PEREGRINE SYSTEMS INC, 424B4, 1997-04-09

PEREGRINE SYSTEMS INC
424B4, 1997-04-09
PREPACKAGED SOFTWARE

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<PAGE>
PROSPECTUS

2,300,000 SHARES

[LOGO]

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

All of the 2,300,000 shares of Common Stock offered hereby are being sold
by Peregrine Systems, Inc. ("Peregrine" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for a discussion of factors 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
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share................................. $9.00 $0.63 $8.37
Total (3)................................. $20,700,000 $1,449,000 $19,251,000
</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 Selling Stockholders have granted the Underwriters an option,
exercisable within 30 days from the date hereof, to purchase up to 345,000
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 $23,805,000, the Underwriting Discounts and
Commissions will be $1,666,350 and the Proceeds to Selling Stockholders will
be $2,887,650. 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
April 14, 1997.

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

UBS SECURITIES OPPENHEIMER & CO., INC.

APRIL 8, 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................................ 2,300,000 shares
Common Stock to be outstanding after the
offering.................................. 15,204,019 shares (1)
Use of proceeds............................. For working capital and other general
corporate purposes, including repayment of
bank debt. See "Use of Proceeds."
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) 2,584
Net income (loss)...................... (6,004) (736) (735) 51(2) (6,411) (3,736) 2,218
Net income (loss) per share............ $ (0.52) $ 0.15
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) 343 466 1,775
Income (loss) from continuing operations................................. (1,499) 231 349 1,638
Income (loss) from continuing operations per share....................... $ (0.11) $ 0.02 $ 0.02 $ 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 $ 15,558
Working capital (deficit)............................................................. (7,300) 11,301
Total assets.......................................................................... 19,034 33,321
Borrowings under bank line of credit.................................................. 4,314 --
Stockholders' equity (deficit)........................................................ (6,353) 12,248
</TABLE>

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

(1) Based upon shares outstanding as of December 31, 1996. Excludes 3,946,408
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 $1.84. 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 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 HAS BEEN ADJUSTED TO GIVE EFFECT TO A TWO-FOR-ONE SPLIT OF THE
COMPANY'S COMMON STOCK EFFECTED IN FEBRUARY 1997 IN THE FORM OF A STOCK
DIVIDEND. SEE "DESCRIPTION OF CAPITAL STOCK."

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."

BENEFITS OF THE OFFERING TO CURRENT 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. 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

8
<PAGE>

stockholders, without regard to possible regulatory or contractual restrictions
on transfer, will be approximately $116,136,171, 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,
John J. Moores, Chairman of the Company's Board of Directors and the Company's
majority stockholder, 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, have granted the Underwriters
an option, solely to cover over-allotments and exercisable within 30 days of the
date of this Prospectus, to acquire up to an additional 345,000 shares of Common
Stock at the initial public offering price. In the event the Underwriters
exercise such option in full, 112,700 shares will be sold by Mr. Moores
individually, 70,550 shares will be sold by Mr. Moores as trustee of various
trusts, substantially all of which were established for members of Mr. Moores's
family, and 24,500 shares will be 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 the initial public offering price of $9.00, the foregoing sales will
result in aggregate gross proceeds of $1,014,300 to Mr. Moores, $634,950 to
trusts of which Mr. Moores serves as trustee and $220,500 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
initial public offering price, Mr. Moores and related entities will realize
substantial gains upon the sale of those shares. In addition, 10,200 shares of
Common Stock will be sold by Christopher A. Cole, a director of the Company,
resulting in aggregate gross proceeds to Mr. Cole of $91,800. 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 any shares he might sell
in the offering and will realize a substantial gain upon their sale.

In addition, in the event the Underwriters exercise their option in full,
30,050 shares will be sold by certain stockholders who are not affiliates of the
Company, resulting in aggregate gross proceeds to such stockholders of $270,450.
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 97,000 shares will be sold in connection with the exercise of
outstanding options held by an officer, a former officer and certain employees
of the Company and will result in aggregate gross proceeds to such individuals
of $873,000. 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 $156,475. In the event the
Underwriters exercise their option, such non-affiliate stockholders and option
holders will realize substantial gains in connection with their sales of shares
in the offering.

