
the Company's growing employee base and to relocate to its new San Diego
headquarters and training facility. In fiscal 1995, the Company used $1,567,000
of cash in its operating activities. In fiscal 1996, the Company generated
$584,000 in cash from operations, but a net cash use of $738,000 by a
discontinued business resulted in an overall cash use by the Company of $154,000
in connection with operating activities. For the nine months ended December 31,
1995, the Company generated $742,000 in cash from operations, but a net cash use
of $646,000 by a discontinued business operation reduced cash from operations to
$96,000. For the nine months ended December 31, 1996, the Company generated
$679,000 in cash from operations, but a net cash use of $973,000 by a
discontinued business operation resulted in an overall cash use by the Company
of $294,000 in connection with operating activities.

The Company has a $4.5 million revolving credit line which expires November
30, 1997, and a term loan from the same bank with an unpaid principal balance of
$1.7 million at December 31, 1996 payable in equal monthly installments of
$37,000 plus interest at the bank's prime rate with the final payment due
November 2000. The Company's revolving credit line had an outstanding balance at
December 31, 1996 of $4.3 million with a variable annual interest rate equal to
the prime rate announced by NationsBank of Texas, N.A. The term loan is secured
by trade receivables and fixed assets of the Company and the revolving credit
line is secured by accounts receivable, equipment and certain other assets of
the Company. Both facilities are

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<PAGE>
personally guaranteed by the Company's majority stockholder. The Company intends
to repay the outstanding balance of the revolving line of credit with a portion
of the proceeds from this offering. See "Use of Proceeds," "Certain
Transactions" and Note 6 of Notes to Consolidated Financial Statements.

The Company believes that the net proceeds from the sale of the Common Stock
offered by the Company hereby, together with 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 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's SERVICECENTER software offers capabilities that extend beyond
those of traditional internal help desk solutions to create an Enterprise
Service Desk, meeting the operational and strategic needs of today's enterprise.
SERVICECENTER'S fully integrated suite of six critical IT management
applications is designed to effectively manage the complexity of today's
enterprise IT infrastructure. An important feature of SERVICECENTER is its
utilization of sophisticated agent technology to anticipate and prevent problems
before they occur, thereby keeping IT systems functioning efficiently and with
minimal downtime.

INDUSTRY BACKGROUND

Today's increasingly competitive business environment has forced many
organizations to improve their operational efficiency, react more quickly to
changes in the marketplace, and better understand and respond to customer needs.
Information technology has played a key role in these efforts and, when
implemented effectively, becomes an important source of competitive advantage.
Today, IT is an integral part of many core business functions, such as 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.

The changing role of IT, combined with advances in enabling technology, has
led to a proliferation of diverse systems and applications within large
organizations. For example, a typical enterprise may maintain mission-critical
applications such as customer billing on a mainframe system, utilize
client/server applications to manage human resource and finance functions, and
employ both wide-area networks ("WANs") and local-area networks ("LANs") to
manage internal corporate documents and communications. The components of these
systems may include Microsoft Windows or Windows NT, different versions of UNIX,
multiple relational database management systems and several networking
standards, all of which may vary widely across distinct operational areas and
geographies. In addition, the increasing use of open computing environments,
internets/intranets, mobile computing and workgroup computing has further
contributed to the complexity of an organization's IT system.

The result is that while IT is becoming more integral and strategic to an
organization's operations, management of the IT infrastructure is becoming
increasingly difficult. Organizations must grapple with a

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<PAGE>
greater volume of support activity while mastering a broader base of IT
products, systems, architectures and network environments.

At the same time that the role of IT is becoming increasingly important to
an organization's operations and strategy, the cost of maintaining the IT
infrastructure is also rising. These costs may be direct, measured by the lost
productivity of individuals, departments or operations, or indirect, measured by
lower quality products and service or delays in receiving key market or customer
data. In a 1996 report, Gartner Group Inc. ("Gartner Group"), a leading provider
of independent research and product analysis relating to the information
technology industry, estimated that corporations spend on average $10,400
annually to service and support every networked PC, representing a significant
multiple of the initial capital outlay for hardware and software. In addition,
failure to effectively implement and deploy IT within the enterprise may
compromise an organization's competitive position.

To avoid the heavy financial and strategic costs associated with maintaining
the IT infrastructure, many organizations have expanded the size of their IT
support structure. However, these support structures have had difficulty keeping
pace with the rapid advances in technology and the diversity of systems and
applications within the IT environment. In addition to facing the technical
challenges associated with maintaining the IT infrastructure, organizations have
also had to address rising support costs and the shortage of available qualified
IT professionals. To control escalating IT management costs, relieve the
technical staffing difficulties and address the complexities of growing IT
infrastructures, many companies have turned to internal help desk software
applications to enable their support professionals to better manage the IT
infrastructure.

LIMITATIONS OF EXISTING SOFTWARE SOLUTIONS

Internal help desk applications provide IT professionals with access to a
database of system or product information which supplements their own individual
experience, and also provide automated procedures to organize, track and resolve
end-user problems. These applications are usually deployed on a departmental or
divisional level or otherwise take a segmented approach to IT management that
requires a specific and separate application to manage each component or system
within the IT infrastructure. Although these internal help desk applications may
improve the operation of the IT infrastructure, these improvements generally
fail to address the IT requirements of the organization as an integrated
enterprise.

Some of the significant limitations of existing internal help desk
applications include:

DEPARTMENTAL/SEGMENTED APPROACH. The IT infrastructure of large enterprises
typically encompasses a number of different servers, network links and
protocols, operating systems and applications and spans multiple departments and
locations. Effective problem diagnosis and resolution require the ability to
monitor and analyze all elements of an enterprise's IT infrastructure across
departments and technologies. Traditional help desk applications segment problem
management primarily on a departmental or platform basis, and lack the ability
to monitor, identify and resolve problems across the many departments and
networks that comprise a large enterprise.

LACK OF INTEGRATION. Most traditional help desk solutions have been
designed to address a limited set of problems associated with IT management,
principally problem tracking and problem resolution. Effective IT management,
however, requires a broader base of functions that can be integrated with each
other. These functions include managing changes to the computing environment
(change management), tracking the individual components of the infrastructure
(inventory management), ordering company-approved hardware and software (order
control), and tracking the infrastructure's financial and accounting information
(financial management). Organizations have found that existing internal help
desk applications cannot easily be expanded with additional applications so that
they integrate with each other and are scalable to accommodate growth in the
enterprise. Moreover, these systems cannot easily integrate and scale with other
essential third party IT applications.

28
<PAGE>
REACTIVE ORIENTATION. Most internal help desk solutions are reactive in
orientation and respond to problems only as they occur. Because these solutions
are designed to "manage by exception," they fail to provide the proactive
benefits that would be achieved if the technology supporting the solutions were
able to anticipate and resolve network and other IT problems before they occur.

LACK OF IT ASSET KNOWLEDGE. The proliferation of diverse products,
platforms and technologies within the typical enterprise IT infrastructure has
outpaced the ability of many companies to track their IT assets and monitor the
costs involved in supporting these complex systems. The failure to maintain an
accurate inventory of IT assets hinders the ability of the IT manager to respond
expeditiously to problems.

THE PEREGRINE SOLUTION

The Company's SERVICECENTER software offers capabilities that extend beyond
those of traditional help desk solutions to meet the operational and strategic
needs of today's enterprise. SERVICECENTER provides a fully 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 addition,
SERVICECENTER works across all major hardware platforms, network operating
systems and network protocols. SERVICECENTER extends traditional help desk
applications and integrates a broad base of applications and platforms to
support the Enterprise Service Desk.

The Company believes that SERVICECENTER is the only software solution that
effectively meets all of the IT management requirements of large enterprises
based on the following factors:

WIDE RANGE OF FUNCTIONALITY. The wide range of applications offered by
SERVICECENTER provides customers with the centralized service and asset
information required to optimize management of IT resources and achieve their
business objectives. In a published research report evaluating currently
available help desk and Enterprise Service Desk solutions, Gartner Group
recently evaluated the Company's SERVICECENTER as having more functionality than
competitive products, based on a weighted ranking of application functionality
criteria provided in a survey of IT professionals. Gartner Group is a leading
information technology advisor to businesses and offers its subscribers, in
addition to research and consulting services, evaluations of software products
and research and analysis of developments and trends in the information
technology industry.

HIGH LEVEL OF INTEGRATION. SERVICECENTER's six applications tightly
integrate with one another to enable comprehensive systems and network
management and support from a single console. In addition, SERVICECENTER can be
easily integrated with third party applications. SERVICECENTER's integration
features allow the IT manager to monitor events on assets ranging from servers
and PCs to bank ATMs and cash registers. These integration features also provide
the manager with greater access to information and data across the enterprise,
thus facilitating expedited problem identification and resolution.

BROAD PLATFORM SUPPORT. The Company believes that SERVICECENTER is unique
in its breadth of platform support. In addition to managing Windows NT and UNIX
environments, the Company's SERVICECENTER supports management of the MVS host
environment, preserving an organization's investment in its IT infrastructure.
SERVICECENTER also supports management of multiple PC LAN/WAN environments,
databases and network protocols and interfaces. These extensive support levels
significantly enhance the integration and functionality of the IT system and
enhance the productivity of the network user who has access to the Enterprise
Service Desk.

PROACTIVE SUPPORT. SERVICECENTER monitors and controls IT operations to
anticipate problems before they occur. The proactive orientation of
SERVICECENTER is enhanced by the Company's sophisticated intelligent agent
technology that automatically collects information from across the system. This
information is made available to the IT manager on a continuous basis to
identify and anticipate system trends and potential problems. With the Company's
SERVICECENTER, the manager is able to resolve problems before they occur, thus
keeping the system functioning efficiently and without interruption.

29
<PAGE>
STRATEGY

The Company's objective is to be the leading supplier of Enterprise Service
Desk solutions worldwide. To achieve this objective, the Company is pursuing the
following strategies:

MAINTAIN FUNCTIONAL AND TECHNICAL LEADERSHIP POSITION. The Company believes
that SERVICECENTER is the first software solution that meets the extensive
integration and functionality requirements of today's enterprise. The Company
believes that the performance features of SERVICECENTER are superior to those of
traditional help desk solutions, both in terms of breadth of functionality as
well as integration across applications and network platforms. The Company
intends to maintain a leadership position by continuing to develop applications
that integrate with the core suite of applications comprising SERVICECENTER and
by increasing the use of intelligent agent technology to enhance the proactive
benefits of the Company's products.

BROADEN TARGET MARKET TO GLOBAL 2000. Historically, the Company has
targeted the Fortune 500. As more complex IT systems have proliferated both in
the United States and internationally, the Company has expanded its sales and
marketing focus to include smaller organizations worldwide. The Company believes
that the companies within the Global 2000 represent a significant market
opportunity as the continuing evolution and complexity of open systems drive the
need for Enterprise Service Desk solutions.

EXPAND INTERNATIONAL SALES. The Company believes that international markets
present a substantial growth opportunity. The Company believes it is well
positioned to exploit this opportunity due to its already established market
presence outside of the United States, its commitment to multiple computing
platforms, including MVS, which is still growing in Europe, and its double-byte
character support, an early product differentiation for the Company in the
Pacific Rim. The Company has assembled an experienced senior management team to
lead its international expansion efforts. The Company has international sales
and support offices in London, Paris, Frankfurt and Amsterdam and an extensive
network of channel and distribution partners in Europe, Latin America and the
Pacific Rim.

LEVERAGE PRODUCT AUTHORSHIP MODEL. A key factor in the Company's product
development activities is its product authorship incentive program. This program
rewards the Company's developers individually with commissions based on the
market success of the software applications designed, written, marketed and
supported by them. As a result of this program, the Company is able to hire and
retain highly skilled developers who assume personal responsibility for the
design and delivery of their products. The Company believes that the proximity
of its product authors to the customer is critical, and its product authorship
program is designed to encourage developers to evaluate the effectiveness of a
product in the actual user environment.

LEVERAGE SALES MODEL. The Company will continue to employ a direct sales
model which minimizes the number of remote sales offices and focuses on
effective use of the telephone and network communications for product
demonstrations and product sales. The Company's experience in the use of this
model has enabled it to improve margins through reduced selling costs and
greater market coverage.

BUILD CUSTOMER PARTNERSHIPS. The Company has established several programs
which promote an active exchange of information between the Company and its
customers. These programs include monthly executive briefings in which customers
and prospects are invited to meet with the senior management of the Company,
frequent focus group meetings with customers to evaluate product positioning,
and regional user group meetings to provide a forum for the exchange of market
and product information. The Company believes that these programs are critical
to the continued success of the Company's products.

EXPAND CHANNELS AND THIRD PARTY RELATIONSHIPS. The Company believes it can
significantly leverage its sales and marketing resources in the Enterprise
Service Desk market by pursuing channel relationships with major distributors,
systems integrators and OEMs. The Company has already established a number of
channel relationships, both domestically and internationally, and will continue
to concentrate on the expansion of its indirect channels. In addition, the
Company continually evaluates complementary products of other vendors and will
seek to license or acquire products that enhance the Company's Enterprise
Service Desk software.

30
<PAGE>
CUSTOMERS

As of December 31, 1996, the Company had licensed SERVICECENTER to over 200
customers worldwide. The following is a representative list of the Company's
customers that have purchased at least $100,000 in licensed software and first
year maintenance over the period from April 1, 1995 to the present. No customer
accounted for more than 10% of the Company's total revenues in fiscal 1996 or
for the nine months ended December 31, 1996.

<TABLE>
<S> <C>
Alamo Rent-A-Car GE Capital
Ameritech J Sainsbury
Bankers Trust Mellon Bank
Bell Atlantic Merisel
Canadian Pacific Rail Mitsubishi Electric
Crestar Bank Northrop Grumman
debis Systemhaus Packard Bell NEC
Deere & Company Philip Morris International
Deutsche Lufthansa Procter & Gamble
Dow Corning Corporation Safeway Stores
Dresdner Bank Shell Oil Company
EDS International Texas Instruments
Edward Jones and Company The Depository Trust Company
Fidelity Investments United HealthCare
</TABLE>

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's multi-tier client/server
architecture provides a scalable solution for diverse support environments.
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 full-featured
fourth generation application language. List prices for SERVICECENTER range from
$25,000 to $220,000 per server and from $3,550 to $7,100 per end-user.

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," effectively 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.

31
<PAGE>
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.

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 a SNMP-based
management console, to determine network status, and to issue commands
instantly. STATIONVIEW and SERVERVIEW manage Novell NetWare, Microsoft Windows
NT, and Compaq Insight Manager-based servers and workstations from SNMP-based
management platforms. STATIONVIEW and SERVERVIEW provide network administrators
with a centralized solution for server and PC management.

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 believes that the proximity of its
product authors to the customer is critical, and its product authorship program
is designed to encourage the Company's developers to evaluate the effectiveness
of a product in the actual user environment. As a result of this program, the
Company is able to hire and retain highly skilled developers who assume personal
responsibility for the design and delivery of their products.

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 1996 and for
the nine months ended December 31, 1996 were $7.7 million and $4.4 million,
respectively, representing 33% and 18% of total

32
<PAGE>
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.

TECHNOLOGY

The Company's products take advantage of a number of standard, commercially
available technologies for relational database storage and retrieval and
client/server communications. The Company's products are designed to provide
comprehensive support for a wide range of implementations of the Enterprise
Service Desk within medium-sized organizations to very large enterprises. In
addition, the Company has developed a number of 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 for
maximum 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. For example, the
same application may interact with a user over the World Wide Web, an IBM 3270
terminal, an ASCII terminal or a fat GUI client without change to the
application. Similarly, the customer may switch from one third party database to
another without making any changes to the applications.

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 that is easy to use 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 completely new applications using the RAD
environment.

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<PAGE>
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
ensuring that all relevant data are transmitted between servers. 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
ensure that all data are transmitted as a discrete unit.

ADAPTORS. The Company provides a large number of 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 created
a number of 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 easily integrated
into the system.

INTELLIGENT AGENTS. The Company provides a number of intelligent agents
that gather and feed information to SERVICECENTER. The agents provide effective
automated inventory gathering and problem determination data that are beneficial
in problem resolution and proactive management of an IT environment. The agents
have the capability 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 Amsterdam. The Company utilizes a sales
model which minimizes the number of remote sales offices and focuses on
effective use of the 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 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. 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.

The Company believes there is a significant growth opportunity in the
international marketplace, due in part to the Company's already established
international presence and its commitment to multiple platforms including the
MVS platform, which is still growing in Europe, and to double-byte character
support that differentiates the Company's products in the Pacific Rim. In
addition, the international marketplace is still in the early stages of growth
and Enterprise Service Desk product offerings in this area are fragmented. To
take advantage of the international market opportunity, the Company has
assembled an experienced senior management team to manage the Company's
expansion into Europe, the Pacific Rim and Latin America. The Company intends to
concentrate its international expansion efforts on the rapid implementation of
an extensive network of distributors as well as growth of its direct sales
force.

34
<PAGE>
To support its growing sales organization, the Company in the last year has
devoted significant resources in restructuring and building a highly qualified
marketing organization. In the course of this restructuring, the marketing
organization has launched a new corporate marketing strategy, helped redefine
the Company's position within the marketplace, and internally emphasized 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. The
Company recently completed a series of product seminars in 30 cities in the
United States and abroad, which generated a significant amount of sales leads.
The Company plans to continue to expand its marketing organization to broaden
the Company's market presence.

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 broad range of consulting services. Basic consulting
services include analyzing user requirements and providing the customer with a
starter system that will quickly demonstrate significant 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 four different hands-on 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, and (iii) large
information technology and systems management companies such as IBM and Computer
Associates International, Inc. Because barriers to entry in the software market
are relatively low, the Company anticipates additional competition from other
established and emerging companies as the market for Enterprise Service Desk
applications expands. In addition, current and potential competitors have
established or may in the future establish cooperative relationships among
themselves or with third parties, 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

35
<PAGE>
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.

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 believes that its current facilities are adequate to meet its needs
through the next twelve months. An additional 13,310 square feet of leased space
at the San Diego headquarters is subleased to JMI, Inc., an affiliate of the
Company. See "Certain Transactions."

36
<PAGE>
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 Amsterdam for European sales, customer support, professional services and
administration.

EMPLOYEES

As of December 31, 1996, the Company employed 163 persons, including 65 in
sales and marketing, 27 in research and development, 14 in customer support, 25
in professional services, and 32 in finance and administration. Of the Company's
employees, 34 are located in Europe and the remainder are 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.

37
<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.................... 41 Vice President, Finance, Chief Financial Officer and Director
David G. Fisher.................... 39 Vice President, Marketing
Douglas F. Garn.................... 38 Vice President, North American Sales
William G. Holsten................. 60 Vice President, Professional Services
Richard T. Nelson.................. 37 Vice President, Secretary and General Counsel
Douglas S. Powanda................. 40 Vice President, International Sales
Charles H. Rudolph................. 44 Vice President, Research and Development
John J. Moores (1)................. 52 Chairman of the Board of Directors
Christopher A. Cole................ 42 Director
Richard A. Hosley II (1)........... 51 Director
Charles E. Noell III (1)(2)........ 45 Director
Norris van den Berg (2)............ 58 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.

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.

38
<PAGE>
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.

CHARLES H. RUDOLPH has served as the Company's Vice President, Research and
Development since December 1994. From June 1994 until December 1994, Mr. Rudolph
served as the Company's Director of Marketing. From April 1993 until June 1994,
he served as a director of Step-by-Step, Inc., a computer consulting and
training firm. From March 1990 until April 1993, Mr. Rudolph served as President
of Pacific Data Products, Inc., a manufacturer of printer enhancement products.
Mr. Rudolph holds a B.S. in Information Systems from King's College.

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.

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.

39
<PAGE>
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, L.P., a venture capital investment firm, 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.

40
<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 year ended March 31, 1996 by (i) each of the
individuals who served as Chief Executive Officer during such fiscal year and
(ii) the Company's next four most highly compensated executive officers whose
salary and bonus for such fiscal year exceeded $100,000 and who served as an
executive officer of the Company during such fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
--------------------------------
ANNUAL COMPENSATION (1) SECURITIES
----------------------------- RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS STOCK AWARDS OPTIONS (#) COMPENSATION
- ---------------------------- ----------- ---------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
CURRENT EXECUTIVE OFFICERS
Alan H. Hunt (2)............ $ 192,500 $ 130,557 $ 344,000(9) 400,000 $ 16,968(10)
President and Chief
Executive Officer
David A. Farley (3)......... 120,000 73,146 172,000(9) 200,000 100,321(11)
Vice President, Finance,
and Chief Financial
Officer
William G. Holsten (4)...... 90,000 201,574 -- 100,000 35,387(12)
Vice President,
Professional Services
Douglas S. Powanda.......... 106,000 179,127(7) -- -- 7,704(13)
Vice President,
International Sales
FORMER EXECUTIVE OFFICERS
James W. Butler (5)......... 101,654 91,955 -- -- 1,896,702(14)
President and Chief
Executive Officer
John W. Woodall (6)......... 119,962 49,901(8) -- 37,500 3,319(15)
President and Chief
Executive Officer
</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.

(2) Mr. Hunt became President and Chief Executive Officer of the Company in
October 1995. Mr. Hunt's salary and bonus include amounts paid to him as
President and Chief Executive Officer of XVT. The Company acquired XVT in
November 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 include amounts
paid to him as Vice President, Finance, and Chief Financial Officer of XVT.

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

(5) Mr. Butler resigned as President and Chief Executive Officer of the Company
in July 1995 and as Vice Chairman and member of the Board of Directors in
October 1995.

(6) Mr. Woodall served as President and Chief Executive Officer of the Company
from July 1995 until October 1995 and as Senior Vice President, Sales and
Marketing, from October 1995 to April 1996. Mr. Woodall is currently
employed as a Consulting Account Executive with the Company.

(7) Includes $54,737 of commission income.

(8) Includes $10,284 of commission income.

41
<PAGE>

(9) In November 1995, the Company issued Mr. Hunt an aggregate of 400,000
shares of Common Stock and Mr. Farley an aggregate of 200,000 shares of
Common Stock pursuant to restricted stock agreements in connection with
their initial employment. The price of such shares at the time of issuance
was $0.86 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, 1996, the price of the
Company's Common Stock was $0.86 per share, resulting in an aggregate value
as of such date for Mr. Hunt's restricted stock of $344,000 and an aggregate
value of Mr. Farley's restricted stock of $172,000. See "Employment
Agreements and Change in Control Arrangements" and "Certain Transactions."

(10) Consists of $238 in group life insurance excess premiums, $844 in matching
contributions under the Company's 401(k) plan and $15,886 in relocation
expenses.

(11) Consists of $84 in group life insurance excess premiums, $1,875 in matching
contributions under the Company's 401(k) plan and $98,362 in relocation
expenses.

(12) Consists of $509 in group life insurance excess premiums, $594 in matching
contributions under the Company's 401(k) plan and $34,284 in relocation
expenses.

(13) Consists of $248 in group life insurance excess premiums, $2,340 in
matching contributions under the Company's 401(k) plan and $5,116 in
relocation expenses.

(14) Includes (i) $15,419 in accrued vacation paid at the time of Mr. Butler's
resignation as an executive officer of the Company, (ii) $30,000 paid in
consulting fees following such resignation, (iii) $287 in group life
insurance excess premiums, (iv) $1,748 in matching contributions under the
Company's 401(k) plan, (v) $250,251 in compensation from the Company's
forgiveness of an unpaid advance of $120,000 and its payment of an
additional $130,251 to cover Mr. Butler's tax obligations arising from such
forgiveness, and (vi) approximately $1,598,997 in compensation relating to
the Company's forgiveness of an outstanding note and assumption of Mr.
Butler's obligations under a residential mortgage loan. See "Certain
Transactions."

(15) Consists of $634 in group life insurance excess premiums and $2,685 in
matching contributions under the Company's 401(k) plan.

42
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1996

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, 1996. All such options were awarded under the Company's 1994 Stock
Option Plan.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTIONS TERM (1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED FISCAL 1996 (2) SHARE (3)(4) DATE (5) 5% 10%
- -------------------------------- ----------- --------------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT EXECUTIVE OFFICERS
Alan H. Hunt.................... 400,000 32.8% $ 2.34 11/01/05 $ 588,645 $ 1,491,743
David A. Farley................. 200,000 16.4% 2.34 11/01/05 294,323 745,871
William G. Holsten.............. 100,000 8.2% 2.34 11/01/05 147,161 372,936
Douglas S. Powanda.............. -- -- -- -- -- --

FORMER EXECUTIVE OFFICERS
James W. Butler (6)............. -- -- -- -- -- --
John W. Woodall (7)............. 37,500 3.1% 2.34 7/01/05 55,186 139,851
</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 1,189,140 shares granted under the Company's
1994 Stock Option Plan and options to acquire 30,370 shares of the Company's
Common Stock granted to employees of XVT. The Company acquired XVT in
November 1995 and assumed certain outstanding XVT options. See "Certain
Transactions." All options granted to the Named Executive Officers during
fiscal 1996 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.

(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.

(6) Mr. Butler resigned as President and Chief Executive Officer in July 1995
and as Vice Chairman of the Board of Directors in October 1995.

(7) Mr. Woodall served as President and Chief Executive Officer of the Company
from July 1995 to October 1995 and as Senior Vice President, Sales and
Marketing, from October 1995 through April 1996. Mr. Woodall is currently
employed as a Consulting Account Executive with the Company.

43
<PAGE>
AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

No Named Executive Officer exercised any stock option during fiscal year
1996. The following table sets forth certain information regarding stock options
held as of March 31, 1996 by the Named Executive Officers.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT MARCH 31, 1996 MARCH 31, 1996 (1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CURRENT EXECUTIVE OFFICERS
Alan H. Hunt......................................... -- 400,000 $ -- $ 3,464,000
David A. Farley...................................... -- 200,000 -- 1,732,000
William G. Holsten................................... 236(2) 100,708(3) 1,595 870,786
Douglas S. Powanda................................... 37,500 52,500 339,750 469,650

FORMER EXECUTIVE OFFICERS
James W. Butler (4).................................. 825,000 -- 8,343,000 --
John W. Woodall (5).................................. -- 37,500 -- 324,750
</TABLE>

- --------------------------
(1) Based upon an initial public offering price of $11.00 per share minus the
exercise price.
(2) Includes an option to acquire 236 shares of the Company's Common Stock
assumed by the Company in connection with the Company's acquisition of XVT
in November 1995. See "Certain Transactions."
(3) Includes an option to acquire 708 shares of the Company's Common Stock
assumed by the Company in connection with the acquisition of XVT.
(4) Mr. Butler resigned as President and Chief Executive Officer of the Company
in July 1995 and as Vice Chairman of the Board of Directors in October 1995.
As of October 1995, Mr. Butler held vested options to acquire 825,000 shares
of Common Stock under the Nonqualified Stock Option Plan and 1991
Nonqualified Stock Option Plan. In connection with Mr. Butler's resignation
as an executive officer and director of the Company, the Company agreed to
extend the exercisability of such options through October 23, 2000. See
"Certain Transactions."
(5) Mr. Woodall served as President and Chief Executive Officer of the Company
from July 1995 to October 1995 and as Senior Vice President, Sales and
Marketing, from October 1995 through April 1996. Mr. Woodall is currently
employed as a Consulting Account Executive with the Company.

