PRIMUS KNOWLEDGE SOLUTIONS INC, S-1/A, 1999-06-18

PRIMUS KNOWLEDGE SOLUTIONS INC
S-1/A, 1999-06-18
PREPACKAGED SOFTWARE

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<PAGE>

As filed with the Securities and Exchange Commission on June 18, 1999
Registration 333-77477
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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Amendment No. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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PRIMUS KNOWLEDGE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
Washington 7372 91-1350484
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

1601 Fifth Avenue
Seattle, Washington 98101
(206) 292-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

Michael A. Brochu
President, Chief Executive Officer and Chairman of the Board
Primus Knowledge Solutions, Inc.
1601 Fifth Avenue
Seattle, Washington 98101
(206) 292-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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Copies to:
<TABLE>
<S> <C>
Gregory Gorder Alan K. Austin
Daniel F. Vaughn Steven V. Bernard
Perkins Coie LLP Wilson Sonsini Goodrich & Rosati
1201 Third Avenue, 40th Floor Professional Corporation
Seattle, Washington 98101-3099 650 Page Mill Road
(206) 583-8888 Palo Alto, California 94304-1050
(650) 493-9300
</TABLE>

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

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

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
------------

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 7, 1999

[PRIMUS LOGO]

4,150,000 Shares
Common Stock

Primus Knowledge Solutions, Inc. is offering 4,000,000 shares, and the
selling shareholders are offering 150,000 shares. This is Primus's initial
public offering, and no public market currently exists for its shares. Our
common stock has been approved for quotation on the Nasdaq National Market
under the symbol "PKSI." We anticipate that the initial public offering price
will be between $10.00 and $12.00 per share.

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

Investing in the common stock involves risks.
See "Risk Factors" beginning on page 5.

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<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discounts and Commissions.......................... $ $
Proceeds to Primus.............................................. $ $
Proceeds to Selling Shareholders................................ $ $
</TABLE>

The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

Primus has granted the underwriters a 30-day option to purchase up to an
additional 622,500 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.

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BancBoston Robertson Stephens

Hambrecht & Quist

U.S. Bancorp Piper Jaffray

FAC/Equities

The date of this prospectus is , 1999
<PAGE>

[ARTWORK APPEARS HERE]

FRONT COVER

[THE COMPANY'S LOGO ACCOMPANIED BY THE FOLLOWING TEXT:

Competitive Differentiation with Customer Support

The growth of electronic commerce has made customer support a primary customer-
contact point and source of customer loyalty. As products and services have
become more standardized, customer support and problem resolution have become
key competitive differentiators.]

[THE SOLUTIONPUBLISHER, SOLUTIONEXPLORER AND SOLUTIONBUILDER LOGOS AND A GRAPHIC
REPRESENTATION OF THE PRIMUS KNOWLEDGE MANAGEMENT SOLUTION ACCOMPANIED BY THE
FOLLOWING TEXT:

SolutionPublisher allows an organization's customers to use the web for problem
resolution at any time of the day or night.

SolutionExplorer's Web-based approach allows field service personnel and
business partners to access and contribute to the knowledge base.

Customer support professionals use SolutionBuilder to find existing solutions
and author new solutions while working with a customer.

Capture, Solve, Reuse and Share for Better Support

Our SolutionSeries products allow customer-support personnel to capture problem-
resolution information in the workflow. Our associative problem-solving
technology enables our users to efficiently locate relevant solutions or create
new solutions to add to the knowledge base. These new solutions are immediately
available for reuse by other customer-support personnel and accessible
throughout the extended enterprise via the Web.]

<PAGE>

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

Until , 1999, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

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TABLE OF CONTENTS

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Page
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Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Use of Proceeds......................................................... 13
Dividend Policy......................................................... 13
Capitalization.......................................................... 14
Dilution................................................................ 15
Selected Consolidated Financial Data.................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 17
Business................................................................ 28
Management.............................................................. 44
Certain Transactions.................................................... 53
Principal and Selling Shareholders...................................... 54
Description of Capital Stock............................................ 57
Shares Eligible for Future Sale......................................... 60
Underwriting............................................................ 62
Legal Matters........................................................... 64
Experts................................................................. 64
Additional Information.................................................. 64
Index to Consolidated Financial Statements.............................. F-1
</TABLE>

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"Primus," "SolutionBuilder," "SolutionPublisher" and "Solution X" are
registered trademarks of Primus. "SolutionExplorer," "SolutionSeries,"
"SolutionAdmin," "Solution Reports" and "Primus Knowledge Solutions" are
trademarks of Primus. "Primus" is also a service mark of Primus. This
prospectus also contains trademarks and service marks of other companies, which
are the property of their respective owners.

Except where we state otherwise, we present information in this prospectus
assuming (1) the conversion of all outstanding shares of preferred stock into
an aggregate of 4,966,660 shares of common stock upon the closing of this
offering, (2) the exercise of warrants to purchase 55,999 shares of preferred
stock and subsequent conversion into 18,666 shares of common stock, (3) the
exercise of warrants to purchase 47,723 shares of common stock and (4) no
exercise of the underwriters' over-allotment option.
<PAGE>

PROSPECTUS SUMMARY

This summary highlights information that we present more fully in the rest of
this prospectus. The summary is not complete and does not contain all the
information you should consider before buying shares in this offering. You
should read the entire prospectus carefully.

Primus Knowledge Solutions, Inc.

We are a leading provider of Web-based problem-resolution software for
customer support and self-service. Our applications enable businesses to
capture problem-resolution information, solve customer problems, reuse
solutions stored in the knowledge base and share captured knowledge throughout
the extended enterprise. Our SolutionSeries family of software products
enhances an organization's problem-resolution capabilities by using our
associative problem-solving technology and leveraging the Internet to extend
customer support to remote employees, business partners and end-user customers.

We believe our software allows organizations to improve customer satisfaction
levels and decrease support costs by:

. reducing the overall time needed to resolve problems
. improving first-call resolution rates
. increasing call deflections to the Web
. reducing escalation of problems to senior analysts
. increasing solution reuse
. reducing training time

We believe that our SolutionSeries products enable our users to realize a
substantial economic return on their investment by:

. Enhancing problem resolution

Our products are based on a methodology which, as opposed to alternative
methodologies such as enhanced text retrieval, decision trees and case-
based reasoning, improves the relevance of solutions retrieved, supports
and enhances diverse problem-solving approaches and cost-effectively
captures knowledge in the workflow.

. Leveraging Internet technology to extend problem-resolution solutions
Our Web-architected applications can be deployed throughout the extended
enterprise more quickly and cost effectively than traditional client/server
products. Our products also enable our users to provide their customers
enhanced around-the-clock Web-based self-service, reducing the overall cost
of customer support. According to International Data Corporation, the cost
of providing Web-based software support averages $0.45 per incident as
compared to $30.00 for traditional phone support.

. Providing solutions for large global organizations and their partners
Our software has been deployed by one of our users to over 500 support
engineers globally and is being used by that company to provide Web-based
customer self-service support to over 130,000 registered end-users.

. Leveraging investment in existing customer-support systems
Our products integrate with most leading customer-relationship-management
systems, increasing customer-support personnel productivity and customer
satisfaction by reducing the need to re-gather existing customer
information before proceeding to problem resolution.

We market and sell our products primarily through a direct sales force. Our
customers include: 3Com, 3M, Amdahl, Compaq, EDS, EMC, Ericsson, Fujitsu,
Lucent, MCI/SHL Systemhouse, Microsoft, Motorola, Nortel Networks, Novell, NTT,
SGI, Softbank, Starbucks, Williams and Xerox.

Our objective is to establish and maintain a leadership position in providing
Web-based problem-resolution software applications for our users and their
customers. Our strategy to achieve this objective is to continue to leverage
the Internet, enhance our product suite, target additional vertical markets,
build additional strategic relationships and extend our solutions to functional
areas outside of customer support.

3
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The Offering

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<S> <C>
Common stock offered by Primus.................. 4,000,000 shares
Common stock offered by the selling
shareholders................................... 150,000 shares
Common stock to be outstanding after this
offering....................................... 13,501,796 shares
Use of proceeds................................. For general corporate purposes, including debt
repayment and working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... PKSI
</TABLE>

Common stock to be outstanding after this offering is based on shares
outstanding on March 31, 1999. It excludes 2,915,427 shares issuable on
exercise of outstanding stock options granted under our 1993, 1994 and 1995
stock plans at a weighted-average exercise price of $4.12 per share,
24,641 shares of common stock available for future grants under the 1995 stock
plan, 1,166,667 shares available for future grant under our 1999 stock
incentive compensation plan, 600,000 shares available for future issuance under
our 1999 employee stock purchase plan and 34,166 shares issuable on exercise of
warrants at a weighted-average exercise price of $5.85 per share. Between March
31, 1999 and May 31, 1999, we issued 10,276 shares of common stock on exercises
of outstanding options, we agreed to issue 18,400 additional shares to
employees of Primus KK and we granted options to purchase 10,000 shares at a
weighted-average exercise price of $10.50 per share.

Summary Consolidated Financial Data
(In thousands, except per share data)

<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues................. $ 2,422 $ 5,189 $ 8,610 $ 1,365 $ 3,911
Loss from operations........... (5,992) (5,945) (10,506) (1,614) (1,844)
Net loss....................... (5,878) (5,985) (10,603) (1,626) (1,863)
Loss Per Share:
Basic and Diluted............ (1.58) (1.62) (2.82) (0.44) (0.48)
Pro Forma Basic and Diluted.. -- -- (1.32) -- (.20)
Shares used in Computation of
Loss Per Share
Basic and Diluted............ 3,857 3,884 3,957 3,903 4,313
Pro Forma Basic and Diluted.. -- -- 8,020 -- 9,280
</TABLE>

The following table summarizes:

. actual consolidated balance sheet data

. pro forma consolidated balance sheet data, giving effect to conversion of
all outstanding shares of preferred stock into 4,966,660 shares of common
stock and proceeds of $272,000 from the exercise of warrants to purchase
66,389 shares of common stock at a weighted-average exercise price of
$4.10 per share, for which we have received binding commitments from the
warrant holders to exercise the warrants in conjunction with the closing
of this offering.

. pro forma consolidated balance sheet data as adjusted to give effect to
our sale of 4,000,000 shares of common stock offered by us through this
prospectus at the assumed initial public offering price of $11.00 per
share and after deducting anticipated underwriting discounts and
commissions and estimated offering expenses and the retirement of long-
term debt of $1.6 million.

See "Capitalization."

<TABLE>
<CAPTION>
March 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma as Adjusted
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<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 2,423 $ 2,695 $41,042
Working capital (deficit)..................... (1,099) (827) 38,136
Total assets.................................. 11,546 11,818 50,165
Long-term obligations, net of current ........ 1,054 1,054 47
Redeemable convertible preferred stock........ 23,373 -- --
Total shareholders' equity (deficit).......... (23,318) 327 40,297
</TABLE>

Our headquarters are located at 1601 Fifth Avenue, Suite 1900, Seattle,
Washington 98101, and our telephone number is (206) 292-1000. Our Web site is
www.primus.com. We were incorporated in Washington in 1986.

4
<PAGE>

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially and
adversely affected. In such case, the trading price of our common stock could
decline and you may lose all or part of your investment.

We have incurred operating losses, and we may not be profitable in the future.

We have incurred net losses in each quarter since inception and we expect to
continue to incur net losses for the foreseeable future. As of March 31, 1999,
we had an accumulated deficit of $33.4 million. We expect to continue to devote
substantial resources to expand our product development, sales and marketing
and client service groups. As a result, we will need to generate significant
revenues to achieve and maintain profitability. We may not be profitable in any
future period. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Quarterly fluctuations in our operating results may adversely affect our stock
price.

Our license revenues have fluctuated substantially from quarter to quarter in
the past and are likely to continue to fluctuate substantially in the future.
Many of the factors causing the fluctuations are listed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results of Operations." In addition, the fiscal or quarterly budget
cycles of our users can cause our revenues to fluctuate from quarter to quarter
and applicable accounting policies may cause us to report new license
agreements as deferred revenue until implementation begins. As a result, we
believe that period-to-period comparisons of our operating results are not
meaningful, and you should not rely on such comparisons to predict our future
performance. We will continue to base our decisions regarding our operating
expenses on anticipated revenue trends. To the extent these expenses are not
followed by increased revenues, our operating results will suffer. Fluctuations
in our operating results, particularly compared to the expectations of market
analysts or investors, could cause severe volatility in the price of our common
stock.

Our quarterly operating results depend on a small number of large orders.

We derive a significant portion of our product license revenue in each
quarter from a small number of relatively large orders. Our operating results
for a particular fiscal quarter could be materially adversely affected if we
are unable to complete one or more substantial license sales or implementations
planned for that quarter. During the last nine quarters, four or fewer
customers accounted for more than half of that quarter's total revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Factors outside our control may cause the timing of our license revenues to
vary from quarter-to-quarter, possibly adversely affecting our operating
results.

Under applicable accounting rules, we may experience further variability in
our license revenues from quarter to quarter due to factors outside our
control, including

. variability in the mix of new and existing customers

. whether we are providing implementation services

. whether implementation is delayed or takes longer than expected

5
<PAGE>

Where we are implementing the software, we will account for the agreement as
an item of deferred revenue and will recognize the revenue over the period of
implementation. Most of our new customers begin implementation within 30 to 60
days of signing a license agreement. Once commenced, implementation of our
products typically ranges from 60 to 90 days. We can't, however, guarantee that
customers will begin implementation or that we will always be able to implement
our software within those time periods. Thus, all of our deferred license
revenue may not be recognized within the originally expected time period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Seasonality may adversely affect our quarterly operating results.

We expect to experience seasonality in our license revenue. To date, we
believe that seasonality has been masked by other factors, such as large orders
and the timing of personnel changes in our sales staff. Our customers' purchase
decisions are often affected by fiscal budgetary factors and by efforts of our
direct sales force to meet or exceed sales quotas. As a result, we expect new
business in the last quarter of a year to be greater than new business in the
first quarter of the following year. One effect of our revenue recognition
policy, however, is that revenue recognized in a quarter will typically not
reflect all of the new license agreements signed and shipped in that quarter.
Because revenue recognized in a given quarter may be primarily associated with
new business in prior quarters, revenue in the first quarter may be higher than
revenue recognized in the previous fourth quarter. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

The limited sales history of our products makes it difficult to evaluate our
business and prospects.

We released our first SolutionSeries product in April 1995. As of March 31,
1999, approximately 40 companies licensed our SolutionSeries products.
Accordingly, the basis upon which you can evaluate our prospects in general,
and market acceptance of our products in particular, is limited. The market for
problem-resolution software will have to grow significantly, and we will have
to achieve broad market acceptance of our products, for our business to
succeed.

Moreover, we released our Web-based products, SolutionPublisher and
SolutionExplorer, in August 1996 and November 1997, respectively. The limited
sales history of our Web-based products further limits your ability to evaluate
our business and prospects. Additionally, part of our strategy is to extend our
solutions to other functional areas where knowledge captured by our products
may be useful, such as product development, sales and marketing and field
service. Whether there will be significant demand for our products in these
areas is untested and uncertain.

We rely on sales of only one product family.

Product-license revenues and related services from our SolutionSeries
products accounted for substantially all of our total revenues during fiscal
1998, and we expect revenues from our SolutionSeries products to continue to
account for substantially all of our future revenues. As a result, factors
adversely affecting the demand for our SolutionSeries products, such as
competition, pricing or technological change, could materially adversely affect
our business, financial condition and operating results. Our future financial
performance will substantially depend on our ability to sell current versions
of the SolutionSeries products and our ability to develop and sell enhanced
versions of SolutionSeries products.

6
<PAGE>

Our future success depends in part on broad market acceptance of the Web as a
delivery vehicle for problem resolution.

Part of our strategy is to continue to increase our focus on developing and
marketing Web-based products. Our Web-based products, SolutionExplorer and
SolutionPublisher, accounted for approximately 33% of our software license
revenue in 1998 and 51% in the first quarter of 1999. Broad market acceptance
of the Web as a delivery vehicle for problem solutions to an enterprise's
customers, resellers, channel partners and field representatives through Web
self-service is critical to the success of our business. Thus, our future
success substantially depends on continued growth in the use of the Internet
and the continued development of the Internet as a viable commercial
communication medium. We cannot be certain that commercial Internet usage will
continue to grow as it has in the past. If use of the Internet as a commercial
communication medium does not continue to grow or evolves in a way that we
cannot address, our business, financial condition and operating results would
be materially and adversely affected.

Factors outside our control may make our products less useful.

The effectiveness of our SolutionSeries products depends in part on
widespread adoption and use of our software by customer-support personnel in
the extended enterprise and the quality of the solutions they generate. The
problem-resolution database is developed by customer-support personnel that
create solutions in the workflow and, sometimes, by importing a user's legacy
solutions. If customer-support personnel do not adopt and use our products,
necessary solutions will not be added to the database, and the database will be
inadequate. Some of our users have found that customer- support personnel
productivity initially drops while customer-support personnel become accustomed
to using our software. If an enterprise deploying our software has not
adequately planned for and communicated its expectations regarding that initial
productivity decline, customer-support personnel may resist adoption of our
software. In addition, if less-than-adequate solutions are created and left
uncorrected by a user's quality-assurance processes or if the legacy solutions
are inadequate, the database will similarly be inadequate, and the value of our
SolutionSeries products to our users will be impaired. Thus, successful
deployment and broad acceptance of our SolutionSeries products will depend in
part on whether our users effectively roll-out and use our software products
and the quality of the users' existing database of solutions, each of which are
outside our control. See "Business--Products."

The high level of competition in our market may result in pricing pressures,
reduced margins or the failure of our products to achieve market acceptance.

. other problem-resolution software vendors

. e-commerce customer-management software vendors

. our potential users' internal information technology departments, which
may choose to rely upon their own proprietary problem-resolution systems
or develop new proprietary systems

As the market for problem-resolution software matures, it is possible that
new and larger companies will enter the market, existing competitors will form
alliances or current and potential competitors could acquire, be acquired by or
establish cooperative relationships with third parties. The resulting
organizations could have greater technical, marketing and other resources and
improve their products to address the needs of our existing and potential
users, thereby increasing their market

7
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share. Increased competition could result in pricing pressures, reduced margins
or the failure of our products to achieve or maintain market acceptance. See
"Business--Competition."

The loss of access to, or a problem with, Versant's database could adversely
affect our business.

We incorporate into our products a database licensed from Versant. We are
currently working to integrate our products with other databases; however we do
not believe that the integrations will be completed for at least three to six
months. Because our products currently rely on Versant's database, we depend on
Versant's ability to support the database in a timely and effective manner.
Until we finish integration of our products with other databases, losing access
to Versant's database would have a material adverse effect on our ability to
license our product to new users. See "Business--Products."

Failure to sufficiently expand our sales and marketing infrastructure would
adversely affect our sales.

To date, we have licensed our products primarily through our direct sales
force. Our vice president of sales began working for us in January 1999, and we
are currently seeking to hire a vice president of marketing. Our future revenue
growth will depend in large part on our ability to recruit, train and manage
additional sales and marketing personnel and to expand our indirect
distribution channels. We have experienced and continue to experience
difficulty in recruiting qualified sales and marketing personnel and in
establishing third-party relationships. We may not be able to successfully
expand our direct sales force or other distribution channels and any such
expansion may not result in increased revenues. Our business, financial
condition and operating results will be materially adversely affected if we
fail to expand our sales and marketing resources. See "Business--Sales and
Marketing."

Our failure to retain skilled technical personnel in a tight labor market may
adversely affect our product development, sales and customer satisfaction.

Qualified technical personnel are in great demand throughout the software
industry. The demand for qualified technical personnel is particularly acute in
the Pacific Northwest, due to the large number of software companies and the
low unemployment in the region. Our success depends in large part upon our
continued ability to attract and retain highly skilled technical employees,
particularly software architects and engineers. Our failure to attract and
retain the highly-trained technical personnel that are integral to our direct
sales, product-development and customer-support teams may limit the rate at
which we can generate sales and develop new products or product enhancements.
This could have a material adverse effect on our business, financial condition
and operating results.

Failure to properly integrate our management team would adversely affect our
business.

In the last year we added three new members to our senior management team,
none of whom worked together prior to joining Primus. Our success depends on
the performance of our senior management and their ability to work together.
Failure to properly integrate them would harm our business. Much of our success
also depends on Michael A. Brochu, our president and chief executive officer.
The loss of Mr. Brochu's services would harm our business. See "Management."

Our inability to expand sufficiently our implementation and consulting
capabilities would limit our ability to grow.

If sales of new licenses increased rapidly or if we were to sign a license
agreement for a particularly large or complex implementation, our client
services personnel may be unable to meet

8
<PAGE>

the demand for implementation services. In that case, if we were unable to
retain or hire highly trained consulting personnel or establish relationships
with third-party systems-integrators and consultants to implement our products,
we would be unable to meet customer demands for implementation and educational
services related to our products. A failure to do so could have a material
adverse effect on our business, operating results and financial condition. See
"Business--Strategy."

Our international operations are subject to additional risks.

Revenues from customers outside the United States represented approximately
$1.4 million in fiscal 1998, or 17% of our total 1998 revenues. A key component
to our business strategy is to expand our sales and support operations
internationally. Our international operations will continue to be subject to a
number of risks. These risks include:

. costs of customizing products for foreign countries

. laws and business practices favoring local competition

. compliance with multiple, conflicting and changing laws and regulations

. longer sales cycles

. greater difficulty or delay in accounts receivable collection

. import and export restrictions and tariffs

. difficulties in staffing and managing foreign operations

. political and economic instability

Our international operations also face foreign-currency-related risks. To
date, substantially all of our revenues have been denominated in U.S. dollars,
but we believe that in the future, an increasing portion of our revenues will
be denominated in foreign currencies, including the Euro, which was introduced
in January 1999. The Euro is an untested currency and may be subject to
economic risks that are not currently contemplated. Fluctuations in the value
of the Euro or other foreign currencies may have a material adverse effect on
our business, operating results and financial condition.