CONTROL BY EXISTING STOCKHOLDERS

Upon completion of this offering, the Company's officers, directors and
their affiliates together will beneficially own approximately 80.5% of the
outstanding shares of Common Stock (78.7% 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 62.8% of the outstanding shares of Common
Stock (61.6% 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 the election of directors and the approval of
mergers, consolidations and sales of all or substantially all of the

9
<PAGE>
assets of the Company. This may prevent or discourage potential bids to acquire
the Company unless the terms of acquisition are approved by such stockholders.
See "Principal and Selling Stockholders."

DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT

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

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

RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS

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

10
<PAGE>
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 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.

11
<PAGE>
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 2,300,000 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 47,000 shares will become eligible for sale 90 days after the date
of this Prospectus pursuant to Rule 144. Approximately 10,900,000 shares will
become eligible for sale 180 days after the date of this Prospectus upon the
release of lock-up obligations (the "Release Date"), and approximately 2,000,000
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 5,727,308 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 2,578,250 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 $8.19 in net tangible book
value per share of Common Stock after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by the Company from the
initial public offering price and will incur additional dilution upon the
exercise of outstanding stock options.

12
<PAGE>
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 has been determined by
negotiations between the Company and the representatives of the Underwriters.
See "Underwriting" for a discussion of the factors 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 2,300,000 shares of
Common Stock offered hereby are estimated to be approximately $18,601,000 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.

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.

The Company's line of credit with NationsBank, as currently in effect, does
not contain any restrictive covenant that would limit the Company's ability to
pay cash dividends or make stock repurchases. John J. Moores, the Company's
majority stockholder, currently guarantees the Company's indebtedness under the
line of credit. The Company believes this guarantee will be released following
this offering and that in connection with any future borrowings by the Company
under its credit line, NationsBank will require the Company to agree to more
typical restrictive covenants, including limitations on the Company's ability to
pay cash dividends and make stock repurchases.

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 2,300,000 shares of
Common Stock offered hereby 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, 15,204,000 shares issued and
outstanding, as adjusted (2)......................................................... 13 15
Additional paid-in capital............................................................... 15,059 33,658
Accumulated deficit...................................................................... (19,391) (19,391)
Unearned portion of deferred stock compensation.......................................... (1,846) (1,846)
Cumulative translation adjustment........................................................ (188) (188)
---------- -----------
Total stockholders' equity (deficit)................................................. (6,353) 12,248
---------- -----------
Total capitalization (deficit)....................................................... $ (4,800) $ 13,801
---------- -----------
---------- -----------
</TABLE>

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

(2) Based upon shares outstanding as of December 31, 1996. Excludes 3,946,408
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 $1.84. 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 offering. After giving effect to the sale by the Company of 2,300,000
shares in the offering and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company, the
Company's pro forma net tangible book value as of December 31, 1996 would have
been $12,248,000 or $0.81 per share of Common Stock. This represents an
immediate increase of pro forma net tangible book value of $1.30 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $8.19 per share to new investors.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share............................ $ 9.00
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...................................................... 1.30
---------
Pro forma net tangible book value per share after offering......... 0.81
---------
Dilution per share to new investors................................ $ 8.19
---------
---------
</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 (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)............. 12,904,000 84.9% $ 15,072,000 42.1% $ 1.17
New investors (1)..................... 2,300,000 15.1 20,700,000 57.9 9.00
------------- ----- -------------- -----
Total............................. 15,204,000 100.0% $ 35,722,000 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>