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 2,548,000 shares of Common Stock was reserved for issuance under the
1994 Plan at December 31, 1996. After December 31, 1996, in connection with this
offering, the Board of Directors and stockholders of the Company approved a
600,000 share increase in the number of shares reserved 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

44
<PAGE>
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 December 31, 1996, 100,000 shares of Common Stock had been issued upon
exercise of options outstanding under the Prior Plans and 52,500 shares of
Common Stock had been issued upon exercise of options outstanding under the 1994
Plan. Options to purchase 1,463,750 shares of Common Stock at a weighted average
exercise price of $1.06 were outstanding under the Prior Plans, and options to
purchase 2,351,100 shares of Common Stock at a weighted average exercise price
of $2.34 were outstanding under the 1994 Plan. In addition, options to acquire
15,558 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 of $4.24.

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 but will not become
effective until the date of the offering. A total of 250,000 shares of Common
Stock has been reserved for issuance under the 1997 Purchase Plan. 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,
respectively, except for the first such offering period which commences on the
first trading day on or after the effective date of this Offering and ends 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 for at least 20 hours per week and more
than five months in any calendar year; 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

45
<PAGE>
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, but it will not become effective
until the date of this offering. 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
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

46
<PAGE>
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.

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. 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."

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 has been accused of any wrongdoing in connection with the
investigation and the Staff 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.

47
<PAGE>
CERTAIN TRANSACTIONS

John J. Moores, the Chairman of the Company's Board of Directors and the
majority stockholder of the Company, is 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 December 31, 1996, the Company's outstanding obligations
under such credit line and term loan were $4.3 million and $1.7 million,
respectively. The Company intends to repay the outstanding balance of the
revolving line of credit with a portion of the proceeds from this offering. See
"Use of Proceeds," "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 stockholders of the Company, Mr. Moores and
JMI Equity Fund, L.P. ("JMI") have 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, and JMI became a stockholder of the Company in 1995. In March
1994, Mr. Moores made a loan to the Company in the amount of $400,000, which was
repaid in April 1994. Prior to becoming a stockholder of the Company, in
September 1995, JMI made a loan to the Company in the amount of $250,000, which
was repaid in November 1995. In July 1996, JMI 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, JMI loaned the Company $250,000, which was repaid in
February 1997. Mr. Moores is a limited partner of JMI, and Charles E. Noell III
and Norris van den Berg, directors of the Company, are general partners of JMI.
JMI holds, before giving effect to this offering, approximately 9.8% of the
Company's outstanding Common Stock.

The Company and JMI 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, Inc., an investment management company ("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 Mr. Noell 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 Jack Murphy 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. Mr. Moores is a
controlling stockholder of Skunkware, and Mr. Noell was president of Skunkware.
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

48
<PAGE>

Company issued approximately 2,018,808 shares of its Common Stock, which were
then valued for purposes 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. Mr. Moores, persons and entities affiliated with Mr.
Moores and JMI owned substantially all of XVT's outstanding capital stock, and
the shares of Common Stock issued by the Company in connection with the
acquisition included 1,579,436 shares issued to Mr. Moores and affiliated
persons and entities. Mr. Moores, JMI and affiliated entities 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 cancelled 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."

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."

49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 and as adjusted
to reflect the sale of the shares of Common Stock offered hereby 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 current directors and executive
officers of the Company as a group; and (v) each Selling Stockholder.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING (2) NUMBER OF AFTER OFFERING (2)
-------------------------- SHARES --------------------------
NAME AND ADDRESS (1) NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
JMI Equity Fund, L.P. (3)........................... 1,280,620 9.8% 84,000 1,196,620 7.9%
12680 High Bluff Drive
San Diego, CA 92130
John J. Moores (4).................................. 10,830,404 83.2 706,550 10,123,854 67.0
Charles E. Noell III (5)............................ 1,325,620 10.1 84,000 1,241,620 8.2
Norris van den Berg (6)............................. 1,325,620 10.1 84,000 1,241,620 8.2
James W. Butler (7)................................. 825,000 6.0 55,000 770,000 4.8
Christopher A. Cole (8)............................. 630,821 4.8 35,000 595,821 3.9
Alan H. Hunt (9).................................... 525,000 4.0 -- 525,000 3.4
David A. Farley (10)................................ 411,908 3.1 -- 411,908 2.7
Douglas S. Powanda (11)............................. 97,500 * -- 97,500 *
Richard A. Hosley II (12)........................... 45,000 * -- 45,000 *
John W. Woodall (13)................................ 37,500 * -- 37,500 *
William G. Holsten (14)............................. 32,194 * -- 32,194 *
All current executives officers and directors
as a group (12 persons) (15)...................... 12,740,327 93.3 781,550 11,958,777 75.9

OTHER SELLING STOCKHOLDERS
- ----------------------------------------------------
Robert Ashton....................................... 237,000 1.8 25,000 212,000 1.4
Marc Rochkind....................................... 236,632 1.8 16,000 220,632 1.5
Charles H. Rudolph (16)............................. 86,250 * 40,000 46,250 *
Donald Odom (17).................................... 84,374 * 6,000 78,374 *
Norris Merritt (18)................................. 71,450 * 15,000 56,450 *
Heath Dylan Lubojasky 1990 Trust (19)............... 11,500 * 725 10,775 *
Kiley Diane Lubojasky 1990 Trust (19)............... 11,500 * 725 10,775 *
</TABLE>

- --------------------------
* Less than 1%.
(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 13,020,019 shares of Common
Stock outstanding as of December 31, 1996 and 15,120,019 shares immediately
following the completion of this offering, together with applicable options
for such shareholder. 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 December 31,
1996 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) JMI Equity Fund, L.P. has granted the underwriters an option, solely to
cover over-allotments, to acquire up to an additional 48,500 shares of
Common Stock at the initial public offering price for a period of thirty
days after the date of this Prospectus.

50
<PAGE>

(4) Includes 1,280,620 shares of Common Stock held by JMI Equity Fund, L.P. and
3,753,816 Shares held by Mr. Moores as trustee under various trusts,
substantially all of which were established for members of Mr. Moores's
family. Of the 706,550 shares being sold by Mr. Moores in this offering,
384,000 are being sold by Mr. Moores individually, 84,000 are being sold by
JMI Equity Fund, L.P. and 238,550 are being sold by trusts for which Mr.
Moores serves as trustee. Mr. Moores is a limited partner of JMI Equity
Fund, L.P. and Chairman of the Company's Board of Directors. Mr. Moores has
granted the underwriters an option, solely to cover over-allotments, to
acquire up to an additional 221,500 shares of Common Stock, and trusts for
which Mr. Moores serves as trustee have granted the underwriters
over-allotment options to acquire up to an additional 139,150 shares of
Common Stock, all at the initial public offering price for a period of
thirty days after the date of this Prospectus. JMI Equity Fund, L.P. has
granted the underwriters an option, solely to cover over-allotments, to
acquire up to an additional 48,500 shares of Common Stock at the initial
public offering price for a period of 30 days after the date of this
Prospectus.

(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 December 31, 1996 and 1,280,620 shares of Common Stock
held by JMI Equity Fund, L.P. Mr. Noell is a director of the Company and a
General Partner of JMI Equity Fund, L.P. Mr. Noell disclaims beneficial
ownership of all shares held by JMI Equity Fund, L.P. except to the extent
of his pecuniary interest therein. All shares indicated as being sold by Mr.
Noell are being sold by JMI Equity Fund, L.P. JMI Equity Fund, L.P. has
granted the underwriters an option, solely to cover over-allotments, to
acquire up to an additional 48,500 shares of Common Stock at the initial
public offering price for a period of 30 days after the date of this
Prospectus.

(6) 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 December 31, 1996 and 1,280,620 shares of Common Stock
held by JMI Equity Fund, L.P. Mr. van den Berg is a director of the Company
and a General Partner of JMI Equity Fund, L.P. Mr. van den Berg disclaims
beneficial ownership of all shares held by JMI Equity Fund, L.P. except to
the extent of his pecuniary interest therein. All shares indicated as being
sold by Mr. van den Berg are being sold by JMI Equity Fund, L.P. JMI Equity
Fund, L.P. has granted the underwriters an option, solely to cover
over-allotments, to acquire up to an additional 48,500 shares of Common
Stock at the initial public offering price for a period of 30 days after the
date of this Prospectus.

(7) Includes 825,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996, of which options to acquire
55,000 shares will be exercised for sale in connection with this offering.
Mr. Butler is the former President and Chief Executive Officer of the
Company.

(8) Includes 104,078 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within 60
days of December 31, 1996. Mr. Cole is a member of the Company's Board of
Directors. Mr. Cole has granted the underwriters an option, solely to cover
over-allotments, to acquire up to an additional 20,000 shares of Common
Stock at the initial public offering price for a period of thirty days after
the date of this Prospectus.

(9) Includes 125,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996 and 400,000 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."

(10) Includes 62,500 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996 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."

(11) Includes 97,500 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996. Mr. Powanda is the
Company's Vice President, International Sales. Mr. Powanda has granted the
underwriters an option, solely to cover over-allotments, to acquire at the
initial public offering price for a period of thirty days after the date of
this Prospectus up to 20,000 shares of Common Stock to be issued upon
exercise of outstanding options held by Mr. Powanda.

(12) 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 December 31, 1996. Mr. Hosley is a member of
the Company's Board of Directors.

(13) Includes 37,500 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996. Mr. Woodall was formerly
the Company's President and Chief Executive Officer and is now a Consulting
Account Executive with the Company.

(14) Includes 32,194 shares of Common Stock issuable upon exercised outstanding
stock options which are presently exercisable or will become exercisable
within 60 days of December 31, 1996. Mr. Holsten is the Company's Vice
President, Professional Services.

(15) Includes 633,772 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996, of which options to acquire
40,000 shares will be exercised for sale in connection with this offering.

51
<PAGE>

(16) Includes 86,250 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996, of which options to acquire
40,000 shares will be exercised for sale in connection with this offering.
Mr. Rudolph is the Company's Vice President, Research and Development.

(17) Includes 84,374 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996, of which options to acquire
6,000 shares will be exercised for sale in connection with this offering.
Mr. Odom is the Director of Customer Relations for the Company.

(18) Includes 71,450 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of December 31, 1996, of which options to acquire
15,000 shares will be exercised for sale in connection with this offering.
Mr. Merritt is a product author with the Company.

(19) Such Selling Stockholder has granted the underwriters an option, solely to
cover over-allotments, to acquire up to an additional 425 shares of Common
Stock at the initial public offering price for a period of thirty days after
the date of this Prospectus.

52
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the completion of this offering, the Company will be 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. Immediately after the
completion of this offering, the Company estimates there will be an aggregate of
15,120,019 shares of Common Stock outstanding, 3,830,408 shares of Common Stock
will be issuable upon exercise of outstanding options and no shares of Preferred
Stock will be 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

Effective upon the closing of this offering, the Company will be 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.

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

53
<PAGE>
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 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.

54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock and
there is no assurance that a significant public market for the Common Stock will
develop or be sustained after this offering. Sales of substantial amounts of
Common Stock in the public market could adversely affect the market price of the
Common Stock and could impair the Company's future ability to raise capital
through the sale of its equity securities.

Upon completion of this offering, the Company will have outstanding
15,120,019 shares of Common Stock based upon shares outstanding as of December
31, 1996. In addition to the 3,000,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), as of the
effective date of the Registration Statement (the "Effective Date"), there will
be 12,120,019 shares of Common Stock outstanding, all of which are "restricted"
shares (the "Restricted Shares") under the Securities Act of 1933, as amended
(the "Securities Act"). No Restricted Shares will be eligible for sale
immediately following the Effective Date in reliance on Rule 144(k) of the
Securities Act. Beginning 180 days after the Effective Date, approximately
10,200,000 additional Restricted Shares of Common Stock subject to lock-up
agreements between the Underwriters and certain stockholders, including officers
and directors, will become eligible for sale in the public market (unless the
Underwriters elect, in their sole discretion, the earlier release of such shares
from the lock-up agreement). After such 180th day, approximately 1,900,000
additional Restricted Shares will become available for sale at various times
pursuant to Rule 144. Of the approximately 10,200,000 Restricted Shares that
will become available for sale in the public market beginning 180 days after the
Effective Date, approximately 9,700,000 shares will be subject to certain volume
and other resale restrictions pursuant to Rule 144. The Representatives of the
Underwriters may release the shares subject to the lock-up agreements in whole
or in part at any time with or without notice.

The foregoing analysis reflects recent amendments, effective April 29, 1997,
of certain provisions of Rule 144 under the Securities Act. Such amendments
resulted in the shortening of the Rule 144 holding period from two years to one
year and the shortening of the Rule 144(k) holding period from three years to
two years.

OPTIONS

On December 31, 1996, options to purchase 3,830,408 shares were outstanding,
of which options to purchase approximately 1,977,242 shares were then
exercisable. See "Management--Stock Plans." The Company intends to file, within
180 days after the date of this prospectus, 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. Beginning 180 days after the
Effective Date, approximately 2,462,250 shares issuable upon the exercise of
vested options will become eligible for sale.

In general, under Rule 144 as recently amended, effective April 29, 1997, an
affiliate of the Company, or person (or persons whose shares are aggregated) who
has beneficially owned Restricted Shares 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 151,200 shares immediately after this offering) 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

55
<PAGE>
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.

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.

LOCK-UP AGREEMENTS

All officers and directors and certain holders of Common Stock and options
to purchase Common Stock have agreed pursuant to certain "lock-up" agreements
that they will not offer, sell, contract to sell, pledge, grant any option to
sell, or otherwise dispose of, directly or indirectly, any shares of Common
Stock or securities convertible or exchangeable for Common Stock, or warrants or
other rights to purchase Common Stock for a period of 180 days after the
transfer or date of this Prospectus without the prior written consent of UBS
Securities LLC.

56
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC and
Oppenheimer & Co., Inc. are acting as representatives (the "Representatives"),
have agreed to purchase from the Company and the Selling Stockholders the
following respective number of shares of Common Stock:

<TABLE>
<CAPTION>
TOTAL NUMBER
UNDERWRITERS OF SHARES
- ----------------------------------------------------------------------------------------- ------------
<S> <C>
UBS Securities LLC.......................................................................
Oppenheimer & Co., Inc...................................................................
------------
Total................................................................................ 3,000,000
------------
------------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligations is such that they are committed to purchase all
shares of Common Stock offered hereby if any of such shares are purchased.

The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock directly to
the public at the offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a commission not in excess of $ per
share. The Underwriters may allow and such dealers may reallow a concession not
in excess of $ per share to certain other dealers. After the public offering
of the shares of Common Stock, the offering price and other selling terms may be
changed by the Underwriters.

The Representatives have further advised the Company that, pursuant to
Regulation M under the Securities Act, certain persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of
the Underwriters for the purpose of fixing or maintaining the price of the
Common Stock. A "syndicate covering transaction" is the bid for or the purchase
of the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid" is
an arrangement permitting the Representatives to reclaim the selling concession
otherwise accruing to an Underwriter or syndicate member in connection with the
offering if the Common Stock originally sold by such Underwriter or syndicate
member is purchased by the Representatives in a syndicate covering transaction
and has therefore not been effectively placed by such Underwriter or syndicate
member. The Representatives have advised the Company that such transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

Certain of the Selling Stockholders have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 450,000 additional shares of Common Stock to cover
over-allotments, if any, at the public offering price set forth on the cover
page of this Prospectus, less the underwriting discounts and commissions. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
Such Selling Stockholders will be obligated, pursuant to the option, to sell
such shares to the Underwriters.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.

57
<PAGE>
All officers, directors and significant stockholders of the Company and
certain other Selling Stockholders of the Company who beneficially own or have
dispositive power over substantially all of the shares of Common Stock
outstanding prior to this offering, have agreed that they will not, without the
prior written consent of UBS Securities LLC, offer, sell, contract to sell,
pledge, grant any option to sell or otherwise dispose of shares of Common Stock
or securities convertible, or exchangeable for, Common Stock, or warrants or
other rights to purchase shares of Common Stock, whether now owned or hereafter
acquired, for a period of 180 days after the date of this Prospectus. The
Company has agreed that it will not, without the prior written consent of UBS
Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock,
for a period of 180 days after the date of this Prospectus, except that the
Company may grant additional options and issue stock under its stock option
plans or issue shares of Common Stock upon the exercise of outstanding stock
options.

The Representatives have advised the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereof.

The Underwriters have reserved for sale, at the initial public offering
price, a limited number of the shares of Common Stock offered hereby for certain
customers, vendors and employees of the Company and certain other individuals
and entities who have expressed an interest in purchasing such shares of Common
Stock in the offering. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares not so purchased will be offered by the Underwriters to the
general public on the same basis as other shares offered hereby.

Prior to this offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market and economic conditions, are certain financial information of
the Company, the history of, and the prospects for, the Company and the industry
in which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present stage of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to those of the Company. The initial public
offering price set forth on the cover page of this Prospectus should not,
however, be considered an indication of the actual value of the Common Stock.
Such price is subject to change as a result of market conditions and other
factors. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to this offering at or above the initial offering price.

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. Cooley Godward LLP, San Diego, California, is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the shares of Common Stock offered hereby.

EXPERTS

The consolidated financial statements as of March 31, 1996 and December 31,
1996 and for the two years in the period ended March 31, 1996 and the nine
months ended December 31, 1996 included in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.

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.

58
<PAGE>
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.

59
<PAGE>
PEREGRINE SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Report of Independent Public Accountants.................................................................... F-2

Consolidated Balance Sheets--March 31, 1996 and December 31, 1996........................................... F-3

Consolidated Statements of Operations--Years ended March 31, 1995 and 1996 and Nine Months ended December
31, 1996.................................................................................................. F-4

Consolidated Statements of Stockholders' Deficit--Years ended March 31, 1995 and 1996 and Nine Months ended
December 31, 1996......................................................................................... F-5

Consolidated Statements of Cash Flows--Years ended March 31, 1995 and 1996 and Nine Months ended December
31, 1996.................................................................................................. F-6

Notes to Consolidated Financial Statements.................................................................. F-7
</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
December 31, 1996, and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the two years in the period
ended March 31, 1996, and for the nine months ended December 31,1996. 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 December 31, 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended March 31, 1996 and for the nine months ended December 31, 1996, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Diego, California
February 6, 1997

F-2
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash............................................................................ $ 437,000 $ 1,271,000
Accounts receivable, net of allowance for doubtful accounts of $130,000 and
$133,000, respectively........................................................ 6,255,000 9,848,000
Financed receivables............................................................ -- 1,814,000
Other current assets............................................................ 1,461,000 687,000
-------------- --------------
Total current assets........................................................ 8,153,000 13,620,000
Property and Equipment, net....................................................... 5,349,000 4,547,000
Other Assets...................................................................... 315,000 867,000
-------------- --------------
$ 13,817,000 $ 19,034,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank line of credit............................................................. $ 2,829,000 $ 4,314,000
Accounts payable................................................................ 1,415,000 1,018,000
Accrued expenses................................................................ 3,366,000 4,971,000
Deferred revenue................................................................ 7,568,000 8,917,000
Current portion of long-term debt............................................... 537,000 772,000
Current portion of capital lease obligation..................................... 407,000 428,000
Net liabilities of discontinued operation....................................... 1,473,000 500,000
-------------- --------------
Total current liabilities..................................................... 17,595,000 20,920,000
Capital Lease Obligation, net of current portion.................................. 332,000 42,000
Long-Term Debt, net of current portion............................................ 1,842,000 1,511,000
Deferred Revenue, net of current portion.......................................... 2,243,000 2,748,000
Other............................................................................. 255,000 166,000
-------------- --------------
Total liabilities........................................................... 22,267,000 25,387,000
-------------- --------------
Commitments and Contingencies
Stockholders' Deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued
or outstanding................................................................
Common stock, $0.001 par value; 50,000,000 shares authorized; 12,898,000 and
12,904,000 shares issued and outstanding, respectively........................ 13,000 13,000
Additional paid-in capital...................................................... 13,525,000 13,540,000
Accumulated deficit............................................................. (21,609,000) (19,245,000)
Unearned portion of restricted stock compensation............................... (516,000) (473,000)
Cumulative translation adjustment............................................... 137,000 (188,000)
-------------- --------------
Total stockholders' deficit................................................. (8,450,000) (6,353,000)
-------------- --------------
$ 13,817,000 $ 19,034,000
-------------- --------------
-------------- --------------
</TABLE>

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

F-3
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------ ------------------------------
1995 1996 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Licenses...................................... $ 9,137,000 $ 11,642,000 $ 8,791,000 $ 13,932,000
Maintenance................................... 7,918,000 8,967,000 6,765,000 7,659,000
Services...................................... 2,573,000 3,157,000 2,082,000 2,936,000
-------------- -------------- -------------- --------------
Total revenues.............................. 19,628,000 23,766,000 17,638,000 24,527,000
-------------- -------------- -------------- --------------
Cost of Revenues:
Cost of licenses.............................. 393,000 415,000 320,000 155,000
Cost of maintenance and services.............. 3,573,000 3,526,000 2,668,000 3,423,000
-------------- -------------- -------------- --------------
Total cost of revenues...................... 3,966,000 3,941,000 2,988,000 3,578,000
-------------- -------------- -------------- --------------
Gross profit................................ 15,662,000 19,825,000 14,650,000 20,949,000
-------------- -------------- -------------- --------------
Operating Expenses:
Sales and marketing........................... 9,549,000 11,820,000 8,392,000 11,217,000
Research and development...................... 7,089,000 7,742,000 6,166,000 4,368,000
General and administrative.................... 2,943,000 4,529,000 2,971,000 2,634,000
-------------- -------------- -------------- --------------
Total operating expenses.................... 19,581,000 24,091,000 17,529,000 18,219,000
-------------- -------------- -------------- --------------
Operating income (loss)..................... (3,919,000) (4,266,000) (2,879,000) 2,730,000
Interest expense................................ (112,000) (389,000) (275,000) (337,000)
Other income (expense).......................... 4,082,000 103,000 101,000 (29,000)
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before
income taxes.................................. 51,000 (4,552,000) (3,053,000) 2,364,000
Provision for income taxes...................... -- -- -- --
-------------- -------------- -------------- --------------
Income (loss) from continuing operations........ 51,000 (4,552,000) (3,053,000) 2,364,000
-------------- -------------- -------------- --------------
Loss from discontinued business:
Loss from operations.......................... -- (781,000) (683,000) --
Loss on disposal.............................. -- (1,078,000) -- --
-------------- -------------- -------------- --------------
Loss from discontinued business................. -- (1,859,000) (683,000) --
-------------- -------------- -------------- --------------
Net income (loss)........................... $ 51,000 $ (6,411,000) $ (3,736,000) $ 2,364,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income (loss) per share:
Income (loss) from continuing operations $ -- $ (0.37) $ (0.25) $ 0.16
Loss from discontinued operations............. -- (0.15) (0.06) --
-------------- -------------- -------------- --------------
Net income (loss)........................... $ -- $ (0.52) $ (0.31) $ 0.16
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average common and common equivalent
shares outstanding............................ 12,250,000 12,331,000 11,924,000 14,438,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>

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

F-4
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
UNEARNED
PORTION OF
NUMBER OF ADDITIONAL RESTRICTED CUMULATIVE
SHARES COMMON PAID-IN ACCUMULATED STOCK TRANSLATION
OUTSTANDING STOCK CAPITAL DEFICIT COMPENSATION ADJUSTMENT
----------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994........................... 10,012,000 $ 10,000 $ 8,519,000 $(11,324,000) $ -- $ (64,000)
Net income...................................... -- -- -- 51,000 -- --
Issuance of common stock........................ 225,000 -- 525,000 -- -- --
Equity adjustment from foreign currency
translation................................... -- -- -- -- -- 86,000
----------- ----------- ------------ ------------ ------------ -----------
Balance, March 31, 1995........................... 10,237,000 10,000 9,044,000 (11,273,000) -- 22,000
Net loss........................................ -- -- -- (6,411,000) -- --
Issuance of shares for XVT...................... 2,018,000 2,000 3,923,000 (3,925,000) -- --
Issuance of common stock........................ 43,000 -- 43,000 -- -- --
Restricted stock shares granted................. 600,000 1,000 515,000 -- (516,000) --
Equity adjustment from foreign currency
translation................................... -- -- -- -- -- 115,000
----------- ----------- ------------ ------------ ------------ -----------
Balance, March 31, 1996........................... 12,898,000 13,000 13,525,000 (21,609,000) (516,000) 137,000
Net income...................................... -- -- -- 2,364,000 -- --
Issuance of common stock........................ 6,000 -- 15,000 -- -- --
Compensation expense related to restricted
stock......................................... -- -- -- -- 43,000 --
Equity adjustment from foreign currency
translation................................... -- -- -- -- -- (325,000)
----------- ----------- ------------ ------------ ------------ -----------
Balance, December 31, 1996........................ 12,904,000 $ 13,000 $ 13,540,000 $(19,245,000) $ (473,000) $(188,000)
----------- ----------- ------------ ------------ ------------ -----------
----------- ----------- ------------ ------------ ------------ -----------

TOTAL
STOCKHOLDERS'
DEFICIT
------------
<S> <C>
Balance, March 31, 1994........................... $(2,859,000)
Net income...................................... 51,000
Issuance of common stock........................ 525,000
Equity adjustment from foreign currency
translation................................... 86,000
------------
Balance, March 31, 1995........................... (2,197,000)
Net loss........................................ (6,411,000)
Issuance of shares for XVT...................... --
Issuance of common stock........................ 43,000
Restricted stock shares granted................. --
Equity adjustment from foreign currency
translation................................... 115,000
------------
Balance, March 31, 1996........................... (8,450,000)
Net income...................................... 2,364,000
Issuance of common stock........................ 15,000
Compensation expense related to restricted
stock......................................... 43,000
Equity adjustment from foreign currency
translation................................... (325,000)
------------
Balance, December 31, 1996........................ $(6,353,000)
------------
------------
</TABLE>

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

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ------------------------
---------------------- DECEMBER DECEMBER
MARCH 31, MARCH 31, 31, 31,
1995 1996 1995 1996
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).................................. $ 51,000 $(6,411,000) ($3,736,000) $2,364,000
Adjustments to reconcile net income (loss) to net
cash, excluding effects of acquisitions, provided
by (used in) operating activities:
Depreciation and amortization...................... 952,000 1,540,000 1,033,000 1,227,000
Loss from discontinued business.................. -- 1,859,000 683,000 --
Gain on sale of fixed assets..................... -- (93,000) -- --
Gain on sale of product line..................... (4,025,000) -- -- --
Increase (decrease) in cash resulting from
changes in:
Accounts receivable............................ (305,000) (2,416,000) (1,577,000) (5,407,000)
Other current assets........................... (480,000) 311,000 (325,000) 74,000
Accounts payable............................... 744,000 714,000 337,000 (397,000)
Accrued expenses............................... 101,000 2,209,000 1,761,000 1,605,000
Deferred revenue............................... 1,282,000 2,364,000 2,818,000 1,854,000
Other.......................................... 113,000 507,000 (252,000) (641,000)
---------- ---------- ----------- -----------
(1,567,000) 584,000 742,000 679,000
---------- ---------- ----------- -----------
Net cash used by discontinued business............. -- (738,000) (646,000) (973,000)
---------- ---------- ----------- -----------
Total cash provided by (used in) operating
activities................................. (1,567,000) (154,000) 96,000 (294,000)
---------- ---------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................ (1,775,000) (3,516,000) (2,582,000) (382,000)
Proceeds from sale of product line................. 2,925,000 -- -- 700,000
Proceeds from sale of subsidiary and fixed assets,
net.............................................. -- 653,000 -- --
Acquisition of certain business assets, net of cash
acquired......................................... (304,000) -- -- --
---------- ---------- ----------- -----------
Net cash provided by (used in) investing
activities................................. 846,000 (2,863,000) (2,582,000) 318,000
---------- ---------- ----------- -----------
Cash flows from financing activities:
Proceeds from bank line of credit, net............. 657,000 1,514,000 683,000 1,485,000
Proceeds from long-term debt....................... -- 3,508,000 3,508,000 287,000
Repayments of long-term debt....................... (463,000) (1,354,000) (143,000) (383,000)
Issuance of common stock........................... -- 15,000 -- 15,000
Principal payments under capital lease
obligation....................................... (89,000) (401,000) (342,000) (269,000)
---------- ---------- ----------- -----------
Net cash provided by financing activities.... 105,000 3,282,000 3,706,000 1,135,000
---------- ---------- ----------- -----------
Effect of exchange rate changes on cash.............. 86,000 115,000 (539,000) (325,000)
---------- ---------- ----------- -----------
Net increase (decrease) in cash...................... (530,000) 380,000 681,000 834,000
Cash, beginning of year.............................. 587,000 57,000 57,000 437,000
---------- ---------- ----------- -----------
Cash, end of year.................................... $ 57,000 $ 437,000 $ 738,000 $1,271,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest......................................... $ 131,000 $ 389,000 $ 259,000 $ 337,000
Income taxes..................................... $ 99,000 $ 36,000 $ -- $ --
Supplemental Disclosure of Non Cash Investing and
Financing Activities:
Stock issued for acquisition....................... $ -- $3,925,000 $ -- $ --
Stock issued as compensation....................... $ -- $ 28,000 $ -- $ --
Common stock issued for acquisition of business
assets........................................... $ 525,000 $ -- $ -- $ --
Liabilities assumed in acquisition of certain
business assets.................................. $ 103,000 $ -- $ -- $ --
Fixed assets acquired under capital lease.......... $1,229,000 $ -- $ -- $ --
</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 THE NINE MONTHS ENDED
DECEMBER 31, 1995 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 statements of operations and cash flows and related
notes for the nine months ended December 31, 1995 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 period 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 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 THE NINE MONTHS ENDED
DECEMBER 31, 1995 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 affect 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.