We currently customize our products for the Japanese market. In the future,
we may develop additional localized versions of our products. Localization of
our products could create additional costs and cause delays in new product
introductions.

Our failure to adapt to technology trends and evolving industry standards would
hinder our competitiveness.

Our market is susceptible to rapid changes due to technology innovation,
evolving industry standards, and frequent new service and product
introductions. New services and products based on new technologies or new
industry standards expose us to risks of technical or product obsolescence. We
will need to use leading technologies effectively, continue to develop our
technical expertise and enhance our existing products on a timely basis to
compete successfully in this industry. We cannot be certain that we will be
successful in using new technologies effectively, developing new products or
enhancing existing products on a timely basis or that any new technologies or
enhancements used by us or offered to our customers will achieve market
acceptance.

Our inability to continue integration of our products with other third-party
software could adversely affect market acceptance of our products.

Our ability to compete successfully also depends on the continued
compatibility and interoperability of our products with products and systems
sold by various third parties, specifically

9
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including customer-relationship-management software sold by Clarify, ONYX
Software, Remedy, Siebel Systems and Vantive. Currently, these vendors have
open applications program interfaces, which facilitate our ability to integrate
with their systems. If any one of them should close their programs' interface
or if they should acquire one of our competitors, our ability to provide a
close integration of our products could become more difficult and could delay
or prevent our products' integration with future systems.

Our efforts to protect our proprietary rights may be inadequate.

Our success depends in part on our ability to protect our proprietary rights.
To protect our proprietary rights, we rely primarily on a combination of
copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as
those contained in license agreements with consultants, vendors and customers.
We have not signed such agreements in every case. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. Other
parties may breach confidentiality agreements and other protective contracts we
have entered into. We may not become aware of, or have adequate remedies in the
event of, such breach.

We pursue the registration of some of our trademarks and service marks in the
United States and in certain other countries, but we have not secured
registration of all our marks. A significant portion of our marks include the
word "Primus." Other companies use "Primus" in their marks alone or in
combination with other words, and we cannot prevent all third-party uses of the
word "Primus." We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would adversely
affect our trademarks.

Other companies may claim that we infringe their intellectual property or
proprietary rights.

If any of our products violate third party proprietary rights, we may be
required to reengineer our products or seek to obtain licenses from third
parties, and such efforts may not be successful. We do not conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. Product development is
inherently uncertain in a rapidly evolving technological environment in which
there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. In addition,
other companies have filed trademark applications for marks similar to the
names of our products. Although we believe that our products do not infringe
the proprietary rights of any third parties, third parties could assert
infringement claims against us in the future. The defense of any such claims
would require us to incur substantial costs and would divert management's
attention and resources to defend against any claims relating to proprietary
rights, which could materially and adversely affect our financial condition and
operations. Parties making such claims could secure a judgment awarding them
substantial damages, as well as injunctive or equitable relief that could
effectively block our ability to sell our services. Any such outcome could have
a material adverse effect on our business, financial condition and operating
results.

Control by insider shareholders of a large percentage of our voting stock may
permit them to influence Primus in a way that adversely affects our stock
price.

Following the closing of this offering, our officers, directors and
affiliated entities together will beneficially own approximately 36.7% of the
outstanding shares of our common stock (35.1% if the underwriters' over-
allotment option is exercised in full). As a result, these shareholders will be

10
<PAGE>

able to influence all matters requiring shareholder approval and, thereby, our
management and affairs. Some matters that typically require shareholder
approval include:

. election of directors

. certain amendments to our articles of incorporation

. merger or consolidation

. sale of all or substantially all our assets

This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock. See "Principal and Selling Shareholders."

Management has broad discretion in using the net proceeds from this offering.

We have not identified specific uses for the net proceeds from this offering,
and we will have broad discretion in how we use them. See "Use of Proceeds."

Our articles of incorporation and bylaws and Washington law contain provisions
that could discourage a takeover.

Certain provisions of our articles of incorporation and our bylaws and
Washington law could make it more difficult for a third party to obtain control
of Primus, which could reduce the market price of our stock. See "Description
of Capital Stock."

Future sales of our common stock may depress our stock price.

After this offering, we will have outstanding 13,501,796 shares of common
stock. Sales of a substantial number of shares of common stock in the public
market following this offering could materially adversely affect the market
price of our common stock. All the shares sold in this offering will be freely
tradable. The remaining shares of common stock outstanding after this offering
will be available for sale in the public market as follows:

<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ---------
<S> <C>
Upon effectiveness of this offering......................... 224,829
90 days after effectiveness of this offering................ 18,150
180 days after effectiveness of this offering............... 8,863,297
At various times thereafter upon the expiration of one-year
holding periods............................................. 245,520
---------
Total.......................................................... 9,351,796
=========
</TABLE>

See "Shares Eligible for Future Sale" and "Underwriting."

Year 2000 remediation may involve significant time and expense and may reduce
our future sales.

Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates or have been programmed with default
dates ending in "99," the common two-digit reference for 1999. As a result, as
we transition from the 20th century to the 21st century, computer systems and
software used by many companies and organizations in a wide variety of
industries, including technology, transportation, utilities, finance and
telecommunications, will produce erroneous results or fail unless they have
been modified or upgraded to process date

11
<PAGE>

information correctly. Although we believe the current versions of our software
products are Year 2000 compliant, we may face claims based on Year 2000 issues
arising from the integration of multiple products within an overall system. We
may also experience reduced sales of our products as potential customers reduce
their budgets or delay new purchases for customer-support software due to
increased expenditures on their own Year 2000 compliance efforts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."

Changes in accounting standards could affect the calculation of our future
operating results.

In October 1997, the American Institute of Certified Public Accountants
issued its Statement of Position 97-2, "Software Revenue Recognition," and
later amended its position by its Statement of Position 98-4. We adopted
Statement of Position 97-2 effective January 1, 1998. Based on our
interpretation of the AICPA's position, we believe our current revenue
recognition policies and practices are consistent with Statement of Position
97-2 and Statement of Position 98-4. The AICPA has also issued Statement of
Position 98-9, which is effective for transactions we enter into beginning
January 1, 2000. However, full implementation guidelines for these standards
have not yet been issued. Once available, such implementation guidelines could
lead to unanticipated changes in our current revenue accounting practices which
could materially adversely affect our business, financial condition and
operating results. Additionally, the accounting standard setters, including the
Securities and Exchange Commission and the Financial Accounting Standards
Board, are reviewing the accounting standards related to stock-based
compensation. Any changes to this standard or any other accounting standards
could materially adversely affect our business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

You should not unduly rely on forward-looking statements.

This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipate," "believes," "expects,"
"future" and "intends," and similar expressions to identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks described above and elsewhere
in this prospectus.

12
<PAGE>

USE OF PROCEEDS

We expect to receive approximately $40.0 million in net proceeds from the
sale by us of the 4,000,000 shares of common stock in this offering, at the
assumed initial public offering price of $11.00 per share (approximately $46.3
million if the underwriters' over-allotment option is exercised in full).

We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including repayment of a
term loan facility. We plan to repay the outstanding balance on our term loan
with Imperial Bank. As of March 31, 1999, we had borrowed $1.6 million under
this facility, which bears interest at Imperial Bank's prime rate plus 1%,
which equaled 8.75% at March 31, 1999. We may also use a portion of the net
proceeds to acquire additional businesses, products and technologies or to
establish joint ventures that we believe will complement our current or future
business. However, we have no specific oral or written plans, agreements or
commitments to do so, and are not currently negotiating any such acquisition or
joint venture. The amounts that we actually expend for working capital and
other general corporate purposes will vary significantly depending on a number
of factors, including future revenue growth, if any, the amount of cash we
generate from operations and the progress of our product development efforts.
As a result, we will retain broad discretion in allocating the net proceeds of
this offering. Pending the uses described above, we will invest the net
proceeds in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. We currently intend to
retain any future earnings to fund the development and growth of our business.
Therefore, we do not currently anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of our current credit facilities
prohibit us from paying dividends without our lender's consent.

13
<PAGE>

CAPITALIZATION

The following table sets forth:

. our actual capitalization as of March 31, 1999

. our pro forma capitalization, after giving effect to the conversion of
all outstanding preferred stock into 4,966,660 shares of common stock and
proceeds of $272,000 from the exercise of warrants to purchase 66,389
shares of common stock at a weighted-average exercise price of $4.10 per
share for which we have received binding commitments from the warrant
holders to exercise the warrants in conjunction with the closing of this
offering.

. our pro forma capitalization, as adjusted to give effect to the sale by
us of 4,000,000 shares of common stock at the assumed initial public
offering price of $11.00 per share (less anticipated underwriting
discounts and commissions and estimated expenses we expect to pay in
connection with this offering) and the repayment of the $1.6 million
balance outstanding on our bank term loan

You should read this table in conjunction with our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------------------------
Pro Forma
Actual Pro Forma as Adjusted
--------------- --------------- -------------------
(In thousands, except share and per share data)
<S> <C> <C> <C>
Long-term obligations, net
of current portion....... $ 1,054 $ 1,054 $ 47
--------------- --------------- ---------------
Redeemable convertible
preferred stock;
12,810,568 shares
designated: 12,810,568
shares issued and
outstanding, actual; no
shares issued and
outstanding, pro forma
and pro forma as
adjusted................. 23,373 -- --

Shareholders' equity
(deficit):
Preferred stock, $.001
par value per share;
15,000,000 shares
authorized; 500,000
issued and outstanding,
actual; no shares
issued and outstanding
pro forma or pro forma
as adjusted............ 1 -- --
Common stock, $.025 par
value per share;
50,000,000 shares
authorized; 4,468,747
shares issued and
outstanding, actual;
9,501,796 shares issued
and outstanding, pro
forma; 13,501,796
shares issued and
outstanding, pro forma
as adjusted(1)......... 112 238 338
Additional paid-in
capital................ 9,975 33,495 73,365
Accumulated deficit..... (33,401) (33,401) (33,401)
Accumulated other
comprehensive loss..... (5) (5) (5)
--------------- --------------- ---------------
Total shareholders'
equity (deficit)..... (23,318) 327 40,297
--------------- --------------- ---------------
Total
capitalization..... $ 1,109 $ 1,381 $ 40,344
=============== =============== ===============
</TABLE>
- -------
(1) Common stock excludes:
. 235,214 shares of common stock issuable on exercise of options
outstanding, of which 225,962 are exercisable, under our 1993 stock plan
at a weighted average exercise price of $1.98 per share
. 8,332 shares of common stock issuable on exercise of stock options
outstanding and exercisable under our 1994 nonemployee director stock
option plan at a weighted average exercise price of $2.25 per share
. 2,671,881 shares of common stock issuable on exercise of options
outstanding, of which 1,055,510 shares are exercisable, under our 1995
stock plan at a weighted-average exercise price of $4.31 per share and
24,641 shares of common stock reserved for future issuance under our 1995
plan. An additional 500,000 shares were reserved under the plan in April
1999.
. 1,166,667 shares of common stock reserved for issuance under our 1999
stock plan
. 600,000 shares available for issuance under our 1999 employee stock
purchase plan
. 34,166 shares issuable on exercise of warrants outstanding at a weighted-
average exercise price of $5.85 per share

14
<PAGE>

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value (total assets less intangible
assets and total liabilities) by the number of outstanding shares of common
stock on an as-if-converted basis, as adjusted assuming the cash exercise of
the warrants referred to below.

Our pro forma net tangible book value at March 31, 1999, after giving effect
to (1) the conversion of all outstanding preferred stock into 4,966,660 shares
of common stock upon the closing of this offering and (2) proceeds of $272,000
from the exercise of warrants to purchase 66,389 shares of common stock at a
weighted-average exercise price of $4.10 per share, was $327,000, or $0.03 per
share of common stock. After giving effect to the sale of the 4,000,000 shares
of common stock at the assumed initial public offering price of $11.00 per
share (less anticipated underwriting discounts and commissions and estimated
expenses we expect to pay in connection with this offering), our pro forma as
adjusted net tangible book value at March 31, 1999 would have been $40.3
million, or $2.98 per share. This represents an immediate increase in the pro
forma net tangible book value of $2.95 per share to existing shareholders and
an immediate dilution of $8.02 per share to new investors, or approximately 73%
of the assumed initial public offering price of $11.00 per share.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $11.00
Pro forma net tangible book value per share at March 31, 1999.... $0.03
Increase per share attributable to new investors................. 2.95
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................... 2.98
------
Dilution per share to new investors.............................. $ 8.02
======
</TABLE>

The following table shows, as of March 31, 1999 on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price paid per share by existing
shareholders and by new investors purchasing common stock in this offering:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 9,501,796 70% $34,020,000 44% $ 3.58
New investors.............. 4,000,000 30 44,000,000 56 $11.00
---------- --- ----------- ---
Total.................... 13,501,796 100% $78,020,000 100%
========== === =========== ===
</TABLE>

At March 31, 1999, we had outstanding options to purchase shares of common
stock as follows:

<TABLE>
<CAPTION>
Number of Weighted-Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
1993 stock plan................................... 235,214 $1.98
1994 stock plan................................... 8,332 2.25
1995 stock plan................................... 2,671,881 4.31
---------
Total........................................... 2,915,427 4.12
=========
</TABLE>

We also have available 1,166,667 shares for grant under our 1999 stock plan
and 600,000 shares for issuance under our 1999 employee stock purchase plan. To
the extent the option holders exercise outstanding options, or any options we
grant in the future, there will be further dilution to new investors. Both of
these plans have provisions to automatically add shares to the plan in certain
circumstances. In April 1999, we reserved an additional 500,000 shares under
our 1995 plan.

15
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data and other operating
information are derived from our consolidated financial statements. The
statement of operation and balance sheet data presented below were derived from
our audited consolidated financial statements. The information for years 1996
through 1998 have been audited by Ernst & Young LLP, independent auditors. In
our opinion, our unaudited financial statements for the three-month periods
ended March 31, 1998 and 1999 and at March 31, 1999 have been prepared on a
basis consistent with our audited financial statements and contain all
adjustments which include only normal recurring adjustments, necessary for a
fair presentation of our financial position and operating results for those
periods. When you read this selected consolidated financial data, it is
important that you also read the historical consolidated financial statements
and related notes included in this prospectus, as well as the section of this
prospectus related to "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Historical results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License............... $ 14 $ 427 $ 1,459 $ 3,558 $ 6,034 $ 948 $ 2,901
Service............... -- 193 963 1,631 2,576 417 1,010
------- ------- ------- ------- -------- ------- -------
Total revenues....... 14 620 2,422 5,189 8,610 1,365 3,911
Cost of revenues:
License............... -- 43 137 97 375 20 145
Service............... -- 332 1,090 2,306 2,434 518 790
------- ------- ------- ------- -------- ------- -------
Total cost of
revenues............ -- 375 1,227 2,403 2,809 538 935
------- ------- ------- ------- -------- ------- -------
Gross profit............ 14 245 1,195 2,786 5,801 827 2,976
Operating expenses:
Sales and marketing... 917 2,118 3,499 4,613 9,750 1,268 2,876
Research and
development.......... 674 1,545 2,459 2,538 3,286 713 1,065
General and
administrative....... 712 1,111 1,229 1,580 3,271 460 879
------- ------- ------- ------- -------- ------- -------
Total operating
expenses............ 2,303 4,774 7,187 8,731 16,307 2,441 4,820
------- ------- ------- ------- -------- ------- -------
Loss from operations.... (2,289) (4,529) (5,992) (5,945) (10,506) (1,614) (1,844)
Interest income
(expense), net......... -- (53) 114 (40) (52) (12) 8
------- ------- ------- ------- -------- ------- -------
Loss before income
taxes.................. (2,289) (4,582) (5,878) (5,985) (10,558) (1,626) (1,836)
Income tax provision.... -- -- -- -- (45) -- (27)
------- ------- ------- ------- -------- ------- -------
Net loss................ $(2,289) $(4,582) $(5,878) $(5,985) $(10,603) $(1,626) $(1,863)
======= ======= ======= ======= ======== ======= =======
Loss Per Share:
Basic and Diluted..... (1.57) (1.49) (1.58) (1.62) (2,82) (0.44) (0.48)
Pro Forma Basic and
Diluted.............. -- -- -- -- (1.32) -- (0.20)
Shares used in
Computation of Loss Per
Share
Basic and Diluted..... 1,458 3,068 3,857 3,884 3,957 3,903 4,313
Pro Forma Basic and
Diluted.............. -- -- -- -- 8,020 -- 9,280
</TABLE>

<TABLE>
<CAPTION>
December 31, March 31, 1999
-------------------------------------------- ------------------
Pro
1994 1995 1996 1997 1998 Actual Forma(2)
------- ------ ------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 6 $ 227 $ 2,014 $ 711 $ 2,583 $ 2,423 $2,695
Working capital
(deficit).............. (1,154) (923) 2,043 (1,957) (816) (1,099) (827)
Total assets............ 454 1,737 5,877 5,274 13,687 11,546 11,818
Long-term obligations,
net of current......... 85 240 738 386 1,073 1,054 1,054
Redeemable convertible
preferred stock........ -- -- 8,128 10,399 23,157 23,373 --
Total shareholders'
equity (deficit)....... (914) (223) (5,291) (11,487) (22,247) (23,318) 327
</TABLE>
- -------
(1) See notes 1 and 12 of notes to consolidated financial statements for an
explanation of the method used to calculate pro forma basic and diluted
loss per share.

(2) Adjusted to reflect the conversion of all outstanding preferred stock into
4,966,660 shares of common stock and proceeds of $272,000 from the exercise
of warrants to purchase 66,389 shares of common stock at a weighted-average
exercise price of $4.10. We have received binding commitments from the
warrant holders to exercise the warrants in conjunction with the closing of
this offering.

16
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section of this prospectus includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipate," "believes,"
"expects," "future" and "intends," and similar expressions to identify forward-
looking statements. You should not unduly rely on these forward-looking
statements, which apply only as of the date of this prospectus. These forward-
looking statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical results or our
predictions. For a description of these risks, see "Risk Factors."

Overview

Our predecessor, Symbologic Corporation, incorporated in October 1986 and
initially focused on a software development tool for creation of systems to
gather organizational expertise. In 1993, we licensed that product line to
another company and founded the Customer Support Consortium, a consortium of
leading software and hardware companies focused on advancing customer-support
strategies, models and standards. From 1993 to 1995, we directed our attention
to customer-support products and began developing our SolutionSeries products.
In 1995, we changed our name to Primus and released SolutionBuilder, our first
SolutionSeries product. We launched our first Web-based products,
SolutionPublisher and SolutionExplorer, in 1996 and the end of 1997,
respectively. In 1997, we also divested our interest in the Customer Support
Consortium in conjunction with its transition to an independent nonprofit
entity. The divestiture consisted of the transfer of cash, accounts receivable
and capital equipment with an aggregate book value of $282,000 to the nonprofit
entity and the assumption by it of a $282,000 obligation related to the
fulfillment of Customer Support Consortium membership requirements. We recorded
no gain or loss as a result of the divestiture.

Our revenues, which consist of software license revenues and related client
services revenues, totaled $2.4 million, $5.2 million and $8.6 million in 1996,
1997 and 1998, respectively. For the foreseeable future, we expect
substantially all of our revenues will continue to be derived from our
SolutionSeries product family and related services. Our customers generally
license a full suite of our products. We have not experienced a decline in
revenues with respect to any one product as a result of product upgrades
provided under our support and maintenance agreements. We market our software
and services through our direct sales organization in the United States and the
United Kingdom. In Japan, Primus KK, a Japanese joint venture in which we hold
a 14.3% minority interest, distributes our products. Our international sales
constituted 17% of our 1998 revenues and 36% of our revenues for the first
quarter of 1999. We believe that international revenues, as a percentage of our
total revenues, will vary substantially on a quarterly basis for the forseeable
future.

We price our software licenses based on the number of servers, users and/or
concurrent users. From time to time, we grant discounts to customers with large
installations or who license several SolutionSeries products concurrently.

Our service revenues consist of consulting, training and maintenance and
support fees. We provide consulting and training services relating to our
products on a time-and-materials basis under installation services agreements
with our customers. We provide maintenance and support services to our
customers under renewable one-year maintenance and support agreements, which we
price as a percentage of our license fees.

Before 1998, we recognized software license revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1.
Beginning in 1998, we have recognized

17
<PAGE>

software license revenue in accordance with AICPA Statement of Position 97-2,
"Software Revenue Recognition," and related amendment and interpretations
contained in the AICPA's Statement of Position 98-4. We typically recognize
software license revenues over the software implementation period if:

. we have signed a noncancelable license agreement with a customer

. we have shipped the software

. the fee is fixed and determinable

. there is sufficient vendor-specific objective evidence to support
allocation of the total fee to all elements of multiple-element
arrangements

. the fee is collectible

We currently recognize license revenue over the implementation period if
implementation services are included in the original license arrangement. As a
result, even where we have a signed license agreement for the purchase of our
software and have shipped the software, license revenue recognition depends on
whether we have begun implementation. At the current stage of our development,
due to the relatively recent introduction of our product line, our desire to
ensure customer satisfaction while we seek to build market share, the limited
number of installations of our products to date and the limited number of
third-party vendors that currently provide implementation services to our
users, we have concluded that the implementation services are, as a practical
matter, essential to the software in initial software arrangements where we
provide implementation services. As such we recognize revenue for these
arrangements following the percentage-of-completion method over the
implementation period. On the other hand, for license agreements under which we
have no implementation responsibility, we generally recognize revenue from the
agreement upon shipping the software, which we typically accomplish shortly
after signing a license agreement.

For new users, we typically agree to implement our software. Conversely,
examples of situations under which we have no implementation responsibility
would include a license agreement to add users for an existing customer or a
license agreement with a new customer who is using an outside implementation
service provider or is relying on its own internal implementation services.
Most of our new customers begin implementation within 30 to 60 days of signing
a license agreement. Once commenced, implementation of our products typically
ranges from 60 to 90 days. We can't, however, guarantee that customers will
begin implementation or that we will always be able to implement our software
within those time periods.