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

(1) Certain Selling Stockholders have granted the Underwriters an option, solely
to cover over-allotments, to acquire up to an aggregate of 345,000 shares of
Common Stock at the initial public offering price for a period of 30 days
after the date of this Prospectus. In the event the Underwriters'
over-allotment option were exercised in full, sales by such Selling
Stockholders would reduce the number of shares held by existing stockholders
to 12,559,019 or approximately 82.6% and would increase the number of shares
held by new investors to 2,645,000 or approximately 17.4% 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. As of December 31, 1996, there were outstanding options to
purchase 3,946,408 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 $1.84 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 2,780
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............. 11,272 11,040 12,686 19,581 24,091 17,529 18,365
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).................. (5,883) (664) (705) (3,919) (4,266) (2,879) 2,584
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) 2,218
Provision for income taxes............... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations............................. (6,004) (736) (735) 51 (4,552) (3,053) 2,218
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) $ 2,218
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share.............. $ (0.52) $ 0.15
--------- ---------
--------- ---------
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 11.3
----- -----
Total operating expenses................................ 99.4 74.9
----- -----
Operating income (loss)..................................... (16.3) 10.5
Interest expense............................................ (1.6) (1.4)
Other income (expense)...................................... 0.6 (0.1)
----- -----
Income (loss) from continuing operations before income
taxes..................................................... (17.3) 9.0
Provision for income taxes.................................. 0.0 0.0
----- -----
Income (loss) from continuing operations.................... (17.3) 9.0
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)% 9.0%
----- -----
----- -----
</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 $2.8
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 1,558 807 878
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............ 5,313 5,128 7,088 6,562 5,947 5,860
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)................. (364) (1,147) (1,368) (1,387) 343 466
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) 231 349
Provision for income taxes.............. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations............................ $ (419) $ (1,223) $ (1,411) $ (1,499) $ 231 $ 349
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

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............ 1,095
-----------
Total operating expenses............ 6,558
-----------
Operating income (loss)................. 1,775
Interest expense........................ (116)
Other income (expense).................. (21)
-----------
Income (loss) from continuing operations
before income taxes................... 1,638
Provision for income taxes.............. --
-----------
Income (loss) from continuing
operations............................ $ 1,638
-----------
-----------
</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 10.8
----- ----- ----- ----- -----
Total operating expenses.......................... 90.3 105.1 103.1 107.1 79.4
----- ----- ----- ----- -----
Operating income (loss)............................... (6.2) (23.5) (19.9) (22.6) 4.5
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) 3.0
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)% 3.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----

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.......................... 11.7 11.5
----- -----
Total operating expenses.......................... 78.2 68.9
----- -----
Operating income (loss)............................... 6.1 18.6
Interest expense...................................... (1.4) (1.2)
Other income (expense)................................ (0.1) (0.2)
----- -----
Income (loss) from continuing operations before income
taxes............................................... 4.6 17.2
Provision for income taxes............................ 0.0 0.0
----- -----
Income (loss) from continuing operations.............. 4.6% 17.2%
----- -----
----- -----
</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 $166,000 in cash from operations, but a net cash use
of $646,000 by a discontinued business operation reduced cash from operations to
an overall cash use of $480,000. 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

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<PAGE>
secured by accounts receivable, equipment and certain other assets of the
Company. Both facilities are 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.

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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.

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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.

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<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.

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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

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<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.

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<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 Services, 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.................... 42 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)........... 52 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 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 years ended March 31, 1997 and 1996 by (i)
the Company's President and Chief Executive Officer and (ii) the Company's next
four most highly compensated executive officers whose salary and bonus for
fiscal 1997 exceeded $100,000 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

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

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

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

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

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

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

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

41
<PAGE>
(7) Bonus compensation for fiscal 1997 includes $126,240 earned in fiscal 1997
to be paid in fiscal 1998. Bonus compensation for fiscal 1996 includes
$35,000 earned in fiscal 1996 to be paid in fiscal 1998.

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

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

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

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

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

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

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

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

42
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1997

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

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- 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>
Alan H. Hunt...................... -- -- -- -- -- --
David A. Farley................... -- -- -- -- -- --
Douglas F. Garn................... 200,000 21.5% $ 2.34 4/01/06 $ 294,323 $ 745,871
William G. Holsten................ 50,000 5.4% 2.34 12/16/06 73,581 186,468
Douglas S. Powanda................ 50,000 5.4% 2.34 12/16/06 73,581 186,468
</TABLE>