FINANCED RECEIVABLES

Financed receivables represent trade accounts receivable for which the
original payment terms extend beyond the Company's customary net 30 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.

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-8
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 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.

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 in the period
ended March 31, 1996 and during the nine months ended December 31, 1996 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' 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. 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

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.

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. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common and common equivalent shares
issued by the Company during the twelve months preceding the initial filing of
the Company's initial public offering, using

F-9
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the treasury stock method and the midpoint of the initial filing range, have
been included in the calculation of Net income (loss) per share for all periods
presented.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation", which provides companies the option to account for employee stock
compensation awards based on their estimated fair value at the date of grant
resulting in a charge to operations in the period the awards are granted or to
present pro forma footnote disclosure describing the effect on the Company's
operations and per share data. SFAS No. 123 is effective for financial
statements with fiscal years beginning after December 15, 1995. As permitted,
the Company has not adopted the recognition and measurement aspects of SFAS No.
123 but has adopted the disclosure requirements in the consolidated financial
statements as of April 1, 1996.

In June 1996, the American Institute of Certified Public Accountants issued
"Proposed Statement of Position: Software Revenue Recognition," which if
adopted, will be effective for years beginning after December 31, 1996. The
Company has reviewed the proposed statement of position and believes its
adoption will not have a material effect on the Company's financial position or
results of operations.

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. 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 THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

2. DISCONTINUED OPERATION (CONTINUED)

The operating results of the discontinued operation are summarized as
follows:

<TABLE>
<CAPTION>
JUNE 1, 1995- APRIL 1,
JANUARY 31, 1995-
1996 MAY 31, 1995
--------------- -------------

<S> <C> <C>
Revenues.................................................... $ 8,483,000 $ 1,901,215
--------------- -------------
--------------- -------------
Net loss.................................................... $ (781,000) $ (382,836)
--------------- -------------
--------------- -------------
</TABLE>

Net loss from discontinued operations for the period April 1, 1995-May 31,
1995 is not included in the loss from discontinued operations in the
accompanying statement of operations as the loss occurred prior to the
attainment of control of XVT by the Company's principal shareholder.

The net liabilities of the discontinued operation as of March 31, 1996 and
December 31, 1996 are summarized as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
------------- ------------
<S> <C> <C>
Current assets, primarily accounts receivable................. $ 1,600,000 $ --
Non current assets............................................ 1,053,000 --
Current liabilities, primarily deferred revenue and accrued
expenses.................................................... 4,126,000 500,000
------------- ------------
Net liabilities of discontinued operation..................... $ 1,473,000 $ 500,000
------------- ------------
------------- ------------
</TABLE>

3. BALANCE SHEET COMPONENTS

Other current assets consist of the following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
------------- ------------
<S> <C> <C>
Receivable from sale of product line (Note 4)................. $ 950,000 $ 250,000
Prepaid expenses and other.................................... 393,000 312,000
Employee advances............................................. 118,000 125,000
------------- ------------
$ 1,461,000 $ 687,000
------------- ------------
------------- ------------
</TABLE>

F-11
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

3. BALANCE SHEET COMPONENTS (CONTINUED)
Property and equipment consists of the following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
-------------- --------------
<S> <C> <C>
Furniture and equipment..................................... $ 6,835,000 $ 7,130,000
Leasehold improvements...................................... 1,881,000 1,974,000
-------------- --------------
8,716,000 9,104,000
Less accumulated depreciation............................... (3,367,000) (4,557,000)
-------------- --------------
$ 5,349,000 $ 4,547,000
-------------- --------------
-------------- --------------
</TABLE>

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
------------- -------------
<S> <C> <C>
Salaries and benefits......................................... $ 888,000 $ 557,000
Commissions................................................... 834,000 1,884,000
Deferred rent................................................. 290,000 336,000
Legal......................................................... 305,000 245,000
Taxes......................................................... 227,000 473,000
Other......................................................... 822,000 1,476,000
------------- -------------
$ 3,366,000 $ 4,971,000
------------- -------------
------------- -------------
</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 December 31, 1996 were
$400,000 and at March 31, 1996 were $1,100,000. The remaining balance at
December 31, 1996 is due as follows: $250,000 in fiscal 1997 and $150,000 in
fiscal 1998. See Note 3.

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, 1996, the Company had a line of credit with a bank which
provided for maximum borrowings of $4,000,000. In December 1996, the Company and
the bank amended the line of credit to

F-12
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

6. DEBT (CONTINUED)
increase the maximum available commitment to $4,500,000 and to extend the
maturity date to November 30, 1997. The maximum available commitment is reduced
by outstanding letters of credit ($128,500 at December 31, 1996). Borrowings
under the agreement bear interest at the bank's prime rate (8.25% at December
31, 1996). During the nine months ended December 31, 1996 the weighted average
interest rate under the agreement was approximately 8.5%, 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.

LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
------------- -------------
<S> <C> <C>
Note payable to bank. Note secured by trade receivables, fixed assets and guaranteed
by the majority stockholder. Interest at prime (8.25% as of December 31, 1996).
Equal monthly installments of principal of $37,000 plus interest, due November 13,
2000.............................................................................. $ 2,017,000 $ 1,723,000
Note payable to lessor. Unsecured; interest at 8%. Monthly payments of principal and
interest of $4,200 through November 2003.......................................... 285,000 259,000
Advance from affiliate.............................................................. -- 250,000
Other............................................................................... 77,000 51,000
------------- -------------
2,379,000 2,283,000
Less current portion................................................................ (537,000) (772,000)
------------- -------------
$ 1,842,000 $ 1,511,000
------------- -------------
------------- -------------
</TABLE>

Principal payments on long-term debt due as of March 31 are as follows:

<TABLE>
<S> <C>
January 1, 1997 - March 31, 1997.............................. $ 130,000
1998.......................................................... 759,000
1999.......................................................... 473,000
2000.......................................................... 476,000
2001.......................................................... 332,000
2002.......................................................... 113,000
----------
$2,283,000
----------
----------
</TABLE>

F-13
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 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:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 2,942,000 $ 1,644,000
Deferred maintenance revenue.............................. 1,158,000 1,148,000
Other..................................................... 603,000 884,000
-------------- --------------
4,703,000 3,676,000
Deferred tax liabilities:
Depreciation.............................................. (135,000) (295,000)
Deferred revenue.......................................... (440,000) (160,000)
-------------- --------------
4,128,000 3,221,000
Valuation allowance......................................... (4,128,000) (3,221,000)
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------
</TABLE>

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

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, ------------
--------------------------- DECEMBER 31,
1995 1996 1996
----------- -------------- ------------
<S> <C> <C> <C>
Federal statutory rate.......................... $ 31,000 $ (2,180,000) $ 805,000
State tax, net of federal benefit............... 5,000 (385,000) 145,000
Imputed interest................................ 85,000 75,000 114,000
Foreign losses (not benefited).................. 759,000 418,000 --
Other........................................... (27,000) 152,000 (157,000)
Change in valuation allowance................... (853,000) 1,920,000 (907,000)
----------- -------------- ------------
$ -- $ -- $ --
----------- -------------- ------------
----------- -------------- ------------
</TABLE>

As of December 31, 1996, the Company has net operating loss carryforwards of
approximately $1,100,000 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 December 31, 1996 the Company also has foreign net
operating loss carryforwards of approximately $3,700,000. See footnote 12 for
breakout of foreign and domestic components of operating income (loss).

A valuation allowance has been recorded to offset completely the carrying
value of the deferred tax asset due to the uncertainty surrounding its
realization, including a lack of earnings history and the variability of

F-14
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

7. INCOME TAXES (CONTINUED)
operating results. 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 the deferred tax
assets are realizable, the valuation allowance will be reduced.

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 year ended March 31, 1996 or
the nine months ended December 31, 1996. 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 and $1,961,000, in fiscal 1995 and 1996, and $1,471,000
and $1,559,000 for the nine months ended December 31,1995 and 1996,
respectively.

Future minimum lease payments for capital and operating leases, excluding
sublease income, at December 31, 1996 are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- -----------
<S> <C> <C>
January 1, 1997 - March 31, 1997................................ $ 340,000 $ 114,000
1998............................................................ 1,397,000 378,000
1999............................................................ 1,420,000 --
2000............................................................ 1,379,000 --
2001............................................................ 1,401,000 --
2002............................................................ 1,469,000 --
Thereafter...................................................... 1,538,000 --
------------- -----------
Total minimum lease payments................................ $ 8,944,000 492,000
-------------
-------------
Amount representing interest.................................... 22,000
-----------
$ 470,000
-----------
-----------
</TABLE>

F-15
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In January, 1995, the Company entered into a three year capital lease with a
8.2% interest rate for computer equipment. At December 31, 1996, $1,194,000 of
such leased equipment is included in property and equipment, net of accumulated
depreciation of $668,000.

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 nine months ended December 31, 1996. 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 purchased 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 and $600,000 for fiscal 1995 and 1996 and $602,000 and
$789,000 for the nine months ended December 31, 1995 and December 31, 1996,
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.

10. STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Company has authorized 2,000,000, $0.001 par value, undesignated
preferred shares, none of which were issued or outstanding at March 31, 1996 and
December 31, 1996. 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. See Note 13.

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 2,563,560 options under the 1994 Plan. Through December
31, 1996 the Company has granted options to purchase 536,250, 997,500, and
2,412,650 shares, respectively, under these plans. Under the Plans, the

F-16
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

10. STOCKHOLDERS' EQUITY (CONTINUED)
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.

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

<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 31, 1996 DECEMBER 31, 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) 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 2.37 830.4 2.34
Exercised............................ -- -- (30.0) 1.01 (6.6) 0.83
Forfeited............................ -- -- -- -- -- --
Expired.............................. (315.0) 0.51 (854.2) 1.18 (474.8) 1.34
--------- ----- --------- ----- --------- -----
Outstanding, end of year............. 3,041.2 $ 1.42 3,597.4 $ 1.79 3,946.4 $ 1.83
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Exercisable, end of year............. 1,481.2 $ 1.26 1,786.0 $ 1.34 2,093.2 $ 1.93
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted.................... $ -- $ -- $ --
----- ----- -----
----- ----- -----
</TABLE>

990,000 of the 3,946,400 options outstanding at December 31, 1996 have an
exercise price of $1.34. 2,397,100 of the options outstanding have an exercise
price of $2.34. 543,750 of the options outstanding have an exercise price of
$0.51. The remaining 15,550 options have an exercise price of $4.24.

Because the options awarded to date have been granted at significant
premiums, under the minimum value pricing model the options were determined to
have no value. As a result, had compensation cost for stock options granted
during the year ended March 31, 1996 and the nine months ended December 31, 1996
been determined consistent with SFAS No. 123, the Company's net income (loss)
and related per share amounts on a pro forma basis would be the same as reported
in the accompanying consolidated statements of operations for the year ended
March 31, 1996 and the nine months ended December 31, 1996.

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 the nine months ended
December 31, 1996: weighted average risk-free interest rate of 6.63 percent;
expected dividend yields of 0.00 percent; and an expected life of 10 years.

F-17
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

10. STOCKHOLDERS' EQUITY (CONTINUED)
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 $0.86 as determined by an independent
appraisal. 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.

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 and 1996, and the nine months ended December 31, 1995 and 1996, were
$170,000 and $203,000, $126,000 and $121,000, 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:

<TABLE>
<CAPTION>
UNITED
STATES EUROPE CONSOLIDATED
-------------- ------------- --------------
<S> <C> <C> <C>
Year ended March 31, 1995
Revenues........................................................ $ 16,216,000 $ 3,412,000 $ 19,628,000
Operating profit (loss)......................................... 481,000 (430,000) 51,000
Identifiable assets............................................. 6,855,000 2,932,000 9,787,000
Year ended March 31, 1996
Revenues........................................................ $ 16,818,000 $ 6,948,000 $ 23,766,000
Operating profit (loss)......................................... (5,010,000) 458,000 (4,552,000)
Identifiable assets............................................. 9,427,000 4,390,000 13,817,000
Nine months ended December 31, 1995
Revenues........................................................ $ 13,047,000 $ 4,591,000 $ 17,638,000
Operating profit (loss)......................................... (3,397,000) 344,000 (3,053,000)
Identifiable assets............................................. 14,130,000 2,285,000 16,415,000
Nine months ended December 31, 1996
Revenues........................................................ $ 17,776,000 $ 6,751,000 $ 24,527,000
Operating profit................................................ 1,902,000 462,000 2,364,000
Identifiable assets............................................. 14,351,000 4,683,000 19,034,000
</TABLE>

F-18
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
DECEMBER 31, 1995 IS UNAUDITED)

13. SUBSEQUENT EVENTS

RECAPITALIZATION AND STOCK SPLIT

In February 1997, the Board of Directors adopted, and the stockholders
approved, (i) an increase in the number of authorized common shares from
20,000,000 to 50,000,000 shares, and an increase in the number of authorized
preferred shares from 2 to 5 million shares, and (ii) a two-for-one stock split
of the Company's common stock. These events have been retroactively reflected in
the accompanying consolidated financial statements.

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.

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.

1994 STOCK OPTION PLAN

In February 1997, the Board adopted, and the stockholders approved, an
increase in the number of shares reserved under the 1994 Stock Option Plan of
600,000 shares.

F-19
<PAGE>
[PEREGRINE SYSTEMS LOGO]

COMPREHENSIVE IT MANAGEMENT SOLUTIONS

Peregrine's SERVICECENTER extends beyond traditional help desk applications
and integrates a broad base of applications and platforms to support the
enterprise.

An important feature of SERVICECENTER is its ability to anticipate and
prevent problems before they occur, through the use of sophisticated agent
technology and system "intelligence," thereby keeping IT systems functioning
efficiently with minimal downtime.

PEREGRINE SERVICE CENTER

Schematic diagram which illustrates that SERVICECENTER has a broad range of
functionability from products whose enterprise value is reactive, proactive and
begins to approach strategic. Schematic illustrates that SERVICECENTER offers
Problem Management, Knowledge-Based Resolution, Change Management,
Inventory/Configuration Management, Order and Catalog Management and Financial
Management applications.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY 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, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS.
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 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
DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 5
Use of Proceeds................................. 14
Dividend Policy................................. 14
Capitalization.................................. 15
Dilution........................................ 16
Selected Consolidated Financial Data............ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business........................................ 27
Management...................................... 38
Certain Transactions............................ 48
Principal and Selling Stockholders.............. 50
Description of Capital Stock.................... 53
Shares Eligible for Future Sale................. 55
Underwriting.................................... 57
Legal Matters................................... 58
Experts......................................... 58
Additional Information.......................... 58
Index to Financial Statements................... F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

3,000,000 Shares

[LOGO]

Common Stock

----------------
PROSPECTUS
, 1997
------------------------

UBS SECURITIES

OPPENHEIMER & CO., INC.

- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<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............................................ $ 12,546
NASD Filing Fee................................................. 4,640
Nasdaq National Market Listing Fee.............................. 50,000
Printing Fees and Expenses...................................... 125,000
Legal Fees and Expenses......................................... 250,000
Accounting Fees and Expenses.................................... 150,000
Blue Sky Fees and Expenses...................................... 5,000
Transfer Agent and Registrar Fees............................... 15,000
Miscellaneous................................................... 37,814
---------
Total....................................................... $ 650,000
---------
---------
</TABLE>

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 December 31, 1996, 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 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.

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,

II-1
<PAGE>
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.

The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on 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>
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Skunkware Acquisition Agreement dated November 29, 1995 by and among the
Registrant, Peregrine/Bridge Transfer Corporation and Skunkware, Inc.
2.2 Agreement and Plan of Merger dated November 30, 1995 by and among the
Registrant, XVT Acquisition Corp. and XVT Software Inc.
**3.1 Amended and Restated Certificate of Incorporation filed with the Secretary of
State of Delaware on February 11, 1997.
**3.2 Bylaws, as amended.
**4.1 Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
**10.1 Nonqualified Stock Option Plan, as amended, and forms of Stock Option
Agreement and Stock Buy-Sell Agreement.
**10.2 1991 Nonqualified Stock Option Plan, as amended, and forms of Stock Option
Agreement and Stock Buy-Sell Agreement.
**10.3 1994 Stock Option Plan, as amended through February 6, 1997, including 1995
Stock Option Plan for French Employees.
**10.4 Form of Stock Option Agreement under 1994 Stock Option Plan, as amended
through February 6, 1997.
**10.5 1997 Employee Stock Purchase Plan.
**10.6 1997 Director Option Plan.
**10.7 Form of Indemnification Agreement for directors and officers.
**10.8 Loan Agreement dated November 13, 1995 by and between the Registrant and
NationsBank of Texas, N.A., as amended through December 16, 1996.
**10.9 Sublease between the Registrant and JMI, Inc.
**10.10 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.
</TABLE>

II-2
<PAGE>

<TABLE>
<C> <S>
**10.11 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.
**10.12 Severance Settlement Agreement and Release of Claims between James W. Butler
and the Company.
**10.13 XVT Stock Option Agreement dated January 18, 1995 between the Registrant and
William Holsten, as amended on October 3, 1996.
**10.14 XVT Stock Option Agreement dated January 18, 1995 between the Registrant and
Christopher Cole, as amended on October 3, 1996.
**+10.15 Restricted Stock Agreement dated November 1, 1995 between the Registrant and
Alan Hunt.
**+10.16 Restricted Stock Agreement dated November 1, 1995 between the Registrant and
David Farley.
**10.17 Stock Option Agreement dated as of December 7, 1990 between the Registrant
and Christopher Cole, as amended on October 26, 1995.
**10.18 Form of Stock Option Agreement under 1995 Stock Option Plan for French
Employees.
**10.19 Form of Stock Option Agreement under 1997 Director Option Plan.
**10.20 Continuing and Unconditional Guaranty dated November 13, 1995 between
NationsBank of Texas, N.A. and John Moores, as amended through December 16,
1996.
**10.21 Promissory Note dated December 16, 1996 delivered by the Registrant to
NationsBank of Texas, N.A.
**10.22 Revolving Promissory Note dated December 16, 1996 delivered by the Registrant
to NationsBank of Texas, N.A.
**10.23 Security Agreement dated November 13, 1995 between the Registrant and
NationsBank of Texas, N.A.
**11.1 Calculation of earnings per share.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.
**24.1 Power of Attorney (see page II-4).
**27.1 Financial Data Schedule.
</TABLE>

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

** Previously filed.

+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission. Omitted portions have been filed
separately with the Commission.

(b) Financial Statement Schedule

Schedule II--Valuation and Qualifying Accounts

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.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to 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 17th day of
March 1997.

PEREGRINE SYSTEMS, INC.

By: /s/ DAVID A. FARLEY
-----------------------------------------
David A. Farley
CHIEF FINANCIAL OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED

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

/s/ ALAN H. HUNT* President and Chief Executive
------------------------------------------- Officer (Principal Executive March 17, 1997
(Alan H. Hunt) Officer) and Director

/s/ DAVID A. FARLEY Chief Financial Officer (Principal
------------------------------------------- Financial and Accounting March 17, 1997
(David A. Farley) Officer) and Director

/s/ JOHN J. MOORES*
------------------------------------------- Chairman of the Board of Directors March 17, 1997
(John J. Moores)

/s/ CHRISTOPHER A. COLE*
------------------------------------------- Director March 17, 1997
(Christopher A. Cole)

/s/ RICHARD A. HOSLEY II*
------------------------------------------- Director March 17, 1997
(Richard A. Hosley II)

/s/ CHARLES E. NOELL III*
------------------------------------------- Director March 17, 1997
(Charles E. Noell III)

/s/ NORRIS VAN DEN BERG*
------------------------------------------- Director March 17, 1997
(Norris van den Berg)

*By: /s/ DAVID A. FARLEY
---------------------------------------
(David A. Farley)
(Attorney-in-fact)
</TABLE>

II-5
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------- -------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1 Skunkware Acquisition Agreement dated November 29, 1995 by and among the Registrant,
Peregrine/Bridge Transfer Corporation and Skunkware, Inc.
2.2 Agreement and Plan of Merger dated November 30, 1995 by and among the Registrant, XVT
Acquisition Corp. and XVT Software Inc.
**3.1 Amended and Restated Certificate of Incorporation filed with the Secretary of State of
Delaware on February 11, 1997.
**3.2 Bylaws, as amended.
**4.1 Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
**10.1 Nonqualified Stock Option Plan, as amended, and forms of Stock Option Agreement and
Stock Buy-Sell Agreement.
**10.2 1991 Nonqualified Stock Option Plan, as amended, and forms of Stock Option Agreement and
Stock Buy-Sell Agreement.
**10.3 1994 Stock Option Plan, as amended through February 6, 1997, including 1995 Stock Option
Plan for French Employees.
**10.4 Form of Stock Option Agreement under 1994 Stock Option Plan, as amended through February
6, 1997.
**10.5 1997 Employee Stock Purchase Plan.
**10.6 1997 Director Option Plan.
**10.7 Form of Indemnification Agreement for directors and officers.
**10.8 Loan Agreement dated November 13, 1995 by and between the Registrant and NationsBank of
Texas, N.A., as amended through December 16, 1996.
**10.9 Sublease between the Registrant and JMI, Inc.
**10.10 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 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.
**10.12 Severance Settlement Agreement and Release of Claims between James W. Butler and the
Company.
**10.13 XVT Stock Option Agreement dated January 18, 1995 between the Registrant and William
Holsten, as amended on October 3, 1996.
**10.14 XVT Stock Option Agreement dated January 18, 1995 between the Registrant and Christopher
Cole, as amended on October 3, 1996.
**+10.15 Restricted Stock Agreement dated November 1, 1995 between the Registrant and Alan Hunt.
**+10.16 Restricted Stock Agreement dated November 1, 1995 between the Registrant and David
Farley.
**10.17 Stock Option Agreement dated as of December 7, 1990 between the Registrant and
Christopher Cole, as amended on October 26, 1995.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------- -------------------
<C> <S> <C>
**10.18 Form of Stock Option Agreement under 1995 Stock Option Plan for French Employees.
**10.19 Form of Stock Option Agreement under 1997 Director Option Plan.
**10.20 Continuing and Unconditional Guaranty dated November 13, 1995 between NationsBank of
Texas, N.A. and John Moores, as amended through December 16, 1996.
**10.21 Promissory Note dated December 16, 1996 delivered by the Registrant to NationsBank of
Texas, N.A.
**10.22 Revolving Promissory Note dated December 16, 1996 delivered by the Registrant to
NationsBank of Texas, N.A.
**10.23 Security Agreement dated November 13, 1995 between the Registrant and NationsBank of
Texas, N.A.
**11.1 Calculation of earnings per share.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in
Exhibit 5).
23.2 Consent of Arthur Andersen LLP.
**24.1 Power of Attorney (see page II-4).
**27.1 Financial Data Schedule.
</TABLE>

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

** Previously filed.

<PAGE>

EXHIBIT 1.1

3,000,000 Shares

PEREGRINE SYSTEMS, INC.

COMMON STOCK

UNDERWRITING AGREEMENT

March __, 1997

UBS Securities LLC
Oppenheimer & Co., Inc.
As Representatives of the Several Underwriters
c/o UBS Securities LLC
299 Park Avenue
New York, NY 10171

Ladies and Gentlemen:
Peregrine Systems, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell 2,100,000 shares (the "Company Shares") of its authorized but
unissued Common Stock, $.001 par value per share (the "Common Stock"), to the
several Underwriters listed on SCHEDULE A to this Agreement (collectively, the
"Underwriters"). Certain stockholders of the Company listed on SCHEDULE B
hereto (the "Selling Stockholders"), including certain principal securityholders
denoted on such Schedule B (the "Principal Stockholders"), propose to sell an
aggregate of 900,000 shares of Common Stock (the "Seller Shares") to the
Underwriters. Each Selling Stockholder proposes to sell that number of Seller
Shares set forth opposite such Selling Stockholder's name in Schedule B hereto.
The Company Shares and the Seller Shares are hereinafter collectively referred
to as the "Firm Shares." Certain of the Selling Stockholders also propose to
grant, as set forth on Schedule B across from such Selling Stockholders' names
in the column entitled "Option Shares," to the Underwriters an option to
purchase up to 450,000 additional shares (the "Option Shares") of Common Stock
on the terms and for the purposes set forth in Section 3(c). The Firm Shares
and the Option Shares are hereinafter collectively referred to as the "Shares."

The Company wishes to confirm as follows its agreements with you (the
"Representatives") and the other Underwriters on whose behalf you are acting in
connection with the several purchases by the Underwriters of the Shares.