We enter into reseller arrangements that typically provide for sublicense
fees payable to us based on a percentage of our list price. We recognize
sublicense fees as they are reported by the reseller when it relicenses our
products to users of our products.

We believe our current revenue-recognition policies and practices are
consistent with applicable AICPA accounting pronouncements; however, the AICPA
has not issued full interpretation guidelines for its latest standards yet. We
might find it necessary to change our current revenue accounting practices once
the AICPA issues its interpretation guidance. Any changes in revenue-
recognition policies could result in substantial changes in the timing of our
future revenues and earnings. The AICPA recently issued its Statement of
Position 98-9, which provides certain amendments to its Statement of
Position 97-2 and is effective for transactions entered into beginning January
1, 2000. We do not expect implementation of this latest AICPA pronouncement to
materially impact our revenue recognition practices.

18
<PAGE>

Since 1992, we have invested heavily in product development and in building
our sales, marketing and client services organizations. From November 1997
through February 1999, we made a strategic investment in building our executive
management team to help us execute our long-term growth strategy. We have
incurred quarterly net losses since inception, and as of March 31, 1999, had an
accumulated deficit of $33.4 million. We anticipate that our operating expenses
will continue to increase substantially for the foreseeable future as we
continue to expand our product development, sales and marketing and client-
services staff.

Results of Operations

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

<TABLE>
<CAPTION>
Three Months
Year Ended December Ended March
31, 31,
------------------------ --------------
1996 1997 1998 1998 1999
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
License........................... 60.2 % 68.6 % 70.1 % 69.5 % 74.2%
Service........................... 39.8 31.4 29.9 30.5 25.8
------ ------ ------ ------ -----
Total revenues................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ -----
Cost of revenues:
License........................... 5.7 1.9 4.4 1.5 3.7
Service........................... 45.0 44.4 28.2 37.9 20.2
------ ------ ------ ------ -----
Total cost of revenues........... 50.7 46.3 32.6 39.4 23.9
------ ------ ------ ------ -----
Gross margin....................... 49.3 53.7 67.4 60.6 76.1
Operating expenses:
Sales and marketing............... 144.5 88.9 113.2 92.9 73.5
Research and development.......... 101.5 48.9 38.2 52.2 27.2
General and administrative........ 50.7 30.5 38.0 33.7 22.5
------ ------ ------ ------ -----
Total operating expenses......... 296.7 168.3 189.4 178.8 123.2
------ ------ ------ ------ -----
Loss from operations............... (247.4) (114.6) (122.0) (118.2) (47.1)
Interest income, net............... 4.7 (0.8) (0.6) (0.9) 0.2
------ ------ ------ ------ -----
Loss before income taxes........... (242.7) (115.4) (122.6) (119.1) (46.9)
Income tax provision .............. -- -- (0.5) -- (0.7)
------ ------ ------ ------ -----
Net loss........................... (242.7)% (115.4)% (123.1)% (119.1)% (47.6)%
====== ====== ====== ====== =====
</TABLE>

Revenues

We derive our revenues from the sale of software products and related
services including support and maintenance contracts. Revenues were $1.4
million and $3.9 million for the three months ended March 31, 1998 and 1999,
respectively, representing an increase in the first quarter of 1999 of $2.5
million or 187% over the comparable quarter of the prior year. Revenues were
$2.4 million, $5.2 million and $8.6 million in 1996, 1997 and 1998,
respectively, representing increases of $2.8 million or 114% from 1996 to 1997
and $3.4 million or 66% from 1997 to 1998. During 1996 and 1997, no single
customer accounted for 10% or more of total revenues. Purchases by one
customer, 3Com, represented 12% of our 1998 revenues.

License Revenue. License revenues were $948,000 and $2.9 million for the
three months ended March 31, 1998 and 1999, respectively, representing an
increase in the first quarter of 1999 of

19
<PAGE>

$2.0 million or 206% over the comparable quarter of the prior year. The
increase was due to increased international sales and increases in both the
size and productivity of the sales force. International license revenues were
$121,000 and $1.2 million for the three months ended March 31, 1998 and 1999,
respectively. Sales personnel totaled 16 and 47 as of March 31, 1998 and 1999,
respectively. License revenues were $1.5 million, $3.6 million and $6.0 million
in 1996, 1997 and 1998, respectively, representing increases of $2.1 million,
or 144%, from 1996 to 1997 and $2.5 million, or 70%, from 1997 to 1998. The
increase from 1996 to 1997 was primarily a result of the introduction of
SolutionPublisher and SolutionExplorer in August 1996 and November 1997,
respectively. The increase in license revenue from these products was $653,000
during this period. The remaining license revenue increase was primarily a
result of increased SolutionBuilder sales. The increase from 1997 to 1998
primarily resulted from introduction of SolutionExplorer in November 1997, the
increased size of our sales force and increased international sales, as a
result of the opening of our U.K. sales office and sales through our Japanese
distributor. The increase in international license revenues was $1.1 million.
Sales personnel increased by 24 during this period.

Service Revenue. Service revenues were $417,000 and $1.0 million for the
three months ended March 31, 1998 and 1999, respectively, representing an
increase in the first quarter of 1999 of $593,000, or 142%, over the comparable
quarter of the prior year. Maintenance and support contract revenues and
consulting fees increased $426,000 and $167,000, respectively, in the first
quarter of 1999 over the comparable quarter of the prior year. Service revenues
were $963,000, $1.6 million and $2.6 million in 1996, 1997 and 1998,
respectively, representing increases of $668,000, or 69%, from 1996 to 1997 and
$945,000, or 58%, from 1997 to 1998. Service revenues in 1996 consisted of
maintenance and support contract revenues and consulting fees of $912,000 and
$51,000, respectively. The increase in service revenue from 1996 to 1997 was a
result of a $371,000 increase in maintenance and support contract revenues and
a $297,000 increase in consulting revenues attributable to customer
implementations. The increase in service revenue from 1997 to 1998 was a result
of a $1.1 million increase in maintenance and support contract revenues offset
by a $127,000 decrease in consulting revenues. From 1996 through March 31,
1999, three customers did not renew their one-year maintenance and support
contracts. We expect the proportion of service revenues to total revenues to
fluctuate in the future, depending in part on use of third-party consulting and
implementation service providers.

Cost of Revenues

Cost of License Revenue. Cost of license revenue includes royalties and fees
paid to third parties under license arrangements and costs related to media and
duplication for our products and manuals. Cost of license revenues were $20,000
and $145,000 for the three months ended March 31, 1998 and 1999, respectively,
and $137,000, $97,000 and $375,000 in 1996, 1997 and 1998, respectively. The
cost of licenses increased $125,000, or 625%, from the three months ended
March 31, 1998 to the three months ended March 31, 1999, and decreased $40,000,
or 29%, from 1996 to 1997, and increased $278,000, or 287%, from 1997 to 1998.
Cost of licenses as a percentage of license revenues were 2.1% and 5.0% for the
three months ended March 31, 1998 and 1999, respectively, and 9.4%, 2.7% and
6.2% for 1996, 1997 and 1998, respectively. We anticipate that our cost of
license revenue will continue to increase in absolute dollars. Our cost of
license revenue as a percent of license revenue has varied in the past due to
the volume of product sales and the type of the royalty agreements in place at
the time.

Cost of Service Revenue. Cost of service revenue includes personnel and other
costs related to professional services and customer support. Cost of service
revenue were $518,000 and $790,000 for the three months ended March 31, 1998
and 1999, respectively, and $1.1 million, $2.3 million and

20
<PAGE>

$2.4 million in 1996, 1997 and 1998, respectively. Cost of service revenue
increased $272,000, or 53% from the three months ended March 31, 1998 to the
three months ended March 31, 1999, and $1.2 million, or 112%, from 1996 to
1997, and $128,000, or 5.6%, from 1997 to 1998. The increases in cost of
service revenue from 1996 to the first quarter of 1999 was a result of hiring
and training a consulting organization to successfully implement our
SolutionSeries products. Professional services and customer support personnel
totaled 12 and 32 as of March 31, 1998 and 1999, respectively, and 13, 14 and
25 at December 31, 1996, 1997 and 1998, respectively. Cost of service revenue
as a percentage of service revenues were 124% and 78% for the three months
ended March 31, 1998 and 1999, respectively, and 113%, 141% and 94% for 1996,
1997 and 1998, respectively. The decrease in cost of service revenues as a
percentage of services revenues from the first quarter of 1998 to the first
quarter of 1999 was primarily due to higher utilization rates as a result of
higher levels of consulting-services activity and increased experience of the
customer-support personnel.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, bonuses and commissions earned by sales and marketing personnel,
travel and costs associated with marketing programs, such as trade shows,
public relations and new product launches. Sales and marketing expenses were
$1.3 million and $2.9 million for the three months ended March 31, 1998 and
1999, respectively, and $3.5 million, $4.6 million and $9.8 million in 1996,
1997 and 1998, respectively. Sales and marketing expenses increased $1.6
million, or 127%, for the three months ended March 31, 1998 as compared to the
three months ended March 31, 1999, and $1.1 million, or 32%, from 1996 to
1997, and $5.1 million, or 111%, from 1997 to 1998. The increase from 1996 to
the first quarter of 1999 resulted primarily from the hiring of sales
management, sales representatives, sales engineers and marketing personnel, as
well as higher commissions paid as a result of revenue growth. Sales and
marketing employees totaled 30 and 58 as of March 31, 1998 and 1999,
respectively, and 23, 24 and 52 at December 31, 1996, 1997 and 1998,
respectively. The launch of our U.K. office in August 1998 contributed to the
increase of sales and marketing headcount that year. Total sales and marketing
headcount at our U.K. office was 7 as of December 31, 1998. Sales and
marketing expenses as a percentage of total revenues were 93% and 74% for the
three months ended March 31, 1998 and 1999, respectively, and 144%, 89% and
113% for 1996, 1997 and 1998, respectively. The increase in sales and
marketing expense as a percentage of total revenues from 1997 to 1998 was due
to headcount growth, attributable in part to the launch of our U.K. office. We
believe that a significant increase in our sales and marketing efforts is
essential for us to maintain market position and further increase market
acceptance of our products. Accordingly, we anticipate that we will continue
to invest significantly in sales and marketing for the foreseeable future, and
the dollar amount of sales and marketing expenses will increase in future
periods.

Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers
and quality assurance personnel and payments to outside contractors. Research
and development expenses were $713,000 and $1.1 million for the three months
ended March 31, 1998 and 1999, respectively, and $2.5 million, $2.5 million
and $3.3 million in 1996, 1997 and 1998, respectively. Research and
development expenses increased $352,000, or 49%, from the three months ended
March 31, 1998 to the three months ended March 31, 1999, $79,000, or 3%, from
1996 to 1997 and $748,000, or 30%, from 1997 to 1998. The increases from 1997
to the three months ended March 31, 1999 were primarily due to increased
hiring of software developers and quality-assurance staff to support
development of our new products and enhancements to our existing products and
to an increase in compensation levels for development and quality-assurance
personnel. Research and development personnel totaled

21
<PAGE>

28 and 38 as of March 31, 1998 and 1999, respectively, and 24 and 31 for 1997
and 1998, respectively. Research and development expenses as a percentage of
total revenues were 52% and 27% for the three months ended March 31, 1998 and
1999, respectively, and 102%, 49% and 38% for 1996, 1997 and 1998,
respectively. We believe that a significant increase in our research and
development investment is essential for us to maintain our market position, to
continue to expand our product line and to develop additional applications for
our associative-based technology. Accordingly, we anticipate that we will
continue to invest significantly in product research and development for the
foreseeable future, and research and development expenses are likely to
increase in future periods. In the development of our new products and
enhancements of existing products, the technological feasibility of our
software is not established until substantially all product development is
complete. Accordingly, software development costs eligible for capitalization
were insignificant, and all costs related to internal research and development
have been expensed as incurred.

General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative and information services personnel. General and administrative
expenses were $460,000 and $879,000 for the three months ended March 31, 1998
and 1999, respectively, and $1.2 million, $1.6 million and $3.3 million in
1996, 1997 and 1998, respectively. General and administrative expenses
increased $419,000, or 91%, from the three months ended March 31, 1998 to the
three months ended March 31, 1999, and $351,000, or 29%, from 1996 to 1997, and
$1.7 million, or 107%, from 1997 to 1998. The increase from 1996 to the first
quarter of 1999 was primarily the result of our hiring additional executive,
finance, and administrative personnel to support the growth of our business
during these periods. The increase in general and administrative expenses from
1997 to 1998 also reflects an increase in reserve accounts, such as in the
allowance for doubtful accounts related to our increase in revenues. General
and administrative expenses as a percentage of total revenues were 34% and 23%
for the three months ended March 31, 1998 and 1999, respectively, and 51%, 31%
and 38% for 1996, 1997 and 1998, respectively. The increase in general and
administrative expenses as a percentage of total revenues from 1997 to 1998 was
primarily due to growth in administrative headcount as we added to our
executive team. General and administrative employees totaled 14 and 19 as of
March 31, 1998 and 1999, respectively, and 10, 13 and 17 at December 31, 1996,
1997 and 1998, respectively. We believe that our general and administrative
expenses will continue to increase as a result of the continued expansion of
our administrative staff and the expenses associated with becoming a public
company, including, but not limited to, annual and other public-reporting
costs, directors' and officers' liability insurance, investor-relations
programs and professional-services fees.

Income Taxes. As of December 31, 1998, we had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $24.8 million and research and development tax credit
carryforwards of $418,000, which begin to expire in 2001, if not utilized. The
Internal Revenue Code contains provisions that limit the use in any future
period of net operating loss and credit carryforwards upon the occurrence of
certain events, including significant change in ownership interests. We had
deferred tax assets, including our net operating loss carryforwards and tax
credits, totaling approximately $10.9 million as of December 31, 1998. We have
recorded a valuation allowance for the entire deferred tax asset as a result of
uncertainties regarding the realization of the asset balance. See note 6 of the
notes to our consolidated financial statements.

22
<PAGE>

Quarterly Results of Operations

The following table presents our unaudited quarterly results of operations
for 1997, 1998 and the three months ended March 31, 1999. You should read the
following table in conjunction with our consolidated financial statements and
the notes related thereto. We have prepared this unaudited information on a
basis consistent with the audited consolidated financial statements. This table
includes all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of our financial position and
operating results for the quarters presented. You should not draw any
conclusions about our future results from our quarterly results of operations.

<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
Dec.
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, 31, March 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License................ $ 295 $ 899 $ 927 $ 1,437 $ 948 $ 1,231 $ 1,419 $ 2,436 $ 2,901
Service................ 293 474 388 476 417 592 790 777 1,010
------- ------- -------- ------- ------- ------- ------- ------- -------
Total revenues......... 588 1,373 1,315 1,913 1,365 1,823 2,209 3,213 3,911
------- ------- -------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 8 23 25 41 20 36 58 261 145
Service................ 583 649 581 493 518 483 710 723 790
------- ------- -------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 591 672 606 534 538 519 768 984 935
------- ------- -------- ------- ------- ------- ------- ------- -------
Gross profit............ (3) 701 709 1,379 827 1,304 1,441 2,229 2,976
Operating expenses:
Sales and marketing.... 991 1,147 896 1,579 1,268 2,056 3,069 3,357 2,876
Research and
development........... 697 676 583 582 713 934 885 754 1,065
General and
administrative........ 313 334 319 614 460 569 709 1,533 879
------- ------- -------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 2,001 2,157 1,798 2,775 2,441 3,559 4,663 5,644 4,820
------- ------- -------- ------- ------- ------- ------- ------- -------
Loss from operations.... (2,004) (1,456) (1,089) (1,396) (1,614) (2,255) (3,222) (3,415) (1,844)
Interest income
(expense), net......... (6) (7) (20) (7) (12) (41) (26) 27 8
------- ------- -------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (2,010) (1,463) (1,109) (1,403) (1,626) (2,296) (3,248) (3,388) (1,836)
Income tax provision ... -- -- -- -- -- -- -- (45) (27)
------- ------- -------- ------- ------- ------- ------- ------- -------
Net loss................ $(2,010) $(1,463) $(1,109) $(1,403) $(1,626) $(2,296) $(3,248) $(3,433) $(1,863)
======= ======= ======== ======= ======= ======= ======= ======= =======
</TABLE>

The following table sets forth unaudited quarterly results of operations as a
percentage of total revenues for 1997, 1998 and the three months ended March
31, 1999.

<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License................ 50.2 % 65.5 % 70.5 % 75.1 % 69.5 % 67.5 % 64.2 % 75.8 % 74.2 %
Service................ 49.8 34.5 29.5 24.9 30.5 32.5 35.8 24.2 25.8
------ ------ ----- ----- ------ ------ ------ ------ ------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ----- ----- ------ ------ ------ ------ ------
Cost of revenues:
License................ 1.4 1.7 1.9 2.1 1.5 2.0 2.6 8.1 3.7
Service................ 99.1 47.3 44.2 25.8 37.9 26.5 32.2 22.5 20.2
------ ------ ----- ----- ------ ------ ------ ------ ------
Total cost of
revenues.............. 100.5 48.9 46.1 27.9 39.4 28.5 34.8 30.6 23.9
------ ------ ----- ----- ------ ------ ------ ------ ------
Gross margin............ (0.5)% 51.1 53.9 72.1 60.6 71.5 65.2 69.4 76.1
Operating expenses:
Sales and marketing.... 168.5 83.5 68.1 82.5 92.9 112.8 138.9 104.5 73.5
Research and
development........... 118.5 49.2 44.3 30.4 52.2 51.2 40.1 23.5 27.2
General and
administrative........ 53.2 24.3 24.3 32.1 33.7 31.2 32.1 47.7 22.5
------ ------ ----- ----- ------ ------ ------ ------ ------
Total operating
expenses.............. 340.3 157.1 136.7 145.1 178.8 195.2 211.1 175.7 123.2
------ ------ ----- ----- ------ ------ ------ ------ ------
Loss from operations.... (340.8) (106.0) (82.8) (73.0) (118.2) (123.7) (145.9) (106.3) (47.1)
Interest income
(expense), net......... (1.0) (0.5) (1.5) (0.4) (0.9) (2.2) (1.2) 0.8 0.2
------ ------ ----- ----- ------ ------ ------ ------ ------
Loss before income
taxes.................. (341.8) (106.6) (84.3) (73.3) (119.1) (125.9) (147.1) (105.5) (46.9)
Income tax provision ... -- -- -- -- -- -- -- (1.4) (0.7)
------ ------ ----- ----- ------ ------ ------ ------ ------
Net loss................ (341.8)% (106.6)% (84.3)% (73.3)% (119.1)% (125.9)% (147.1)% (106.9)% (47.6)%
====== ====== ===== ===== ====== ====== ====== ====== ======
</TABLE>

23
<PAGE>

The trends discussed above in the annual and quarterly comparisons of
operating results generally apply to the comparison of operating results for
the nine quarters in the 27-month period ended March 31, 1999. Cost of licenses
as a percentage of license revenue for the fourth quarter of 1998 were
significantly higher than other periods due to a $128,000 expense related to
the resale of a third party's products. General and administrative expenses for
the fourth quarter of 1998 were significantly higher than prior periods
primarily due to year-end compensation accruals and increases in reserve
accounts, such as our allowance for doubtful accounts related to our increase
in revenues. Our quarterly operating results have varied widely in the past,
and we expect that they will continue to fluctuate in the future as a result of
a number of factors, many of which are outside our control. We expect to
experience seasonality with respect to software license revenues. To date, we
believe that seasonality has been masked by other factors, such as the impact
of large transactions and personnel changes.

We believe that our period-to-period operating results are not meaningful,
and you should not rely on them as indicative of our future performance. You
should also evaluate our prospects in light of the risks, expenses and
difficulties commonly encountered by comparable early-stage companies in new
and rapidly emerging markets. We can't assure you that we will successfully
address the risks and challenges that face us. In addition, although we have
experienced significant revenue growth recently, we can't assure you that our
revenue will continue to grow or that we will become or remain profitable in
the future. Our future operating results will depend on many factors,
including:

. demand for our products and services

. product and price competition

. variability in the mix of our license and service revenues

. variability in the mix of our direct versus indirect license revenues

. variability in the mix of services that we perform versus those performed
for our customers by others

. success in expanding our direct sales force and indirect distribution
channels

. our ability to develop and market new and enhanced products on a timely
basis

. timing of our new product introductions and product enhancements or those
of our competitors

. continued purchases by our existing customers, including additional
license and maintenance revenues

. international sales and strategic acquisitions

. the loss of any key employees and timing of our new hires

Liquidity and Capital Resources

Since our inception, we have primarily financed our operations through the
private sale of our equity securities, resulting in net proceeds of $33.2
million through March 31, 1999. To a lesser extent, we have financed our
operations through equipment financing and traditional lending arrangements.

As of March 31, 1999, we had cash and cash equivalents of $2.4 million, a
decrease from $2.6 million of cash and cash equivalents held as of December 31,
1998. Our working capital deficit at March 31, 1999 was $1.1 million, compared
to working capital deficit of $816,000 at December 31, 1998. The increase in
the working capital deficit is attributable primarily to a $1.4 million
decrease in cash and securities available-for-sale and accounts receivable,
offset by a

24
<PAGE>

$1.3 million decrease in current liabilities during the first quarter of 1999.
As of March 31, 1999, working capital excluding deferred revenue was $5.6
million compared to $6.8 million at December 31, 1998. As of March 31, 1999,
accounts receivable of $4.8 million included $2.1 million due from one
customer, Origin. We have not experienced any delays or problems with the
collection of Origin's account.