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

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

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

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

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

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

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

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

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

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

43
<PAGE>
STOCK PLANS

1994 STOCK OPTION PLAN. The Company's 1994 Stock Option Plan, as amended
(the "1994 Plan"), provides for the grant to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), and for the grant to employees and consultants of
nonstatutory stock options. The 1994 Plan was adopted by the Board of Directors
in January 1994 and approved by the Company's stockholders in April 1994. The
1994 Plan replaces the Company's Nonqualified Stock Option Plan and the 1991
Nonqualified Stock Option Plan (the "Prior Plans"). Options previously issued
under the Prior Plans shall be exercisable according to their terms. Unless
terminated sooner, the 1994 Plan will terminate automatically in January 2004. A
total of 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 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, 30,000 shares of Common Stock had been issued upon
exercise of options outstanding under the Prior Plans and 6,500 shares of Common
Stock had been issued upon exercise of options outstanding under the 1994 Plan.
Options to purchase 1,533,750 shares of Common Stock at a weighted average
exercise price of $1.04 were outstanding under the Prior Plans, and options to
purchase 2,397,100 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

44
<PAGE>
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 May 1, 1997. 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. The first such offering
period will commence on the first trading day on or after May 1, 1997 and will
end on the last trading day on or before July 31, 1997. The 1997 Purchase Plan
is administered by the Board of Directors or by a committee appointed by the
Board. Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary; provided, however, that officers of
the Company are not eligible to participate in the 1997 Purchase Plan. The 1997
Purchase Plan permits participants to purchase Common Stock through payroll
deductions of up to 15% of an employee's compensation, including commissions,
but excluding overtime, bonuses and other incentive compensation. The price of
stock purchased under the 1997 Purchase Plan is 85% of the lower of the fair
market value of the Common Stock at the beginning or at the end of each offering
period. Shares purchased under the 1997 Purchase Plan may not be sold or
otherwise transferred by a participant for a period of 12 months after the date
of their purchase. Employees may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.

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

1997 DIRECTOR OPTION PLAN. Outside directors are entitled to participate in
the 1997 Director Option Plan (the "Director Plan"); provided, however, that no
outside director who is directly or indirectly the holder of more than three
percent of the Company's outstanding Common Stock may be granted an option under
the Director Plan. The Director Plan was adopted by the Board of Directors and
approved by the stockholders in February 1997, 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

45
<PAGE>
substituted for, it shall remain exercisable and shall continue to vest as
provided in the Director Plan. However, if an eligible outside director's status
as a director of the Company or the successor corporation, as applicable, is
terminated following such assumption or substitution, other than upon a
voluntary resignation by such outside director, each option granted to such
director shall become fully vested and exercisable. If the successor does not
agree to assume or substitute for the option, each option shall also become
fully vested and exercisable. Options granted under the Director Plan must be
exercised within three months of the end of the optionee's tenure as a director
of the Company, or within 12 months after such director's termination by death
or disability, but in no event later than the expiration of the option's
ten-year term. No option granted under the Director Plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable, during the lifetime of the optionee, only by such
optionee.

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

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

46
<PAGE>
with its officers and directors containing provisions which may require the
Company, among other things, to indemnify the officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature), and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.

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

OTHER MANAGEMENT MATTERS

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

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<PAGE>
CERTAIN TRANSACTIONS

John J. Moores, the Chairman of the Company's Board of Directors and the
majority stockholder of the Company, 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 a stockholder of the Company, Mr. Moores
has made short-term working capital loans to the Company on an as-needed basis,
each such loan bearing interest at the prime rate announced by major commercial
banks. Mr. Moores became a stockholder of the Company in 1989. As of January 1,
1993, the Company owed Mr. Moores $500,000 in connection with outstanding loans
that were repaid in March 1994 and April 1994. In September 1995, Mr. Moores
made a loan to the Company in the amount of $250,000, which was repaid in
November 1995. In July 1996, Mr. Moores made a loan to the Company in the amount
of $2,000,000, which was repaid three days later. The Company used the proceeds
of the $2,000,000 loan to make a capital contribution to its subsidiary in the
United Kingdom, which, in turn, repaid certain advances owed to the Company. In
December 1996, Mr. Moores loaned the Company $250,000, which was repaid in
February 1997.