<PAGE>

1. REGISTRATION STATEMENT. A registration statement on Form S-1 (File
No. 333-21483) including a prospectus relating to the Shares and each amendment
thereto has been prepared by the Company in conformity with the requirements of
the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, and has been filed with the
Commission. Three conformed copies of such registration statement and
amendments, together with three copies of each exhibit filed therewith, have
been delivered to you. Conformed copies of such registration statement and
amendments (without exhibits) and of the related preliminary prospectus have
been delivered to you in such reasonable quantities as you have requested for
each of the Underwriters. If such registration statement has not become
effective, a further amendment to such registration statement, including a form
of final prospectus, necessary to permit such registration statement to become
effective will be filed promptly by the Company with the Commission. If such
registration statement has become effective, a final prospectus containing all
Rule 430A Information (as hereinafter defined) will be filed by the Company with
the Commission in accordance with Rule 424(b) of the Rules and Regulations on or
before the second business day after the date hereof (or such earlier time as
may be required by the Rules and Regulations).

The term "Registration Statement" as used in this Agreement shall mean such
registration statement at the time such registration statement becomes or became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as hereinafter defined), shall also mean
such registration statement as so amended; provided, however, that such term
shall also include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes effective
as provided by Rule 430A of the Rules and Regulations. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the preceding
paragraph and any preliminary prospectus included in the Registration Statement
at the time it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares in the form in which it is first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no filing pursuant to Rule
424(b) of the Rules and Regulations is required, shall mean the form of final
prospectus included in the Registration Statement at the time such registration
statement becomes effective. The term "Rule 430A Information" means information
with respect to the Shares and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule 430A of
the Rules and Regulations.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants as follows:

(A) The Company has not received, and has no notice of, any order of
the Commission preventing or suspending the use of any Preliminary Prospectus,
or

<PAGE>

instituted proceedings for that purpose, and each Preliminary Prospectus, at
the time of filing thereof, conformed in all material respects to the
requirements of the Act and the Rules and Regulations. When the Registration
Statement became or becomes, as the case may be, effective (the "Effective
Date") and at all times subsequent thereto up to and at the Closing Date (as
hereinafter defined), any later date on which Option Shares are to be purchased
(the "Option Closing Date") and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, (i) the Registration Statement and
Prospectus, and any amendments or supplements thereto, will contain all
statements which are required to be stated therein by, and will comply with the
requirements of, the Act and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. Notwithstanding the foregoing, the Company
makes no representation or warranty as to statements contained in the ____ and
____ paragraphs of the section of the Prospectus entitled "Underwriting," the
table included in the section entitled "Underwriting" which identifies the
underwriters and the allocation of the shares among them, or the information in
the last paragraph on the outside front cover page of the Prospectus. The
Company has not distributed any offering material in connection with the
offering or sale of the Shares other than the Registration Statement, the
Preliminary Prospectus, the Prospectus or any other materials, if any, permitted
by the Act.

(B) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware, with
full corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement. The Company is
duly qualified to do business as a foreign corporation in good standing in each
jurisdiction where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to so qualify
would not have a material adverse effect on the business, financial condition or
results of operations of the Company and its Subsidiaries (as hereinafter
defined), taken as a whole (a "Material Adverse Effect"). The Company has no
subsidiaries (as defined in the Rules and Regulations) other than Peregrine
Systems GmbH, Peregrine Systems (U.K.) Limited, and Peregrine Bridge Subsidiary,
Inc. (collectively, the "Subsidiaries"). The Company owns all of the
outstanding capital stock of each of the Subsidiaries [, except for qualifying
directors' shares, if any.] Other than the Subsidiaries, the Company does not
own, directly or indirectly, any shares of stock or any other equity or long-
term debt securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity. Complete and correct
copies of the certificates of incorporation and of the bylaws of the Company and
the domestically domiciled Subsidiaries and the charter documents of the
foreign-domiciled Subsidiaries and all amendments thereto have been delivered to
the

<PAGE>

Representatives, and except as set forth in the exhibits to the Registration
Statement no changes therein will be made subsequent to the date hereof and
prior to the Closing Date or, if later, the Option Closing Date. Each
Subsidiary has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation, with
full corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement. Each
Subsidiary is duly qualified to do business as a foreign corporation in good
standing in each jurisdiction where the ownership or leasing of the properties
or the conduct of its business requires such qualification, except where the
failure to so qualify would not have a Material Adverse Effect. All of the
outstanding shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable and are owned
beneficially by the Company [(except for qualifying directors' shares, if any)]
subject to no security interest, other encumbrance or adverse claims, other than
restrictions on transfer under applicable securities laws.

(C) The Company has full legal power and authority to enter into this
Agreement and to perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and is a valid
and binding agreement on the part of the Company, enforceable against the
Company in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by applicable laws or equitable principles
and except as enforcement hereof may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. The performance
of this Agreement by the Company and the consummation by the Company of the
transactions herein contemplated will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under, (i) any
indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, or any lease, contract or other
agreement or instrument to which the Company or any Subsidiary is a party or by
which its properties are bound, or (ii) the certificate of incorporation or
bylaws of the Company or any Subsidiary, or (iii) any law, order, rule,
regulation, writ, injunction or decree of any court or governmental agency or
body to which the Company or any Subsidiary is subject. The Company is not
required to obtain or make (as the case may be) any consent, approval,
authorization, order, designation or filing by or with any court or regulatory,
administrative or other governmental agency or body as a requirement for the
consummation by the Company of the transactions herein contemplated, except such
as may be required under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or under state securities or blue sky ("Blue Sky")
laws or under the rules and regulations of the National Association of
Securities Dealers, Inc. ("NASD").

(D) Except as disclosed in the Prospectus, there is not pending or,
to the Company's knowledge, threatened, any action, suit, claim, proceeding or
investigation against the Company or its Subsidiaries or any of their respective
officers or any of their

<PAGE>

respective properties, assets or rights before any court or governmental
agency or body or otherwise which might result in a Material Adverse Effect,
or prevent consummation of the transactions contemplated hereby. There are
no agreements, contracts, leases or documents that are required to be
described in the Prospectus, or to be filed as exhibits to the Registration
Statement, by the Act or by the Rules and Regulations that have not been
accurately described in all material respects in the Prospectus or filed as
exhibits to the Registration Statement.

(E) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of any preemptive right or other right to subscribe for or
purchase securities. The authorized and outstanding capital stock of the Company
conforms in all material respects to the description thereof contained in the
Registration Statement and the Prospectus (and such description correctly states
the substance of the provisions of the instruments defining the capital stock of
the Company). The Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable. No preemptive
right, co-sale right, registration right, right of first refusal or other
similar rights of securityholders exists with respect to any of the Shares or
the issue and sale thereof other than those that have been expressly waived
prior to the date hereof. No further approval or authorization of any security
holder, the Board of Directors or any duly appointed committee thereof or others
is required for the issuance and sale or transfer of the Shares by the Company,
except as may be required under the Act, the Exchange Act or under state
securities or Blue Sky laws. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company, and the related notes
thereto, included in the Prospectus, the Company does not have outstanding any
options or warrants to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The
description of the Company's stock option and other plans or arrangements, and
the options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents, in all material respects, the
information required to be shown with respect to such plans, arrangements,
options and rights.

(F) Arthur Andersen LLP, who have examined the financial statements,
together with the related schedules and notes, of the Company filed with the
Commission as a part of the Registration Statement, which are included in the
Prospectus, are independent public accountants within the meaning of the Act and
the Rules and Regulations. The financial statements of the Company, together
with the related schedules and notes, forming part of the Registration Statement
and Prospectus, fairly

<PAGE>

present the financial position and the results of operations of the Company
at the respective dates and for the respective periods to which they apply.
All financial statements, together with the related schedules and notes,
filed with the Commission as part of the Registration Statement have been
prepared in accordance with generally accepted accounting principles as in
effect in the United States consistently applied throughout the periods
involved except as may be otherwise stated in the Registration Statement. The
selected and summary financial and statistical data included in the
Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the financial statements presented
therein. No other financial statements or schedules are required by the Act
or the Rules and Regulations to be included in the Registration Statement.

(G) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change, or any development which in the Company's reasonable
judgment is likely to cause a material adverse change, in the business,
properties or assets described or referred to in the Registration Statement, or
the results of operations, condition (financial or otherwise), business or
operations of the Company and its Subsidiaries, taken as a whole, (ii) any
transaction which is material to the Company or its Subsidiaries, except
transactions in the ordinary course of business, (iii) any obligation, direct or
contingent, which is material to the Company and its Subsidiaries, taken as a
whole, incurred by the Company or its Subsidiaries, except obligations incurred
in the ordinary course of business, (iv) any material change in the capital
stock or outstanding indebtedness of the Company or its Subsidiaries or (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company. Neither the Company nor its Subsidiaries have any material
contingent obligation which is not disclosed in the Registration Statement or
for which an appropriate reserve has not been established in the financial
statements of the Company included as part of the Registration Statement.

(H) (i) The Company and each Subsidiary have good and valid title to
all material properties and assets described in the Prospectus as owned by them,
free and clear of any pledge, lien, security interest, charge, encumbrance,
claim, equitable interest, or restriction, except for such pledges, liens,
security interests, charges, encumbrances, claims, equitable interests, or
restrictions that, individually or in the aggregate, would not result in a
Material Adverse Effect, (ii) the agreements to which the Company or any
Subsidiary is a party described in the Prospectus are valid agreements,
enforceable against the Company or such Subsidiary in accordance with their
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles, and,
to the Company's knowledge, the other contracting party or parties thereto are
not in material breach or default under any of such agreements and (iii) the
Company and each Subsidiary have valid and enforceable leases for the properties
described in the Prospectus as leased by them, except as enforcement thereof

<PAGE>

may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles, and such leases conform in all
material respects to the description thereof, if any, set forth in the
Registration Statement.

(I) The Company and each Subsidiary now hold and at the Closing Date
and any later Option Closing Date, as the case may be, will hold, all licenses,
certificates, approvals and permits from all state, United States, foreign and
other regulatory authorities, necessary to the conduct of their businesses (as
such businesses are currently conducted), except for such licenses,
certificates, approvals and permits the failure of which to hold would not have
a Material Adverse Effect, all of which are valid and in full force and effect,
and there is no proceeding pending or, to the knowledge of the Company,
threatened which may cause any such license, certificate, approval or permit to
be withdrawn, cancelled, suspended or not renewed. Neither the Company nor any
Subsidiary is in violation of its certificate of incorporation, bylaws or other
charter documents, as applicable, or, except for defaults or violations which
would not have a Material Adverse Effect, in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
bond, debenture, note or other evidence of indebtedness or in any contract,
indenture, mortgage, loan agreement, joint venture or other agreement or
instrument to which it is a party or by which it or any of its properties are
bound, or in violation of any law, order, rule, regulation, writ, injunction or
decree of any court or governmental agency or body.

(J) The Company and each Subsidiary have filed on a timely basis all
necessary federal, state and foreign income, franchise and other tax returns and
have paid all taxes shown thereon as due, and the Company has no knowledge of
any tax deficiency which has been or might be asserted against the Company or
any Subsidiary which might have a Material Adverse Effect. All material tax
liabilities are adequately provided for within the financial statements of the
Company.

(K) The Company and its Subsidiaries maintain insurance of the types
and in the amounts adequate for their business and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering product liability and real and personal
property owned or leased against theft, damage, destruction, acts of vandalism
and all other risks customarily insured against, all of which insurance is in
full force and effect.

(L) Neither the Company nor any of its Subsidiaries is involved in
any labor dispute or disturbance nor, to the knowledge of the Company, is any
such dispute or disturbance threatened.

(M) Except as described in the Prospectus, the Company and each
Subsidiary own or possess adequate licenses or other rights to use all patents,
patent

<PAGE>

applications, trademarks, trademark applications, service marks, service
mark applications, tradenames, copyrights, manufacturing processes, formulae,
trade secrets, know-how, franchises, and other material intangible property and
assets (collectively, "Intellectual Property") necessary to the conduct of their
businesses as conducted and as proposed to be conducted as described in the
Prospectus. The Company has no knowledge that it or any Subsidiary lacks or
will be unable to obtain any rights or licenses to use any of the Intellectual
Property necessary to conduct the business now conducted or proposed to be
conducted by it as described in the Prospectus, except as described in the
Prospectus. The Prospectus fairly and accurately describes in all material
respects the Company's rights with respect to the Intellectual Property. Except
as would not, individually or in the aggregate, have a Material Adverse Effect,
the Company has not received any notice of infringement or of conflict with
rights or claims of others with respect to any Intellectual Property. The
Company is not aware of any Intellectual Property of others which are infringed
upon by potential products or processes of the Company or any Subsidiary
referred to in the Prospectus in such a manner as to result in a Material
Adverse Effect.

(N) The Company and each Subsidiary are conducting their businesses
in compliance with all of the laws, rules and regulations of the jurisdictions
in which it is conducting business, except where failure to be so in compliance
would not have a Material Adverse Effect.

(O) The Company is not an "investment company," or a "promoter" or
"principal underwriter" for a registered investment company, as such terms are
defined in the Investment Company Act of 1940, as amended.

(P) Neither the Company nor any of its Subsidiaries has incurred any
liability for a fee, commission, or other compensation on account of the
employment of a broker or finder in connection with the transactions
contemplated by this Agreement other than the underwriting discounts and
commissions contemplated hereby.

(Q) The Company and each of its Subsidiaries is (i) in compliance
with any and all applicable federal, foreign, state and local environmental
laws, rules, regulations, treaties, statutes and codes promulgated by any and
all governmental authorities relating to the protection of human health and
safety, the environment or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its business as currently conducted, and (iii) is in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, or failure to receive required permits,
licenses or other approvals would not, individually or in the aggregate, have a
Material Adverse Effect. No action, proceeding, revocation proceeding, writ,
injunction or claim is pending or threatened relating to the Environmental Laws
or to the Company's

<PAGE>

or its Subsidiaries' activities involving Hazardous Materials. "Hazardous
Materials" means any material or substance (i) that is prohibited or
regulated by any environmental law, rule, regulation, order, treaty, statute
or code promulgated by any governmental authority, or any amendment or
modification thereto, or (ii) that has been designated or regulated by any
governmental authority as radioactive, toxic, hazardous or otherwise a danger
to health, reproduction or the environment.

(R) Neither the Company nor any of its Subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any foreign, United States or state
governmental officer or official, or other person charged with similar public of
quasi-public duties, other than payments required or permitted by the laws of
the United States.

(S) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act. The Shares have been approved for quotation as a National Market
Security on The Nasdaq Stock Market, Inc. ("Nasdaq National Market"), subject to
notice of issuance. The Company has taken no action designed to, or likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act or delisting the Common Stock from the Nasdaq National Market, nor
has the Company received any notification that the Commission or the Nasdaq
National Market is contemplating terminating such registration or listing.

(T) Neither the Company nor, to its knowledge, any of its officers,
directors or affiliates has taken, and at the Closing Date and at any later
Option Closing Date, neither the Company nor, to its knowledge, any of its
officers, directors or affiliates will have taken, directly or indirectly, any
action which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Shares.

3. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each of
the Selling Stockholders, and with respect to Section 3(h) and (i) each of the
Principal Stockholders only, severally and not jointly, represents and warrants
with respect to the Seller Shares set forth opposite its name on Schedule B
hereto that:

(A) This Agreement, the Custody Agreement signed by the Selling
Stockholders and ChaseMellon Shareholder Services, LLC as Custodian, relating to
the deposit of the Seller Shares (the "Custody Agreement") and the Power of
Attorney appointing certain individuals as the Selling Stockholder's attorneys-
in-fact to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement (the "Power of Attorney")
have been duly authorized, executed and delivered by or on behalf of the Selling
Stockholders and are valid and binding agreements of the Selling Stockholders
enforceable in accordance with their terms, except as rights to

<PAGE>

indemnity and contribution hereunder may be limited by applicable law and
except as enforcement hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditor's rights generally, or by general equitable principles.

(B) The execution and delivery by each of the Selling Stockholders
of, and the performance by each such Selling Stockholder of its obligations
under, this Agreement, the Custody Agreement and the Power of Attorney do not
contravene any provision of applicable law, and will not result in (i) any
violation of the Selling Stockholder's charter or bylaws (if the Selling
Stockholder is not an individual), (ii) the material breach or violation of any
of the terms and provisions, or constitute a material default under, any
indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, or any lease, contract or other
agreement or instrument to which the Selling Stockholder is a party or by which
its properties are bound, (iii) the material breach or violation of any
statute, rule or regulation, of any regulatory body or administrative agency or
other governmental agency or body having jurisdiction over the Selling
Stockholder or any of its properties or operations, or (iv) the breach or
violation of any judgment, order, writ or decree of any government, arbitrator,
court, regulatory body or administrative agency, or other governmental agency or
body having jurisdiction over the Selling Stockholder or any of its properties
or operations;

(C) No authorization, approval or consent of any regulatory body or
administrative agency or other governmental agency or body is necessary in
connection with the performance of this Agreement and consummation of the
transactions herein contemplated by the Selling Stockholders except such as have
been obtained under the Act or such as may be required under state or other
securities or Blue Sky laws or the by-laws and rules of the NASD in connection
with the purchase and the distribution of the Shares by the Underwriters;

(D) The Selling Stockholder has, and on the Closing Date will have
good and valid title to such Selling Stockholder's Seller Shares and the legal
right and power, and all authorization and approval required by law, to enter
into this Agreement, the Custody Agreement and the Power-of-Attorney, and to
sell, transfer and deliver such Seller Shares, except that no representation is
made with respect to federal and state securities laws.

(E) Delivery of the Selling Stockholders' Seller Shares against
payment therefor will transfer to the Underwriters good and valid title to such
Seller Shares, free and clear of any security interests, claims, liens, equities
and other encumbrances (except for those resulting from the Power of Attorney
and the Custody Agreement and restrictions on transfer under applicable
securities laws).

10.

<PAGE>

(F) All information furnished by or on behalf of the Selling
Stockholder for use in the Registration Statement and Prospectus is, and on the
Closing Date will be, true, correct and complete in all material respects, and
does not, and on the Closing Date will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make such
information not misleading.

(G) Neither the Selling Stockholder nor, if applicable, any of its
respective directors, officers or controlling persons has taken, directly or
indirectly, any action designed, or which might reasonably be expected, to cause
or result, under the Act or otherwise, in, or which has constituted,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares other than entering into the lock-up
agreements described in the Prospectus.

(H) Without taking any action to verify independently the Company's
representations or warranties made in this Agreement, and without assuming
responsibility for the accuracy, completeness or fairness of such
representations and warranties, no Principal Stockholder has any reason to
believe that the Company's representations and warranties contained in this
Agreement are not accurate.

(I) No Principal Stockholder is aware that the Registration Statement
or the Prospectus includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.

4. PURCHASE OF THE SHARES BY THE UNDERWRITERS.

(A) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, (i) the Company agrees to issue and
sell the Company Shares to the several Underwriters, (ii) each Selling
Stockholder agrees, severally and not jointly, to sell to the Underwriters that
number of Seller Shares set forth opposite such Selling Stockholder's name in
Schedule B hereto, and (iii) each of the Underwriters agrees to purchase from
the Company and the Selling Stockholders the respective aggregate number of Firm
Shares set forth opposite its name on Schedule A, plus such additional number of
Firm Shares which such Underwriter may become obligated to purchase pursuant to
Section 4(b) hereof. The price at which such Firm Shares shall be sold by the
Company and purchased by the several Underwriters shall be $_____ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 4, the
agreement of each Underwriter is to purchase only the respective number of Firm
Shares specified on Schedule A.

(B) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under

11.

<PAGE>

the provisions of Section 12 hereof) to purchase and pay for the number of
Shares agreed to be purchased by such Underwriter or Underwriters, the
non-defaulting Underwriters shall have the right within twenty-four (24)
hours after such default to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between
you and such purchasing Underwriter or Underwriters and upon the terms herein
set forth, all or any part of the Shares which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail so
to make such arrangements with respect to all such Shares and portion, the
number of Shares which each non-defaulting Underwriter is otherwise obligated
to purchase under this Agreement shall be automatically increased on a pro
rata basis (as adjusted by you in such manner as you deem advisable to avoid
fractional shares) to absorb the remaining shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase; provided, however,
that the non-defaulting Underwriters shall not be obligated to purchase the
Shares and portion which the defaulting Underwriter or Underwriters agreed to
purchase if the aggregate number of such Shares exceeds 10% of the total
number of Shares which all Underwriters agreed to purchase hereunder. If the
total number of Shares which the defaulting Underwriter or Underwriters
agreed to purchase shall not be purchased or absorbed in accordance with the
two preceding sentences, the Company shall have the right, within twenty-four
(24) hours next succeeding the 24-hour period referred to above, to make
arrangements with other underwriters or purchasers reasonably satisfactory to
you for purchase of such Shares and portion on the terms herein set forth.
In any such case, either you or the Company shall have the right to postpone
the Closing Date determined as provided in Section 6 hereof for not more than
seven business days after the date originally fixed as the Closing Date
pursuant to said Section 6 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If the aggregate number of Shares which the defaulting
Underwriter or Underwriters agreed to purchase exceeds 10% of the total
number of Shares which all Underwriters agreed to purchase hereunder, and if
neither the non-defaulting Underwriters nor the Company shall make
arrangements within the 24-hour periods stated above for the purchase of all
the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b),
and no action taken hereunder, shall relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.

(C) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth,
certain of the Selling Stockholders grant an option to the several Underwriters
to purchase up to the number of Option Shares specified opposite such Selling
Stockholders' name on Schedule B under the column entitled "Option Shares" at
the same price per share as the Underwriters shall

12.

<PAGE>

pay for the Firm Shares. Said option may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date of this Agreement upon written or
facsimile notice by you to the [attorneys for the Selling Stockholders]
setting forth the aggregate number of shares of the Option Shares as to which
the several Underwriters are exercising the option. Delivery of certificates
for the shares of Option Shares, and payment therefor, shall be made as
provided in Section 6 hereof. Each Underwriter will purchase such percentage
of the Option Shares as is equal to the percentage of Firm Shares that such
Underwriter is purchasing, the exact number of shares to be adjusted by you
in such manner as you deem advisable to avoid fractional shares.

5. OFFERING BY UNDERWRITERS.

(A) The terms of the initial public offering by the Underwriters of
the Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.

(B) You, on behalf of the Underwriters, represent and warrant that
(i) the information set forth in the last paragraph on the outside front cover
page, in the ___ and ____ paragraphs under the caption "Underwriting" and in the
table included in the section entitled "Underwriting," which identifies the
underwriters and the allocation of the shares among them, in the Registration
Statement, any Preliminary Prospectus and the Prospectus relating to the Shares
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and that
the statements made therein are correct and do not omit to state any material
fact required to be stated therein or necessary to make the statements made
therein in light of the circumstances under which they were made not misleading,
and (ii) the Underwriters have not distributed and will not distribute prior to
the Closing Date or on any Option Closing Date, as the case may be, any offering
material in connection with the offering and sale of the shares other than the
Preliminary Prospectus, the Prospectus, the Registration Statement and other
materials permitted by the Act.

6. DELIVERY OF AND PAYMENT FOR THE SHARES.

(A) Delivery of certificates for the Firm Shares and the Option
Shares (if the option granted pursuant to Section 4(c) hereof shall have been
exercised not later than 11:00 a.m., California time, on the date at least two
business days preceding the Closing Date), and payment therefor, shall be made
at the offices of Cooley Godward LLP, 4365

13.

<PAGE>

Executive Drive, Suite 1100, San Diego, CA 92121-2128 at 6:00 a.m.,
California time, on the fourth business day after the date of this Agreement
(the "Closing Date").

(B) If the option granted pursuant to Section 4(c) hereof shall be
exercised after 11:00 a.m., California time, on the date two business days
preceding the Closing Date, and on or before the 30th day after the date of this
Agreement, delivery of certificates for the Option Shares, and payment therefor,
shall be made at the offices of Cooley Godward LLP, 4365 Executive Drive, Suite
1100, San Diego, CA 92121-2128 at 6:00 a.m., California time, on the third
business day after the exercise of such option.

(C) Payment for the Shares purchased from the Company shall be made
at the Closing to the Company or its order, and payment for the Shares purchased
from the Selling Stockholders shall be made at the Closing to the custodian, for
the account of the Stockholders, in each case by wire transfer of funds. Such
payment shall be made upon delivery of certificates for the Shares to you for
the respective accounts of the several Underwriters against receipt therefor
signed by you. Certificates for the Shares to be delivered to you shall be
registered in such name or names and shall be in such denominations as you may
request at least three business days before the Closing Date, in the case of
Firm Shares, and at least two business days prior to the Option Closing Date, in
the case of the Option Shares. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at a location in New York,
New York, designated by the Underwriters not less than one full business day
prior to the Closing Date or, in the case of the Option Shares, by 3:00 p.m.,
New York time, on the business day preceding the Option Closing Date.

It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company or
to the custodian for the account of the Selling Stockholders for shares to be
purchased by any Underwriter whose funds shall not have been received by you on
the Closing Date or any later Option Closing Date. Any such payment by you
shall not relieve such Underwriter from any of its obligations hereunder.

7. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:

(A) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed. If the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a), the Company will

14.

<PAGE>

provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission. If for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information
and has been filed with the Commission within the time period prescribed.
The Company will notify you promptly of any request by the Commission for the
amending or supplementing of the Registration Statement or the Prospectus or
for additional information. Promptly upon your request, it will prepare and
file with the Commission any amendments or supplements to the Registration
Statement or Prospectus which, in the reasonable opinion of counsel to the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable
in connection with the distribution of the Shares by the Underwriters. The
Company will promptly prepare and file with the Commission, and promptly
notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have
occurred as a result of which the Prospectus or any other prospectus relating
to the Shares as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. In case any Underwriter is required to deliver a prospectus
after the nine-month period referred to in Section 10(a)(3) of the Act in
connection with the sale of the Shares, the Company will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses
as may be necessary to permit compliance with the requirements of Section
10(a)(3) of the Act. The Company will file no amendment or supplement to the
Registration Statement or Prospectus that shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing or which is not in compliance
with the Act and Rules and Regulations or the provisions of this Agreement.

(B) The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the initiation or threat of any proceeding for that
purpose; and it will promptly use its best efforts to prevent the issuance of
any such stop order or to obtain its withdrawal at the earliest possible moment
if such stop order should be issued.

(C) The Company will cooperate with you in endeavoring to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for

15.

<PAGE>

purposes of the distribution of the Shares, except that the Company shall not
be required in connection therewith or as a condition thereof to qualify as a
foreign corporation, or to execute a general consent to service of process in
any jurisdiction, or to make any undertaking with respect to the conduct of
its business. In each jurisdiction in which the Shares shall have been
qualified, the Company will make and file such statements, reports and other
documents in each year as are or may be reasonably required by the laws of
such jurisdictions so as to continue such qualifications in effect for so
long a period as you may reasonably request for distribution of the Shares,
or as otherwise may be required by law.

(D) The Company will furnish to you, as soon as available, copies of
the Registration Statement (including all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.

(E) The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than the 45th day following the
end of the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings statement (which will
be in reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and
covering a twelve-month period beginning after the effective date of the
Registration Statement, and will advise you in writing when such statement has
been made available.

(F) During a period of five years after the date hereof, the Company,
as soon as practicable after the end of each respective period, will furnish to
its stockholders annual reports (including financial statements audited by
independent certified public accountants) and will furnish to its stockholders
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will, upon request, furnish to you and the other several
Underwriters hereunder (i) concurrently with making such reports available to
its stockholders, statements of operations of the Company for each of the first
three quarters in the form made available to the Company's stockholders; (ii)
concurrently with the furnishing thereof to its stockholders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity and of cash flow of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
nationally recognized independent certified public accountants; (iii)
concurrently with the furnishing of such reports to its stockholders, copies of
all reports (financial or other) mailed to stockholders; (iv) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, any securities exchange or the Nasdaq National Market
by the Company (except for documents for which confidential treatment is
requested); and (v) every material press release and every material news item or
article in respect of the Company

16.