As of March 31, 1999, we had $1.6 million outstanding under a senior term-
loan facility with Imperial Bank that bears interest at a rate equal to the
bank's prime rate plus 1%, which equaled 8.75% as of March 31, 1999. In April
1999, we entered into a $5.0 million working-capital revolving line of credit
with Imperial Bank that is secured by our accounts receivable and bears
interest at the bank's prime rate plus .75%, which was 8.5% as of March 31,
1999. This facility allows us to borrow up to the lesser of 80% of our eligible
accounts receivable or $5 million. The facility will expire in April 2000. In
April 1999, we also obtained a $1.0 million capital-equipment line of credit
with Imperial Bank that bears interest at a rate equal to the bank's prime rate
plus 1.0%, which equaled 8.75% as of March 31, 1999. All of our lending
facilities require us to maintain certain financial covenants, including
requirements that we maintain certain financial ratios. We were in compliance
with or received waivers of all of these financial covenants at March 31, 1999.

Our operating activities resulted in net cash outflows of $674,000 and $2.2
million for the three months ended March 31, 1998 and March 31, 1999,
respectively. The increase in operating cash outflows from the three months
ended March 31, 1998 to the three months ended March 31, 1999 was due primarily
to a decrease in deferred revenues and accounts payable. Operating activities
resulted in net cash outflows of $6.4 million in 1996, $3.1 million in 1997,
and $7.5 million in 1998. The decrease in operating cash outflows from 1996 to
1997 was attributable primarily to an increase in deferred revenues. The
increase in operating cash outflows from 1997 to 1998 resulted from further
operating losses and growth in accounts receivable, partially offset by further
increases in deferred revenues.

Investing activities provided cash of $412,000 and $921,000 for the three
months ended March 31, 1998 and March 31, 1999, respectively. In addition,
investing activities used cash of $1.2 million in 1996, $490,000 in 1997 and
$3.3 million in 1998 primarily for the purchase of capital equipment and short-
term securities.

Financing activities provided cash of $36,000 and $1.2 million for the three
months ended March 31, 1998 and March 31, 1999, respectively. Financing
activities provided cash of $9.4 million in 1996, $2.3 million in 1997 and
$12.7 million in 1998 primarily through the issuance of preferred stock and
proceeds from the exercise of stock options, partially offset by payments on
capital equipment lease obligations.

In the quarter ending June 30, 1999, the Company issued 18,400 shares of
common stock and 10,000 fully vested options to acquire shares of common stock
at an exercise price of $10.50 per share to employees of Primus KK. The
aggregate fair value of the stock and stock options of $239,800 was expensed by
us in the quarter ending June 30, 1999.

We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we

. enter new markets for our products and services

. increase research and development spending

. increase sales and marketing activities

25
<PAGE>

. develop new distribution channels

. improve our operational and financial systems

. broaden our professional service capabilities

Such operating expenses will consume a material amount of our cash resources,
including a portion of the net proceeds from this offering. We believe that the
net proceeds from this offering, together with our existing cash and cash
equivalents, and available bank borrowings, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at
least the next twelve months. Thereafter, we may require additional funds to
support our working capital requirements or for other purposes and may seek to
raise such additional funds through public or private equity financing or from
other sources. We may not be able to obtain adequate or favorable financing at
that time. Any financing we obtain may dilute your ownership interest in
Primus.

Qualitative and Quantitative Disclosures About Market Risk

We develop products in the United States and sell them in North America, Asia
and Europe. As a result, our financial results could be affected by factors
such as changes in foreign currency exchange rates or weak economic conditions
in foreign markets. Since our sales are currently priced in U.S. dollars and
translated to local currency amounts, a strengthening of the dollar could make
our products less competitive in foreign markets. Interest income and expense
are sensitive to changes in the general level of U.S. interest rates,
particularly since our investments are in short-term instruments and our long-
term debt and available line of credit require interest payments of variable
rates. However, based on the nature and current levels of our investments and
debt, we have concluded that there is no material market risk exposure.

Year 2000 Compliance

Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates or have been programmed with default
dates ending in "99," the common two-digit reference for 1999. As a result, as
we transition from the 20th century to the 21st century, computer systems and
software used by many companies and organizations in a wide variety of
industries will produce erroneous results or fail unless they have been
modified or upgraded to process date information correctly. Significant
uncertainty exists in the software industry and other industries concerning the
scope and magnitude of problems associated with the century change. We
recognize the need to ensure our operations will not be adversely affected by
Year 2000 software failures.

In September 1998, we established a Year 2000 compliance task force, composed
of high-level representatives from the product development, information systems
and legal departments. The task force is responsible for formulating and
implementing our Year 2000 readiness and has applied a phased approach to
analyzing our operations and relationships as they relate to the Year 2000
problem.

We have completed our initial assessment of the potential overall impact of
the impending century change on our business, financial condition and operating
results. Based on our current assessment, we believe the current versions of
our software products are Year 2000 compliant. By Year 2000 compliant, we mean
that our software products, when used with accurate date data and in accordance
with their associated documentation, are capable of properly processing date
data from, into and between the 20th and 21st centuries, including the years
1999, 2000 and leap years,

26
<PAGE>

provided that all other products (e.g., hardware, software and firmware) used
with our products properly exchange date data with them. However, our products
are generally integrated into enterprise systems involving sophisticated
hardware and complex software products that we cannot adequately evaluate for
Year 2000 compliance. We may face claims based on Year 2000 problems in other
companies' products, or issues arising from the integration of multiple
products within an overall system. Although we have not been a party to any
litigation or arbitration proceeding involving our products or services related
to Year 2000 compliance issues, we may in the future be required to defend our
products or services in such proceedings, or to negotiate resolutions of claims
based on Year 2000 issues. The costs of defending and resolving Year 2000-
related disputes, regardless of the merits of such disputes, and any liability
we have for Year 2000-related damages, including consequential damages, could
materially adversely affect our business, financial condition and operating
results. In addition, we believe that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
Year 2000 compliance and as they delay purchase of new systems that may not be
Year 2000 compliant. These expenditures may result in reduced funds available
to purchase software products such as those we offer. To the extent Year 2000
issues cause a significant delay in, or cancellation of, decisions to purchase
our products or services, our business, financial condition and operating
results would be materially adversely affected.

We have reviewed our internal management information and other critical
business systems to identify any Year 2000 problems. We also have communicated
with the external vendors that supply us with material software and information
systems and with our significant suppliers to determine their Year 2000
readiness. In the course of these investigations, we have not encountered any
material Year 2000 problems with these third-party products.

In September 1998, we had a firm of independent consultants undertake an
assessment of our Year 2000 readiness, at a cost of $6,000. To date, apart from
that assessment, we have not incurred any material costs directly associated
with our Year 2000 compliance efforts, except for compensation expense
associated with our salaried employees who have devoted some of their time to
our Year 2000 assessment and remediation efforts. We do not expect the total
cost of Year 2000 problems to be material to our business, financial condition
and operating results. However, during the months prior to the century change,
we will continue to evaluate new versions of our software products, new
software and information systems provided to us by third parties and any new
infrastructure systems that we acquire to determine whether they are Year 2000
compliant. Despite our current assessment, we may not identify and correct all
significant Year 2000 problems on a timely basis. Year 2000 compliance efforts
may involve significant time and expense and unremediated problems could
materially adversely affect our business, financial condition and operating
results. We currently have no contingency plans to address the risks associated
with unremediated Year 2000 problems.

27
<PAGE>

BUSINESS

Overview

We are a leading provider of Web-based problem-resolution software for
customer support and self-service. Our applications enable businesses to
capture problem-resolution information, solve customer problems, reuse
solutions stored in the knowledge base and share captured knowledge with our
customers, their field personnel, business partners and end users (i.e. an
extended enterprise). Our SolutionSeries family of software products enhances
an organization's problem-resolution capabilities by using our associative
problem-solving technology, as described below under "--Industry Background",
and leveraging the Internet to extend customer support to remote employees,
business partners and end-user customers.

Industry Background

During the last several years, many businesses have found that providing
responsive and accurate answers to their customers' questions and problems has
become an important business function. As products and services have become
more standardized, customer support and problem resolution have become
increasingly important competitive differentiators. Furthermore, the growth of
Internet-based electronic commerce has facilitated the purchasing and ordering
process and enabled an efficient but less personal relationship between
merchant and customer. As a result, customer support has often become the
primary point of customer contact and can significantly influence customer
loyalty.

Customer support is increasingly challenging

While recognizing the importance of quality customer support, most
organizations have been challenged by increasing product and distribution-
channel complexity and by rising customer expectations.

Product complexity Products and services are increasingly complex
in today's marketplace, driven primarily by:

. Proliferation of technology-based
products and services

. Increasing integration of products and
components from several manufacturers

. High rates of innovation and product
change

Each of these factors threatens an enterprise's
ability to provide quality customer service and
manage costs, since they can contribute to
longer time needed to resolve problems and
lower first-call resolution rates.

As product innovation continues to shorten
product lifecycles, as well as open new markets
for technology-based products, these challenges
will be heightened. Customers will need more
product education and support. Historically,
businesses have responded to the increased
demand by adding headcount to their customer
support organizations.

28
<PAGE>

However, current shortages of qualified
customer-support personnel, high turnover in
customer-support departments and the increasing
cost of training customer-support personnel
have made adding headcount less effective.

Distribution-channel As traditional wholesale-retail-consumer
complexity business models expand to include resellers,
systems integrators, outsourcers and channel
partners, enterprises are facing difficult
challenges in enabling their business partners
to provide high-quality, consistent customer
support. Without access to a collaborative
system that allows them to share important
problem-resolution information, partners in the
extended business enterprise may provide
inconsistent solutions or redirect their
customers' problems to the enterprise.

Increasing customer Many companies have found that their customers
expectations increasingly want to be able to resolve
customer problems in a fast, convenient manner
at any time of the day or night. Customers also
expect to be able to use their choice of
medium: telephone, fax, email or the Internet.
The Aberdeen Group estimates that, by 2002,
companies will receive over 50% of all general
customer support contacts and inquiries over
the Web and through email messages and other
Web-based forms. These increasing demands have
led some companies to hire more customer-
support personnel to provide around-the-clock
customer support. Others have sought to meet
this challenge by investing in technology to
increase their customer-support capabilities.

Traditional customer-support responses have been inadequate

Many businesses have provided customer-support and problem resolution through
a call center. Software systems designed to support customer call centers
traditionally include call-routing, call-tracking and customer-relationship-
management systems. These systems are effective at directing customer calls on
a timely basis to the appropriate customer-support personnel together with the
related customer information. They do not, however, help support analysts
become more effective problem solvers or enable them to capture and share
valuable knowledge gained from understanding and solving the customer's
problems.

To better address the need for improved problem-resolution capabilities,
businesses have considered a variety of alternatives including increasing
staffing, developing their own problem-resolution systems and buying problem-
resolution solutions from third-party software vendors. Increased hiring is an
expensive alternative that provides little leverage and limits a company's
ability to efficiently address the significant demands of very large
organizations (i.e. scalability). Development of custom solutions can detract
the business from its core competencies and prove costly to develop and
maintain. Software vendors focused on providing problem-resolution systems have
developed various approaches to enable businesses to manage problem-resolution
information.

29
<PAGE>

Traditionally, third-party systems have incorporated enhanced text-retrieval,
decision-tree or case-based-reasoning technology.

Enhanced text-retrieval Enhanced text-retrieval systems use key-word
systems searches to locate words, phrases and concepts
within documents and files. These systems then
retrieve and rank the findings according to the
frequency with which the search terms occur.
Text-retrieval systems are of limited use in
real-time problem solving, since they generally
require the user to know the exact words used
by the systems developer to label a particular
concept. We believe that they return too much
irrelevant information and do little or nothing
to enable the capture of new solutions to
customer problems.

Case-based-reasoning and
decision tree systems
Case-based-reasoning and decision tree systems
typically require a customer-support analyst to
follow a fixed question-and-answer sequence to
arrive at a pre-engineered solution. These
systems work best in reasonably stable
environments in which problems can be
anticipated and their solutions pre-engineered.
For organizations with quickly changing
product-support requirements, these systems can
be costly and time consuming to develop.
Furthermore, since the solution to a problem is
not captured in the product's workflow, it can
be expensive and time consuming to maintain the
database. For instance, for each "new" solution
an analyst uncovers, a complete description
needs to be submitted to a knowledge engineer,
who then must redesign the cases or the
decision trees and enter this into the
database. In the meantime, many problems have
to be re-solved from the start, since the
system does not automatically capture the
solution. Finally, we believe that, since these
approaches are rigid by nature, the
methodologies generally take a long time to
resolve complex problems that require several
levels of questioning, do not provide guidance
toward solving subsequent problems if no
solution is found the first time and do not
effectively leverage the experience of more
senior personnel.

Associative problem solving: a better problem-solving methodology

We believe that, over the past few years, problem-resolution systems based on
associative problem-solving technology have gained increasing acceptance by
addressing the shortcomings associated with text-retrieval, decision-tree and
case-based-reasoning systems. Associative problem-solving technology uses
natural-language statements to describe the support problem, including symptoms
of the problem, facts about the environment in which the problem arose and
recent changes to that environment. These systems treat natural-language
statements as concepts and search for relevant solutions using algorithms that
leverage the associations that exist among each of the many concepts in the
knowledge database. As a result, these systems enable users to locate, evaluate
and return solutions with a high degree of relevance.

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<PAGE>

The combination of natural-language support and the associative search
methodology helps these systems to support multiple approaches to problem
solving. For example, a more senior analyst, who may know many of the potential
solutions based on his or her experience, will be able to leverage that
experience to find the relevant solution quickly by describing only the most
relevant facts and symptoms. A less experienced junior analyst, on the other
hand, can learn how to better solve customer problems through use of the system
by seeing which problem-description elements provide key clues to the solution.
Non-technical users benefit from the natural-language interface, which allows
them to describe their problems without needing to know the technical jargon
that a software engineer may have used to describe the problem in the knowledge
database. Associative problem-solving systems are therefore well suited to
provide self-service customer support through the Internet.

Associative problem-solving systems also enhance a customer-support
organization's ability to capture solutions without the costly and time-
consuming task of off-line development and maintenance of the knowledge
database. For example, when information returned in response to the problem
description does not solve the customer's problem, associative problem-solving
systems enable the customer-support personnel to create and capture new
solutions in their workflow. By enabling customer-support organizations to
capture solutions on a real-time basis, the need for off-line knowledge
engineering is minimized and the number of solutions that get created more than
once is reduced.

The Internet provides an opportunity to improve support levels and reduce
support costs

Internet technology has allowed many organizations to re-engineer their call
centers into customer-contact centers. Customer-contact centers are now being
designed to allow for multiple channels of customer contact, including
telephone, fax, email and the Web. Integrating the support capabilities of the
customer-contact center with a business's Web site presents an opportunity to
increase customer-service levels and reduce costs.

By incorporating problem-resolution technology in its Web-site architecture,
an enterprise can provide its customers with around-the-clock access to
customer support, thereby improving customer-satisfaction levels. An enterprise
can also reduce the overall cost of customer support and increase the
scalability of its customer-support operations by inducing more customers to
first seek support from the enterprise's Web site, rather than the more costly
customer-call center. To date, many companies have handled the growing number
of support inquiries over the Web by posting static responses to a frequently
asked questions on their Web sites or through automating responses to incoming
inquiries with pre-scripted email responses. Both of these approaches are
limited in their ability to effectively handle unique incoming customer
inquiries.

Finally, businesses can also use Internet technologies to deploy Web-based
problem-resolution applications. In contrast to client-server applications,
software applications that can be deployed over the Web (i.e. Web-based
applications) can be more rapidly and cost-effectively deployed to the extended
enterprise over the Internet. In addition, Web-based applications can be more
rapidly and cost-effectively deployed through limited-access private networks
(i.e. an intranet) and limited-access public networks (i.e. an extranet). This
enables remote employees and business partners to leverage and add to pre-
existing organizational knowledge and thereby increase an organization's
effectiveness in resolving customer issues.

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<PAGE>

We believe that with customer support playing a critical role in overall
customer-satisfaction a significant opportunity exists for software that:

. enhances problem resolution through associative problem-solving
technology

. leverages the Internet and corporate intranets and extranets to capture
and share organizational knowledge with customers, business partners and
remote employees

. provides scalability to meet the demands of the extended enterprise and
Web-based customer self-service

. integrates with existing information technology infrastructure

Furthermore, we think that successful problem-resolution software will give
employees outside of the customer support department access to useful
information gained in the customer-support process. For example, employees in
other functional areas, such as product development, field service, and sales
and marketing, can use this information to identify problems with existing
products, target areas for new product development and understand changes in
customer needs and preferences.

Primus Solution

We provide Web-based problem-resolution application software for customer-
support and self-service over the Internet. Our applications enable businesses
to capture problem-resolution knowledge, solve customer problems, reuse
solutions and share captured knowledge throughout the extended enterprise. Our
SolutionSeries family of software products enhances an organization's problem-
resolution capabilities, since it is based on our associative problem-solving
technology and leverages the Internet to offer customer support to the extended
enterprise and its end-users customers. Our software:

Provides substantial
economic return on
investment
We believe, based in part on the studies
described below under "--Customers," that our
SolutionSeries products provide our users with
applications that enable them to realize
significant and measurable cost reductions and
to improve their customer-satisfaction levels
by:

. reducing the overall time needed to
resolve problems

. improving first-call resolution rates

. reducing escalation of problems to senior
analysts

. reducing analyst training times

. increasing call deflections to the Web

. increasing solution reuse

Enhances problem resolution
through associative problem-
solving technology
We developed our SolutionSeries products using
our proprietary associative problem-solving
search technology to:

. improve the relevance of solutions
retrieved, decreasing the costs of
analyst support and customer-support call
time

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<PAGE>

. support and enhance diverse problem-
solving approaches, enabling effective
problem resolution by a full range of
users, from senior analyst to non-
technical end-user

. effectively provide self-service customer
support through the Internet

. cost-effectively capture knowledge in the
workflow, reducing development and
maintenance costs of supporting the
enterprise knowledge base and minimizing
the number of solutions that are created
more than once

Leverages Internet
technology to extend
problem-resolution solutions Our Web-based SolutionSeries products were
designed and built to support an enterprise's
service and support strategies for the Internet
and corporate intranets and extranets. Because
they are Web-architected, our products can be
deployed to an organization's internal support
staff and the extended enterprise more quickly
and efficiently than traditional client/server
products. Our software also enables our users
to provide enhanced around-the-clock customer
self-service over the Internet. In addition to
improving customer convenience, Web-based self-
service can significantly lower support costs
by handling more customer support questions
through the scalable Web support site, rather
than the enterprise's call center. According to
International Data Corporation, the cost of
providing Web-based software support averages
$0.45 per incident as compared to $30.00 per
incident for traditional phone support.

Provides scalable solutions
for global organizations and
their partners
Our SolutionSeries product family is designed
to scale so that it can serve the extended
service and support communities of global
enterprises, including field personnel,
business partners, as well as customers and
personnel in functional areas other than
customer support, such as sales, marketing and
product development. One of our users has
deployed our solution to over 500 support
engineers globally and currently is using our
Web-based products to provide self-service
support to over 130,000 registered end-users.

Leverages investment in
existing customer-support
systems
Our SolutionSeries products integrate with most
leading customer-relationship-management
systems, including those from Clarify, ONYX
Software, Remedy, Siebel Systems and Vantive.
The resulting integrated systems are designed
to

33
<PAGE>

provide a unified view of customer and problem-
resolution information, increasing analyst
productivity and customer satisfaction by
reducing the need to re-gather existing
customer information before proceeding to
problem resolution. In addition, SolutionSeries
users can access existing customer-support data
and documents either by importing the data into
the SolutionSeries database or by accessing the
data through our products' integration with
leading text-retrieval systems.

Strategy

Our objective is to establish and maintain a leadership position in providing
Web-based problem-resolution software applications for the extended enterprise
and its end-user customers. Our strategy to achieve this objective is to:

Leverage the Internet We intend to continue to leverage the Internet
to enable our users to capture, manage and
share knowledge with their extended enterprise
and customers. We believe that businesses will
increasingly adopt the Web as the means of
providing fast and efficient customer support
for the extended enterprise.

Enhance our product suite We plan to enhance the capabilities of our
SolutionSeries product family by developing,
acquiring and licensing additional products and
technologies. We intend to focus on
applications and technologies that further
enable Web-based customer self-service.

Target additional vertical Initially, we have focused our sales and
markets marketing efforts on serving the customer-
support and problem-resolution needs of
technology-based industries, such as software,
hardware and telecommunications. We intend to
broaden the reach of our problem-resolution
products to customer-service and support
organizations in other industries with
characteristics similar to technology-based
industries. We believe that the critical market
characteristics indicating a need for our
products include:

. a dynamic, rapidly changing business
environment

. complex products or services

. competitive differentiation based on
service and support

We currently plan to pursue the financial-
services, consumer electronics and
pharmaceutical industries.

Build additional strategic
relationships
We currently have strategic marketing
relationships with several call-tracking and
customer-relationship-management

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<PAGE>

software vendors, including Clarify, ONYX
Software, Remedy, Siebel Systems and Vantive.
We intend to strengthen and expand our current
relationships and build new ones with leading
systems consultants and integrators. We believe
that strategic relationships will provide us
with distribution opportunities, as well as
leverage our implementation resources.
Concurrently, we intend to expand our indirect
distribution channels to complement our direct
sales force.

Extend our solutions to
other functional areas
Our products currently provide information and
reports that are used in functional areas other
than customer support. We intend to continue to
enhance the features of our solutions to
provide benefits to functional business areas
in which the product feedback and customer
knowledge created in customer support is
valuable and actionable, such as product
development and sales and marketing.

Products

The SolutionSeries product family consists of the SolutionBuilder
application, which we first released in April 1995, and our more recently
introduced Web-based applications, SolutionExplorer and SolutionPublisher. We
generally license our SolutionSeries applications based on the number of users
and servers. In 1998, the typical order sizes for our products ranged from
$50,000 to $500,000, with some over $1 million. Our users generally license the
full suite of SolutionSeries products.

Our SolutionSeries products enable businesses to capture problem-resolution
information, solve customer problems, reuse solutions and share problem-
resolution knowledge throughout the extended enterprise.