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

The Company leases a suite at San Diego's 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. JMI Equity Fund L.P.
("JMI Equity Fund") is the controlling stockholder of Skunkware. Mr. Noell and
Norris van den Berg, a director of the Company, are general partners of JMI
Equity Fund, and Mr. Moores is a limited partner of JMI Equity Fund. JMI Equity
Fund holds, before giving effect to this offering, approximately 9.8% of the
Company's outstanding Common Stock. 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. JMI Equity Fund held voting control of XVT's
outstanding capital stock, and trusts for which Mr. Moores serves as trustee
owned also owned 131,332 shares of XVT's Series C Preferred Stock. The shares of
Common Stock issued by the Company in connection with the acquisition included
1,579,436 shares issued to JMI Equity Fund and such trusts. JMI and such trusts
had acquired their shares of XVT in a series of financing transactions between
June 1992 and September 1994 for an aggregate consideration of $3,466,333. In
addition, in December 1994, David A. Farley, the Company's Vice President,
Finance, and Chief Financial Officer, had purchased approximately 32,833 shares
of XVT's outstanding Series C Preferred Stock for an aggregate consideration of
$350,000. In consideration of such shares and in payment for certain accumulated
dividends owing on the Series C Preferred, the Company issued Mr. Farley 149,408
shares of its Common Stock in connection with the acquisition of XVT. The
Company also assumed all outstanding options to acquire XVT's Common Stock,
including outstanding options to William G. Holsten, the Company's Vice
President, Professional Services, and Christopher A. Cole, a director of the
Company. Following such assumption and after adjustment of the number of shares
subject to such options to reflect the applicable exchange ratio, Messrs. Cole
and Holsten received options to acquire 2,828 and 944 shares, respectively, of
the Company's Common Stock. Outstanding options to acquire XVT's Common Stock
held by Alan H. Hunt, the Company's President and Chief Executive Officer, and
Mr. Farley were 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."

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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 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; and (iv) all directors and executive
officers of the Company as a group. If the Underwriters' over-allotment option
is exercised in full, certain Selling Stockholders will sell an aggregate of
345,000 shares of Common Stock in this offering. See "Underwriting."

<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF TOTAL SHARES (2)
BENEFICIALLY ----------------------------------
NAME AND ADDRESS (1) OWNED (2) BEFORE OFFERING AFTER OFFERING
- ----------------------------------------------------------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
JMI Equity Fund, L.P. (3)........................................ 1,280,620 9.9% 8.4%
12680 High Bluff Drive
San Diego, CA 92130

John J. Moores (4)............................................... 9,549,784 74.0 62.8
Charles E. Noell III (5)......................................... 1,325,620 10.2 8.7
Norris van den Berg (6).......................................... 1,325,620 10.2 8.7
James W. Butler (7).............................................. 825,000 6.0 5.1
Christopher A. Cole (8).......................................... 630,821 4.8 4.1
Alan H. Hunt (9)................................................. 525,000 4.0 3.4
David A. Farley (10)............................................. 411,908 3.2 2.7
Douglas S. Powanda (11).......................................... 97,500 * *
Richard A. Hosley II (12)........................................ 45,000 * *
William G. Holsten (13).......................................... 32,194 * *
Douglas F. Garn (14)............................................. -- -- --
All current executives officers and directors
as a group (13 persons) (15)................................... 12,780,327 94.1 80.5
</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 12,904,019 shares of Common
Stock outstanding as of December 31, 1996 and 15,204,019 shares immediately
following the completion of this offering, together with applicable options
for such stockholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities, subject to community
property laws, where applicable. Shares of Common Stock subject to options
that are presently exercisable or exercisable within 60 days of 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 24,500 shares of
Common Stock at the initial public offering price for a period of 30 days
after the date of this Prospectus.

(4) Includes 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. Mr. Moores is Chairman of the Company's Board of Directors.
Excludes 1,280,620 shares of Common Stock held by JMI Equity Fund, L.P., of
which Mr. Moores is a limited partner. Mr. Moores does not exercise voting
or dispositive control over the shares held by JMI Equity Fund, L.P. and
disclaims beneficial ownership of all such shares except to the extent of
his pecuniary interest therein. Mr. Moores individually has granted the
Underwriters an option, solely to cover over-allotments, to acquire up to
112,700 shares of Common Stock, and trusts for which Mr. Moores serves as
trustee have granted the Underwriters options, solely to cover
over-allotments, to acquire up to 70,550 shares of Common Stock, all 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,

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<PAGE>

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 24,500 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 24,500 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. Mr. Butler is the former
President and Chief Executive Officer of the Company. Mr. Butler has granted
the Underwriters an option, solely to cover over-allotments, to acquire at
the initial public offering price for a period of 30 days after the date of
this Prospectus up to 16,000 shares of Common Stock to be issued upon
exercise of outstanding options held by Mr. Butler.