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or its affairs which was generally released to stockholders or prepared for
general release by the Company. During such five-year period, if the Company
shall have any active subsidiaries, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so
consolidated.

(G) Prior to or simultaneously with the execution and delivery of
this Agreement, the Company will obtain an agreement from each beneficial owner
of the Company's Common Stock and from each option holder (in each case as
specified by the Representatives) holding options exercisable within 180 days of
the effective date of the Registration Statement providing that such person will
not, commencing on the effective date of the Registration Statement and
continuing until the expiration of 180 days following the effective date of the
Registration Statement, without the prior written consent of UBS Securities LLC:
(i) offer, sell, contract to sell, pledge, grant any option to sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock or securities
convertible into, or exchangeable for, shares of Common Stock, or warrants or
other rights to purchase shares of Common Stock of which such person is, or may
in the future become, the beneficial owner (within the meaning of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended); or (ii) exercise any
registration rights, whether held by such person as of the date hereof or
hereafter acquired, with respect to any shares of Common Stock; PROVIDED,
HOWEVER, that, if such person is an individual, he or she may transfer shares by
gift, will or intestacy to his or her immediate family or to a trust the
beneficiaries of which are exclusively such person or a member of such person's
immediate family, so long as any such transferee agrees in writing to be subject
to the provisions of such lockup agreement.

(H) The Company shall not, during the 180 days following the
effective date of the Registration Statement, except with the prior written
consent of UBS Securities LLC, file a registration statement covering any of its
shares of capital stock, except that one or more registration statements on Form
S-8 may be filed at any time following the effective date of the Registration
Statement.

(I) The Company shall not, during the 180 days following the
effective date of the Registration Statement, except with the prior written
consent of UBS Securities LLC, issue, sell, offer or agree to sell, grant,
distribute or otherwise dispose of, directly or indirectly, any shares of Common
Stock, or any options, rights or warrants with respect to shares of Common
Stock, or any securities convertible into or exchangeable for Common Stock,
other than (i) the sale of Shares hereunder, (ii) the grant of options or the
issuance of shares of Common Stock under the Company's stock option plans or
stock purchase plan, as the case may be, existing on the date hereof, (iii) the
issuance of shares of Common Stock upon exercise of the currently outstanding
options or warrants described in the Registration Statement.

17.

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(J) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.

(K) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.

(L) The Company will use its best efforts to maintain listing of its
shares of Common Stock on the Nasdaq National Market.

(M) The Company is familiar with the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder, and has in the past
conducted its affairs, and will in the future conduct its affairs, in such a
manner so as to ensure that the Company was not and will not be an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.

(N) If at any time during the 180-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, consult with you in good faith regarding the necessity of disseminating a
press release or other public statement responding to or commenting on such
rumor, publication or event and, if the Company in its reasonable judgment
determines that such a press release or other public statement is appropriate,
the substance of any press release or other public statement.

8. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each of the Selling
Stockholders agrees with the Underwriters that:

(A) Such Selling Stockholder will not, without the prior written
consent of UBS Securities LLC, offer, sell, contract to sell, pledge, grant any
option to sell, or otherwise dispose of, directly or indirectly, any shares of
Common Stock or securities convertible, or exchangeable for, Common Stock, or
warrants or other rights to purchase shares of Common Stock of which the
undersigned is now, or may in the future become, the beneficial owner (within
the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended).
Notwithstanding the foregoing, if such Selling Stockholder is an individual, he
or she may transfer shares of Common Stock during his or her lifetime or on
death by gift, will, or intestacy, to his or her immediate family or to a trust
the beneficiaries of which are exclusively the undersigned and/or a member or
member of his or her immediate family; PROVIDED, HOWEVER, that in any such case
it shall be a condition

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to any such transfer that any such transferee execute an agreement stating
that the transferee is receiving and holding such Common Stock subject to the
provisions of this Section 8(a), and there shall be no further transfer of
such Common Stock except in accordance with this agreement.

(B) Such Selling Stockholder agrees that, commencing on the date
hereof and continuing until the expiration of 180 days following the effective
date of the Registration Statement, such Selling Stockholder will not exercise
any registration rights whether held by the Selling Stockholder as of the date
hereof or hereafter acquired, with respect to any shares of Common Stock.

(C) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 and the Interest and Dividend Compliance Act of 1983 with respect to
the transactions herein contemplated, such Selling Stockholder agrees to deliver
to you prior to or at the Closing Date a properly completed and executed United
States Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).

(D) With respect to the Seller Shares set forth opposite its name
on Schedule B hereto, to pay or cause to be paid all taxes, including the
cost of original issue tax stamps, if any, on the transfer and sale of the
Seller Shares and the fees and expenses of counsel and accountants retained
by such Selling Stockholder, except such fees and expenses that are paid by
the Company, if any. The Selling Stockholders will pay and save each
Underwriter and any subsequent holder of the Seller Shares harmless from any
and all liabilities with respect to or resulting from any failure or delay in
paying Federal and state stamp and other transfer taxes, if any, which may be
payable or determined to be payable in connection with the original issuance
or sale to such Underwriter of the Seller Shares. The Selling Stockholders
acknowledge and agree that the Underwriters shall not be liable for any costs
and expenses incident to the performance of the obligations of the Selling
Stockholders under this Agreement, including, but not limited to, the
expenses incident to the delivery of the certificates for the Seller Shares,
the costs and expenses incident to the preparation, printing and filing of
the Registration Statement (including all exhibits thereto) and the
Prospectus and any amendments or supplements thereto, the expenses of
qualifying the Seller Shares under the securities or blue sky laws of various
jurisdictions, the filing fees payable in connection with the review of the
offering of the Shares by the NASD, and the cost of furnishing to the
Underwriters the required copies of the Registration Statement and Prospectus
and any amendments or supplements thereto. Each Selling Stockholder agrees
to pay or cause to be paid its pro rata share (based on the percentage which
the number of Seller Shares sold bears to the total number of Shares sold) of
all underwriting discounts and commissions.

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9. EXPENSES.

The Company agrees with each Underwriter that:

(A) The Company will pay and bear all costs, fees and expenses, on
behalf of the Company and the Selling Stockholders, in connection with the
preparation, printing and filing of the Registration Statement (including
financial statements, schedules and exhibits), Preliminary Prospectuses and the
Prospectus and any amendments or supplements thereto; the reproduction of this
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the
Custody Agreement, the Power-of-Attorney, the Preliminary Blue Sky Memoranda and
any Supplemental Blue Sky Memoranda and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any; the cost of all stock
certificates representing the Shares and Transfer Agents' and Registrars' fees;
the fees and disbursements of corporate, patent and regulatory counsel for the
Company; all fees and other charges of the Company's independent public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary
Prospectuses and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and expenses incident to securing any required
review and the cost of qualifying the Shares under the laws of such
jurisdictions within the United States as you may designate (including filing
fees and fees and disbursements of Underwriters' Counsel in connection with such
NASD filings and Blue Sky qualifications); listing application fees of the
Nasdaq National Market; and all other expenses directly incurred by the Company
in connection with the performance of its obligations hereunder.

(B) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or the
Selling Stockholders to perform any agreement on its part to be performed
hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, the Company will, in addition to paying the expenses described in
clause (a) above, reimburse the several Underwriters for all out-of-pocket
expenses (including reasonable fees and disbursements of Underwriters' counsel)
reasonably incurred by the Underwriters in reviewing the Registration Statement
and the Prospectus and in otherwise investigating, preparing to market or
marketing the Shares. The Company will in no event be liable to any of the
several Underwriters for any loss of anticipated profits from the sale by them
of the Shares.

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10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.

The obligations of the several Underwriters to purchase and pay for
the Shares, as provided herein, shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later Option Closing Date, as the case may
be, of the representations and warranties of the Company and the Selling
Stockholders herein, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions:

(A) The Registration Statement shall have become effective not later
than 7:00 a.m., California time, on the date following the date of this
Agreement, or such later time or date as shall be consented to in writing by
you. If the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the reasonable satisfaction of Underwriters' Counsel.

(B) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this subsection.

(C) You shall have received, at no cost to you, on the Closing Date
and on any later Option Closing Date, as the case may be, the opinion of Wilson
Sonsini Goodrich & Rosati P.C., corporate counsel to the Company, dated the
Closing Date or such later Option Closing Date, in substantially the form
attached hereto on Appendix A, addressed to the Underwriters and with reproduced
copies of signed counterparts thereof for each of the Representatives. You
shall have received, at no cost to you, on the Closing Date, and on any later
Option Closing Date, as the case may be, the opinion of Wilson Sonsini Goodrich
& Rosati P.C., as counsel to the Selling Stockholders, dated the Closing Date or
such later Option Closing Date, in the form attached hereto as Appendix B,
addressed to the Underwriters and with reproduced copies of signed counterparts
thereof for each of the Representatives. You shall have received, at no cost to
you, on the Closing Date and on any later Option Closing Date, as the case may
be, the opinions of Morgan, Lewis & Bockius and Sherman & Sterling, as counsel
to the Company's foreign subsidiaries, dated the Closing Date or such later
Option Closing

21.

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Date, in the form attached hereto as Appendix C, addressed to the
Underwriters and with reproduced copies of signed counterparts thereof for
each of the Representatives.

(D) You shall have received from Cooley Godward LLP, Underwriters'
Counsel, an opinion or opinions, dated the Closing Date or on any later Option
Closing Date, as the case may be, in form and substance reasonably satisfactory
to you, with respect to the sufficiency of all corporate proceedings undertaken
by the Company and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as it may have reasonably
requested for the purpose of enabling it to pass upon such matters.

(E) You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a letter from Arthur Andersen LLP
addressed to the Company and the Underwriters, dated the Closing Date or such
later Option Closing Date, as the case may be, confirming that it is an
independent certified public accountant with respect to the Company within the
meaning of the Act and the Rules and Regulations thereunder and based upon the
procedures described in its letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), but carried
out to a date not more than five days prior to the Closing Date or any such
later Option Closing Date, as the case may be, (i) confirming that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later Option Closing Date, as the case may be; and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter that are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company which, in your reasonable judgment, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In addition, you shall have received from Arthur Andersen LLP a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent it deemed necessary in establishing the scope
of its latest examination of the Company's financial statements, did not
disclose any weaknesses in internal controls that it considered to be material
weaknesses. All such letters shall be in a form reasonably satisfactory to the
Representatives and their counsel.

(F) You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a certificate of the President and the
Chief Financial Officer of the Company, dated the Closing Date or such later
date, to the effect that as of such date (and you shall be satisfied that as of
such date):

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(I) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later Option Closing Date, as the case may be; and the Company has complied with
all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later Option
Closing Date, as the case may be;

(II) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration Statement
or preventing or suspending the use of the Prospectus has been issued, and no
proceedings for that purpose have been instituted or are pending or, to the best
of their knowledge, threatened under the Act;

(III) They have carefully reviewed the Registration Statement
and the Prospectus and, as of the effective date of the Registration Statement,
to the best of such officer's knowledge, the Registration Statement and the
Prospectus and any amendments or supplements thereto contain all statements
required to be stated therein; and neither the Registration Statement nor any
post-effective amendment or supplement thereto includes any untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.

(IV) Since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an amended or
supplemented Prospectus that has not been so set forth in such amendment or
supplement; and

(V) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has not been
(A) any material adverse change in the properties or assets described or
referred to in the Registration Statement and the Prospectus or in the condition
(financial or otherwise), operations, business or prospects of the Company and
its Subsidiaries, (B) any transaction which is material to the Company and its
Subsidiaries, except transactions entered into in the ordinary course of
business, (C) any obligation, direct or contingent, incurred by the Company or
its Subsidiaries, which is material to the Company and its Subsidiaries taken as
a whole, (D) any change in the capital stock or outstanding indebtedness of the
Company or its Subsidiaries which is material to the Company and its
Subsidiaries taken as a whole or (E) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company.

(G) You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a certificate dated as of the date of
delivery, signed by the Attorneys for the Selling Stockholders to the effect
that, as of the Closing Date, or any later option Closing Date, as the case may
be, they have not been informed that:

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(I) The representations and warranties made by the Selling
Stockholders herein are not true and correct in any material respect on the
Closing Date or the Option Closing Date, as the case may be; and

(II) The Selling Stockholders have not complied with any
obligation or satisfied any condition which is required to be satisfied on the
part of such Selling Stockholder at or prior to the Closing Date or the Option
Closing Date, as the case may be.

(H) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.

(I) The Firm Shares and the Option Shares, if any, shall have been
approved for designation upon notice of issuance on the Nasdaq National Market.

All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.

11. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AND SELLING STOCKHOLDERS.
The obligation of the Company and the Selling Stockholders to deliver the Shares
shall be subject to the conditions that (i) the Registration Statement shall
have become effective and (ii) no stop order suspending the effectiveness
thereof shall be in effect and no proceedings therefor shall be pending or
threatened by the Commission.

12. INDEMNIFICATION AND CONTRIBUTION.

(A) The Company and the Principal Stockholders jointly and severally
agree to indemnify and hold harmless each Underwriter and each person (including
each partner or officer thereof) who controls any Underwriter within the meaning
of Section 15 of the Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Act, the Exchange Act, or the common law or
otherwise, and the Company and the Principal Stockholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other out-of-pocket expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue

24.

<PAGE>

statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof) or any post-effective amendment
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that (1) the indemnity
agreements of the Company and the Selling Stockholders contained in this
paragraph (a) shall not apply to any such losses, claims, damages,
liabilities or expenses if such statement or omission is contained in the
third, fourth, seventh or eighth paragraph of the section of the Prospectus
entitled "Underwriting," in the table included in the section entitled
"Underwriting" which identifies the Underwriters and the allocation of the
Shares among them, or the last paragraph of text on the cover page of the
Prospectus, and (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims,
damages, liabilities or expenses purchased the Shares which is the subject
thereof (or to the benefit of any person controlling such Underwriter) if at
or prior to the written confirmation of the sale of such Shares a copy of the
Prospectus (or the Prospectus as amended or supplemented) was not sent or
delivered to such person within the time required by the Act and the
regulations thereunder and the untrue statement or omission or alleged untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented) unless the failure is the result of noncompliance by the
Company with paragraph (a) of Section 7 hereof, and (3) each Principal
Stockholder shall only be liable under this paragraph with respect to (A)
information pertaining to such Principal Stockholder furnished by or on
behalf of such Principal Stockholder expressly for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto or (B) facts that would constitute a
breach of any representation or warranty of such Principal Stockholder set
forth in Section 2 hereof. In no event, however, shall the liability of any
Principal Stockholder for indemnification under this Section 12(a) exceed the
lesser of (A) the aggregate net proceeds received by such Principal
Stockholder upon the sale of the shares by such Principal Stockholder to the
Underwriters and (B) the proportion of the aggregate losses, claims, damages,
or liabilities indemnified against which equals the proportion which the
number of shares being sold by such Principal Stockholder bears to the total
number of shares being sold by the Company and all Selling Stockholders. The
indemnity agreement of the Company contained in this paragraph (a) and the
representations and warranties of the Company contained in Section 2 hereof
shall remain operative and in full force and effect regardless

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<PAGE>

of any investigation made by or on behalf of any indemnified party and shall
survive the delivery of any payment for the Shares.

(B) Each Underwriter severally agrees to indemnify and hold
harmless the Company and each Selling Stockholder, each of their respective
executive officers, each of their respective directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or each Selling Stockholder any such other Underwriter
within the meaning of Section 15 of the Act, from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Act, the
Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as
part thereof) or any post-effective amendment thereto or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or (ii)
any untrue statement or alleged untrue statement of a material fact contained
in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, if such statement or omission is contained in the third, fourth,
seventh or eighth paragraph of the section of the Prospectus entitled
"Underwriting" or the last paragraph on the cover page of the Prospectus.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Shares.

(C) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 11 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against it, in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (a "Notice") of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the party to whom
such Notice was not given was unaware of the action, suit, investigation,
inquiry or proceeding to which the Notice would have related and was prejudiced
by the failure to give the Notice, but the omission

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so to notify such indemnifying party or parties of any such service or
notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution
or otherwise than on account of such indemnity agreement. Any indemnifying
party shall be entitled at its own expense to participate in the defense of
any action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(the "Notice of Defense") to the indemnified party, to assume (alone or in
conjunction with any other indemnifying party or parties) the entire defense
of such action, suit, investigation, inquiry or proceeding, in which event
such defense shall be conducted, at the expense of the indemnifying party or
parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided,
however, that (i) if the indemnified party or parties reasonably determine
that there may be a conflict between the positions of the indemnifying party
or parties and of the indemnified party or parties in conducting the defense
of such action, suit, investigation, inquiry or proceeding or that there may
be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties shall be entitled to
conduct the defense to the extent reasonably determined by such counsel to be
necessary to protect the interests of the indemnified party or parties and
(ii) in any event, the indemnified party or parties shall be entitled, at its
or their own expense, to have counsel chosen by such indemnified party or
parties participate in, but not conduct, the defense. It is understood that
the indemnifying parties shall not, in respect of the legal defenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for (a) the fees and expenses of more than
one separate firm (in addition to any local counsel) for all of the
Underwriters and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act, and (b) the fees and expenses of more than
one separate firm (in addition to any local counsel) for the Company, its
directors, its officers who sign the Registration Statement and each person,
if any, who controls the Company within the meaning of Section 15 of the Act.
If, within a reasonable time after receipt of the Notice, an indemnifying
party gives a Notice of Defense and the counsel chosen by the indemnifying
party or parties is reasonably satisfactory to the indemnified party or
parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (c) of this Section 11 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding, except
that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred
to in clause (i) of the proviso to the preceding sentence and (B) the
indemnifying party or parties shall bear such other expenses as it or they
have authorized to be incurred by the indemnified party or parties. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or parties shall be responsible for
any legal or other

27.

<PAGE>

expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding. The
indemnifying party or parties shall not be liable for any settlement of any
proceeding effected without its or their written consent.

(D) If the indemnification provided for in this Section 11 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 11, then each indemnifying party shall,
in lieu of indemnifying such indemnified party, contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in paragraph (a) or (b) of this Section 11
(i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Shares or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of each
indemnifying party in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company and/or the Selling Stockholders, on
the one hand, and the Underwriters, on the other, shall be deemed to be in
the same respective proportions as the total net proceeds from the offering
of the Shares received by the Company or the Selling Stockholders, as the
case may be, and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Shares. Relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.

The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (e). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparation to defend or defense against any action or claim which is the
subject of this paragraph (e). Notwithstanding the provisions of this
paragraph (e), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations

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in this paragraph (e) to contribute are several in proportion to their
respective underwriting obligations and not joint.

Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (d) of this Section 11).

(E) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.

(F) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including without limitation the
provisions of this Section 11, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 11 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.

13. TERMINATION. This Agreement may be terminated by you at any time on
or prior to the Closing Date or on or prior to any later Option Closing Date, as
the case may be, without any liability on the part of the Underwriters to the
Company or the Selling Stockholders (i) if the Company or the Selling
Stockholders shall have failed, refused or been unable, at or prior to the
Closing Date, or on or prior to any later Option Closing Date, as the case may
be, to perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled by
the Company or the Selling Stockholders is not fulfilled, or (ii) if trading on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market shall have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have been
required on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market, by such trading exchanges or by order of the Commission
or any other

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governmental authority having jurisdiction, or if a banking moratorium shall
have been declared by federal or New York authorities, or (iii) if the
Company shall have sustained a loss by strike, fire, flood, accident or other
calamity of such character as to have a Material Adverse Effect regardless of
whether or not such loss shall have been insured, or (iv) if there shall have
been a material adverse change in the general political or economic
conditions or financial markets in the United States as in the reasonable
judgment of the Representatives makes it inadvisable or impracticable to
proceed with the offering, sale and delivery of the Shares, or (v) if there
shall have occurred an outbreak or escalation of hostilities between the
United States and any foreign power or of any other insurrection or armed
conflict involving the United States or other national or international
calamity, hostilities or crisis or the declaration by the United States of a
national emergency which, in the reasonable judgment of the Representatives,
adversely affects the marketability of the Shares, or (vi) if since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there shall have occurred any material adverse
change or any development involving a prospective material adverse change in
or affecting the condition, financial or otherwise, of the Company or the
business affairs, management, or business prospects of the Company, whether
or not arising in the ordinary course of business, or (vii) if any foreign,
federal or state statute, regulation, rule or order of any court or other
governmental authority shall have been enacted, published, decreed or
otherwise promulgated which in the reasonable judgment of the Representatives
materially and adversely affects or will materially and adversely affect the
business or operations of the Company, or trading in the Common Stock shall
have been suspended, or (viii) there shall have occurred a material adverse
decline in the value of securities generally on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market or (ix) action
shall be taken by any foreign, federal, state or local government or agency
in respect of its monetary or fiscal affairs which, in the reasonable
judgment of the Representatives, has a material adverse effect on the
securities markets in the United States. If this Agreement shall be
terminated in accordance with this Section 12, there shall be no liability of
the Company to the Underwriters and no liability of the Underwriters to the
Company; provided, however, that in the event of any such termination the
Company agrees to indemnify and hold harmless the Underwriters from all costs
or expenses incident to the performance of the obligations of the Company
under this Agreement, including all costs and expenses referred to in Section
9.

If you elect to terminate this Agreement as provided in this Section 12,
the Company shall be notified promptly by you by telephone, facsimile or
telegram, confirmed by letter.

14. REIMBURSEMENT OF CERTAIN EXPENSES.

(A) In addition to their other respective obligations under
Section 11 of this Agreement, the Company and the Selling Stockholders jointly
and severally hereby agree to reimburse on a quarterly basis the Underwriters
for all reasonable legal and other

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expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based
upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) of Section 11 of this Agreement, notwithstanding
the absence of a judicial determination as to the propriety and
enforceability of the obligations under this Section 13 and the possibility
that such payments might later be held to be improper; provided, however,
that (i) to the extent any such payment is ultimately held to be improper,
the persons receiving such payments shall promptly refund them and (ii) such
persons shall provide to the Company, upon request, reasonable assurances of
their ability to effect any refund, when and if due.

(B) In addition to their other obligations under Section 11 of this
Agreement, the Underwriters hereby agree to reimburse on a quarterly basis the
Company and the Selling Stockholders for all reasonable legal and other expenses
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
paragraph (c) of Section 11 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 13 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the Company or the Selling Stockholders, as they
case may be, shall promptly refund it and (ii) the Company and the Selling
Stockholder shall provide to the Underwriters, upon request, reasonable
assurances of its ability to effect any refund, when and if due.

15. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 11 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 11, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Shares from any of the several Underwriters.

16. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to UBS Securities LLC, 299 Park Avenue, New
York, NY 10171, Attention: [_______________________________]; and if to the
Company, shall be mailed, telegraphed or delivered to it at its office, 12670
High Bluff Drive, San Diego, California 92130, Attention: Richard T. Nelson,
with a copy to Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California 94304-1050, Attention: Douglas H. Collom. All notices given
by telegraph shall be promptly confirmed by letter.

31.

<PAGE>

17. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(i) any investigation made by or on behalf of any Underwriter or controlling
person thereof, or by or on behalf of the Company or its respective directors of
officers, and (ii) delivery of and payment for the Shares under this Agreement.

This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

You will act as Representatives of the several Underwriters in all dealings
with the Company under this Agreement, and any action under or in respect of
this Agreement taken by you jointly or by UBS Securities LLC, as
Representatives, will be binding upon all of the Underwriters.

This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

32.

<PAGE>

Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company
and the several Underwriters in accordance with its terms.
Very truly yours,

PEREGRINE SYSTEMS, INC.

By:
---------------------------
Alan H. Hunt, President and
Chief Executive Officer

The foregoing Agreement
is hereby confirmed and
accepted as of the date
first above written.

UBS SECURITIES LLC
OPPENHEIMER & CO., INC.

By: UBS SECURITIES LLC

By: ______________________________

Title: ______________________________

Acting on behalf of the several
Underwriters, including themselves,
named on SCHEDULE A hereto.

33.

<PAGE>

SCHEDULE A
UNDERWRITERS

NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED

UBS Securities LLC................................

Oppenheimer & Co., Inc............................

Total 3,000,000
=========

<PAGE>

SCHEDULE B

SELLING STOCKHOLDERS

NAME OF STOCKHOLDER SELLER SHARES OPTION SHARES
- ------------------- ------------- -------------

JMI Equity Fund, L.P.* 84,000 48,500
John J. Moores* 384,000 221,500
John J. Moores as trustee for
Britton Lee Baas Trust* 5,500 3,200
Christopher Nathan Baas Trust* 5,500 3,200
Michael Baas & Debra Baas 1991 Trust* 18,900 11,000
Patrick Baas & Rosario Baas 1991 Trust* 22,700 13,200
Roseanne Elaine Baas Trust* 5,500 3,200
Seth Joseph Baas Trust* 5,500 3,200
Toni Louise Cruse 1994 Trust* 1,200 700
Anthony Kent Moores 1991 Trust* 18,900 11,000
Avery Katherine Moores 1994 Trust* 7,800 4,600
Barry Alexander Moores 1993 Trust* 7,800 4,600
Barry Owen Moores 1991 Trust* 18,900 11,000
Benjamin Hunter Moores 1996 Trust* 2,200 1,200
Jennifer Ann Moores Trust* 39,325 23,000
John Jay Moores, Jr. Trust* 39,325 23,000
Melissa Kristen Moores Trust* 5,500 3,200
Jason Brian Shulman Trust* 5,500 3,200
Molly Moores Shulman 1991 Trust* 18,900 11,000
Rachel Erin Shulman Trust* 5,500 3,200
Clare C. Toner Trust* 1,500 900
David A. Toner Trust* 1,500 900
Dorothy B. Williams Trust* 1,100 650
Christopher A. Cole* 35,000 20,000
James W. Butler* 55,000 0
Charles H. Rudolph* 40,000 0
Douglas S. Powanda* 0 20,000
Marc Rochkind 16,000 0
Robert Ashton 25,000 0
Donald Odom 6,000 0
Norris Merritt 15,000 0
Dorothy B. Williams as trustee for
Heath Dylan Lubojasky 1990 Trust 725 425
Kiley Diane Lubojasky 1990 Trust 725 425

- -------------------------------
* Denotes Principal Stockholder

<PAGE>

APPENDIX A

1. Opinion of Wilson Sonsini Goodrich & Rosati, P.C.

Wilson Sonsini Goodrich & Rosati P.C. shall opine to the effect that:

(A) The Company has been duly organized and is validly existing as a
corporation, and is in good standing under, the laws of the State of Delaware.
Peregrine Bridge Subsidiary, Inc. ("Domestic Subsidiary") has been duly
organized, is validly existing and is in good standing under the laws of the
jurisdiction in which it operates;

(B) Each of the Company and Domestic Subsidiary has the corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus; each of the Company and Domestic
Subsidiary is duly qualified to do business as a foreign corporation and is in
good standing in all jurisdictions in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to so qualify would not have a Material Adverse Effect;

(C) To the best of our knowledge, other than the Subsidiaries, the
Company does not own or control, directly or indirectly, any corporation,
association or other entity. All of the outstanding shares of capital stock of
Domestic Subsidiary have been duly authorized and validly issued, are fully paid
and non-assessable and are owned by the Company;

(D) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Registration Statement and the Prospectus under
the caption "Capitalization" as of the dates stated therein; the authorized
shares of the Company's Common Stock have been duly authorized; the issued and
outstanding shares of the Company's capital stock have been duly authorized and
validly issued and are fully paid and nonassessable, and have not been issued in
violation of any preemptive right under the Company's charter documents, or to
such counsel's knowledge, any co-sale right, registration right, right of first
refusal or other similar right set forth in any agreement to which the Company
is a party (except for registration rights waived in connection with this
offering);

(E) The Shares to be issued by the Company pursuant to this Agreement
have been duly authorized and will be, upon issuance and delivery against
payment therefor in accordance with the terms hereof, validly issued, fully paid
and nonassessable, and the shareholders of the Company do not have any
preemptive right under the Company's charter documents, or, to such counsel's
knowledge, any co-sale right, registration right, right of first refusal or
other similar right set forth in any agreement to which the Company is a party
(except for registration rights waived in connection with

A-1.