Capture problem-resolution
information
Our SolutionSeries products enable users to
efficiently capture relevant information about
customer problems as the information becomes
available. Typically, a customer-support
analyst will capture facts and the symptoms of
the customer's problem using our
SolutionBuilder product while on the phone with
the customer. Field personnel and business
partners that provide customer support can also
capture problem-resolution information through
our Web-based applications. Because our system
captures problem-resolution information in the
workflow, there is no need to re-enter
information after solving the problem. Our
products' features help to reduce information-
input and call-processing times and facilitate
ease of use. Our SolutionSeries software:

. Captures customer information in natural
language through a notepad-style data-
input screen

. Features easy-to-use Windows and browser
interfaces

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<PAGE>

. Facilitates classifying potentially
relevant information

. Escalates unresolved customer problems
within the customer-support hierarchy
without losing previously captured
information

. Integrates with customer-relationship-
management software

Solve customer problems The associative problem-solving technology of
our SolutionSeries products helps our users
find relevant solutions to their customers'
problems or, if no solution exists, creates a
new solution to solve the problem. Our
SolutionSeries software:

. Combines the natural language information
captured from the analyst with additional
search algorithms that leverage
associations among data objects in the
knowledge base

. Stores problem-resolution information
with problem-description information to
locate, evaluate and return solutions
with a high degree of relevance

. Integrates to legacy problem-resolution
databases

. Displays potential solutions ranked
according to relevancy

. Uses retrieved information to lead the
analyst to a new solution, if none of the
existing solutions solve the customer's
problem

Reuse solutions Our software is designed to enable a customer-
support organization to immediately reuse
solutions created in the ordinary workflow of
problem resolution. This process helps the
organization to improve first-call resolution
rates, reduce overall problem-resolution times
and avoid the cost and delay of off-line
knowledge engineering.

. Once a new solution is discovered, the
data upon which the solution was built is
automatically captured with the new
solution

. Our software enables the new solution to
be added to the problem-resolution
database, either immediately upon its
being marked as a working solution by the
support analyst or after the
organization's customary quality-
assurance review process

Share problem-resolution
knowledge throughout the
extended enterprise Our software enables immediate and broad
dissemination of information and solutions
captured in the customer-support workflow to
the extended enterprise:

. Our Web-based products enable immediate
access to newly developed solutions for
all authorized members

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<PAGE>

of an enterprise's extended customer-
support organization, including remote
users such as field support, external
business partners and customers

. Various security and administration
options in our software allow the system
administrators to customize users' access
levels to specific portions of the
problem-resolution knowledge base to
improve access speeds, enhance the
relevance of retrieved solutions and
regulate access to solutions data

. Functional areas outside of customer
support can benefit from information
gathered through use of our
SolutionSeries software; for example, our
software can provide reports and other
analytical tools to facilitate faster
feedback to product development and
engineering personnel for enhancements,
patches and fixes

Our SolutionSeries product line consists of three user-facing products:
SolutionBuilder, SolutionExplorer and SolutionPublisher. The following table
describes these products:

<TABLE>
<CAPTION>
Initial
Product Release Targeted User Description
<C> <C> <C> <S>
SolutionBuilder April 1995 . Customer-support . Desktop application for
professionals capturing, solving, reusing
and sharing problem-
resolution information;
facilitates quality-assurance
review of new solutions

- --------------------------------------------------------------------------------------------
SolutionExplorer November 1997 . Extended enterprise . Web-based application for
customer-support capturing, solving, reusing
personnel, such as field and sharing problem-
service and business resolution information
partners remotely

- --------------------------------------------------------------------------------------------
SolutionPublisher August 1996 . End-user customers and . Web-based application for
the extended-support providing customers with
community direct access to the problem-
resolution knowledge base
through the Internet, thus
enabling customer self-
service
. If self-service proves
ineffective in resolving the
problem, SolutionPublisher
captures and escalates the
relevant information
regarding the problem for
resolution by customer-
support personnel
</TABLE>

Our other SolutionSeries products include:

SolutionSeries WebPack. We introduced our SolutionSeries WebPack product in
March 1999. SolutionSeries WebPack bundles SolutionExplorer and
SolutionPublisher with implementation services to enable new users of our
products to provide Web-based customer-self-service support solutions with an
accelerated deployment cycle, which we believe may be as little as five days.

SolutionSeries Server. Our SolutionSeries Server product provides search
functionality, manages the problem-solution database interactions and controls
system administration. Our SolutionSeries Server includes our SolutionAdmin,
SolutionReports and SolutionX data-transfer utility modules, which provide
user-authority management, security services, report generation and data
exchange.

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<PAGE>

The following diagram illustrates integration of our SolutionSeries products:

[Diagram illustrating the integration of the SolutionSeries products]

Our typical license agreement provides for a perpetual, nontransferable
license to use our software by the licensee.

Product Architecture

Our products use a multi-tiered architecture to meet the problem-resolution
needs of today's fast-paced and dynamic enterprises. We use industry-standard
platforms, components and communications interfaces to provide problem-
resolution software that is designed to be reliable, maintainable and scalable,
and provide high performance on an around-the-clock basis. Our flexible
architecture adapts to a range of needs, from a single desktop to enterprise
systems that support thousands of users.

Our SolutionServer software runs on either Windows NT or Sun Solaris systems
in single- or multi-processor configurations. Our client software runs in a
fully customizable interface on both Web-based applications, using Microsoft or
Netscape browsers, and tailorable desktop applications for the professional
user.

The core tier of our applications is the database server. We currently use
the Versant object-oriented database and plan to release implementations using
Microsoft SQL Server 7.0 and Oracle 8 and 8i databases. Our next tier is the
application search server that contains the search logic and knowledge domain
model. Our application server tier has multiple interfaces to either the
performance tuned SolutionBuilder communications interface or to the Internet
server application logic and session management. Our Internet server uses a
communications protocol that enables it to interface seamlessly with most
Internet clients, including Microsoft and Netscape clients.

Customer Support and Professional Services

We believe that high-quality customer support and professional services are
requirements for continued growth and increased sales of our products. We have
made significant investments to increase the size of our support and services
organization in the past and plan to continue to do so in the future. As of
March 31, 1999, our customer support and professional services organization
consisted of 32 employees.

Consulting. Our consulting teams work closely with our customers prior to
product implementation to review a customer's business objectives and
information technology infrastructure

38
<PAGE>

in order to assist the customer in determining Primus solutions that will best
suit the customer's needs. Thereafter, our consultants install, integrate and
implement our software in the user's customer-support environment.

Training. We provide training classes in conjunction with our products,
including end-user training and advanced technical training regarding the
implementation and administration of our products. Classes are offered at
customer sites and at our Seattle office. We also provide training classes for
third-party partners, such as service providers and systems integrators.

Customer Support. We typically provide technical support 12 hours a day, five
days a week in North America. We offer similar services in the United Kingdom
and Japan. On-call support for priority matters is also available 24 hours a
day, 7 days a week. We offer support via telephone, fax, email and Web-based
self-service.

Customers

Our products solve issues and problems associated with complex products and
services. As a result, we have traditionally targeted:

. enterprises in dynamic, technology-related industries that offer external
customer support

. outsourcers that provide customer-support services to technology-related
businesses

. organizations with significant information-technology infrastructure that
provide internal support to their employees

The following table lists our customers as of April 30, 1999:

<TABLE>
<S> <C> <C>
3Com Lucent QAD
3M MAPICS RCN
Amdahl Marcam Security Dynamics
Barr Systems MCI/SHL Systemhouse SGI
Best Software Microsoft Simplex
Compaq Mosaix Softbank
EDS Motorola Starbucks
EMC Network Associates Sterling Commerce
Entex Nortel Networks Vanguard Cellular
Ericsson Novell Williams
Fujitsu NTT Wind River Systems
Iomega Origin Xerox
</TABLE>

The following case studies, which are based solely on information supplied by
the respective companies and which we believe to be accurate in all material
respects, illustrate how selected SolutionSeries customers are benefiting from
our products:

3Com Corporation

3Com develops and delivers information access products and network systems to
more than 200 million customers worldwide. Its customer base includes large,
medium and small enterprises; carriers and network service providers; personal-
computer original equipment manufacturers; and consumers.

3Com initially purchased SolutionSeries software in July 1997 for its call
center operation to enhance employee productivity and customer resolution
rates. In August 1998, 3Com acquired additional licenses for its call center
and SolutionPublisher licenses to enable the company to offer its customers
another avenue to obtain technical support via the Web.

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<PAGE>

In October 1998, 3Com launched the 3Com Knowledgebase Web service, an
interactive trouble-shooting tool containing a vast repository of technical
solutions input by expert 3Com technical engineers around the world. This
service, which utilizes the SolutionSeries products, has more than 132,000
registered end-users worldwide and, as of February 1999, was adding
approximately 9,000 new end-users a week, with repeat usage growing at 40% per
month. 3Com believes that its Knowledgebase Web service is not only assisting
3Com customers in solving their network challenges more quickly and easily, but
it is also providing actionable feedback to 3Com design, manufacturing and
technical-support personnel to enhance product quality and support processes.

QAD, Inc.

QAD is a leading provider of enterprise and extended supply-chain management
software and services to multinational corporations. QAD acquired
SolutionSeries software to help it manage increasing product complexity, rising
employee training costs, and the need to ensure a high level of customer
satisfaction. QAD selected SolutionSeries software because of its ability to
capture knowledge in the workflow, provide fast and flexible search results,
integrate with its own MFG/PRO software and document management systems and
facilitate management oversight to improve call center productivity.

Once it had implemented the SolutionSeries software, QAD experienced a
reduction in call resolution times of more than 58%, a decrease of
approximately 50% in the amount of time required to train new employees, and an
increase in customer satisfaction of approximately 8%. In addition, by using
the SolutionPublisher application, QAD was able to deflect approximately 10% of
its incoming calls to its Web site.

Compaq Computer Corporation

Compaq Services Operations Management, a customer-support outsourcing
division of Compaq Computer Corporation, is an industry leader in implementing
and supporting high performance computer systems.

Compaq Services purchased SolutionSeries software to lower their service
delivery costs and to maintain a comprehensive knowledge base of their
customers' information systems issues and requirements. Compaq Services uses
the knowledge base to analyze causes of recurring problems and to identify new
services to help customers reduce their information systems costs.

Over an eight-month period, customer support staff at Compaq Services who
used the SolutionSeries applications were able to close incident tickets an
average of five minutes (or 20%) faster than staff who did not use the
SolutionSeries applications. Similarly, call center support staff who used the
SolutionSeries applications were able to resolve 15% more incidents over the
eight-month period than their counterparts who did not use the SolutionSeries
applications. This represents a reduction in the number of incidents that would
have otherwise been escalated to more sophisticated and more costly support
staff.

Novell Corporation

Novell launched the era of computer networking and today, with products like
NetWare 5 and Novell Directory Services, continues to extend its leadership in
Internet solutions based on open standards. Novell's global channel,
consulting, developer, education and technical support programs are among the
most extensive in the network computing industry.

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<PAGE>

Novell purchased SolutionSeries software to reduce support costs by capturing
and re-using the knowledge of its internal and extended support community.
Because Novell's partners provide a substantial portion of the call center
support available to Novell end users, Novell decided to use Primus's Web-based
applications to distribute product information among its partners and internal
engineers over the Internet.

Novell recognized the opportunities of knowledge sharing within its customer
service model and acquired Primus's SolutionExplorer product to enable members
of its extensive Novell Certified Engineer network to share product knowledge
with Novell and with other members of the network.

Sales and Marketing

We market and sell our products primarily through a direct sales force. We
have sales offices in Seattle, Atlanta, Boston, Dallas, Reston and San
Francisco and in the United Kingdom. The field sales force is complemented by
direct telesales based at our headquarters in Seattle, Washington. To date,
significantly all of our efforts have been targeted at customer-service and
support organizations in the information technology and telecommunications
industries, as well as internal helpdesk organizations for companies with large
information-technology departments. These efforts are directed at key
executives and personnel responsible for the organizations' customer service
and support strategies and operations. Technical sales support is provided by
sales engineers located in several of the field offices. We currently plan to
add a significant number of sales representatives and sales engineers in other
domestic and international locations.

Our marketing department is focused on creating awareness of our products and
services and generating interest in our solution. We conduct comprehensive
marketing and branding programs, which may include direct mail, public
relations, Web-based lead generation, telemarketing lead generation,
advertising, trade shows, seminars, and ongoing customer communications
programs. Many of our marketing activities are done in collaboration with our
consulting and software partners. Our marketing department also coordinates our
participation in industry tradeshows and forums, secures speaking engagements
for our executives and establishes and maintains close relationships with
recognized industry analysts. As of March 31, 1999, our sales and marketing
staff consisted of 58 employees.

Our products are marketed and distributed in Japan by Primus KK, a joint
venture owned by Trans Cosmos Inc. and Primus. Our distribution arrangements
provide Trans Cosmos with exclusive worldwide distribution rights to the Kanji
version of our SolutionBuilder product and Primus KK with exclusive
distribution rights in Japan, and nonexclusive distribution rights in Korea, to
the English and Japanese versions of our SolutionExplorer and SolutionPublisher
products. The rights regarding our SolutionBuilder product expire in September
2000. The other rights are renewable for one-year terms. The agreements are
terminable by either party upon breach.

Product Development

We have been a leader in developing innovative problem-resolution approaches
and were one of the first companies to use associative problem-solving
technology in a customer-support context. Our product development is focused on
enhancing our users' ability to implement global, Web-centric customer contact
centers using our products. We believe that a technically skilled, highly
productive software development organization will continue to be a key
component of our success. As of March 31, 1999, our product development team
consisted of 38 full-time employees.

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<PAGE>

Our current development efforts include enhancing our software development
kits and opening our application program interfaces to enable additional
development work by third-party developers and clients on software that
integrates with our products and extends their reach in problem resolution in
enterprise environments. In addition, we are broadening the databases on which
our SolutionServer product is implemented to include Microsoft's SQL Server 7.0
and the Oracle 8 and 8i database.

Competition

The market for our products is new and rapidly evolving, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our primary source of direct
competition comes from other problem-resolution software vendors, e-commerce
customer-management software vendors and our potential customers' internal
information technology departments, which choose to rely upon their own
proprietary problem resolution systems or develop new proprietary systems.
Competitors providing problem-resolution systems include companies such as
Advantagekbs, Inference, Molloy, ServiceSoft and ServiceWare. In addition,
companies providing e-commerce customer-management solutions that may compete
with us include Broadvision, Silknet and Smart Technologies.

The principal competitive factors in our industry include:

. vendor and product reputation . the availability of products on
the Internet and multiple
operating platforms

. customer referenceability . product ease-of-use

. measurable economic return . the quality of customer support
services, documentation and
training

. product quality, performance and . the quality and effectiveness of
price application deployment services

. product functionality and . the effectiveness of sales and
features marketing efforts

. product scalability

. product integration with other
enterprise applications

As the market for problem-resolution software matures, it is possible that
new and larger companies will enter the market, existing competitors will form
alliances, or current and potential competitors could acquire, be acquired by
or establish cooperative relationships with third parties. The resulting
organizations could have greater technical, marketing and other resources,
improve their products to address the needs of our existing and potential
users, thereby increasing their market share. Increased competition could
result in pricing pressures, reduced margins or failure of our products to
achieve or maintain market acceptance.

Although we believe that our products and services currently compete
favorably with respect to such factors and that we hold a leadership position
compared to our competitors in the problem-resolution market, we can't provide
any assurance that we can maintain our competitive position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other resources.

Proprietary Information

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<PAGE>

such as those contained in license agreements with consultants, vendors and
customers. We pursue the registration of certain of our trademarks and service
marks in the United States and in certain other countries, but we have not
secured registration of all our marks. We are a party to a license agreement
with Versant. Under the terms of the agreement, Versant granted us a license to
use Versant's database as part of our SolutionSeries products. Versant also
agreed to provide us with support and maintenance services. We pay Versant a
royalty on licenses of our products with the Versant database. We can terminate
the agreement on 120 days' prior written notice to Versant. Versant can
terminate the agreement on two years' prior written notice to us. Either party
may terminate following a material breach by the other, if the breach has not
been cured within 120 days of notice of breach.

Employees

As of March 31, 1999, we had 147 employees, including 17 U.K.-based
employees. These included 58 in sales and marketing, 32 in client services and
support, 38 in product development and 19 in general and administration. None
of our employees is represented by a labor union. We have not experienced any
work stoppages, and we believe our relationship with our employees is good. In
addition, we regularly supplement our workforce with consultants.

Competition for qualified personnel in our industry is intense. We believe
that our future success will depend in part on our continued ability to hire,
assimilate and retain qualified personnel.

Facilities

Our principal administrative, engineering, manufacturing, marketing and sales
facilities total approximately 28,346 square feet in an office tower in
Seattle, Washington. Our principal lease expires on October 30, 2000. We also
lease other domestic sales and services offices in offices in Atlanta, Boston,
Dallas, Reston and San Francisco. We maintain international offices in the
United Kingdom. We believe that our existing facilities are adequate to meet
current requirements and that additional or substitute space will be available
as needed to accommodate any expansion of operations.

Legal Proceedings

Primus is not a party to any material legal proceedings.

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<PAGE>

MANAGEMENT

Executive Officers and Directors

Our executive officers and directors as of May 31, 1999 are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael A. Brochu....... 45 President, Chief Executive Officer and Chairman of the Board
Elizabeth J. Huebner.... 41 Chief Financial Officer, Vice President of Finance, Secretary
and Treasurer
Kim M. Nelson........... 44 Vice President of Sales
Patricia L. Cox......... 38 Vice President of Client Services
Edward L. Walter........ 49 Vice President of Product Development and Technology
Antonio M. Audino(1).... 40 Director
Promod Haque(2)......... 51 Director
Fredric W.
Harman(1)(2)........... 38 Director
Yasuki Matsumoto(1)..... 45 Director
</TABLE>
- --------
(1) Member of compensation committee.

(2) Member of the audit committee.

Michael A. Brochu has served as our President and Chief Executive Officer
since November 1997. Mr. Brochu was President and Chief Operating Officer of
Sierra On-Line, Inc., an interactive software publisher, from June 1994 until
October 1997. He was Senior Vice President of CUC International Inc. from
August 1996 to November 1997 after CUC's acquisition of Sierra On-Line. Mr.
Brochu is also a member of the board of directors of Primus KK and Integrated
Systems, a publicly traded developer of software for embedded microprocessors,
and is chairman of the board of directors of OnHealth Network Company, a
publicly-traded Internet content provider of public-health information. Mr.
Brochu received his B.B.A. in accounting and finance from the University of
Texas at El Paso.

Elizabeth J. Huebner has served as our Vice President of Finance and Chief
Financial Officer since June 1998 and was named Secretary and Treasurer in
April 1999. From March 1996 to July 1998, Ms. Huebner was the Chief Financial
Officer of Fluke Corporation, a manufacturer of electronic test tools. From
March 1992 until March 1996, Ms. Huebner was the Vice President of Finance for
the Western region of AT&T Wireless. Ms. Huebner received her B.S. in
accounting from the University of Utah.

Kim M. Nelson has served as our Vice President of Sales since January 1999.
From June 1993 to December 1998, Mr. Nelson held several positions at Oracle
Corporation, including Area Vice President of Sales, Vice President of Field
Operations, and Vice President of Sales for Oracle Business Online. Mr. Nelson
received his B.S. in business from the University of Colorado.

Patricia L. Cox has served as our Vice President of Client Services since
March 1998. From January 1997 to March 1998, Ms. Cox was a Regional Services
Manager for Lawson Software. From April 1993 to December 1996, Ms. Cox was a
Regional Consulting Manager for Platinum Software Corporation. Ms. Cox received
her B.S. in computer information systems from Bentley College.

Edward L. Walter has served as our Vice President of Product Development and
Technology since February 1999. Mr. Walter founded Simplications, LLC, a
developer of seminars on interactive product creations in June 1998 and served
as its managing partner until February 1998. From October 1995 to May 1998, Mr.
Walter was the Vice President of Engineering of Lexant, a software company.

44
<PAGE>

From March 1991 to October 1994, he was the Vice President of Engineering of
Aldus Corporation, a software company. Mr. Walter currently serves as associate
professor for the Institute of Design at the Illinois Institute of Technology.
Mr. Walter holds a B.S. in psychology from Duke University.

Antonio M. Audino has served as one of our directors since April 1995. Since
September 1996, Mr. Audino has been a managing director of Voyager Capital, a
venture capital firm. In 1994, Mr. Audino founded Ally Ventures. He also
founded and currently serves as Chairman of Centris, L.L.C. From 1987 to 1994,
Mr. Audino held various management positions at Microsoft Corporation. Mr.
Audino holds a B.S. in accounting and a B.A. in philosophy from Creighton
University. Mr. Audino is a member of the board of Captura Software and GoAhead
Software, each a privately held software company.

Promod Haque has served as one of our directors since February 1996. Mr.
Haque became a partner of Norwest Venture Capital in November 1989. Mr. Haque
holds a Ph.D. in electrical engineering and an M.B.A. from Northwestern
University and a B.S. in electrical engineering from the University of Delhi,
in India. Mr. Haque is a member of the board of directors of Information
Advantage, Extreme Networks and Transaction Systems Architects, as well as
several private companies.

Fredric W. Harman has served as one of our directors since February 1996.
Since 1994, Mr. Harman has served as a managing member of the general partner
of venture capital funds affiliated with Oak Investment Partners. From 1991 to
1994, he served as a general partner of Morgan Stanley Venture Capital. Mr.
Harman holds a B.S. and M.S. in electrical engineering from Stanford University
and an M.B.A. from the Harvard School of Business. Mr. Harman is a director of
ILOG, S.A. and Inktomi and several privately held companies.