(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 10,200 shares of Common Stock at the
initial public offering price for a period of 30 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 30 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 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.

(14) Mr. Garn is the Company's Vice President, North American Sales.

(15) Includes 673,772 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. Current officers and
directors collectively have granted the Underwriters an option, solely to
cover over-allotments, to acquire up to 277,950 shares of Common Stock at
the initial public offering price for a period of 30 days after the date of
this Prospectus, of which 60,000 shares would be issued upon exercise of
outstanding options held by officers of the Company.

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<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
15,204,019 shares of Common Stock outstanding, 3,946,408 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

52
<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.

53
<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
15,204,019 shares of Common Stock based upon shares outstanding as of December
31, 1996. In addition to the 2,300,000 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 12,904,019 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. Approximately 47,000 shares will become eligible for sale 90
days following the Effective Date pursuant to Rule 144 under the Securities Act.
Beginning 180 days after the Effective Date, approximately 10,900,000 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 2,000,000 additional Restricted
Shares will become available for sale at various times pursuant to Rule 144. Of
the approximately 10,900,000 Restricted Shares that will become available for
sale in the public market beginning 180 days after the Effective Date,
approximately 10,400,000 shares will be subject to certain volume and other
resale restrictions pursuant to Rule 144. UBS Securities LLC 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 3,946,408 shares were outstanding,
of which options to purchase approximately 2,093,242 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 2,578,250 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 152,040 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

54
<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.

55
<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 the following respective number of
shares of Common Stock:

<TABLE>
<CAPTION>
TOTAL NUMBER
UNDERWRITERS OF SHARES
- ----------------------------------------------------------------------------------------- ------------
<S> <C>
UBS Securities LLC....................................................................... 920,000
Oppenheimer & Co., Inc................................................................... 920,000
Bear, Stearns & Co. Inc.................................................................. 37,000
Alex. Brown & Sons Incorporated.......................................................... 37,000
Cowen & Company.......................................................................... 37,000
Deutsche Morgan Grenfell Inc............................................................. 37,000
Dillon, Read & Co. Inc................................................................... 37,000
Donaldson, Lufkin & Jenrette Securities Corporation...................................... 37,000
Goldman, Sachs & Co...................................................................... 37,000
Hambrecht & Quist LLC.................................................................... 37,000
Morgan Stanley & Co. Incorporated........................................................ 37,000
Robertson, Stephens & Company LLC........................................................ 37,000
Dakin Securities Corporation............................................................. 15,000
First Albany Corporation................................................................. 15,000
Furman Selz LLC.......................................................................... 15,000
Hanifen, Imhoff Inc...................................................................... 15,000
Unterberg Harris......................................................................... 15,000
Volpe Brown Whelan & Company, LLC........................................................ 15,000
------------
Total................................................................................ 2,300,000
------------
------------
</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 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 $0.35 per share. The Underwriters may
allow and such dealers may reallow a concession not in excess of $0.10 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

56
<PAGE>
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.

Certain 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 345,000 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.

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 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 was determined through
negotiations among the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market and economic conditions, were 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.

57
<PAGE>
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. 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.