<PAGE>

this offering), which rights have not previously been waived, in connection
with the purchase or sale of any of the Shares;

(F) The Company has full corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the Firm
Shares or the Option Shares, as the case may be, to be issued and sold by it
hereunder;

(G) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar as indemnification and
contribution provisions may be limited by applicable law and except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws relating to or affecting creditors'
rights generally or general equitable principles;

(H) The Registration Statement has become effective under the Act
and, to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement or suspending or preventing the use of the Prospectus
has been issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act; any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has
been made in the manner and within the time period required by such Rule 424(b);

(I) The Registration Statement, all Preliminary Prospectuses, the
Prospectus, and each amendment or supplement thereto (other than the financial
statements, financial data and supporting schedules or statistical information
included therein, as to which such counsel need express no opinion), comply as
to form in all material respects with the requirements of the Act and the
applicable Rules and Regulations, and, to our knowledge, there are no
agreements, contracts, leases or documents of a character required to be
described in, or filed as an exhibit to, the Registration Statement which are
not described or filed as required by the Act and the applicable Rules and
Regulations;

(J) The terms and provisions of the capital stock of the Company
conform to the description thereof contained in the Registration Statement and
the Prospectus, and the information in the Prospectus under the caption
"Description of Capital Stock", to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by such counsel and is correct in all
material respects, and the form of certificate evidencing the Common Stock
complies with the applicable provisions of Delaware law;

<PAGE>

(K) The statements in the Registration Statement and the Prospectus
summarizing statutes, rules and regulations, including the Delaware General
Corporation Law and the description of the certificate of incorporation and
bylaws, are accurate and fairly and correctly present the information required
to be presented by the Act or the Rules and Regulations in all material
respects; and such counsel does not know of any statutes, rules or regulations
required to be described in the Registration Statement or the Prospectus that
are not described or referred to therein as required;

(L) The statements under the captions "Risk Factors - Shares Eligible
for Future Sale," "Management - Employment Agreements," "Management - Stock
Option Plans," "Shares Eligible for Future Sale" and "Description of Capital
Stock" in the Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, are accurate summaries and
fairly and correctly present, in all material respects, the information called
for with respect to such documents and matters; provided that such counsel shall
be entitled to rely on representations of the Company with respect to certain
factual matters contained in such statements, and provided further that such
counsel shall state that nothing has come to the attention of such counsel which
leads them to believe that such representations are not true and correct in all
material respects;

(M) The execution, delivery and performance of this Agreement and the
consummation of the transactions therein contemplated do not and will not (a)
result in a breach of any of the terms or provisions of, or constitute a default
under, the certificate of incorporation or bylaws of the Company or any of its
Subsidiaries, any agreement or document filed as an exhibit to the Registration
Statement, or any United States federal or state statute, rule or regulation
applicable to the Company (except that no opinion need to be expressed with
respect to compliance with federal and state securities laws) or (b) to the
knowledge of such counsel, result in a breach or violation of any of the terms
or provisions of, or constitute a default or result in the acceleration of any
obligation under, any agreement of the Company included as an exhibit to the
Registration Statement or (c) to the knowledge of such counsel, result in a
violation or breach of, or constitute a default under, any applicable license,
authorization, approval, permit, judgment, franchise, order, writ or decree of
any court or governmental agency or body having jurisdiction over the Company;

(N) The Company has the corporate power and authority to own or lease
all of the assets owned or leased by it and to conduct its business, in each
case as described in the Registration Statement and the Prospectus, except where
failure to have such power and authority would not have a Material Adverse
Effect;

(O) No authorization, approval, consent, order, designation or
declaration of or filing by or with any governmental authority or agency is
necessary in

<PAGE>

connection with the execution and delivery of this Agreement by the Company
and the consummation of the transactions therein contemplated, except such as
may have been obtained under the Act and the Rules and Regulations or such as
may be required under state securities or Blue Sky laws or by the bylaws and
rules of the NASD in connection with the purchase and distribution of the
Shares by the Underwriters;

(P) To such counsel's knowledge, there are no pending or threatened
actions, suits, claims, proceedings or investigations of a character required to
be disclosed in the Registration Statement or the Prospectus under the Act or
the applicable Rules and Regulations, other than those described therein;

(Q) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of shares of Common Stock or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration Statement
and Prospectus, all holders of securities of the Company having registration
rights with respect to shares of Common Stock or other securities have, with
respect to the offering contemplated hereby, waived such rights or such rights
have otherwise been waived or such rights have expired by reason of lapse of
time following notification of the Company's intent to file the Registration
Statement or have included such securities in the Registration Statement
pursuant to the exercise of such rights;

(R) The Company will not, upon consummation of the transactions
contemplated by this Agreement, be an "investment company," or a "promoter" or
"principal underwriter" for, a "registered investment company," as such terms
are defined in the Investment Company Act of 1940, as amended;

In addition, such counsel shall include a statement to the effect that such
counsel has participated in conferences with officials and other representatives
of the Company, the Representatives, Underwriters' Counsel and the independent
public accountants of the Company, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed,
and although they have not verified the accuracy or completeness of the
statements contained in the Registration Statement or the Prospectus, nothing
has come to the attention of such counsel which caused them to believe that, at
the time the Registration Statement became effective, the Registration Statement
(except as to financial statements, financial and statistical data and
supporting schedules contained therein, as to which such counsel need express no
opinion) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or at the Closing Date or any later Option Closing Date,
as the case may be, the Registration Statement or the Prospectus (except as
aforesaid) contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary

<PAGE>

to make the statements therein, in light of the circumstances under which
they were made, not misleading.

Counsel rendering the foregoing may rely as to questions of fact upon
representations or certificates of officers of the Company and of governmental
officials, as the case may be, in which case its opinion is to state that it is
so doing and that it has no actual knowledge of any material misstatement or
inaccuracy in such opinions, representations or certificates, and that they
believe that they and the Underwriters are justified in relying on such opinions
or certificates. In connection with any opinion relating to the Underwriting
Agreement to which the laws of the State of New York apply, counsel may assume
that the laws of the State of California apply. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.

<PAGE>

APPENDIX B

2. Opinion of Wilson Sonsini Goodrich & Rosati P.C.

Wilson Sonsini Goodrich & Rosati P.C. shall opine to the effect that:

(A) This Agreement has been duly authorized, executed and delivered
by or on behalf of each of the Selling Stockholders;

(B) The execution and delivery by each of the Selling Stockholders
of, and the performance by each such Selling Stockholder of its obligations
under, this Agreement, the Custody Agreement and the Power of Attorney will not
result in (i) any violation of the Selling Stockholder's organizational
documents, (ii) the breach or violation of any of the terms and provisions, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement, bond, debenture, note agreement or other evidence of indebtedness, or
any lease, contract or other agreement or instrument to which the Selling
Stockholder is a party or by which its properties are bound, (iii) the breach
or violation of any federal, California or, to the best of our knowledge, local
statute, rule or regulation; provided however, that no opinion need be rendered
concerning state securities or Blue Sky laws, or (d) to the best of such
counsel's knowledge, the breach or violation of any judgment, order, writ or
decree of any government, arbitrator, court, regulatory body or administrative
agency, or other governmental agency or body having jurisdiction over the
Selling Stockholder or any of its properties or operations;

(C) No authorization, approval or consent of any regulatory body or
administrative agency or other governmental agency or body is necessary in
connection with the performance of this Agreement and consummation of the
transactions herein contemplated by the Selling Stockholders, except such as
have been obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;

(D) Each of the Underwriters who has purchased Seller Shares
(assuming they have purchased such shares in good faith and without notice of
any adverse claim within the meaning of the applicable Uniform Commercial Code),
upon payment for such Seller Shares, has received good and valid title to such
Seller Shares, free and clear of any security interests, claims, liens, and
encumbrances, except for security interests, claims, liens, and encumbrances
created or imposed by, or in favor of, the Underwriters; and

(E) Each of the Custody Agreement and the Power of Attorney has been
duly authorized, executed and delivered by or on behalf of each Selling
Stockholder and is a valid and binding agreement of each Selling Stockholder,
enforceable in accordance

B-1.

<PAGE>

with its terms except as to (i) rights to indemnity and contribution
hereunder which may be limited by applicable law, (ii) bankruptcy and laws
relating to the rights and remedies of creditors generally, and (iii) the
availability of equitable remedies.

Counsel rendering the foregoing opinion may rely as to questions of fact upon
representations or certificates of the Selling Stockholders or officers of the
Selling Stockholders no knowledge of any material misstatement or inaccuracy in
such opinions, representations or certificate. Representatives of the
Underwriters, and to Underwriters' counsel.

<PAGE>

APPENDIX C

PEREGRINE SYSTEMS, INC.

FOREIGN COUNSEL LEGAL OPINIONS

1. [Foreign Subsidiary] has been duly incorporated and is validly
existing, duly qualified to conduct business and in good standing under the laws
of [Country].

2. [Foreign Subsidiary] has the corporate power and authority to own,
lease and operate its properties and to conduct its business as presently
conducted and as proposed to be conducted.

3. [Foreign Subsidiary] has an authorized capitalization of ___________
shares, of which __________ shares are issued and outstanding. All the issued
shares of the capital stock of [Foreign Subsidiary] have been duly and validly
authorized and issued and are fully paid and nonassessable and are owned
directly or indirectly by Peregrine Systems, Inc. ("Peregrine"), free and clear
of all liens, encumbrances, equities or claims.

4. There are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer of, any shares of the
capital stock of [Foreign Subsidiary] pursuant to the charter or bylaws of
[Foreign Subsidiary], nor any agreement or other instrument known to us
providing for such rights or restrictions.

5. To the best of our knowledge, there are no legal or governmental
proceedings pending to which [Foreign Subsidiary] is a party or of which any
property or assets of [Foreign Subsidiary] are subject which, if determined
adversely to [Foreign Subsidiary], would have a material adverse effect on the
business, operating results or financial condition of [Foreign Subsidiary] and,
to the best of our knowledge, no such proceedings are threatened or contemplated
by governmental authorities in [Country] or threatened by others.

6. The issue and sale to the public of shares of Common Stock of
Peregrine, pursuant to a Registration Statement on Form S-1 filed with and
declared effective by the United States Securities and Exchange Commission, will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known by us to which
[Foreign Subsidiary] is a party or by which [Foreign Subsidiary] is bound or to
which any of the property or assets of [Foreign Subsidiary] is subject, nor will
such actions result in any violation of the provisions of the charter or bylaws
of [Foreign Subsidiary] or any statute, order, rule or regulation known to us to
be applicable to [Foreign Subsidiary] under the laws of [Country].

<PAGE>

<PAGE>
SKUNKWARE ACQUISITION AGREEMENT

This Acquisition Agreement ("Agreement") dated November 29, 1995, is
entered into effective as of October 31, 1995 by and among Peregrine Systems,
Inc., a Delaware corporation ("Peregrine"), Peregrine/Bridge Transfer
Corporation, a Delaware corporation and a wholly-owned subsidiary of Peregrine
(the "Subsidiary"), and Skunkware, Inc., a Delaware corporation (the "Buyer").

RECITALS

A. Peregrine, located in San Diego, California, has transferred and
assigned to the Subsidiary all assets and related liabilities connected with
Peregrine's database software division (known as "Skunkware") that is presently
operated from the Company's facilities in Texas (the "Business").

B. The parties hereto desire to provide for the purchase by the Buyer of
all of the outstanding shares of capital stock of the Subsidiary and to effect
the other transactions contemplated by this Agreement.

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE I.

SUBSIDIARY STOCK AND ROYALTY PAYMENT

1.1 PURCHASE AND SALE OF STOCK. Subject to the terms and conditions of
this Agreement, Peregrine hereby assigns, transfers, and sells, and the Buyer
hereby purchases, 1,000 shares of common stock, $.001 par value per share, of
the Subsidiary (the "Shares") for an aggregate purchase price of $559,144.46,
payable by check to Peregrine.

1.2 ROYALTY PAYMENTS. In connection with the change of ownership of the
Subsidiary resulting from the sale and purchase of the Shares, the Subsidiary
agrees to pay Peregrine a royalty equal to seven percent (7%) on the gross
license revenues derived from licensed sales beginning November 1, 1995 by the
Subsidiary or any affiliate of all software products, now existing and to be
developed in the future, but exclusive of the software products previously
acquired by Peregrine that are specifically identified in EXHIBIT B attached
hereto and exclusive of the software products licensed for resale or acquired in
the future by the Subsidiary (the software products for which royalties are
payable hereunder referred to herein as the "Software Products"). Such royalty
payments will be payable on a quarterly basis commencing January 1, 1996, will
be limited to $600,000 in any single calender year period, and will be
considered fully paid upon the first to occur of (i) after discounting at the
rate of 9% per annum for each quarterly payment made from the date of payment to
October 31, 1995, accumulated payments valued at $677,000 having been made to

<PAGE>

Peregrine or (ii) November 1, 2001 if all quarterly payments required by this
Section 1.2 have been made.

1.3 ACCESS TO PRODUCT INFORMATION. For as long as royalty payments are
due and owing to Peregrine pursuant to Section 1.2 above, the Subsidiary shall
make available and maintain until the expiration of two years after the end of
the year to which they pertain, complete books, records and accounts regarding
licensed sales by the Subsidiary or any affiliate of the Software Products, in
order to calculate and confirm the Subsidiary's payment obligations hereunder.
Upon reasonable notice to the Subsidiary, and not more than twice a year,
Peregrine or its designated representative shall have the right to examine such
books, records and accounts during the Subsidiary's normal business hours to
verify the Subsidiary's activities (including those activities of its
affiliates) under this Agreement. Where such examination discloses a shortfall
of more than five percent (5%) for the period being audited, the Subsidiary
agrees to pay or reimburse Peregrine for its reasonable auditing expenses upon
written request by Peregrine.

ARTICLE II.

LICENSE OF SOFTWARE

2.1 SOFTWARE LICENSE. Concurrently with the execution of this Agreement,
Peregrine Bridge Subsidiary, Inc., a wholly owned subsidiary of Peregrine, and
the Subsidiary have entered into a Software License Agreement, a copy of which
is attached as EXHIBIT A hereto (the "License Agreement").

ARTICLE III.

REPRESENTATIONS AND WARRANTIES OF PEREGRINE

Peregrine hereby represents and warrants to Buyer as follows, except as
disclosed in a schedule of exceptions attached as EXHIBIT B hereto (the
"Disclosure Schedule"):

3.1 ORGANIZATION. Each of Peregrine and the Subsidiary is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and has all requisite corporate power and authority to own
and lease all of its properties and assets and to carry on its business as it is
now being conducted. Neither of Peregrine nor the Subsidiary is qualified to do
business as a foreign corporation in any state other than California, Texas and
New Hampshire in the case of Peregrine.

3.2 AUTHORITY. Peregrine has all requisite corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by Peregrine and the
consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Peregrine. This

-2-
<PAGE>

Agreement has been duly executed and delivered by Peregrine and constitutes a
valid and binding obligation, enforceable against Peregrine in accordance with
its terms. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, result in any
violation of, or default under, any provision of the Certificate of
Incorporation or Bylaws of either Peregrine or the Subsidiary or any agreement,
instrument, judgment or law applicable to Peregrine or the Subsidiary, other
than such violations or defaults which individually or in the aggregate would
not have a material adverse effect on the Subsidiary.

3.3 SUBSIDIARY CAPITAL STRUCTURE. The authorized capital stock of the
Subsidiary consists of 1,000 shares of Common Stock, $.001 par value per share.
At the date of this Agreement, all of the Shares are issued and outstanding and
held by Peregrine. All of the Shares are validly issued, fully paid and
nonassessable, and free of any liens, encumbrances or claims of any kind (other
than restrictions on transfer under applicable securities laws), and not subject
to preemptive or similar rights. There are no rights, commitments or agreements
of any character to which Peregrine or the Subsidiary is a party or by which it
is bound obligating the Subsidiary to issue, deliver or sell additional shares
of the capital stock of the Subsidiary or obligating the Subsidiary to enter
into any such right, commitment or agreement.

3.4 CORPORATE RECORDS. Full and complete copies of the Certificate of
Incorporation, Bylaws and corporate records of the Subsidiary have been made
available to the Buyer.

3.5 LIABILITIES AND OBLIGATIONS. Included as part of the Disclosure
Schedule attached hereto is a schedule of all liabilities and obligations of the
Subsidiary as of the date of this Agreement (the "Liabilities"). The Subsidiary
has no liability or obligation except as set forth on such schedule, and except
for customary obligations related to the conduct of business by the Subsidiary
in corporate form, including the payment of corporate franchise taxes, foreign
qualification fees and the like.

3.6 ASSETS. The Subsidiary has good title to all of the rights,
properties and assets identified in Disclosure Schedule attached hereto (the
"Assets"), free and clear of all liens, claims and encumbrances other than
(a) the lien of current taxes not yet due and payable, and (b) possible liens
and encumbrances which do not in any case materially detract from the value of
the asset subject thereto and which have not arisen otherwise than in the
ordinary course of business. Subject to the foregoing, Peregrine offers no
representation or warranty with respect to the condition, suitability or fitness
for any particular purpose of any of the Assets.

ARTICLE IV.

ADDITIONAL AGREEMENTS

4.1 EMPLOYEES. Effective on the date hereof, the Subsidiary has offered
employment to each of the individuals identified on EXHIBIT C attached hereto
(the "Employees"), and each of the Employees has accepted such employment with
the Subsidiary. In connection with such

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<PAGE>

acceptance, each Employee has waived all claims for severance and any other
employment claims relating to each Employee's employment by Peregrine prior
to the effective date of this Agreement.

4.2 RESOURCE SHARING AGREEMENT. Peregrine and the Subsidiary agree to
negotiate in good faith and to enter into an agreement mutually acceptable to
Peregrine and the Subsidiary with respect to the Subsidiary's access to
Peregrine administrative or computer resources on a transitional basis to enable
the Subsidiary to continue operations with minimal disruption resulting from the
transactions contemplated by this Agreement. Any such agreement shall provide
reasonable compensation to Peregrine at commercial rates.

4.3 LEASE ASSIGNMENT. Peregrine and the Subsidiary agree to use their
reasonable best efforts to obtain the approval of INTCO Properties L.P., the
lessor of the premises of the Business located in Austin, Texas, with respect to
the assignment from Peregrine to the Subsidiary of the real property lease for
such premises.

ARTICLE V.

MISCELLANEOUS

5.1 AMENDMENT. This Agreement may be amended, modified or supplemented
only by an instrument in writing executed by the party against which enforcement
of the amendment, modification or supplement is sought.

5.2 ASSIGNMENT. Neither this Agreement nor any right created hereby shall
be assignable by any party hereto.

5.3 NOTICE. Any notice or communication must be in writing and given by
depositing the same in the United States mail, addressed to the party to be
notified, postage prepaid and registered or certified with return receipt
requested, or by delivering the same in person. Such notice shall be deemed
received on the date on which it is hand-delivered or on the third business day
following the date on which it is so mailed. For purposes of notice, the
addresses of the parties shall be:

If to the Buyer or Skunkware, Inc.
to the Subsidiary: c/o John Moores
JMI Services, Inc.
1119 St. Paul Street
Baltimore, Maryland 21202

With a copy to: Mr. Charles E. Noell
JMI Services, Inc.
1119 St. Paul Street
Baltimore, Maryland 21202

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<PAGE>

If to Peregrine: Peregrine Systems, Inc.
12670 High Bluff Drive
San Diego, California 92130
Attn: Mr. David A. Farley

With a copy to: Douglas H. Collom, Esq.
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050

Any party may change its address for notice by written notice given to the
other parties.

5.4 ENTIRE AGREEMENT. This Agreement and the exhibits hereto supersede
all prior agreements and understandings relating to the subject matter hereof.

5.5 COSTS, EXPENSES AND LEGAL FEES. Whether or not the transactions
contemplated hereby are consummated, each party hereto shall bear its own costs
and expenses in connection with the transaction contemplated hereby.

5.6 GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereto shall be governed, construed and enforced in accordance with the
laws of the State of California.

5.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

"PEREGRINE" PEREGRINE SYSTEMS, INC.
a Delaware corporation

By: /s/ David A. Farley
-----------------------------------
David A. Farley
Chief Financial Officer

"BUYER" SKUNKWARE, INC.
a Delaware corporation

By: /s/ Charles E. Noell
-----------------------------------
Charles E. Noell
President

"SUBSIDIARY" PEREGRINE/BRIDGE TRANSFER CORPORATION
a Delaware corporation

By: /s/ John Woodall
-----------------------------------
John Woodall
President

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<PAGE>

EXHIBIT A

SOFTWARE LICENSE AGREEMENT

THIS SOFTWARE LICENSE AGREEMENT, dated November 29, 1995 and effective as
of October 31, 1995 (the "Effective Date"), is made and entered into between
Peregrine Bridge Subsidiary, Inc., a Delaware corporation with principal offices
at 12670 High Bluff Drive, San Diego, California 92130 ("Bridge"), and
Peregrine/Bridge Transfer Corporation, a Delaware corporation, with an address
at 6034 West Courtyard, Suite 230, Austin, Texas 78730 ("Transfer Corp.").

IN CONSIDERATION OF THE MUTUAL PROMISES CONTAINED HEREIN, THE PARTIES AGREE
AS FOLLOWS:

SECTION 1

GRANT OF RIGHTS

1.1 LICENSE GRANT. Bridge hereby grants to Transfer Corp. a
non-exclusive, perpetual, nontransferable (except as provided in Section
8.2), worldwide, royalty bearing license to use, modify, prepare and have
prepared derivative works of, perform, and display the software described in
EXHIBIT A attached hereto (the "Software"), in source code and object code
form, to incorporate the Software in or bundle it with Transfer Corp.'s
products and to reproduce and have reproduced, distribute and sublicense
copies of the Software, and any modifications and derivative works thereof
prepared by or on behalf of Transfer Corp., to Transfer Corp.'s customers
either as stand-alone products or for use in conjunction with Transfer
Corp.'s products. Bridge further grants to Transfer Corp. a non-exclusive,
perpetual, worldwide license to use, prepare and have prepared derivative
works of, and reproduce and have reproduced the documentation for, the
Software (the "Documentation") and derivative works thereof prepared by or
for Transfer Corp., and to distribute the Documentation and such derivative
works in connection with Transfer Corp.'s authorized distribution of the
Software.

1.2 SUBLICENSE RIGHTS. Transfer Corp. shall have the right to grant and
authorize sublicenses of the rights granted pursuant to Section 1.1 to its
affiliates and to value added resellers ("VARs") and original equipment
manufacturers ("OEMs") with the prior written approval of Bridge, which shall
not be unreasonably withheld. Transfer Corp. shall enter into written
agreements with all such affiliates, VARs and OEMs who are given access to the
Software or Documentation that ensure that such sublicensees abide by the
restrictions on the Software contained in this Agreement.

1.3 END USER LICENSING. Transfer Corp. and its permitted sublicensees
shall distribute the Software pursuant to written license agreements on
reasonable terms and conditions determined by them in their discretion.

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<PAGE>

1.4 COPYRIGHT NOTICES. Transfer Corp. will, and will ensure that its
sublicensees, reproduce Bridge's copyright notice(s) for the Software in the
same manner and location as Transfer Corp. includes copyright notices of other
third party software.

1.5 OWNERSHIP. Transfer Corp. shall own all modifications and derivative
works of the Software made at the expense of Transfer Corp., subject to Bridge's
ownership of the underlying Software. Such derivative works shall be subject to
the royalty obligations of Transfer Corp. and other restrictions on the Software
in this Agreement.

1.6 RIGHT OF FIRST OFFER TO PURCHASE THE SOFTWARE. Transfer Corp. will
have the right of first offer to purchase all of Bridge's right, title and
interest in the Software and Documentation (A) if Bridge decides to offer the
Software for sale or decides to license another party to use and distribute the
Software or (B) if Peregrine Systems, Inc., Bridge's parent corporation,
decides to sell all or substantially all of its assets. In the event that
Bridge decides to offer the Software for sale or license to another entity, or
Peregrine Systems decides to sell all or substantially all of its assets as
described above, Bridge will give written notice thereof to Transfer Corp.
Transfer Corp. may purchase the Software and Documentation following receipt of
such notice and may do so by paying Bridge in cash on or prior to consummation
of either of the transactions described in (A) or (B) above an amount equal to
One Million Ninety Thousand Dollars ($1,090,000) less the sum of all royalty
payments and license fees made hereunder to the date of payment of such purchase
price. Upon any purchase by Transfer Corp. of all Bridge's right, title and
interest in the Software and Documentation, Transfer Corp. agrees to grant, and
does hereby grant, to Bridge's parent company, Peregrine Systems, Inc.
("Peregrine") a non-exclusive, perpetual, irrevocable, worldwide license to use,
prepare and have prepared derivative works of, and reproduce and incorporate in
Peregrine's products existing as of the Effective Date and distribute solely as
part of such products the Software or any portions or derivative works thereof.

SECTION 2

CONSIDERATION, REPORTS AND AUDIT RIGHTS

2.1 ROYALTIES. In consideration for the license granted pursuant to
Section 1, Transfer Corp. agrees to pay royalties to Bridge as follows:
Transfer Corp. shall pay royalties to Bridge in the amount of two percent (2%)
of gross revenues from sales of products containing the Software sold by
Transfer Corp. or received from its sublicensees in the form of license fees or
royalties for sublicensing the Software. Royalties shall be payable to Bridge
quarterly within thirty (30) days of the end of each calendar quarter after the
Effective Date. Transfer Corp. will submit with each royalty payment a written
report of its sales of products containing the Software and its sublicensing
activities showing the basis for the royalty payments made, including a report
with enough information to enable Bridge to determine its royalty obligations to
the former sole stockholder of Bridge Technology, Inc., pursuant to Section 1.4
of the Agreement and Plan of Reorganization dated March 16, 1995. Once total
royalties paid to Bridge hereunder reach One Million Ninety Thousand Dollars
($1,090,000), the license granted herein to Transfer Corp. shall be fully paid
and no more

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<PAGE>

royalties will be due to Bridge. In addition to payment of royalties
hereunder, Transfer Corp. shall pay Bridge upon execution of this Agreement
a nonrefundable license fee in the amount of Two Hundred Thousand Dollars
($200,000), which shall be credited against future royalties due to Bridge.
For purposes of this Agreement, "gross revenue from sales of products" shall
mean Transfer Corp.'s gross proceeds actually received from sale of products
containing the Software, or any portion thereof, after deducting product
returns for credit or cash and sales taxes and freight and insurance charges,
if the same are included in the customer invoice as part of the price of such
products.