Yasuki Matsumoto has served as one of our directors since October 1994. Since
March 1997, Mr. Matsumoto has been the President and Chief Executive Officer of
EnCompass Group, Inc., an information technology venture capital investment
firm. In 1991, Mr. Matsumoto formed DBC Technologies, which marketed high
technology products in the Far East. Mr. Matsumoto holds an M.S. in computer
engineering from Portland State University. Mr. Matsumoto serves on the boards
of several privately held software companies.

Our bylaws provide for the division of our board of directors into three
classes as nearly equal in size as possible with staggered three-year terms at
our shareholders meeting in 2000. The classification of our board could make it
more difficult for a third party to acquire, or could discourage a third party
from acquiring, control of us.

Committees of the Board of Directors

Our compensation committee currently consists of Messrs. Audino, Harman and
Matsumoto. The compensation committee:

. reviews and approves the compensation and benefits for our executive
officers
. makes recommendations to the board of directors regarding such matters

Our audit committee currently consists of Messrs. Haque and Harman. The audit
committee:

. makes recommendations to the board of directors regarding the selection
of independent auditors
. reviews the results and scope of the audit and other services provided by
our independent auditors

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<PAGE>

. reviews and evaluates our audit and control functions

Director Compensation

Our board of directors and shareholders adopted our 1999 stock incentive
compensation plan in April 1999. A total of 1,166,667 shares of our common
stock are currently available for issuance under this plan. Members of our
board of directors are eligible to participate in the 1999 plan. See
"Management--Executive Compensation."

Director and Officer Indemnification and Liability

Our articles of incorporation limit the liability of directors to the fullest
extent permitted by the Washington Business Corporation Act as it currently
exists or as it may be amended in the future. Consequently, subject to the
Washington Business Corporation Act, no director shall be personally liable to
us or our shareholders for monetary damages resulting from his or her conduct
as one of our directors, except liability for:

. acts or omissions involving intentional misconduct or knowing violations
of law
. unlawful distributions
. transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally entitled

Our articles of incorporation also provide that we will indemnify any
individual made a party to a proceeding because that individual is or was a
director of Primus and will advance or reimburse reasonable expenses incurred
by the individual in advance of the final disposition of the proceeding to the
full extent permitted by applicable law. Any repeal of or modification to our
articles of incorporation may not adversely affect any right of a director of
Primus who is or was a director at the time of such repeal or modification. To
the extent the provisions of our articles of incorporation provide for
indemnification of directors for liabilities arising under the Securities Act
of 1933, those provisions are, in the opinion of the Securities and Exchange
Commission, against public policy as expressed in the Securities Act and they
are therefore unenforceable.

Our bylaws provide that we will indemnify our directors and officers and may
indemnify our employees and agents to the full extent permitted by law. In
addition, we intend to purchase and maintain a liability insurance policy,
pursuant to which our directors and officers may be indemnified against
liability they may incur for serving in their capacities as directors and
officers of Primus.

We believe that the limitation of liability provision in our articles of
incorporation, the indemnification provisions in our bylaws and the liability
insurance policy will facilitate our ability to continue to attract and retain
qualified individuals to serve as our directors and officers.

Compensation Committee Interlocks and Insider Participation

During the year ended December 31, 1998, Messrs. Brochu, Audino, Haque and
Harman served on the compensation committee of our board of directors, as did
Kenneth L. Block, a former director of Primus. None of our executive officers
serve as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as members of our board
of directors or its compensation committee.

Mr. Haque is a partner at Norwest Venture Capital Management, the general
partner of Norwest Equity Partners V, L.L.P. Between February 12, 1996 and July
22, 1998, Norwest Equity Partners

46
<PAGE>

purchased 2,845,528 shares of our Series A preferred stock for $3.5 million and
800,000 shares of our Series D preferred stock for $2.0 million. In connection
with a bridge loan financing in June 1998, we granted Norwest Equity Partners a
warrant for 23,500 shares of Series D preferred stock at an aggregate exercise
price of $59,000. The bridge loan converted into Series D preferred stock in
July 1998. The shares of preferred stock and warrants held by Norwest will
convert immediately prior to closing this offering into 1,441,166 shares of
common stock.

Mr. Harman is a managing member of Oak Associates VI, L.L.C. and Oak VI
Affiliates, L.L.C., the general partners of Oak Investment Partners VI, L.P.
and Oak VI Affiliates Fund, L.P., respectively. On February 12, 1996 and July
22, 1998, respectively, Oak Investment Partners purchased 3,177,886 shares of
our Series A preferred stock for $3.9 million and 687,773 shares of our Series
D preferred stock for $1.7 million. On February 12, 1996 and July 22, 1998,
respectively, Oak VI Affiliates Fund, purchased 74,146 shares of our Series A
preferred stock for $91,000 and 16,047 shares of our Series D preferred stock
for $40,000. In connection with a bridge loan financing in June 1998, we
granted the Oak funds warrants for 26,499 shares of Series D preferred stock at
an aggregate exercise price of $66,000. The bridge loan converted into Series D
preferred stock in July 1998. The shares of preferred stock and warrants held
by affiliates of Mr. Harman will convert immediately prior to closing this
offering into 1,571,424 shares of common stock.

In March 1999, Messrs. Brochu and Audino purchased 1,000 and 5,556 shares,
respectively, of our common stock at a price per share of $9.00. Block Capital
LLC, an entity controlled by Mr. Block, purchased 16,667 shares of our common
stock at a price per share of $9.00.

Norwest Equity Partners and the Oak funds are parties to a registration
rights agreement with us. Pursuant to the terms of that agreement, the holders
of our preferred stock have certain registration rights that obligate us, under
certain circumstances, to effect a registration under the Securities Act of
shares of common stock. See "Description of Capital Stock--Registration
Rights."

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<PAGE>

Executive Compensation

The following table sets forth information concerning the compensation
received for services rendered to us in all capacities, for our chief executive
officer, two of our former executive officers whose compensation exceeded
$100,000 in 1998 and our four other executive officers whose compensation is
expected to exceed $100,000 in 1999.

Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------------- ------------
Security
Name and Principal Fiscal Underlying All Other
Position Year Salary Bonus Options (#) Compensation($)
- ------------------ ------ -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Brochu....... 1999 $ 56,250(1) $ -- 78,666 $ --
President and Chief 1998 199,995 45,833 -- --
Executive Officer
Elizabeth J. Huebner.... 1999 34,375(2) -- 36,666 --
Chief Financial Officer 1998 46,655(3) -- 106,666 --
and Vice President
of Finance
Kim M. Nelson........... 1999 31,249(4) -- 143,332 --
Vice President of Sales
Patricia L. Cox......... 1999 31,248(5) -- 33,333 --
Vice President of Client 1998 85,456(6) -- 100,000 --
Services
Edward L. Walter........ 1999 19,519(7) -- 143,332 --
Vice President of
Product Development and
Technology
Steven L. Sperry........ 1998 142,006(8) 25,000 -- 75,000(9)
Former Chairman of the
Board
David Hanafee........... 1999 -- 7,500(10) -- 30,000(11)
Former Vice President of 1998 118,606 20,870 -- 103,236(12)
Sales
</TABLE>
- --------
(1) Represents salary earned as of March 31, 1999 and is based on an
annualized salary of $225,000. Mr. Brochu is also eligible to receive a
performance-based bonus in 1999.
(2) Represents salary earned as of March 31, 1999 and is based on an
annualized salary of $137,500. Ms. Huebner is also eligible to receive a
performance-based bonus in 1999.
(3) Ms. Huebner joined Primus in June 1998.
(4) Mr. Nelson joined Primus in January 1999. Represents salary earned as of
March 31, 1999 and is based on an annualized salary of $125,000. Mr.
Nelson is also eligible to receive a performance-based bonus in 1999.
(5) Based on an annualized salary of $125,000. Ms. Cox is also eligible to
receive a performance-based bonus in 1999.
(6) Ms. Cox joined Primus in March 1998.
(7) Mr. Walter joined Primus in February 1999. Represents salary earned as of
March 31, 1999 and is based on an annualized salary of $125,000.
Mr. Walter is also eligible to receive a performance-based bonus in 1999.
(8) Mr. Sperry resigned from his position as chairman of our board of
directors on November 6, 1998.
(9) Represents severance payments received by Mr. Sperry upon his resignation.
(10) Mr. Hanafee resigned from his position as our vice president of sales on
December 31, 1998.
(11) Represents severance payments received by Mr. Hanafee upon his
resignation.
(12) Represents commission payments.

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<PAGE>

Option Grants in Last Fiscal Year

The following table sets forth certain information regarding stock options we
granted during fiscal 1998.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
Potential Realizable
Value at Assumed
Number of Percentage of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term(3)
Options Employees in Price Expiration ---------------------
Name Granted(#) Fiscal Year(1) ($/Sh)(2) Date 5%($) 10%($)
- ---- ---------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Brochu....... -- -- -- -- -- --
Elizabeth J. Huebner.... 106,666 16.77% $ 4.50 6/19/08 $1,431,227 $2,563,308
Kim M. Nelson........... -- -- -- -- -- --
Patricia L. Cox......... 100,000 15.72 3.00 4/08/08 1,491,784 2,553,117
Edward L. Walter........ -- -- -- -- -- --
Steven L. Sperry........ -- -- -- -- -- --
David Hanafee........... -- -- -- -- -- --
</TABLE>
- --------
(1) Based on a total of 635,953 option shares granted to employees during
fiscal 1998.
(2) Options were granted at an exercise price equal to the fair market value of
our common stock at the time of the grant.
(3) The potential realizable value is calculated based on the term of the
option at the time of grant (ten years) and the assumed initial public
offering price of $11.00. The assumed rates of appreciation are prescribed
by the Securities and Exchange Commission for illustrative purposes only
and are not intended to forecast or predict future stock prices. The
potential realizable value at 5% and 10% appreciation is calculated by
assuming that the initial public offering price appreciates at the
indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at its
appreciated price.

Aggregate Option Exercises in Fiscal 1998 and Year-End Option Values

None of Messrs. Brochu, Nelson or Walter exercised any options during fiscal
1998, nor did any of Mesdames Huebner or Cox. The following table sets forth
certain information regarding unexercised stock options held by our current and
former executive officers as of December 31, 1998.

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Value Realized Options at Fiscal In-the-Money Options at
Acquired (Market Price at Year-End Fiscal Year-End($)(1)
on Exercise Less ------------------------- -------------------------
Name Exercise Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Brochu....... -- $ -- 159,249 428,750 $1,273,992 $3,430,000
Elizabeth J. Huebner.... -- -- -- 106,666 -- 693,329
Kim M. Nelson........... -- -- -- -- -- --
Patricia L. Cox......... -- -- -- 100,000 -- 800,000
Edward L. Walter........ -- -- -- -- -- --
Steven L. Sperry........ 165,000 349,800 825,947 -- 6,707,576 --
David Hanafee........... -- -- 29,164 -- 233,312 --
</TABLE>
- --------
(1) Calculated on the basis of an assumed initial public offering price of
$11.00 per share.

Change of Control Agreements

Primus has entered into an agreement with each of Michael A. Brochu, Kim M.
Nelson, Edward L. Walter, Elizabeth J. Huebner and Patricia L. Cox, that
provides for certain compensation

49
<PAGE>

arrangements upon and following a change of control of the company. The
agreements expire one year following a change of control. A change of control
occurs under the agreements when:

. Primus completes a merger, consolidation or share exchange after which
its prior shareholders own less than a majority of the surviving
corporation

.Primus sells substantially all of its assets not in the ordinary course of
business
.one person or entity acquires a majority of Primus's outstanding shares

Immediately upon a change of control, 50% of the unvested options of each
executive become exercisable. Our 1995 and 1999 stock incentive compensation
plans also provide for vesting of all unvested options in certain circumstances
involving a merger, sale or liquidation of Primus.

If one of our executives is terminated by us without cause or terminates his
or her employment due to a substantial change in his or her position or
responsibilities during the year following a change of control, then he or she
will be entitled to his or her accrued annual base salary, bonus and
commissions through the date of termination plus severance pay equal to one-
half of annual base salary. Further, all of his or her outstanding options will
become immediately exercisable. To the extent the employee regularly receives
commissions as part of his or her compensation, we will also pay commissions to
the terminated employee for sales to his or her former accounts that occur
during the six months following termination.

Separation Agreement

On November 6, 1998, we entered into a separation agreement with Mr. Sperry
in connection with his resignation as one of our officers and a member of our
board of directors. Under this agreement, we paid Mr. Sperry a lump sum
separation payment of $75,000.

Employment Arrangement

In connection with hiring Ms. Huebner, we agreed to grant her, during the
first three years of her employment, options to purchase 200,000 shares of
common stock at an exercise price equal to the fair market value on the date of
grant. As of March 31, 1999 we had granted all but 56,668 options.

Employee Benefit Plans

1999 Stock Incentive Compensation Plan

Our board of directors and shareholders have adopted our 1999 incentive
compensation plan. The purpose of this plan is to enhance long-term shareholder
value by offering opportunities to selected persons to participate in our
growth and success, and to encourage them to remain in the service of Primus
and its subsidiaries and to acquire and maintain ownership in our company. Upon
effectiveness of this offering, the 1999 incentive compensation plan will
replace our current stock option plans for purposes of all future stock
incentive awards. The 1999 incentive compensation plan provides for awards of
stock options, shares of common stock or units denominated in common stock, all
of which may be subject to restrictions. The board has reserved a total of
1,166,667 shares of common stock under the plan, plus an automatic annual
increase, to be added on the first day of our fiscal year beginning in 2001,
equal to the lesser of 666,666 shares and 5% of the average common shares
outstanding as used to calculate fully diluted earnings per share as reported
in our annual report to shareholders for the preceding year. Shares formerly
available for issuance under our 1995 option plan will become available under
the 1999 incentive compensation plan, as will shares that become available when
options granted under our 1993 and 1995 plans expire or are otherwise cancelled
without exercise.

50
<PAGE>

Stock Option Grants. The board of directors or a committee appointed by the
board will serve as the plan administrator of the 1999 incentive compensation
plan. The plan administrator will have the authority to select individuals to
receive options under the 1999 incentive compensation plan and to specify the
terms and conditions of each option granted (incentive or nonqualified), the
exercise price (which, for incentive stock options, must be at least equal to
the fair market value of the common stock on the date of grant), the vesting
provisions and the option term. For purposes of the 1999 incentive compensation
plan, fair market value means the average of the high and low per share sales
price as reported on the Nasdaq National Market on the date of grant. Unless
the plan administrator decides otherwise, and to the extent required for
incentive stock options by the Internal Revenue Code of 1986, as amended, an
option granted under the 1999 incentive compensation plan will expire 10 years
from the date of grant.

Stock Awards. The plan administrator is authorized under the 1999 incentive
compensation plan to award shares of common stock or awards denominated in
units of common stock on such terms and conditions and subject to restrictions
established by the plan administrator in its sole discretion. The terms,
conditions and restrictions may be based, without limitation, on the manner in
which shares subject to stock awards held while restricted and the
circumstances under which a holder's service with us is terminated. Holders of
restricted stock are shareholders of Primus and have, subject to certain
restrictions, all the rights of shareholders with respect to their shares.

Adjustments. The plan administrator will make proportional adjustments to the
number of shares issuable under the 1999 incentive compensation plan and to
outstanding awards in the event of stock splits or other capital adjustments.

Corporate transactions. In the event of certain corporate transactions, such
as a merger or sale of Primus, each outstanding option will be assumed or
replaced with a comparable award by Primus' successor corporation or parent
thereof. If the successor will not assume or replace the options, they will
automatically accelerate and become 100% vested and exercisable immediately
before the corporate transaction. To the extent that options accelerate due to
a corporate transaction, the restrictions on restricted stock awards also will
lapse.

1999 Employee Stock Purchase Plan

Our board of directors and shareholders have adopted our 1999 employee stock
purchase plan. We will implement the stock purchase plan upon the effectiveness
of this offering to encourage employees to remain employed by Primus or its
subsidiaries. We intend for this plan to qualify under Section 423 of the
Internal Revenue Code.

This plan permits eligible employees of Primus and its subsidiaries to
purchase common stock through payroll deductions of up to 10% of their
compensation. Under this plan, no employee may purchase common stock worth more
than $25,000 in any calendar year, valued as of the first day of each offering
period. Further, no employee may purchase more than 500 shares in any six-month
purchase period.

We will implement the stock purchase plan with twenty-four-month offering
periods, each of which will consist of four six-month purchase periods, except
that the first offering period will begin on the effectiveness of this offering
and end on December 31, 1999. Subsequent offering periods will begin on each
January 1 and July 1. The price of the common stock purchased under this plan
will be the lesser of 85% of the fair market value on the first day of an
offering period and 85% of the fair market value on the last day of a purchase
period, except that the purchase price for the first offering period will be
equal to the lesser of 100% of the initial public offering price of the common
stock and

51
<PAGE>

85% of the fair market value on the last day of each purchase period. Under the
circumstances specified in the plan, we may change the purchase date during an
offering period and terminate the plan at the end of any purchase period to
avoid our incurring adverse accounting charges. This plan terminates ten years
after the date of adoption by our board of directors, but the board may
terminate it at any earlier time. We have not yet issued any shares of common
stock under this plan.

Employees generally will be eligible to participate in the plan if they are
customarily employed by Primus for more than 20 hours per week and more than
five months in a calendar year, and are not (and would not become as a result
of being granted an option under the plan) 5% shareholders of Primus or its
subsidiaries.

We authorized the issuance under this plan of a total of 600,000 shares of
common stock, plus an automatic annual increase, to be added on the first day
of our fiscal year beginning in 2000, equal to the lesser of 200,000 shares and
1.7% of the average common shares outstanding as used to calculate fully
diluted earnings per share as reported in Primus's annual report to
shareholders for the preceding year, or a lesser amount determined by our board
of directors. Any shares from increases in previous years that are not actually
issued will be added to the aggregate number of shares available for issuance
in future periods.

In the event of a merger, consolidation or acquisition by another corporation
of all or substantially all of our assets, each outstanding option to purchase
shares under the stock purchase plan will be assumed or an equivalent option
substituted by the successor corporation. If the successor corporation refuses
to assume or substitute for the option, the offering period during which a
participant may purchase stock will be shortened to a specified date before the
proposed transaction. Similarly, in the event of a proposed liquidation or
dissolution of Primus, the offering period during which a participant may
purchase stock will be shortened to a specified date before the date of the
proposed liquidation or dissolution.

1995 Stock Incentive Compensation Plan

Our board of directors and shareholders approved a stock incentive
compensation plan in 1995. In April 1999, we increased the shares available for
issuance under the 1995 plan by 500,000 shares. The 1995 plan provides for
grants of incentive stock options, non-qualified stock options, stock awards
and stock appreciation rights. We will not grant further options under our 1995
plan after effectiveness of this offering. As of March 31, 1999, options to
purchase 2,671,881 shares of our common stock were outstanding under the 1995
plan and 24,641 shares remained available for grant.

Non-Employee Director Stock Option Plan

Our board of directors and shareholders approved a non-employee director plan
in 1994. Our board discontinued further grants under our 1994 plan upon
adoption of our 1995 plan. As of March 31, 1999, options to purchase 8,332
shares of our common stock were outstanding under the 1994 plan.

Employee Stock Option and Restricted Stock Award Plan

Our board of directors and shareholders approved an employee stock option and
restricted stock award plan in 1993. Our board discontinued further grants
under the 1993 plan upon adoption of our 1995 plan. As of March 31, 1999,
options to purchase 235,214 shares of our common stock were outstanding under
our 1993 plan.

52
<PAGE>

CERTAIN TRANSACTIONS

In November 1995 we entered into a joint venture agreement with Trans Cosmos,
to establish Primus KK, a Japanese company. We hold a 14.3% interest in Primus
KK and have one of the six board seats.

In November 1995, we issued 60,606 shares of common stock to Yuriko
Matsumoto, the wife of Mr. Matsumoto, at a per share price of $1.65. In
September 1996, Trans Cosmos USA, Inc. purchased 313,008 shares and EnCompass
Group purchased 500,000 shares of our Series A preferred stock for a total of
$1.0 million. Mr. Matsumoto is the president and chief executive officer of
EnCompass Group, Inc., a wholly owned subsidiary of Trans Cosmos. In July 1998,
EnCompass Group purchased 108,204 shares of our Series D preferred stock for
$271,000 and Trans Cosmos purchased 600,000 shares of our Series D preferred
stock for $1.5 million. In September 1996 and March 1997, Trans Cosmos USA, an
affiliate of Trans Cosmos, bought 500,000 shares of our Series B preferred
stock and 1,000,000 shares of our Series C preferred stock, respectively, for
an aggregate price of $3.0 million. In connection with a bridge loan financing
in June 1998, we granted EnCompass Group warrants for 6,000 shares of Series D
preferred stock at an aggregate exercise price of $15,000. The bridge loan
converted into Series D preferred stock in July 1998. The shares of preferred
stock and warrants held by affiliates of Mr. Matsumoto will convert immediately
prior to closing this offering into 1,071,401 shares of common stock.

In September 1997, we entered into an exclusive, worldwide distribution
agreement with Trans Cosmos for Kanji versions of our SolutionBuilder product.
Trans Cosmos bought $2.0 million of SolutionBuilder licenses and related
upgrade rights. Trans Cosmos pays us a portion of its technical support income
related to our SolutionBuilder product. Trans Cosmos's distribution rights
terminate on the earlier of September 26, 2000 or upon Trans Cosmos's sale of
all of its SolutionBuilder licenses.

In September 1997, we granted Primus KK a first right of refusal with respect
to distribution of Asian-language versions of our products. In March 1999, we
entered into a one-year software marketing and distribution agreement with
Primus KK. The agreement provides Primus KK with exclusive distribution rights
in Japan, and nonexclusive distribution rights in Korea, to English and
Japanese versions of our SolutionExplorer and SolutionPublisher products.
Primus KK pays us royalty on license and maintenance fees for those products.
Unless either party terminates, the agreement automatically renews for
additional one-year periods. The agreement has customary termination provisions
for breach and for failure by Primus KK to meet certain revenue and staffing
goals.