58
<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, 2,000,000 shares authorized, no shares issued
or outstanding................................................................
Common stock, $0.001 par value; 20,000,000 shares authorized; 12,898,000 and
12,904,000 shares issued and outstanding, respectively........................ 13,000 13,000
Additional paid-in capital...................................................... 14,413,000 15,059,000
Accumulated deficit............................................................. (21,609,000) (19,391,000)
Unearned portion of deferred compensation....................................... (1,404,000) (1,846,000)
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 2,780,000
-------------- -------------- -------------- --------------
Total operating expenses.................... 19,581,000 24,091,000 17,529,000 18,365,000
-------------- -------------- -------------- --------------
Operating income (loss)..................... (3,919,000) (4,266,000) (2,879,000) 2,584,000
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) 2,218,000
Provision for income taxes...................... -- -- -- --
-------------- -------------- -------------- --------------
Income (loss) from continuing operations........ 51,000 (4,552,000) (3,053,000) 2,218,000
-------------- -------------- -------------- --------------
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) $ 2,218,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income (loss) per share:
Income (loss) from continuing operations $ -- $ (0.37) $ (0.25) $ 0.15
Loss from discontinued operations............. -- (0.15) (0.06) --
-------------- -------------- -------------- --------------
Net income (loss)........................... $ -- $ (0.52) $ (0.31) $ 0.15
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
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
NUMBER OF ADDITIONAL PORTION OF 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 1,403,000 -- (1,404,000) --
Equity adjustment from foreign currency
translation................................... -- -- -- -- -- 115,000
----------- ----------- ------------ ------------ ------------ -----------
Balance, March 31, 1996........................... 12,898,000 13,000 14,413,000 (21,609,000) (1,404,000) 137,000
Net income...................................... -- -- -- 2,218,000 -- --
Issuance of common stock........................ 6,000 -- 15,000 -- -- --
Compensation expense related to restricted stock
and options................................... -- -- -- -- 189,000 --
Deferred compensation related to options
granted....................................... -- -- 631,000 -- (631,000) --
Equity adjustment from foreign currency
translation................................... -- -- -- -- -- (325,000)
----------- ----------- ------------ ------------ ------------ -----------
Balance, December 31, 1996........................ 12,904,000 $ 13,000 $ 15,059,000 $(19,391,000) $(1,846,000) $(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
and options................................... 43,000
Deferred compensation related to options
granted....................................... --
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) $2,218,000
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 1,373,000
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 2,242,000 1,854,000
Other.......................................... 113,000 507,000 (252,000) (641,000)
---------- ---------- ----------- -----------
(1,567,000) 584,000 166,000 679,000
---------- ---------- ----------- -----------
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) (480,000) (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 37,000 (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 (including $200,000 in cash transfered to the buyer at closing) in exchange
for a $600,000, 9.25% nonrecourse note receivable. Due to thin capitalization of
XVT and XVT's poor historical financial performance, the Company has provided a
full valuation allowance against this note receivable. The Company will reduce
this valuation allowance as cash is received. In order to secure its interest in
this note the Company has retained a right of first refusal in the event any
subsequent changes in control over XVT's assets or business. This right expires
in September 2001. The loss on disposal of approximately $1,100,000, as
reflected in the accompanying consolidated statement of operations, includes the
loss on the sale of the net assets of approximately $1,200,000 reduced by the
results of operations from February 1, 1996 through the date of disposal.

F-10
<PAGE>
PEREGRINE SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO 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-
JANUARY 31,
1996
---------------

<S> <C>
Revenues................................................................... $ 8,483,000
---------------
---------------
Net loss................................................................... $ (781,000)
---------------
---------------
</TABLE>

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>

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>

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)
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 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.

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)
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. During December 1996,
the Company recorded $631,000 in deferred compensation related to the grant of
185,000 options. This deferred compensation will be amortized on a straight line
basis to expense over the option's four year vesting period.

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 $2.34. The restrictions lapse on the
shares ten years from the date of grant or, if the Company achieves certain
objectives for earnings growth from fiscal 1997 through fiscal 2002, or, on a
change in control of the Company. The unearned portion of restricted stock is
included in stockholders' deficit and is being amortized as compensation expense
on a straight-line basis over the vesting period.

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................................................ 1,756,000 462,000 2,218,000
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>
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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.................... 52
Shares Eligible for Future Sale................. 54
Underwriting.................................... 56
Legal Matters................................... 58
Experts......................................... 58
Additional Information.......................... 58
Index to Financial Statements................... F-1
</TABLE>

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

UNTIL MAY 3, 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.

2,300,000 Shares

[LOGO]

Common Stock

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

PROSPECTUS
APRIL 8, 1997

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

UBS SECURITIES

OPPENHEIMER & CO., INC.

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