2.2 TAXES. Transfer Corp. shall be responsible for and shall pay any and
all taxes imposed on the licensing and delivery of the Software and
Documentation to Transfer Corp. This shall include, without limitation, sales,
use, property, license, value added, excise, franchise, foreign withholding, or
income taxes, other than such taxes which are imposed by the United States or
any political subdivision thereof on the net income of Bridge.

2.3 REPORTS AND AUDIT RIGHTS. Transfer Corp. agrees to make and maintain
until the expiration of two (2) years after the end of the year to which they
pertain, complete books, records and accounts regarding Transfer Corp's copying
and distribution and sublicensing activities regarding the Software, in order to
calculate and confirm Transfer Corp.'s royalty obligations hereunder. Upon
reasonable notice of Bridge and no more than once a year, Bridge, or Bridge's
representative, shall have the right to examine such books, records and accounts
during Transfer Corp's normal business hours to verify Transfer Corp.'s copying
and distribution activities under this Agreement and its revenues earned from
sublicensing rights in the Software to third parties, in order to calculate and
confirm Transfer Corp.'s royalty obligations hereunder. If any such examination
discloses a shortfall in payment to Bridge, Transfer Corp. shall pay such
amounts to Bridge within thirty (30) days of such disclosure. Where such
examination discloses a shortfall of more than five percent (5%) for the period
being audited, Transfer Corp. agrees to pay or reimburse Bridge for its
reasonable auditing expenses upon written request by Bridge.

SECTION 3

WARRANTY DISCLAIMER AND INDEMNIFICATION

3.1 DISCLAIMER OF WARRANTY. THE SOFTWARE AND DOCUMENTATION ARE LICENSED
"AS IS". BRIDGE MAKES AND TRANSFER CORP. RECEIVES NO WARRANTIES IN CONNECTION
WITH THE SOFTWARE OR DOCUMENTATION, EXPRESS, IMPLIED, STATUTORY OR IN ANY
COMMUNICATION BETWEEN BRIDGE AND TRANSFER CORP. BRIDGE SPECIFICALLY DISCLAIMS
ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
AGAINST INFRINGEMENT WITH RESPECT TO THE SOFTWARE AND DOCUMENTATION AND THEIR
USE, OPERATION, DISTRIBUTION OR SUPPORT.

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<PAGE>

3.2 INFRINGEMENT INDEMNITY.

(a) INDEMNITY. Bridge agrees, at its expense, to defend or, at its
option, to settle, any claim or proceeding brought against Transfer Corp. on
the issue of infringement of any copyright or trade secret of any third party
by the Software or Documentation as used within the scope of this Agreement,
and to indemnify Transfer Corp. against all damages, costs, liability and
expense (including court costs and reasonable fees of attorney and other
professionals) which may be assessed against Transfer Corp. under any such
claim or proceeding. Transfer Corp. shall provide Bridge with (i) prompt
written notice after Transfer Corp. first becomes aware of such claim or
proceeding, (ii) sole control and authority over the defense or settlement
thereof and (iii) proper and full information and assistance to settle and/or
defend any such claim or action. Without limiting the foregoing, if a final
injunction is, or Bridge believes, in its sole discretion, is likely to be,
entered prohibiting the use of the Software or Documentation by Transfer
Corp. as contemplated herein, Bridge may, at its sole option and expense,
either: (A) procure for Transfer Corp. the right to use the infringing
Software or Documentation as provided herein, (B) replace the infringing
Software or Documentation with non-infringing, functionally equivalent
products; or (C) suitably modify the infringing Software or Documentation so
that it is not infringing.

(b) EXCEPTIONS. Notwithstanding the provisions of Section 3.2(a)
above, Bridge assumes no liability for (i) infringement claims arising from
combination of the Software or Documentation with other software or products not
provided by Bridge, but not covering the Software or Documentation standing
alone, (ii) the modification of the Software or Documentation unless such
modification was made by Bridge, or (iii) any claims, demands, or proceedings
arising out of the BMC Dispute (which is more particularly referenced in the
Skunkware Acquisition Agreement dated concurrently herewith among Peregrine
Systems, Transfer Corp. and Skunkware, Inc.).

(c) If exercise by Transfer Corp. of any rights granted to Transfer
Corp. herein is enjoined, or in Transfer Corp.'s opinion is likely to be
enjoined, Bridge at its option and expense may: (i) procure from the person or
persons claiming infringement a license for Transfer Corp. and its licensees and
sublicensees at all levels to continue to exercise all rights granted under this
Agreement with respect to the Software and Documentation, or (ii) modify the
allegedly infringing item to avoid the infringement, without materially
impairing performance of the Software or Documentation.

3.3 TRANSFER CORP. INDEMNITY. Transfer Corp. agrees to indemnify Bridge
and to hold Bridge harmless from all costs, loss, liability and expense
(including court costs and reasonable fees of attorneys and other professionals)
from any claims, demands or proceedings brought against or incurred by Bridge
arising from or in connection with the use, modification, distribution and
support of the Software or Documentation by Transfer Corp. or its sublicensees,
agents or distributors or end-user customers, including Transfer Corp.'s
obligations hereunder in connection with the existing licenses and customer
support agreements for the Software and Documentation, but excluding any claims,
demands and proceedings to the extent covered by Bridge's indemnity obligations
under Section 3.2.

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<PAGE>

SECTION 4

CONFIDENTIALITY

4.1 OBLIGATIONS. "Confidential Information" consists of the source code
of the Software. Except as expressly authorized in writing by Bridge or except
as reasonably required by Transfer Corp. to exercise its rights under the
licenses granted in this Agreement (and subject to a confidentiality agreement
with any third party to whom such information is disclosed), Transfer Corp. will
keep confidential and will not directly or indirectly divulge to any person or
entity or use the Confidential Information.

4.2 EXCEPTIONS. The foregoing restrictions will not apply to information
that (i) is known to Transfer Corp. at the time of communication to Transfer
Corp., (ii) has become publicly known through no wrongful act of Transfer Corp.,
(iii) has been rightfully received from a third party authorized to make such
communication without restriction, (iv) has been independently developed by
employees of Transfer Corp. not having access to Confidential Information or
(v) has been approved for release by written authorization of Bridge.

4.3 SOURCE CODE PROTECTION. Transfer Corp. agrees to use the source code
of the Software under carefully controlled conditions in accordance with and for
the purposes of this Agreement and to inform those employees and contractors who
are given access to the source code by Transfer Corp. that such materials are
the confidential and proprietary information of Transfer Corp. and its licensor
and disclosed to the employees as such. Transfer Corp. agrees to limit access
to the source code strictly to those employees and contractors who require
access in order to carry out the purposes of this Agreement. Transfer Corp.
shall be fully responsible for the conduct of all its employees, agents and
sublicensees who may in any way breach this Agreement. Transfer Corp. shall
enter into its standard written nondisclosure and assignment of inventions
agreement with its employees and contractors who are granted access to the
Confidential Information.

4.4 REMEDIES. Any breach of the restrictions contained in this Section 4
is a breach of this Agreement which may cause irreparable harm to Bridge
entitling Bridge to obtain injunctive relief in addition to all legal remedies.

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<PAGE>

SECTION 5

TRADEMARKS AND MARKETING

Transfer Corp. will have the right to distribute and market the Software
and Documentation under its own trademarks, service marks and logos or under
the BRIDGE and FASTLOAD trademarks of Bridge (the "Bridge Marks"). Upon
Bridge's request, all representations of the Bridge Marks used or to be used by
Transfer Corp. will be submitted for approval of design, color and other
details.

SECTION 6

SOFTWARE SUPPORT

Transfer Corp. will assume all responsibility for maintenance and support
of the Software and Documentation for itself, its sublicensees and end users.
In addition, Transfer Corp. agrees to take over Bridge's responsibilities under
existing license and/or support agreements with licensees, all of which are
listed in Exhibit A, and perform all obligations thereunder for all existing
licensees of the Software. Bridge hereby assigns and delegates all such
obligations and duties and all related rights to Transfer Corp., and Transfer
Corp. agrees to assume such obligations and duties. Transfer Corp. will notify
such customers in writing of its assumption of such responsibilities promptly
after receiving from Bridge a list of the customers' names and addresses.
Transfer Corp. will have the right to enter into new support agreements in its
own name and on its own behalf with such customers upon expiration of existing
agreements. Bridge shall have no liability under any such new agreements.

SECTION 7

TERM AND TERMINATION

7.1 TERM. Unless earlier terminated this Agreement shall remain in effect
perpetually.

7.2 TERMINATION FOR DEFAULT. This Agreement will terminate automatically
if either party defaults on any of its material obligations hereunder and fails
to remedy such default within one hundred twenty (120) days after written notice
of such default given by the nonbreaching party.

7.3 TERMINATION ON PURCHASE OF THE SOFTWARE. This Agreement will
terminate upon purchase of the Software by Transfer Corp. pursuant to Section
1.6.

7.4 EFFECT OF TERMINATION. Upon termination of this Agreement for
default, the licenses granted herein and any sublicenses of the rights granted
hereunder shall terminate, except that end users may continue to use the
Software under sublicenses granted prior to the date of termination. In

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case of the purchase of the Software by Transfer Corp., the licenses granted
herein to Transfer Corp. shall terminate upon the closing date of such
purchase transaction, but sublicenses granted by Transfer Corp. and Transfer
Corp.'s obligations to continue to support existing licensees of the Software
shall survive. Transfer Corp. shall, at Bridge's option, return to Bridge
or destroy the original and all copies of Confidential Information and
certify in writing as to its destruction, except that in case of purchase of
the Software by Transfer Corp., Transfer Corp. may retain the source code
and Documentation of the Software and such other Confidential Information
related to the Software and Documentation as is necessary to continue to
license and support the Software.

SECTION 8

GENERAL PROVISIONS

8.1 GOVERNING LAW AND JURISDICTION. The rights and obligations of the
parties under this Agreement shall be governed by and construed under the laws
of the State of California without reference to conflict of laws principles.

8.2 ASSIGNMENT. This Agreement may not be transferred or assigned by
Transfer Corp., without the prior written consent of Bridge. Any such attempted
transfer or assignment will be void. Notwithstanding the foregoing, Transfer
Corp. may assign this Agreement and its rights and obligations thereunder to an
entity that succeeds to all or substantially all of its assets or business,
provided that the assignee or transferee agrees in writing to comply with all
the terms and restrictions contained in this Agreement. Subject to the
foregoing provisions, this Agreement will be binding upon and inure to the
benefit of the parties hereto, their successors and assigns.

8.3 EXPORT CONTROL. Any and all obligations of Bridge to provide the
Software and Documentation will be subject in all respects to such United States
laws and regulations s will from time to time govern the license and delivery of
technology and products abroad by persons subject to the jurisdiction of the
United States, including the Export Administration Act of 1979, as amended, any
successor legislation and the Export Administrations issued by the Department of
Commerce, Bureau of Export Administration. Transfer Corp. agrees not to export
the Software or Documentation or any technical data related thereto except in
conformity with such laws and regulations.

8.4 MODIFICATION. No modification to this Agreement, nor any waiver of
any rights, will be effective unless agreed in writing by the party to be
charged, and the waiver of any breach or default will not constitute a waiver of
any other right hereunder or any subsequent breach or default.

8.5 LIMITATION OF LIABILITY. IN NO EVENT WILL BRIDGE BE LIABLE FOR ANY
LOSS OF DATA, LOST PROFITS, COST OF PROCUREMENT OF SUBSTITUTE TECHNOLOGY OR
SERVICES OR FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES
ARISING IN ANY WAY OUT OF THIS AGREEMENT, HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY, WHETHER FOR BREACH OF

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CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE. THIS LIMITATION WILL
APPLY EVEN IF BRIDGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.

8.6 NOTICES. Any required notices hereunder will be given in writing at
the address of each party first set forth above, or to such other address as
either party may substitute by written notice to the other in the manner
provided herein, and will be deemed served when delivered or, if delivery is not
accomplished by reason or some fault of the addressee, when tendered.

8.7 SURVIVAL PROVISIONS. The following provisions will survive
termination of this Agreement for any reason: Section 3 (Warranty Disclaimer
and Indemnification), 4 (Confidentiality), 7.5 (Effect of Termination) and 8
(General Provisions), as well as any payment obligations that have accrued prior
to termination.

8.8 ENTIRE AGREEMENT. This Agreement, including Exhibit A, which is
incorporated herein by reference, constitutes the entire and exclusive Agreement
between the parties hereto and supersedes any and all prior proposals,
agreements and representations between them, whether written or oral, with
respect to its subject matter.

8.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed an original, but all of which together will constitute one
and the same instrument.

8.10 SEVERABILITY. All terms and provisions of this Agreement shall,
if possible, be construed in a manner which makes them valid, but in the event
any term or provision of this Agreement is found by a court of competent
jurisdiction to be illegal or unenforceable, the validity or enforceability of
the remainder of this Agreement shall not be affected so long as neither party
is thereby denied the material economic benefit intended by this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.

PEREGRINE BRIDGE SUBSIDIARY, INC. PEREGRINE/BRIDGE TRANSFER CORPORATION

By: /s/ AUTHORIZED SIGNATORY By: /s/ JOHN WOODALL
_________________________ _________________________
Name: _______________________ John Woodall
Title: ____________________ President

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EXHIBIT A

PRODUCTS TO BE LICENSED TO TRANSFER CORP.

1. Bridge/Fastload for DB2/2 Server Edition

2. Bridge/Fastload for DB2/2 Mainframe Edition

3. Bridge/Fastload for DB2/2/6000 Server Edition

4. Bridge/Fastload for DB2/2/6000 Mainframe Edition

5. Bridge/Fastload for SYBASE Server Edition

6. Bridge/Fastload for SYBASE Mainframe Edition

7. Bridge Monitor for DB2/2/6000

EXISTING BRIDGE SOFTWARE LICENSE AGREEMENTS

ABSA Bank
Denel Properties
African Explosives and Chemical Industries
South African Airways
BMW South Africa
EDS
Computer/Alliance/Information Technologies

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<PAGE>

EXHIBIT B

SKUNKWARE ASSETS AND LIABILITIES

ASSETS

Furniture & Fixtures -- Texas 33,056.26
Accum Depr -- Furn & Fix -- Texas (1,813.00)
Office Equipment -- Texas 12,214.36
Accum Depr -- Off Equip -- Texas (1,379.00)
Data Processing Equip -- Texas 70,083.00
Accum Depr -- DP Equip -- Texas (9,528.00)
Software -- Texas 26,054.32
Accum Depr -- Software -- Texas (2,085.00)
Leasehold Improvements -- Texas 14,621.50
Accum Depr -- Lease Imp -- Texas (1,706.00)
----------
139,518.44

Purchases by Peregrine for Skunkware 189,121.03

Purchased Cap Software 102,252.34
Amortization -- Cap Software (84,544.03)
----------
Net 17,708.31

Deposits
Office lease -- Irving, TX 6,283.50
Office lease -- Austin, TX 1,401.84
Furniture rental -- Irving, TX 857.34
----------
Total deposits 8,542.68
----------
TOTAL ASSETS 354,890.46
----------

LIABILITIES

Accrued Vacation -- TX Employees 32,578.74
Accrued Vacation -- JO 4,260.13
----------
36,838.87

Deferred Maintenance -- Bridge 7,618.00
----------
TOTAL LIABILITIES 44,456.87
----------
NET ASSETS 310,433.59
==========

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EXHIBIT B

TECHNOLOGICAL SOFTWARE ASSETS

(excluded from the definition of "Software Products"
under Section 1.2 of the Skunkware Acquisition Agreement)

Purchased Computer Programs:

1. IPS Data Base Performance, Space Management and
Integrity Monitor for IMS and CICS, OL/1 and DEDB
Data Bases.

2. IOVF EXTENSION Extending a DEBD without data base reorganization.

3. D.P. AUDITOR Auditing IMS and CICS DL/1 systems.

4. C.A.S.S. Change Accumulation Sub-system. Real-time change
accumulation sub-system.

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<PAGE>

EXHIBIT B

OTHER ASSETS TO BE TRANSFERRED

ASSETS:

Software License Agreements:
ABSA Bank
Denel Properties
African Explosives and Chemical Industries
South African Airways
BMW South Africa
EDS
Computer Alliance/Information Technologies

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<PAGE>

EXHIBIT C

PEREGRINE/BRIDGE TRANSFER CORPORATION
EMPLOYEES

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<PAGE>

PEREGRINE/BRIDGE TRANSFER CORPORATION
EMPLOYEES

Jack Olson
Wayne Fisher
Tom Harper
Rickey Chevrie
Kevin Cogley
Dempsey Darrow
Tom Hintz
Craig Knutson
Molly Markley
Tom McMillan
Tom Price
Gerald Tavolino
Craig Taylor
Robert Young
Jane McMaster
Dana Ponder-Henson

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<PAGE>

AGREEMENT AND PLAN OF MERGER

This Agreement and Plan of Merger dated as of November 30, 1995 (the
"AGREEMENT") by and among Peregrine Systems, Inc., a Delaware corporation
("PEREGRINE"), XVT Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Peregrine (the "COMPANY"), and XVT Software Inc., a Delaware
corporation ("XVT"; XVT and the Company being hereinafter sometimes called the
"CONSTITUENT CORPORATIONS"):

WITNESSETH:

WHEREAS, the authorized capital stock of Peregrine consists of (i)
2,000,000 shares of Preferred Stock, par value $.001 per share, of which no
shares are issued and outstanding, and (ii) 20,000,000 shares of Common Stock,
par value $.001 per share (the "PEREGRINE COMMON"), of which 5,101,963 shares
are issued and outstanding;

WHEREAS, the authorized capital stock of the Company consists of 100 shares
of Common Stock, par value $.0l per share, all of which shares are outstanding
and owned beneficially and of record by Peregrine;

WHEREAS, the authorized capital stock of XVT consists of (a) 520,918 shares
of Preferred Stock, (i) 192,588 shares of which have been designated as Series A
Convertible Preferred Stock, par value $.001 per share (the "XVT SERIES A
PREFERRED"), of which 192,588 shares are issued and outstanding, (ii) 93,808
shares of which have been designated as Series B Convertible Preferred Stock,
par value $.001 per share (the "XVT SERIES B PREFERRED"), of which 93,808 shares
are, issued and outstanding, and (iii) 234,522 shares of which have been
designated as Series C Convertible Preferred Stock, par value $.001 per share
(the "XVT SERIES C PREFERRED," the XVT Series A Preferred, XVT Series B
Preferred and the XVT Series C Preferred collectively, the "XVT PREFERRED"), of
which 140,713 shares are issued and outstanding, and (ii) 7,000,000 shares of
Common Stock, par value $.0005 per share (the "XVT COMMON"), of which 1,230,768
shares are issued and outstanding;

WHEREAS, the respective Boards of Directors of Peregrine, the Company and
XVT have by resolutions approved this Agreement and deem it advisable for the
mutual benefit of the Constituent Corporations, and of the respective
stockholders of each, that the Company merge with and into XVT under and
pursuant to the General Corporation Law of the State of Delaware (the "DELAWARE
CORPORATION LAW") and upon the terms and subject to the conditions hereinafter
set forth; and

WHEREAS, the parties intend by executing and delivering this Agreement, to
adopt a plan of reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");

<PAGE>

NOW, THEREFORE, in consideration of these premises and the mutual
agreements, provisions and covenants contained in this Agreement, the parties
hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 CERTAIN DEFINITIONS. For purposes of this Agreement, the following
terms shall have the meanings set forth below:

"AFFILIATE" means, with respect to a specified Person, any Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the Person specified.

"GOVERNMENTAL AUTHORITY" means any government, court, tribunal, regulatory
or administrative agency or commission, or other governmental authority, agency
or instrumentality, whether federal, state or local (domestic or foreign).

"LIEN" means, with respect to any asset, any mortgage, lien, pledge, claim,
charge, security interest, easement, assessment, restrictive covenant,
reservation, restriction or encumbrance of any kind in respect of such asset.

"MATERIAL ADVERSE EFFECT" means, with respect to a specified Person, a
material adverse affect on the business, assets, condition (financial or
otherwise) or result of operations of the Person.

"PERSON" means an individual, corporation, partnership, joint venture,
limited liability company, limited liability partnership, association, trust or
other entity or organization, including a Governmental Authority.

1.2 ADDITIONAL DEFINITIONS. Each of the following terms is defined in the
Section set forth opposite such term:

TERM SECTION
---- --------
Agreement Recitals
Closing 2.7
Closing Date 2.7
Code Recitals
Common Exchange Ratio 3.3
Company Recitals
Constituent Corporations Recitals
Delaware Corporation Law Recitals
Dissenting Shares 3.7

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TERM SECTION
---- --------
Effective Time 2.2
Merger 2.1
Outstanding Options 6.5
Peregrine Recitals
Peregrine Common Recitals
Surviving Corporation 2.1
XVT Recitals
XVT Common Recitals
XVT Series A Preferred Recitals
XVT Series B Preferred Recitals
XVT Series C Preferred Recitals
XVT Preferred Recitals

ARTICLE II

THE MERGER

2.1 THE MERGER. In accordance with Section 251 of the Delaware
Corporation Law, the Company shall be merged with and into XVT (the "MERGER"),
and XVT shall be the surviving corporation (such corporation in its capacity as
such surviving corporation, the "SURVIVING CORPORATION"). The terms and
conditions of the Merger, the mode of carrying the same into effect, and the
manner and basis of converting shares of each of the Constituent Corporations
into the consideration which the holders of those shares are to receive upon
conversion of such shares shall be as set forth in this Agreement.

2.2 EFFECTIVE TIME. The Merger shall become effective as of the time of
the filing of the executed certificate of merger with the Secretary of State of
Delaware pursuant to Section 251(c) of the Delaware Corporation Law (the
"EFFECTIVE TIME").

2.3 CERTAIN EFFECTS OF THE MERGER. As of the Effective Time, the effect
of the Merger shall be as provided by the applicable provisions of the Delaware
Corporation Law. Without limiting the generality of the foregoing and subject
thereto, at the Effective Time: the separate existence of the Company shall
cease and the Company shall be merged into XVT; the Surviving Corporation shall
possess, without further act or deed, all the rights, privileges, powers and
franchises of a public as well as a private nature, and be subject to all the
restrictions, disabilities and duties of each of the Constituent Corporations;
and all and singular, the rights, privileges, powers and franchises of each of
the Constituent Corporations; and all property, real, personal and mixed, and
all debts due to any of the Constituent Corporations on whatever account, as
well for stock subscriptions as all other things in action or belonging to each
of the Constituent Corporations shall be vested in the Surviving Corporation;
and all property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectively the property of the Surviving
Corporation as they were of the several and respective Constituent

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Corporations; and the title to any real estate vested by deed or otherwise,
under the laws of Delaware, in any of the Constituent Corporations, shall not
revert or be in any way impaired by reason of the Merger; but all rights of
creditors and all liens upon any property of any of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the respective Constituent Corporations shall thenceforth attach to
the Surviving Corporation, and may be enforced against it to the same extent
as if such debts, liabilities and duties had been incurred or contracted by
it. Any action or proceeding, whether civil, criminal or administrative,
pending by or against any of the Constituent Corporations shall be prosecuted
as if the Merger had not taken place, and the Surviving Corporation may be
substituted in such action or proceeding.

2.4 CERTIFICATE OF INCORPORATION. The certificate of incorporation of the
Surviving Corporation shall, from and after the Effective Time, be amended to
read in its entirety as set forth in the certificate of incorporation of the
Company as in effect immediately prior to the Effective Time until changed as
permitted by law or by such certificate of incorporation, except that Paragraph
FIRST of such certificate of incorporation shall be amended to change the name
of the Surviving Corporation to "XVT Software Inc." so that as so amended said
Paragraph FIRST shall read in its entirety as follows: "The name of the
Corporation is "XVT Software Inc."

2.5 BY-LAWS. The By-Laws of the Surviving Corporation shall, from and
after the Effective Time, be amended to read in their entirety as set forth in
the by-laws of the Company as in effect immediately prior to the Effective Time
until changed as permitted by law, by the certificate of incorporation of the
Surviving Corporation or by such bylaws.

2.6 DIRECTORS AND OFFICERS. The directors and officers of the Surviving
Corporation from and after the Effective Time shall be the directors and
officers of the Company immediately prior to the Effective Time, each to hold
office in accordance with applicable law and the certificate of incorporation
and by-laws of the Surviving Corporation.

2.7 THE CLOSING. Subject to the satisfaction or waiver of all conditions
precedent set forth in Article VII, the closing (the "CLOSING") shall be held at
the offices of Testa, Hurwitz & Thibeault, High Street Tower, 125 High Street,
Boston, Massachusetts 02110 on November 30, 1995 or as soon thereafter as
practicable (the "CLOSING DATE"). If any condition in Article VII is not
satisfied in any material respect (or is not duly waived) at the Closing, any
party whose obligations are subject to such condition may extend the period in
which the Closing must be consummated (during which period each other party
shall use its respective reasonable efforts to cause all such conditions to be
satisfied in all material respects). If all conditions are determined to be
satisfied in all material respects (or are duly waived) at the Closing (whether
or not delayed), the Closing shall be consummated by the making of all necessary
filings with the Secretary of State of Delaware under the Delaware Corporation
Law. Each of Peregrine, the Company and XVT shall use all reasonable efforts,
on or prior to the Closing, to execute and deliver all such instruments,
documents or certificates as may be necessary or advisable, on the advice of
counsel, for the consummation at the Closing of the transactions contemplated by
this

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Agreement or to cause the Effective Time, subject to consummation at the
Closing, to occur as soon as practicable.

ARTICLE III

CONVERSION AND EXCHANGE OF SECURITIES

3.1 SHARES OF THE SURVIVING CORPORATION. The authorized number and par
value of shares of all classes of stock of the Company immediately prior to the
Effective Time shall be the authorized number and par value of shares of the
classes of stock of the Surviving Corporation from and after the Effective Time.

3.2 CONVERSION OF COMPANY COMMON. At the Effective Time, each share of
Common Stock, par value $.01 per share, of the Company issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, automatically be converted
into and represent one validly issued, fully paid and nonassessable share of
Common Stock, par value $.01 per share, of the Surviving Corporation.

3.3 CONVERSION OF XVT SECURITIES.

(a) At the Effective Time, each share of XVT Common issued and
outstanding immediately prior to the Effective Time (other than shares of XVT
Common (i) held in the treasury of XVT, which shall not be considered as
outstanding for purposes of this Agreement, (ii) held by Peregrine or any
subsidiary of Peregrine or XVT, or (iii) which are Dissenting Shares (as
hereinafter defined)) shall, by virtue of the Merger and without any action on
the part of the holder thereof, automatically be canceled and extinguished and
converted into the right to receive 0.1178 shares of Peregrine Common (the
"COMMON EXCHANGE RATIO").