In February 1998, we entered into a service agreement with EnCompass
Globalization, Inc., an affiliate of Trans Cosmos, under which EnCompass
Globalization agreed to provide us with localization, translation and testing
services for Japanese versions of our SolutionSeries products. EnCompass
Globalization provides its services on a time and materials basis. The term of
the agreement is not fixed, but specific projects are described in mutually
agreed statements of work that establish time frames in which the projects are
to be completed.

In April 1999, we agreed to issue an aggregate of 18,400 shares of common
stock to Primus KK for issuance to an employee and granted fully vested options
to purchase an aggregate of 10,000 shares of common stock to Primus KK
employees.

53
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of our common stock as of May 31, 1999 by:

. each person or group that we know owns more than 5% of our common stock
. our chief executive officer, two of our former executive officers whose
compensation exceeded $100,000 in 1998 and our four other executive
officers whose compensation is expected to exceed $100,000 in 1999
. each selling shareholder
. each of our directors
. all of our directors and executive officers as a group
Beneficial ownership is determined in accordance with rules of the Securities
and Exchange Commission and includes shares over which the indicated beneficial
owner exercises voting and/or investment power. Shares of our common stock
subject to options currently exercisable or exercisable within 60 days of
May 31, 1999 are deemed outstanding for computing the percentage ownership of
the person holding the options but are not deemed outstanding for computing the
percentage ownership of any other person. Except as otherwise indicated, we
believe the beneficial owners of the common stock listed below, based on
information furnished by them, have sole voting and investment power with
respect to the number of shares listed opposite their names.

<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding
Number of Shares -----------------
Beneficially Owned Number of Shares Prior to After
Name and Address Prior to Offering Being Offered Offering Offering
---------------- ------------------ ---------------- -------- --------
<S> <C> <C> <C> <C>
Entities affiliated with
Trans Cosmos, Inc.(1)
777-108th Avenue, N.E.,
Suite 2300
Bellevue, WA 98004...... 1,810,291 -- 19.0% 13.4%

Entities affiliated with
Oak Investment Partners
VI,
Limited Partnership(2)
Suite 1300
525 University Avenue
Palo Alto, CA 94301..... 1,576,773 -- 16.6% 11.7%

Norwest Equity Partners,
V, L.L.P.(3)
Suite 250
245 Lytton Avenue
Palo Alto, CA 94301..... 1,441,166 -- 15.2% 10.7%

Snowdon, L.P.(4)
1119 St. Paul Street
Baltimore, MD 21117..... 862,659 -- 9.1% 6.4%

Steven L. Sperry(5)
2305 East Harrison
Seattle, WA 98112....... 828,448 100,000 8.1% 5.1%

J.Z. Knight
14507 Yelm Highway
Southeast
Yelm, WA 98597.......... 582,036 -- 6.1% 4.3%

Michael A. Brochu(6)..... 225,584 -- 2.3% 1.6%

Patricia L. Cox(7)....... 33,333 -- * *
</TABLE>

54
<PAGE>

David M. Hadley......... 268,675 50,000 2.8% 1.6%

David Hanafee........... 29,167 -- * *

Elizabeth J.
Huebner(7)............. 28,888 -- * *

Edward L. Walter........ -- -- -- --

Antonio M. Audino(8).... 97,221 -- 1.0% *

Promod Haque(9)......... 1,449,499 -- 15.2% 10.7%

Fredric W. Harman(10)... 1,585,106 -- 16.6% 11.7%

Yasuki Matsumoto(11).... 1,171,004 -- 12.3% 8.7%

Directors and executive
officers as a group (9
persons).............. 4,590,635 -- 46.7% 33.2%
</TABLE>
- --------
* less than one percent

(1) Represents the following: (a) 200,000 shares issuable upon conversion of
preferred stock held by Trans Cosmos; (b) 493,225 shares issuable upon
conversion of the preferred stock held by Trans Cosmos USA, a wholly-owned
subsidiary of Trans Cosmos; (c) 2,000 shares issuable on exercise of
warrants and 241,068 shares issuable upon conversion of the preferred
stock held by EnCompass Group, a wholly-owned subsidiary of Trans Cosmos;
(d) 16,667 shares of common stock owned by TCI Club, Inc., an affiliate of
Trans Cosmos, Inc. and (e) 857,331 shares of common stock and shares
issuable upon conversion of preferred stock held by U.S. Information
Technology Financing, L.P., an affiliate of EnCompass Group.

(2) Represents the following: (a) 8,632 shares issuable on exercise of
warrants and 1,532,191 shares issuable upon conversion of the preferred
stock held by Oak Investment Partners VI, Limited Partnership; and (b) 201
shares issuable on exercise of warrants and 35,749 shares issuable upon
conversion of the preferred stock held by Oak VI Affiliates Fund, L.P. Oak
Associates VI, L.L.C. and Oak VI Affiliates, L.L.C. are general partners
of Oak Investment Partners VI and Oak VI Affiliates, respectively, and
thus are each deemed to beneficially own the respective shares.

(3) Represents the following: (a) 7,833 shares issuable on exercise of
warrants and 1,433,333 shares issuable upon conversion of preferred stock
held by Norwest Equity Partners.

(4) Represents shares issuable upon conversion of preferred stock. Snowdon
L.P. is a limited partnership, the managing general partner of which is
Nevis Capital Management, Inc. Nevis Capital Management, Inc. is owned and
controlled by Jon Baker and David Wilmerding.

(5) Represents 169,167 shares held directly by Mr. Sperry and 659,281 shares
subject to options held by Mr. Sperry that are exercisable currently or
within 60 days of May 31, 1999.

(6) Represents 1,000 shares held directly by Mr. Brochu and 224,584 shares
subject to options that are exercisable currently or within 60 days of May
31, 1999. Excludes 20,416 shares subject to options, that are exercisable
currently or within 60 days of May 31, 1999, held by Delialah D. Brochu,
Mr. Brochu's former spouse.

(7) Represents shares subject to options that are exercisable currently or
within 60 days of May 31, 1999.

55
<PAGE>

(8) Includes 9,999 shares subject to options that are exercisable currently or
within 60 days of May 31, 1999.

(9) Represents the following: (a) 8,333 shares subject to options that are
exercisable currently or within 60 days of May 31, 1999; and (b) 1,441,166
shares issuable upon exercise of warrants and conversion of preferred
stock held by Norwest Equity Partners, V. L.L.P. Mr. Haque is a partner in
Norwest Venture Partners, an affiliate of Norwest Equity Partners V.
L.L.P. Mr. Haque disclaims beneficial ownership of the shares held by
Norwest Equity Partners, V, L.L.P. except to the extent of his pecuniary
interest arising from his interest in Norwest Venture Capital.

(10) Represents the following: (a) 8,333 shares subject to options that are
exercisable currently or within 60 days of May 31, 1999; and (b) 1,576,773
shares issuable upon exercise of warrants and conversion of preferred
stock held by Oak Investment Partners VI and Oak VI Affiliates Fund, L.P.
Mr. Harman is Managing Member of Oak Associates VI, L.L.C., the general
partner of Oak Investment Partners VI, and Managing Member of Oak VI
Affiliates, L.L.C., the general partner of Oak VI Affiliates Fund, L.P.
Mr. Harman disclaims beneficial ownership of the shares held by Oak
Investment Partners VI and Oak VI affiliates, except to the extent of his
pecuniary interest arising from his interest in Oak Associates VI, L.L.C.

(11) Represents the following: (a) 243,068 shares issuable upon exercise of
warrants and conversion of preferred stock held by EnCompass Group; (b)
857,331 shares of common stock, including shares issuable upon conversion
of preferred stock held by U.S. Information Technology Financing, L.P.;
(c) 9,999 shares subject to options that are exercisable currently or
within 60 days of May 31, 1999; and (d) 60,606 shares held by his wife,
Yuriko Matsumoto. Mr. Matsumoto disclaims beneficial ownership of the
shares beneficially held by U.S. Information Technology Financing, L.P.,
EnCompass Group and Yuriko Matsumoto.

56
<PAGE>

DESCRIPTION OF CAPITAL STOCK

We are authorized to issue up to 50,000,000 shares of common stock, $.025 par
value per share, and 15,000,000 shares of preferred stock, $.001 par value per
share. The following summary of certain provisions of the common stock and
preferred stock is not complete and may not contain all the information you
should consider before investing in the common stock. You should read carefully
our articles of incorporation, which are included as an exhibit to the
Registration Statement, of which this prospectus is a part.

Common Stock

As of March 31, 1999, assuming conversion of all outstanding shares of
preferred stock and exercise of warrants that expire on closing of this
offering, there were 9,501,796 shares of common stock outstanding held of
record by 188 shareholders. Following this offering, there will be 13,501,796
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise of options or warrants outstanding as of
March 31, 1999 other than the warrants that expire upon the effectiveness of
this registration statement). The holders of common stock are entitled to one
vote per share on all matters to be voted on by the shareholders. Subject to
preferences of any outstanding shares of preferred stock, the holders of common
stock are entitled to receive ratably any dividends the board of directors
declares out of funds legally available for the payment of dividends. If Primus
is liquidated, dissolved or wound up, the holders of common stock are entitled
to share pro rata all assets remaining after payment of liabilities and
liquidation preferences of any outstanding shares of preferred stock. Holders
of common stock have no preemptive rights or rights to convert their common
stock into any other securities. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable, and the shares of common stock to be
issued following this offering will be fully paid and nonassessable.

Preferred Stock

Upon the closing of this offering, each outstanding share of Series A
convertible preferred stock will convert into 0.41 shares of common stock. Each
outstanding share of Series B preferred stock, Series C preferred stock and
Series D preferred stock will convert into 0.333 shares of Common Stock.
Thereafter, pursuant to our articles of incorporation, the board of directors
will have the authority, without further action by the shareholders, to issue
up to 15,000,000 shares of preferred stock in one or more series. The board
also has the authority to fix the designations, powers, preferences, privileges
and relative, participating, optional or special rights and the qualifications,
limitations or restrictions of any preferred stock issues, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the common
stock. The board of directors, without shareholder approval, can issue
preferred stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms that could delay or
prevent a change in control of Primus or make removal of management more
difficult. Additionally, the issuance of preferred stock may decrease the
market price of the common stock and may adversely affect the voting and other
rights of the holders of common stock. We have no plans to issue any preferred
stock.

Registration Rights

After this offering, the holders of 4,985,326 shares of common stock will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act, pursuant to a

57
<PAGE>

registration rights agreement. Under the terms of the registration rights
agreement, if we propose to register any of our securities under the Securities
Act, either for our own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of the
registration and to include shares of common stock in the registration at our
expense. Additionally, such holders are entitled to certain demand registration
rights pursuant to which they may require us to file a registration statement
under the Securities Act at our expense with respect to their shares of common
stock. Further, such holders may require us to file additional registration
statements on Form S-3 at our expense. All of these registration rights are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration and our right to decline to effect such a registration before the
earlier of February 2000 and six months after the closing of this offering.

Antitakeover Effects of Certain Provisions of Articles of Incorporation, Bylaws
and Washington Law

As noted above, our board of directors, without shareholder approval, has the
authority under our articles of incorporation to issue preferred stock with
rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change in control of Primus or make removal of management
more difficult.

Election and Removal of Directors. Effective with the first annual meeting of
shareholders following this offering, our articles of incorporation provide for
the division of our board of directors into three classes, as nearly as equal
in number as possible, with the directors in each class serving for a three-
year term, and one class being elected each year by our shareholders. Directors
may be removed only for cause. Because this system of electing and removing
directors generally makes it more difficult for shareholders to replace a
majority of the board of directors, it may tend to discourage a third party
from making a tender offer or otherwise attempting to gain control of Primus
and may maintain the incumbency of the board of directors.

Approval for Certain Business Combinations. Our articles of incorporation
require that certain business combinations (including a merger, share exchange
and the sale, lease, exchange, mortgage, pledge, transfer or other disposition
or encumbrance of a substantial part of our assets other than in the usual and
regular course of business) be approved by the holders of not less than two-
thirds of the outstanding shares, unless such business combination has been
approved by a majority of the board of directors, in which case the affirmative
vote required shall be a majority of the outstanding shares.

Shareholder Meetings. Under our articles of incorporation and bylaws, our
shareholders may call a special meeting only upon the request of holders of at
least 25% of the outstanding shares. Additionally, the board of directors, the
chairman of the board and the president may call special meetings of
shareholders.

Requirements for Advance Notification of Shareholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
shareholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.

Washington law imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a

58
<PAGE>

"target corporation," with certain exceptions, from engaging in certain
significant business transactions with an "acquiring person," which is defined
as a person or group of persons that beneficially owns 10% or more of the
voting securities of the target corporation, for a period of five years after
such acquisition, unless the transaction or acquisition of shares is approved
by a majority of the members of the target corporation's board of directors
prior to the time of acquisition. Such prohibited transactions include, among
other things,

. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person
. termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares
. allowing the acquiring person to receive any disproportionate benefit as
a shareholder

After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of Primus.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.

59
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock
and a significant public market for the common stock may not develop or be
sustained after this offering. Future sales of substantial amounts of common
stock in the public market, including shares issued upon exercise of
outstanding options and warrants, could harm market prices and could impair our
ability to raise capital through the sale of our equity securities.

<TABLE>
<CAPTION>
Approximate
shares
Days after the eligible
date for future
of this prospectus sale Comment
- ------------------ ----------- ------------------------------------------------
<S> <C> <C>
Upon
effectiveness.... 224,829 Freely tradeable shares and shares eligible for
sale under Rule 144(k) that are not subject to
180-day lockup.
90 days........... 18,150 Shares eligible for sale under Rule 144, 144(k)
or 701 that are not subject to 180-day lockup.
180 days.......... 8,863,297 Lockup released; shares eligible for sale under
Rule 144, 144(k) or 701.
Over 180 days..... 245,520 Restricted securities held for one year or less.
</TABLE>

After this offering, we will have outstanding 13,501,796 shares of common
stock (14,124,296 shares if the underwriters' over-allotment option is
exercised in full). Of these shares, the 4,150,000 shares that we expect to
sell in this offering (including the 150,000 shares sold by the selling
shareholders) (4,772,500 shares if the underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction under the
Securities Act, except for shares purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act.

The remaining 9,351,796 shares of common stock that will be outstanding after
this offering will be restricted shares. We issued and sold the restricted
shares in private transactions in reliance on exemptions from registration
under the Securities Act. Restricted shares may be sold in the public market
only if they are registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities Act, as summarized
below.

An aggregate of 9,092,150 restricted shares are subject to lock-up agreements
or other contractual restrictions providing that the shareholder will not
offer, sell, contract to sell or otherwise dispose of the shares for 180 days
after the date of this prospectus. We also have entered into an agreement with
the underwriters that we will not offer, sell or otherwise dispose of common
stock for a period of 180 days from the date of this prospectus.

Ninety days after the date of this prospectus, 18,150 shares that are not
subject to lock-up agreements will be eligible for sale in the public market
under Rules 144 and 701. When the lock-up agreements expire, an additional
8,863,297 restricted shares will be eligible for immediate sale (of which
6,099,897 shares will be subject to certain volume, manner of sale and other
limitations under Rule 144). The remaining 245,520 restricted shares will be
eligible for sale pursuant to Rule 144 on the expiration of various one-year
holding periods over six months after the lock-up period expires.

Following the expiration of the lock-up periods, shares issued upon exercise
of options that we granted before the date of this prospectus will be available
for sale in the public market under Rule 701. Rule 701 permits resales of these
shares in reliance upon Rule 144 under the Securities Act but without
compliance with certain restrictions, including the holding-period requirement,
imposed under Rule 144.

60
<PAGE>

In general under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person who has beneficially owned restricted shares
for at least one year including the holding period of any prior owner except an
affiliate of Primus would be entitled to sell in any three-month period up to
the greater of

. 1% of the then-outstanding shares of common stock (approximately 135,000
shares immediately after this offering) and
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 in connection with the
sale.

Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who has not been an affiliate of ours at any time
during the three months before a sale, and who has beneficially owned the
restricted shares for at least two years is entitled to sell them without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.

Within 90 days, after the effectiveness of this offering, we will file a
registration statement on Form S-8 to register shares of common stock subject
to outstanding options or reserved for issuance under our stock plans.
Approximately 4,602,094 shares will be registered on the Form S-8. Common stock
issued upon exercise of outstanding vested options is available for immediate
resale in the open market after the filing of a registration statement on
Form S-8, except where the Rule 144 limitations, the lock-up agreements and the
vesting restrictions we imposed apply.

Also, six months following this offering, the holders of 4,985,326 shares of
outstanding common stock will be entitled to require us to register their
shares for sale in the public market. See "Description of Capital Stock--
Registration Rights."

61
<PAGE>

UNDERWRITING

The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC, U.S. Bancorp Piper
Jaffray Inc. and FAC/Equities, a division of First Albany Corporation, have
severally agreed with us and the selling shareholders, subject to the terms and
conditions set forth in the underwriting agreement, to purchase from us and the
selling shareholders the number of shares of common stock set forth opposite
their respective names below. The underwriters are committed to purchase and
pay for all such shares if any are purchased.

<TABLE>
<CAPTION>
Number
Underwriter of shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc................................
Hambrecht & Quist LLC............................................
U.S. Bancorp Piper Jaffray Inc...................................
First Albany Corporation ........................................
---------
Total.......................................................... 4,150,000
=========
</TABLE>

The representatives have advised us and the selling shareholders that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession of not in excess of $ per
share, of which $ may be reallowed to other dealers. After the initial
public offering, the public offering price, concession and reallowance to
dealers may be reduced by the representatives. No such reduction shall change
the amount of proceeds to be received by us and the selling shareholders as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.

The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Over-allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 622,500 additional shares of common stock at the same price per
share as we will receive for the 4,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the 4,150,000 shares offered
hereby. If purchased, such additional shares will be sold by the underwriters
on the same terms as those on which the 4,150,000 shares are being sold. We
will be obligated, pursuant to the option, to sell shares to the extent the
option is exercised. The underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered hereby. If such option is exercised in full, the total public offering
price of the 4,622,500 shares we sell to the underwriters, underwriting
discounts and commissions on such shares and total proceeds to us from the sale
of such shares will be $ , $ and $ , respectively.

62
<PAGE>

Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters, the selling shareholders and us against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.

Lock-up Agreements. Under the terms of lock-up agreements, each of our
officers and directors and certain of our shareholders have agreed with the
representatives, for a period of 180 days after the date of this prospectus,
subject to certain exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to,
any shares of common stock, or any securities convertible into or exchangeable
for shares of common stock, now owned directly by such holders or with respect
to which they have the power of disposition, without the prior written consent
of BancBoston Robertson Stephens. However, BancBoston Robertson Stephens may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the lock-up agreements. There are no
agreements between the representatives and any of our shareholders providing
consent by the representatives to the sale of shares prior to the expiration of
the period 180 days after the date of this prospectus.

Future Sales. In addition, we have agreed that during the 180 days after the
date of this prospectus, we will not, subject to certain exceptions, without
the prior written consent of BancBoston Robertson Stephens:

. Consent to the disposition of any shares held by shareholders prior to
the expiration of the period of 180 days after the date of this
prospectus; or

. Issue, sell, contract to sell or otherwise dispose of any shares of
common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than the sale of shares in
this offering, the issuance of common stock upon the exercise of
outstanding options or warrants or our issuance of options or shares
under our 1999 stock incentive compensation plan and our 1999 employee
stock purchase plan.

Listing. The common stock has been approved for listing on the Nasdaq
National Market under the symbol "PKSI."

No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby will be determined through negotiations
between us and the representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.

Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Exchange Act, certain persons participating
in this offering may engage in transactions, including stabilizing bids,
syndicate covering transactions or the imposition of penalty bids, that 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 this offering. A "penalty bid"
is an arrangement permitting the

63
<PAGE>

representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this 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 us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

Directed Share Program. At our request, the underwriters have reserved up to
207,500 shares of common stock to be issued by us and offered hereby for sale,
at the initial public offering price, to our directors, officers, employees,
business associates and other related persons. The number of shares of common
stock available for sale to the general public will be reduced to the extent
such individuals purchase such reserved shares. Any reserved shares which are
not so purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered hereby.

LEGAL MATTERS

Certain legal matters will be passed on for Primus by Perkins Coie LLP,
Seattle, Washington. As of March 31, 1999, an investment partnership comprised
of certain members of Perkins Coie beneficially owned 4,833 shares of our
common stock. Certain legal matters will be passed on for the underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in this prospectus and Registration
Statement for the years ended December 31, 1996, 1997 and 1998, as set forth in
their reports, which are included in this prospectus and Registration
Statement. Our consolidated financial statements are included herein in
reliance on their reports, given on their authority as experts in accounting
and auditing.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This prospectus, which forms a part of the Registration
Statement, does not contain all the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in
this prospectus to any contract or other document of Primus, such references
are not necessarily complete and you should refer to the exhibits attached to
the Registration Statement for copies of the actual contract or document. You
may review a copy of the Registration Statement, including exhibits and
schedule filed therewith, at the Securities and Exchange Commission's public
reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Securities and
Exchange Commission located at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may also obtain copies of such materials from the
Public Reference Section of the Securities and Exchange Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, such as Primus, that file
electronically with the Securities and Exchange Commission.

64
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2

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

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

Consolidated Statements of Shareholders' Deficit............................ F-5

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

Notes to Consolidated Financial Statements.................................. F-7
</TABLE>

F-1
<PAGE>

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Shareholders
Primus Knowledge Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Primus
Knowledge Solutions, Inc. as of December 31, 1997 and 1998, and the related
consolidated statements of operations, shareholders' deficit, and cash flows
for each of the three years in the period ended December 31, 1998. 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 consolidated financial position of Primus
Knowledge Solutions, Inc. at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

Ernst & Young LLP

Seattle, Washington
March 12, 1999,
except for Note 14, as to which the date is
May 3, 1999.