(b) At the Effective Time, each share of XVT Series A Preferred
issued and outstanding immediately prior to the Effective Time (other than
shares of XVT Series A Preferred (i) held in the treasury of XVT, which shall
not be considered as outstanding for purposes of this Agreement, (ii) held by
Peregrine or any subsidiary of Peregrine or XVT, or (iii) which are Dissenting
Shares (as hereinafter defined)) shall, by virtue of the Merger and without any
action on the part of the holder thereof, automatically be canceled and
extinguished and converted into the right to receive
1.6409 shares of Peregrine Common.

(c) At the Effective Time, each share of XVT Series B Preferred
issued and outstanding immediately prior to the Effective Time (other than
shares of XVT Series B Preferred (i) held in the treasury of XVT, which shall
not be considered as outstanding for purposes of this Agreement, (ii) held by
Peregrine or any subsidiary of Peregrine or XVT, or (iii) which are Dissenting
Shares (as hereinafter defined)) shall, by virtue of the Merger and without

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any action on the part of the holder thereof, automatically be canceled and
extinguished and converted into the right to receive 2.4331 shares of
Peregrine Common.

(d) At the Effective Time, each share of XVT Series C Preferred
issued and outstanding immediately prior to the Effective Time (other than
shares of XVT Series C Preferred (i) held in the treasury of XVT, which shall
not be considered as outstanding for purposes of this Agreement, (ii) held by
Peregrine or any subsidiary of Peregrine or XVT, or (iii) which are Dissenting
Shares (as hereinafter defined)) shall, by virtue of the Merger and without any
action on the part of the holder thereof, automatically be canceled and
extinguished and converted into the right to receive
2.2753 shares of Peregrine Common.

(e) At the Effective Time, each share of XVT Preferred and XVT Common
held (i) in the treasury of XVT, or (ii) by Peregrine or any subsidiary of
Peregrine or XVT, immediately prior to the Effective Time shall, by virtue of
the Merger and without any action on the part of the holder thereof,
automatically be canceled and retired and all rights in respect thereof shall
cease to exist.

(f) Notwithstanding anything to the contrary in this Agreement, if
the conversion of any shares of XVT Common for Peregrine Common would result in
the offer and sale of the shares of Peregrine Common to be issued in the Merger
not being exempt from any applicable registration or qualification requirements
under either federal or state securities or Blue Sky laws, Peregrine may
purchase such shares for cash in an amount equal to $0.59 per share of XVT
Common.

3.4 NO FRACTIONAL PEREGRINE COMMON. Notwithstanding any other provision
of this Agreement, neither certificates nor scrip for fractional shares of
Peregrine Common shall be issued to any holder of XVT Preferred or XVT Common in
the Merger and the holder thereof shall not be entitled to any voting or other
rights of a holder of shares or a fractional share interest. Each holder of
shares of XVT Preferred or XVT Common who otherwise would have been entitled to
receive a fraction of a share of Peregrine Common shall receive in lieu thereof
cash, without interest, in an amount determined by multiplying such holder's
fractional interest by $5.00. All amounts of cash in respect of fractional
interests which have not been claimed at the end of three years from the
Effective Time by surrender of certificates for shares of XVT Preferred or XVT
Common shall be repaid to the Surviving Corporation, subject to the provisions
of applicable escheat or similar laws, for the account of the holders entitled
thereto.

3.5 DISTRIBUTION OF PEREGRINE COMMON.

(a) As soon as practicable after the Effective Time, Peregrine shall
distribute the Peregrine Common and cash as provided in this Section 3.5.

(b) At the Effective Time, each holder of an outstanding certificate
or certificates for shares of XVT Preferred or XVT Common shall cease to have
any rights as a

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stockholder of XVT, except such rights, if any, as such holder
may have with respect to Dissenting Shares. Each such holder of an outstanding
certificate or certificates for shares of XVT Preferred or XVT Common converted
in the Merger, upon surrender of each such certificate to Peregrine shall
receive promptly in exchange for each such certificate the shares of Peregrine
Common and cash (if any) to which such holder is entitled pursuant to
Sections 3.3 and 3.4 of this Agreement. Pending such surrender and exchange,
such holder's certificate or certificates for shares of XVT Preferred or XVT
Common shall be deemed for all corporate purposes, by virtue of the Merger and
without any action on the part of the holder thereof, to evidence only the right
to receive the shares of Peregrine Common and cash (if any) provided for under
this Agreement. Unless and until any such outstanding certificates for shares
of XVT Preferred or XVT Common shall be so surrendered, no dividend (cash or
stock) payable to holders of record of shares of Peregrine Common as of any date
subsequent to the Effective Time shall be paid to the holder of any such
outstanding certificate and his other rights as a stockholder of Peregrine shall
be suspended, but upon such surrender of such outstanding certificate there
shall be paid to the record holder of the certificate of shares of Peregrine
Common issued in exchange therefor the amount of dividends, if any, without
interest and less any taxes which may have been imposed thereon, that have
theretofore become such certificate issued upon such surrender and exchange, and
his other rights as a stockholder of Peregrine shall thereafter be restored.

3.6 CLOSING OF STOCK TRANSFER BOOKS. The stock transfer books of XVT
shall be closed at the close of business on the business day immediately
preceding the Effective Time. In the event of a transfer of ownership of XVT
Preferred or XVT Common which is not registered in the transfer records of XVT,
the shares of Peregrine Common and cash (if any) to be issued in the Merger as
provided in this Agreement may be delivered to a transferee, if the certificate
representing such XVT Preferred or XVT Common is presented to Peregrine,
accompanied by all documents required to evidence and effect such transfer and
by payment of any applicable stock transfer taxes.

3.7 DISSENTING SHARES. Shares of XVT Preferred or XVT Common that have
not been voted for adoption of this Agreement and with respect to which
appraisal rights shall have been properly perfected in accordance with
Section 262 of the Delaware Corporation Law (the "DISSENTING SHARES") shall not
be converted into the right to receive shares of Peregrine Common and cash (if
any) in accordance with this Agreement, at or after the Effective Time, unless
and until the holder of such Dissenting Shares withdraws his demand for such
appraisal in accordance with Section 262(k) of the Delaware Corporation Law or
becomes ineligible for such appraisal. If a holder of Dissenting Shares shall
withdraw in accordance with Section 262(k) of the Delaware Corporation Law his
demand for such appraisal or shall become ineligible for such appraisal, then,
as of the latter of the Effective Time or the occurrence of such event, such
holder's Dissenting Shares shall cease to be Dissenting Shares and shall be
converted into the right to receive the shares of Peregrine Common and cash (if
any) into which his XVT Preferred or XVT Common was converted as of the
Effective Time pursuant to this Agreement. Any amounts to be paid to holders of
Dissenting Shares with respect to such Dissenting Shares shall be paid by the
Surviving Corporation.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF XVT

XVT hereby represents and warrants to each of Peregrine and the Company as
follows:

4.1 CORPORATE EXISTENCE AND POWER. XVT is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all corporate power and authority and all governmental
licenses, authorizations, consents, permits and approvals necessary to enable it
to own, lease or otherwise hold its properties and assets and to carry on its
business as now conducted and currently proposed to be conducted. XVT is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it or
the nature of its activities makes such qualification necessary, except for
those jurisdictions where the failure to be so qualified would not, individually
or in the aggregate, have a Material Adverse Effect on XVT.

4.2 CORPORATE AUTHORIZATION. The execution, delivery and performance by
XVT of this Agreement, and the consummation by XVT of the Merger and the other
transactions contemplated by this Agreement are within XVT's corporate power and
authority and, subject to the adoption of this Agreement by the stockholders of
XVT as required by law, have been duly authorized by all necessary corporate
action. This Agreement has been duly authorized, executed and delivered by XVT
and constitutes a valid and binding obligation XVT, enforceable against XVT in
accordance with its terms.

4.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance
by XVT of this Agreement, and the consummation by XVT of the Merger and the
other transactions contemplated by this Agreement, do not and will not require
any consent, approval or action by or in respect of, or any declaration, filing
or registration with, any Governmental Authority, other than routine filings
with the Secretary of State of Delaware necessary to consummate the Merger.

4.4 NON-CONTRAVENTION. The execution, delivery and performance by XVT of
this Agreement, and the consummation by XVT of the Merger and the other
transactions contemplated by this Agreement, do not and will not, with or
without the giving of notice, the lapse of time or both: (i) contravene or
conflict with the certificate of incorporation or bylaws of XVT, (ii) assuming
compliance with the matters referred to in Section 4.3, contravene or conflict
with or constitute a violation of any provision of any law, rule, regulation,
judgment, injunction, order or decree currently in effect and binding upon or
applicable to XVT, (iii) require any consent, approval or other action by any
Person, contravene or conflict with or constitute a violation of or a default
under, or give rise to any right of termination, cancellation or acceleration of
any right or obligation of XVT or to a loss of any benefit to which XVT is
entitled, under any material provision of (a) any agreement, contract,
indenture, lease or other instrument binding upon XVT or (b) assuming compliance
with the matters referred to in

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Section 4.3, any license, franchise, permit or other similar authorization
held by XVT or (iv) except for the rights of any holders of Dissenting
Shares, result in the creation or imposition of any Lien on any asset of XVT.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF PEREGRINE AND THE COMPANY

Peregrine and the Company hereby represent and warrant to XVT as follows:

5.1 CORPORATE EXISTENCE AND POWER. Each of Peregrine and the Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all corporate power and authority and all
governmental licenses, authorizations, consents, permits and approvals necessary
to enable it to own, lease or otherwise hold its properties and assets and to
carry on its business as now conducted and currently proposed to be conducted.
Peregrine is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification necessary,
except for those jurisdictions where the failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect on Peregrine.

5.2 CORPORATE AUTHORIZATION. The execution, delivery and performance by
Peregrine and the Company of this Agreement, and the consummation by Peregrine
and the Company of the Merger and the other transactions contemplated by this
Agreement, are within the corporate power and authority of Peregrine and the
Company, respectively, and, subject to the adoption of this Agreement by the
stockholder of the Company as required by law, have been duly authorized by all
necessary corporate action. This Agreement has been duly and validly
authorized, executed and delivered by Peregrine and the Company and constitutes
a valid and binding obligation of Peregrine and the Company, enforceable against
Peregrine and the Company in accordance with its terms.

5.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance
by Peregrine and the Company of this Agreement, and the consummation by
Peregrine and the Company of the Merger and the other transactions contemplated
by this Agreement, do not and will not require any consent, approval or action
by or in respect of, or any declaration, filing or registration with, any
Governmental Authority, other than routine filings with the Secretary of State
of Delaware necessary to consummate the Merger, and compliance with the
applicable requirements of the Securities Act of 1933, and any applicable state
securities and blue sky laws in connection with the offering, sale and delivery
of the shares of Peregrine Common to be issued in the Merger.

5.4 NON-CONTRAVENTION. The execution, delivery and performance by
Peregrine and the Company of this Agreement, and the consummation by Peregrine
and the Company of the

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Merger and the other transactions contemplated by this Agreement, do not and
will not, with or without the giving of notice, the lapse of time or both:
(i) contravene or conflict with the certificates of incorporation or by -laws
of Peregrine or the Company, (ii) assuming compliance with the matters
referred to in Section 5.3, contravene or conflict with or constitute a
violation of any provision of any law, rule, regulation, judgment,
injunction, order or decree binding upon or applicable to Peregrine or the
Company, (iii) require any consent, approval or other action by any Person,
contravene or conflict with or constitute a violation of or a default under,
or give rise to any right of termination, cancellation or acceleration of any
right or obligation of Peregrine or the Company or to a loss of any benefit
to which Peregrine or the Company is entitled, under any material provision
of (a) any material agreement, contract, indenture, lease or other instrument
binding upon Peregrine or the Company or (b) assuming compliance with the
matters referred to in Section 5.3, any license, franchise, permit or other
similar authorization held by Peregrine or the Company, or (iv) result in the
creation or imposition of any Lien on any asset of Peregrine or the Company.

5.5 INVESTMENT. The capital stock of XVT being acquired by Peregrine in
the Merger is being acquired for its own account for the purpose of
investment and not with a view to or for sale in connection with any
distribution thereof.

ARTICLE VI

COVENANTS OF ALL PARTIES

Each of the parties hereby covenants and agrees with the other parties as
follows:

6.1 COOPERATION. It shall cooperate fully with the other parties hereto
in furnishing any information or perforating any action reasonably requested by
any such party, which information or action is necessary to the speedy and
successful consummation of the transactions contemplated by this Agreement or is
necessary, appropriate or desirable for the respective corporate purposes of
Peregrine and XVT. Subject to its further rights under this Agreement, it shall
use all reasonable efforts to cause the Closing to occur at the earliest
practicable time.

6.2 OTHER REQUIRED INFORMATION. It shall furnish to the other parties
hereto any application or statement, and all information concerning itself and
its Affiliates as is required to be set forth in any application or statement,
to be filed with any Governmental Authority in connection with the transactions
contemplated by this Agreement or otherwise.

6.3 MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms and
conditions provided in this Agreement, it shall use all reasonable efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, appropriate or desirable under applicable laws and regulations
to consummate the transactions contemplated by this Agreement. It shall use
reasonable efforts to obtain consents of all Persons and Governmental
Authorities necessary, appropriate or desirable for the consummation of the
transactions contemplated by this Agreement.

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6.4 CERTAIN TAX AND ACCOUNTING MATTERS. It shall not, either before or
after the consummation of the Merger, take any actions which would prevent the
Merger from qualifying as a tax-free reorganization under Section 368(a) of the
Code.

6.5 XVT STOCK OPTIONS. At or prior to the Effective Time, Peregrine and
XVT shall take all action necessary to cause the assumption by Peregrine as of
the Effective Time of the options to purchase XVT Common outstanding as of the
Effective Time (the "OUTSTANDING OPTIONS"). Each of the Outstanding Options
shall be converted without any action on the part of the holder thereof into an
option to purchase shares of Peregrine Common as of the Effective Time. The
number of shares of Peregrine Common that the holder of an assumed Outstanding
Option shall be entitled to receive upon the exercise of such option shall be a
number-of whole and fractional shares determined by multiplying the number of
shares of XVT Common subject to such option, determined immediately before the
Effective Time, by the Common Exchange Ratio. The option price of each share of
Peregrine Common subject to an assumed Outstanding Option shall be the amount
(rounded up to the nearest whole cent) obtained by dividing the exercise price
per share of XVT Common at which such option is exercisable immediately before
the Effective Time by the Common Exchange Ratio. The assumption and
substitution of Outstanding Options as provided herein shall not give the
holders of such options additional benefits which they did not have immediately
prior to the Effective Time or relieve the holders of any obligations or
restrictions applicable to their options or the shares obtainable upon exercise
of the options. Only whole shares of Peregrine Common shall be issued upon
exercise of any Outstanding Option, and in lieu of receiving any fractional
share of Peregrine Common, the holder of such option shall receive in cash the
fair market value of the fractional share, net of the applicable exercise price
of the fractional share and applicable withholding taxes.

ARTICLE VII

CONDITIONS OF CLOSING

7.1 CONDITIONS TO OBLIGATIONS OF PEREGRINE, THE COMPANY. The obligations
of each of the parties hereto under this Agreement to consummate the Merger are,
at its option, subject to the satisfaction of the following conditions:

(a) STOCKHOLDER APPROVALS. The adoption of this Agreement and the
transactions contemplated hereby shall have been approved by the stockholders of
XVT and the Company as required by the Delaware Corporation Law and the
certificates of incorporation and by-laws of XVT and the Company.

(b) LITIGATION; INJUNCTIONS. No action, suit, litigation, proceeding
or investigation shall (i) have been formally instituted and be pending with
regard to the Merger, or (ii) be threatened by any Governmental Authority with
regard to the Merger, which, if resolved substantially in accordance with the
plaintiff's demands, would be reasonably likely to materially and adversely
affect the Merger contemplated by this Agreement. On the Closing Date, there
shall not be in force any order or decree restraining or enjoining consummation
of the Merger, or

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placing any limitation upon such consummation or to invalidate, suspend or
require modification of any provision of this Agreement.

7.2 CONDITIONS APPLICABLE TO PEREGRINE AND THE COMPANY. The obligations
of Peregrine and the Company under this Agreement to consummate the Merger are,
at their option, subject to the satisfaction of the following conditions, in
addition to the conditions contained in Section 7. 1:

(a) PERFORMANCE OF THIS AGREEMENT. All the terms, covenants and
conditions of this Agreement to be complied with and performed by XVT on or
before the Closing Date shall have been complied with, and performed in all
material respects.

(b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of XVT set forth in this Agreement shall be true and correct in
all material respects both on the date of this Agreement and as of the Closing
Date with the same force and effect as if such representations and warranties
were made anew at and as of the Closing Date, except: (i) to the extent such
representations and warranties are by their express provisions made as of the
date of this Agreement or another specified date; and (ii) for the effect of any
activities or transactions which may have taken place after the date of this
Agreement which are contemplated by this Agreement.

(c) CLOSING CERTIFICATES. Peregrine and the Company shall have
received a certificate dated the Closing Date, signed by the chief executive
officer and chief financial officer of XVT to the effect that the conditions set
forth in Sections 7.2(a) through 7.2(b) have been satisfied.

(d) PROCEEDINGS. All proceedings to be taken in connection with the
Merger and the other transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Peregrine and the Company, and Peregrine and the Company shall have
received copies of all such documents and other evidence as they may reasonably
request to establish the consummation of such transactions and the taking of all
proceedings in connection therewith.

7.3 CONDITIONS APPLICABLE TO XVT. The obligations of XVT under this
Agreement to consummate the Merger are, at its option, subject to the
satisfaction of the following conditions, in addition to the conditions
contained in Section 7. 1:

(a) PERFORMANCE OF THIS AGREEMENT. All the terms, covenants and
conditions of this Agreement to be complied with and performed by Peregrine and
the Company on or before the Closing Date shall have been complied with, and
performed in all material respects.

(b) ACCURACY OF REPRESENTATIONS WARRANTIES. The representations and
warranties of Peregrine and the Company set forth in this Agreement shall have
been true and correct in all material respects on the date of this Agreement and
as of the Closing Date with the

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same force and effect as if such representations and warranties were made
anew at and as of the Closing Date, except: (i) to the extent such
representations and warranties are by their express provisions made as of the
date of this Agreement or another specified date; and (ii) for the effect of
any activities or transactions which may have taken place after the date of
this Agreement which are contemplated by this Agreement.

(c) OFFICERS' CERTIFICATE. XVT shall have received a certificate
dated the Closing Date, signed by the chief executive officer and the chief
financial officer of Peregrine, to the effect that, the conditions set forth in
Sections 7.3(a) through 7.3(b) hereof have been satisfied.

(d) PROCEEDINGS. All proceedings to be taken in connection with the
Merger and the other transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to XVT, and XVT shall have received copies of all such documents and
other evidence as it may reasonably request to establish the consummation of
such transactions and the taking of all proceedings in connection therewith.

ARTICLE VIII

TERMINATION

8.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time by (a) the mutual written agreement of Peregrine and XVT or
(b) by either party in the event of the failure of the stockholders of the other
constituent corporation to approve the Merger or any matter required to be
approved by such stockholders in order to consummate the Merger. The party
desiring to terminate this Agreement shall give notice of such termination to
the other party.

8.2 PROCEDURE UPON TERMINATION. In the event of the termination of this
Agreement, the Board or Boards of Directors so terminating may direct its or
their officers not to file the certificate of merger in the office of the
Secretary of State of Delaware notwithstanding favorable action by the
stockholders of the Company and XVT.

ARTICLE IX

MISCELLANEOUS

9.1 SPECIFIC PERFORMANCE. Each of the parties to this Agreement hereby
acknowledges that the other parties will have no adequate remedy at law if it
fails to perform any of its obligations under this Agreement. In such event,
each of the parties agrees ' that the other parties shall have the right, in
addition to any other rights it may have (whether at law or in equity), to
specific performance of this Agreement.

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<PAGE>

9.2 EXPENSES. All fees and expenses incurred by Peregrine and the Company
in connection with this Agreement and the transactions contemplated hereby
(including without limitation the fees and expenses of their financial, legal
and accounting advisers) will be borne by Peregrine. All fees and expenses
incurred by XVT in connection with this Agreement and the transactions
contemplated hereby (including without limitation the fees and expenses of its
financial, legal and accounting advisers) will be borne by XVT.

9.3 FURTHER ASSURANCES. lf at any time after the Effective Time, Peregrine
or the Company shall consider it advisable that any further conveyance,
agreements, documents, instruments and assurances of law or any other things are
necessary or desirable to vest, perfect, confirm or record in the Surviving
Corporation, the tide to any property, rights, privileges, powers and franchises
of XVT, the officers of XVT last in office and such other Persons, if any, as
the Board of Directors of XVT last in office may authorize shall execute and
deliver, upon Peregrine's reasonable request, any and all proper conveyances,
agreements, documents, instruments and assurances of law, and do all things
necessary or proper to vest, perfect, confirm or record title to such property,
rights, privileges, powers and franchises in the Surviving Corporation and
otherwise to carry out the provisions of this Agreement.

9.4 PARTIES IN INTEREST. All the terms and provisions of this Agreement
shall be binding upon, shall inure to the benefit of and shall be enforceable by
the respective successors and permitted assigns of the parties hereto. Nothing
expressed or implied in this Agreement is intended or shall be construed to
confer upon or give any Person other than the parties hereto, their permitted
successors or assigns, and their respective stockholders any rights or remedies
under or by reason of this Agreement or any transaction contemplated hereby.

9.5 ENTIRE AGREEMENT. This Agreement supersedes any other agreement,
whether written or oral, that may have been made or entered into by Peregrine
and XVT (or by any officers, directors, stockholders or partners of any of such
parties) relating to the matters contemplated hereby. This Agreement
constitutes the entire agreement by the parties, 'and there are no agreements or
commitments except as set forth herein.

9.6 AMENDMENT OR MODIFICATION. At any time before or after the adoption
of this Agreement and the transactions contemplated hereby by the stockholders
of any party, this Agreement may be amended or supplemented by additional
agreements, articles or certificates, as may be determined by the parties hereto
to be necessary, desirable or expedient to further the purposes of this
Agreement, or to clarify the intention of the parties hereto, or to add to or to
modify the covenants, terms or conditions hereof or to effect or facilitate any
governmental approval or acceptance of the Merger or of this Agreement or to
effect or facilitate the filing or recording of this Agreement or the
consummation of any of the transactions contemplated hereby.

9.7 WAIVER. Any party to this Agreement may, by written notice to the
other parties to this Agreement, (a) extend the time for the performance of any
of the obligations or other actions of the other parties for its benefit under
this Agreement; (b) waive any inaccuracies in the

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<PAGE>

representations or warranties of the other parties made to it contained in
this Agreement or in any document delivered pursuant hereto; (c) waive
compliance with any of the conditions or covenants of the other parties for
its benefit contained in this Agreement; or (d) waive or modify performance
of any of the obligations of the other parties for its benefit under this
Agreement. Except as provided in the preceding sentence, no action taken
pursuant to this Agreement, including any investigation by or on behalf of
any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representations, warranties, covenants,
conditions or agreements contained in this Agreement. The failure of any
party hereto to enforce at any time any of the provisions of this Agreement
shall in no way be construed to be a waiver of any such provision, nor in any
way to affect the validity of this Agreement or any part hereof or the right
of such party thereafter to enforce each and every such provision. No waiver
of any breach of or non-compliance with this Agreement shall be held to be a
waiver of any other or subsequent breach or noncompliance.

9.8 ASSIGNABILITY. This Agreement and any rights hereunder shall be
assignable by either party.

9.9 HEADINGS AND INTERPRETATION. The headings contained in this Agreement
are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement. Terms such as "herein", "hereof ' and
"hereinafter" refer to this Agreement as a whole and not to the particular
sentence or paragraph where they appear, unless the context otherwise requires.
Unless the context otherwise requires, (i) terms used in the plural include the
singular, and vice versa, and (ii) words in the masculine gender include the
feminine, and vice versa. References in this Agreement in which they appear to
Articles or Sections shall be to Articles or Sections to this Agreement, unless
otherwise indicated.

9.10 NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be delivered by hand or overnight courier service,
mailed or sent by graphic scanning or other telegraphic communications equipment
of the sending party, as follows:

If to Peregrine or the Company:

Peregrine Systems, Inc.
12670 High Bluff Drive
San Diego, CA 92130
Attention: Chief Executive Officer

If to XVT:

XVT Software Inc.
4900 Pearl East Circle Boulder, CO 80301
Attention: Chief Executive Officer

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<PAGE>

or to such other address as any party may have @shed to the others in writing in
accordance herewith, except that notices of change of address shall only be
effective upon receipt All notices and other communications given to any party
hereto in accordance with the provisions of this Agreement shall be deemed to
have been given on the date of receipt if delivered by hand or overnight courier
service or sent by telex, graphic scanning or other telegraphic communications
equipment of the sender, or on the date five business days after dispatch by
certified or registered mail if mailed, in each case delivered, sent or mailed
(properly addressed) to such party as provided in this Section 9. 1 0 or in
accordance with the latest unrevised direction from such party given in
accordance with this Section 9.10.

9.11 LAW GOVERNING. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware, without giving
effect to the principles of conflicts of law thereof.

9.12 INVALIDITY OF PROVISIONS. Each of the provisions contained in this
Agreement is distinct and severable and a declaration of invalidity or
unenforceability of any such provision or part thereof by a court of competent
jurisdiction shall not affect the validity or enforceability of any other
provision hereof or thereof.

9.13 COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties on the date first above written.

PEREGRINE SYSTEMS, INC.

By: /s/ Alan Hunt
-----------------------------------
Title: CEO & President
--------------------------------

XVT ACQUISITION CORP.

By: /s/ Charles E. Noell
-----------------------------------
Title: President
--------------------------------

XVT SOFTWARE, INC.

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<PAGE>

By: /s/ David A. Farley
-----------------------------------
Title: Chief Financial Officer
--------------------------------

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<PAGE>

WILSON SONSINI GOODRICH & ROSATI
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone 415-493-9300 Facsimile 415-493-6811

EXHIBIT 5.1

March 17, 1997

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

Re: Registration Statement on Form S-1

Ladies and Gentlemen:

We have examined Amendment No. 2 to the Registration Statement on Form
S-1 (File No. 333-21483) to be filed by you with the Securities and Exchange
Commission on March 17, 1997 (the "Registration Statement") in connection
with the registration under the Securities Act of 1933, as amended, of
3,450,000 shares (including shares issuable upon exercise of the
underwriters' over-allotment option) of Common Stock of Peregrine Systems,
Inc. (the "Shares"). As your counsel in connection with this transaction, we
have examined the proceedings proposed to be taken in connection with the
sale and issuance of the Shares by Peregrine Systems, Inc.

It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of
the Shares, and upon completion of the proceedings being taken in order to
permit such transactions to be carried out in accordance with the securities
laws of the various states, where required, the Shares, when issued and sold
in the manner referred to in the Registration Statement, will be 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,

WILSON SONSINI GOODRICH & ROSATI

/s/ Wilson Sonsini Goodrich & Rosati
--------------------------------------

<PAGE>

Peregrine Systems, Inc.
List of Subsidiaries

Peregrine Systems GmbH (a German corporation)

Peregrine Systems Limited (an English corporation)

Peregrine Bridge Subsidiary, Inc. (a Delaware Corporation)

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports, and to all references to our Firm, included in or made a part of this
registration statement.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

March 17, 1997
San Diego, California