F-2
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
Pro Forma
Shareholders'
December 31 Equity at
------------------ March 31, March 31,
1997 1998 1999 1999
-------- -------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 711 $ 2,583 $ 2,423
Securities available-for-sale.. 610 2,833 1,773
Accounts receivable, (including
amounts due from related
parties of $1,065 at March 31,
1999), net of reserves of $70,
$371, and $371 at December 31,
1997 and 1998 and at March 31,
1999, respectively............ 2,555 4,999 4,777
Prepaid royalties.............. 73 166 65
Other current assets........... 70 307 300
-------- -------- --------
Total current assets...... 4,019 10,888 9,338
Property and equipment, net...... 1,208 1,914 1,922
Accounts receivable, long term... -- 600 --
Deposits and other assets........ 47 285 286
-------- -------- --------
Total assets.............. $ 5,274 $ 13,687 $ 11,546
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Line of credit................. $ 500 $ -- $ --
Accounts payable and accrued
liabilities................... 757 2,239 2,059
Compensation-related accruals.. 646 1,388 1,028
Long-term debt, current
portion....................... 417 444 616
Obligations under capital
leases, current............... 86 28 25
Deferred revenue, including
related-party amounts of
$1,969, $1,395, and $1,395 at
December 31, 1997 and 1998 and
March 31, 1999, respectively.. 3,570 7,605 6,709
-------- -------- --------
Total current
liabilities.............. 5,976 11,704 10,437
Obligations under capital leases,
net of current.................. -- 54 47
Long-term debt, net of current... 386 1,019 1,007
Redeemable convertible preferred
stock: Issued and outstanding
shares--7,910,568, 12,810,568
and 12,810,568 at December 31,
1997 and 1998, and March 31,
1999, respectively (none
pro forma), liquidation value of
$22,750......................... 10,399 23,157 23,373
Commitments (Note 10)

Shareholders' equity (deficit):
Preferred stock, $.001 par
value:
Authorized shares--
15,000,000...................
Convertible, issued and
outstanding shares--500,000
at December 31, 1997 and
1998 and March 31, 1999,
liquidation value of $1,000
(none pro forma)............. 1 1 1 $ --
Common stock, $.025 par
value:
Authorized shares--
50,000,000.................
Issued and outstanding
shares--3,894,277,
4,283,141 and 4,468,747 at
December 31, 1997 and
1998, and March 31, 1999,
respectively (9,435,407
pro forma)................. 97 107 112 236
Additional paid-in capital..... 9,350 9,184 9,975 33,225
Accumulated deficit............ (20,935) (31,538) (33,401) (33,401)
Accumulated other comprehensive
loss.......................... -- (1) (5) (5)
-------- -------- -------- --------
Total shareholders' equity
(deficit)................ (11,487) (22,247) (23,318) $ 55
-------- -------- -------- ========
Total liabilities and
shareholders' equity..... $ 5,274 $ 13,687 $ 11,546
======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License (including
amounts from related
parties of $30 and
$575 in 1997 and
1998,
respectively.)....... $ 1,459 $ 3,558 $ 6,034 $ 948 $ 2,901
Services.............. 963 1,631 2,576 417 1,010
---------- ---------- ---------- ---------- ----------
2,422 5,189 8,610 1,365 3,911
Cost of revenues:
License............... 137 97 375 20 145
Services.............. 1,090 2,306 2,434 518 790
---------- ---------- ---------- ---------- ----------
1,227 2,403 2,809 538 935
---------- ---------- ---------- ---------- ----------
Gross profit............ 1,195 2,786 5,801 827 2,976
Operating expenses:
Sales and marketing... 3,499 4,613 9,750 1,268 2,876
Research and
development.......... 2,459 2,538 3,286 713 1,065
General and
administrative....... 1,229 1,580 3,271 460 879
---------- ---------- ---------- ---------- ----------
Total operating
expenses............... 7,187 8,731 16,307 2,441 4,820
---------- ---------- ---------- ---------- ----------
Loss from operations.... (5,992) (5,945) (10,506) (1,614) (1,844)
Interest income......... 223 103 187 29 58
Interest expense........ (109) (143) (239) (41) (50)
---------- ---------- ---------- ---------- ----------
Loss before income
taxes.................. (5,878) (5,985) (10,558) (1,626) (1,836)
Income tax provision.... -- -- 45 -- 27
---------- ---------- ---------- ---------- ----------
Net loss................ (5,878) (5,985) (10,603) (1,626) (1,863)
Preferred stock
accretion.............. (208) (301) (545) (80) (215)
---------- ---------- ---------- ---------- ----------
Loss available to common
shareholders........... $ (6,086) $ (6,286) $ (11,148) $ (1,706) $ (2,078)
========== ========== ========== ========== ==========
Loss per share:
Basic and diluted..... $ (1.58) $ (1.62) $ (2.82) $ (0.44) $ (0.48)
Pro forma basic and
diluted.............. -- -- $ (1.32) -- $ (0.20)
Shares used in the
calculation of loss per
share:
Basic and diluted..... 3,857,448 3,883,514 3,957,310 3,903,007 4,313,329
Pro forma basic and
diluted.............. -- -- 8,020,050 -- 9,279,996
</TABLE>

See accompanying notes.

F-4
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)

<TABLE>
<CAPTION>
Accumulated Total
Preferred Stock Common Stock Additional Other Shareholders'
----------------- -------------------- Paid-in Comprehen- Accumulated Equity
Shares Par Value Shares Par Value Capital sive Income Deficit (Deficit)
------- --------- --------- --------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... -- $-- 3,848,414 $ 96 $8,754 $ -- $ (9,072) $ (222)
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $19........... 500,000 1 -- -- 980 -- -- 981
Exercise of stock
warrants............... -- -- 340 -- 1 -- -- 1
Exercise of stock
options................ -- -- 19,263 -- 24 -- -- 24
Stock options and
warrants issued in
exchange for services.. -- -- -- -- 20 -- -- 20
Repurchase of common
stock.................. -- -- (4,458) -- (9) -- -- (9)
Preferred stock
accretion.............. -- -- -- -- (208) -- -- (208)
Net loss................ -- -- -- -- -- -- (5,878) (5,878)
------- --- --------- ---- ------ ---- -------- --------
Balance at December 31,
1996................... 500,000 1 3,863,559 96 9,562 -- (14,950) (5,291)
Exercise of stock
options................ -- -- 30,718 1 80 -- -- 81
Stock options and
warrants issued in
exchange for services.. -- -- -- -- 9 -- -- 9
Preferred stock
accretion.............. -- -- -- -- (301) -- -- (301)
Net loss................ -- -- -- -- -- -- (5,985) (5,985)
------- --- --------- ---- ------ ---- -------- --------
Balance at December 31,
1997................... 500,000 1 3,894,277 97 9,350 -- (20,935) (11,487)
Exercise of stock
options and warrants... -- -- 467,753 12 821 -- -- 833
Repurchase of common
stock.................. -- -- (78,889) (2) (471) -- -- (473)
Stock options and
warrants issued in
exchange for services.. -- -- -- -- 29 -- -- 29
Preferred stock
accretion.............. -- -- -- -- (545) -- -- (545)
Comprehensive loss:
Foreign currency
translation loss...... -- -- -- -- -- (1) --
Net loss............... -- -- -- -- -- -- (10,603)
Total comprehensive
loss................... -- -- -- -- -- -- -- (10,604)
------- --- --------- ---- ------ ---- -------- --------
Balance at December 31,
1998................... 500,000 1 4,283,141 107 9,184 (1) (31,538) (22,247)
Exercise of stock
options (unaudited).... -- -- 105,378 3 833 -- -- 836
Repurchase of common
stock (unaudited)...... -- -- (12,500) -- (103) -- -- (103)
Sale of common stock
(unaudited)............ -- -- 92,728 2 276 -- -- 278
Preferred stock
accretion (unaudited).. -- -- -- -- (215) -- -- (215)
Comprehensive loss
(unaudited):
Foreign currency
translation loss
(unaudited)........... -- -- -- -- -- (4) --
Net loss (unaudited)... -- -- -- -- -- -- (1,863)
Total comprehensive loss
(unaudited)............ -- -- -- -- -- -- -- (1,867)
------- --- --------- ---- ------ ---- -------- --------
Balance at March 31,
1999 (unaudited)....... 500,000 $ 1 4,468,747 $112 $9,975 $ (5) $(33,401) $(23,318)
======= === ========= ==== ====== ==== ======== ========
</TABLE>

See accompanying notes.

F-5
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss....................... $(5,878) $(5,985) $(10,603) $(1,626) $(1,863)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Option and warrant
compensation expense........ 20 9 29 -- --
Depreciation and
amortization................ 317 403 434 115 132
Equity in loss of joint
venture..................... -- 50 -- -- --
Changes in assets and
liabilities:
Accounts receivable........ (1,337) (975) (3,044) 837 822
Prepaid royalties.......... (97) 238 (93) (255) 101
Other current assets....... (30) 72 (237) (72) 7
Deposits and other assets.. -- 2 (238) -- (1)
Accounts payable and
accrued liabilities....... 178 234 1,482 410 (180)
Compensation-related
accruals.................. (49) 355 742 (176) (360)
Deferred revenue........... 432 2,498 4,035 93 (896)
------- ------- -------- ------- -------
Net cash used in
operating activities.... (6,444) (3,099) (7,493) (674) (2,238)
Investing activities
Purchases of securities
available-for-sale............ (2,307) (1,311) (2,833) -- (1,773)
Proceeds from maturity of
securities available-for-
sale.......................... 2,007 1,000 610 610 2,833
Equipment purchases............ (907) (179) (1,059) (198) (139)
------- ------- -------- ------- -------
Net cash provided by
(used in) investing
activities.............. (1,207) (490) (3,282) 412 921
Financing activities
Proceeds from issuance of long-
term debt..................... 1,827 201 1,715 1,318 222
Repayments on long-term debt... (1,143) (306) (1,055) (1,383) (62)
Proceeds from (payments on)
line of credit................ -- 500 (500) 94 --
Principal payments on capital
lease obligations............. (164) (160) (85) (36) (10)
Proceeds from issuance of
common stock, net............. 15 82 833 43 1,114
Proceeds from issuance of
preferred stock, net.......... 8,902 1,969 12,213 -- --
Repurchase of common stock..... -- -- (473) -- (103)
Proceeds from exercise of stock
warrants...................... 1 -- -- -- --
------- ------- -------- ------- -------
Net cash provided by financing
activities...................... 9,438 2,286 12,648 36 1,161
Translation adjustment........... -- (1) -- (4)
------- ------- -------- ------- -------
Increase (decrease) in cash and
cash equivalents................ 1,787 (1,303) 1,872 (226) (160)
Cash and cash equivalents at
beginning of year............... 227 2,014 711 711 2,583
------- ------- -------- ------- -------
Cash and cash equivalents at end
of year......................... $ 2,014 $ 711 $ 2,583 $ 485 $ 2,423
======= ======= ======== ======= =======
Supplemental disclosure of cash
flow information
Interest paid.................. $ 109 $ 143 $ 179 $ 34 $ 35
======= ======= ======== ======= =======
</TABLE>

See accompanying notes.

F-6
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY

Description of Business

Primus Knowledge Solutions, Inc. (Primus or the Company) is a leading
provider of Web-based problem-resolution software for customer support and
self-service, which enables businesses to capture problem-resolution
information, solve customer problems, reuse solutions stored in the knowledge
base and share captured knowledge throughout the extended enterprise.

The Company's primary market is comprised largely of technology companies.
Sales are primarily generated through a domestic and European field sales
organization. Products sold domestically and internationally are developed by
the Company at its Seattle headquarters.

The Company is subject to certain business risks that could affect future
operations and financial performance. These risks include changing computing
environments, rapid technological change, development of new products, limited
protection of proprietary technology, and competitive pricing.

Liquidity

The Company continues to incur losses from operating results and had a
shareholders' deficit of $22.2 million at December 31, 1998. The Company had
shareholders' equity of approximately $910,000 at December 31, 1998 on a pro
forma basis, assuming conversion of preferred stock to common stock. As a
result of its significant research and development, customer support, and
selling and marketing efforts, the Company has required substantial working
capital to fund its operations. To date, the Company has financed its
operations principally through its equity offerings. Management believes that
under its current business plans, its current working capital, cash flows from
operating activities and funds available from borrowing arrangements are
sufficient to fund its operations and capital requirements through at least
December 31, 1999. Any substantial inability to achieve the current business
plan could have a material adverse impact on the Company's financial position,
liquidity, or results of operations and may require the Company to reduce
expenditures to enable it to continue operations through December 1999.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned foreign subsidiary, Primus UK. All significant intercompany
balances and transactions have been eliminated.

Interim Financial Information

The financial information at March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that Primus considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the entire year.

Investment in Primus KK

In December 1995, Primus invested $50,000 for a 50% interest in Primus KK, a
Japanese distributor, with Trans Cosmos Inc., a Japanese company (TCI), a
significant shareholder of the

F-7
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

1. Significant Accounting Policies and Liquidity--(continued)

Company. Primus accounted for its investment using the equity method and, wrote
down its investment to zero in March 1997 as a result of recognizing the
Company's portion of the investee's losses to date. In September 1997, Primus
and TCI renegotiated their agreement, reducing Primus' ownership to 14.3%. The
investment is accounted for using the cost method.

Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements. Changes in these
estimates and assumptions may have a material impact on the financial
statements. The Company has used estimates in determining certain provisions,
including uncollectible trade accounts receivable, useful lives for fixed
assets and intangibles, and tax liabilities.

Revenue Recognition

Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), was
issued in October 1997 by the American Institute of Certified Public
Accountants and was later amended by Statement of Position 98-4 ("SOP 98-4").
The Company adopted SOP 97-2 effective January 1, 1998. The Company believes
its current revenue recognition policies and practices are consistent with SOP
97-2 and SOP 98-4. However, full implementation guidelines for these standards
have not yet been issued. Once available, such implementation guidance could
lead to unanticipated changes in current revenue accounting practices, and such
changes could materially adversely affect the timing of the Company's future
revenues and earnings. Additionally, the AICPA recently issued SOP 98-9, which
provides certain amendments to SOP 97-2, which is effective for transactions
entered into beginning January 1, 2000. This pronouncement is not expected to
materially impact the Company's revenue recognition practices.

The Company generates revenues through two sources: (1) software license
revenues and (2) service revenues. Software license revenues are generated from
licensing the rights to use the Company's products directly to end-users and
indirectly through resellers. Service revenues are generated from sales of
maintenance services, consulting services, and training services performed for
customers that license the Company's products.

Revenues from software license agreements are recognized over the software
implementation period (if sold with initial implementation services) or upon
delivery of software (if sold without implementation services) if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to elements of the arrangement. At the current stage of the Company's
development, due to the relatively recent introduction of the Company's product
line, in an attempt to ensure customer satisfaction while building market
share, the limited number of installations of the Company's products to date
and the limited number of third-party vendors that currently provide
implementation services to the Company's users, the Company has concluded that
the implementation services are, as a practical matter, essential to the
software in initial software arrangements where we provide implementation
services. As such the Company recognizes revenue for these arrangements
following

F-8
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

1. Significant Accounting Policies and Liquidity--(continued)

the percentage-of-completion method over the implementation period. Percentage-
of-completion is measured by the percentage of implementation hours incurred to
date to estimated total implementation hours. This method is used because
management considers expended hours to be the best measure of progress on these
engagements.

Vendor-specific objective evidence is typically based on the price charged
when an element is sold separately, or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple element arrangements could consist of software
products, upgrades, enhancements, customer support services, or consulting
services. If an acceptance period is required, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period. The
Company enters into reseller arrangements that typically provide for sublicense
fees based on a percentage of list price. Sublicense fees are recognized when
reported by the reseller upon relicensing of the Company's product to end
users. The Company's agreements with its customers and resellers do not contain
product return rights.

Revenues from maintenance services are recognized ratably over the term of
the contract, typically one year. Consulting revenues are primarily related to
implementation services performed on a time-and-material basis under separate
service arrangements. Revenues from consulting and training services are
recognized as services are performed. In cases where license fee payments are
contingent on the acceptance of services, the Company defers recognition of
revenues from both the license and the service elements until the acceptance
criteria are met.

Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company's
cash equivalents consist of money market funds and commercial paper.

Securities Available-for-Sale

Securities available-for-sale consist primarily of investment-grade corporate
obligations, all of which mature within 12 months from purchase.

Investments classified as available-for-sale are stated at amortized cost,
which approximates fair market value, and mature within one year. Interest
earned on securities available-for-sale is included in interest income. The
cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and
accretion are included in interest income. Realized gains and losses and
declines in value judged to be other than temporary on securities available-
for-sale are also included in interest income. The cost of securities sold is
calculated using the specific identification method.

Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject the Company to a concentration
of credit risk consist principally of accounts receivable. The Company's
customer base is dispersed across different

F-9
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

1. Significant Accounting Policies and Liquidity--(continued)

geographic areas throughout North America, Europe, and Japan. During 1996 and
1997, no single customer accounted for 10% or more of total revenues. One
customer's purchases represented 12% of 1998 revenues. The Company does not
require collateral or other security to support credit sales, but provides an
allowance for bad debts based on historical experience and specifically
identified risks.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation.
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of the assets (three to seven years) or over the lease
term if it is shorter for leasehold improvements.

Fair Value of Financial Instruments

At December 31, 1998, the recorded amounts of cash and cash equivalents,
accounts receivable and payable, prepaid royalties, and accrued liabilities
reflected in the financial statements approximate fair value due to the short-
term nature of the instruments.

The fair value of the Company's long-term debt and obligations under capital
leases approximates the carrying value of these obligations.

Development Costs

Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. The Company believes its
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility; accordingly, software
costs incurred after the establishment of technological feasibility have not
been material and, therefore, have been expensed.

Federal Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
utilizes the liability method of accounting for income taxes. A deferred tax
asset or liability is recorded for all temporary differences between financial
and tax reporting. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized.

Foreign Currency Translation

The functional currency of the Company's foreign subsidiary is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars at
the exchange rate in effect on the balance sheet date. Revenues and expenses
are translated at the average rates of exchange prevailing during the year. The
translation adjustment resulting from this process is shown within accumulated
other comprehensive income (loss) as a component of shareholders' deficit.
Gains and losses on foreign currency transactions are

F-10
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

1. Significant Accounting Policies and Liquidity--(continued)

included in the consolidated statement of operations as incurred. To date,
gains and losses on foreign currency transactions have not been significant.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
APB No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123 (refer to Note 8).

Supplemental Disclosure on Noncash Investing and Financial Information

During 1998, the Company acquired 78,889 shares of common stock, that had
been issued for more than six months, valued at $473,332 in exchange for
amounts due in the exercise of 230,214 common stock options.

During 1998, the Company acquired $81,400 of equipment through a capital
lease.

During 1996, the Company issued 12,208 shares of common stock in a cashless
exercise of common stock options. Compensation expense of $9,797 was recorded
in connection with the net issuance.

Advertising

Advertising costs are expensed as incurred. Advertising expense was $76,000,
$218,000, and $394,000 during the years ended December 31, 1996, 1997, and
1998, respectively.

Loss Per Share and Pro Forma Loss Per Share

Basic and diluted net loss per share is computed by dividing loss available
to common shareholders by the average number of common shares outstanding for
the period. Other common stock equivalents, including stock options, warrants,
and convertible preferred stock, are excluded from the calculation because
their effect is antidilutive.

Upon the completion of the Company's proposed initial public offering, all
preferred stock will automatically convert into common stock. Accordingly, pro
forma basic and diluted loss per share is computed using the weighted average
number of shares of common stock outstanding and the weighted average preferred
stock outstanding as if such shares were converted to common stock at the time
of issuance.

F-11
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

1. Significant Accounting Policies and Liquidity--(continued)

Other Comprehensive Income

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
(SFAS 130), which establishes standards for reporting and display of
comprehensive income and its components in the financial statements. The
Company adopted SFAS 130 in 1998. The only item of other comprehensive income
(loss) which the Company currently reports is foreign currency translation
adjustments. The comprehensive loss for the periods ended March 31, 1998 and
1999 was $1,626,000 and $1,867,000, respectively.

Business Segments

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), which establishes standards for
reporting information about operating segments in annual financial statements.
As the Company operates only in one segment, the adoption of SFAS 131 did not
impact the Company's disclosures.

Reclassifications

Certain prior year balances have been reclassified to conform to the current
year presentation.

2. Marketable Securities

The following tables summarize the Company's marketable securities by type of
securities. All securities mature within 12 months of the purchase date. The
fair value of the securities approximates their cost.

<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
----- -------
<S> <C> <C>
(In
thousands)
Commercial paper and short-term obligations................ $ -- $ 2,432
Corporate notes and bonds.................................. 610 401
----- -------
$ 610 $ 2,833
===== =======
</TABLE>

The gross realized gains and losses on sales of available-for-sale securities
were not material for the years ended December 31, 1998 and 1997.

3. Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
(In thousands)
Computer and computer equipment.......................... $ 1,751 $ 2,625
Furniture, fixtures, and equipment....................... 450 715
------- -------
2,201 3,340
Less accumulated depreciation............................ (993) (1,426)
------- -------
$ 1,208 $ 1,914
======= =======
</TABLE>

F-12
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

3. Property and Equipment--(continued)

Property and equipment includes assets under financing agreements with an
original cost of $692,000. Accumulated amortization on these assets
approximated $606,000 and $481,000 at December 31, 1998 and 1997, respectively.
Amortization expense related to these assets is included in depreciation
expense.

4. License Agreements

The Company has entered into various agreements that allow the Company to
incorporate licensed technology into its products. The Company incurs royalty
fees under these agreements that are based on a predetermined fee per license
sold. Royalty costs incurred under these agreements are recognized as products
are licensed and are included in cost of revenues. These amounts totaled
$118,000, $287,000, and $166,000 for the years ended December 31, 1996, 1997,
and 1998, respectively.

5. Borrowings

In March 1998, the Company entered into a financing arrangement with a bank,
which provided up to $3,000,000 under a line of credit to support working
capital and up to $2,000,000 under a term loan to purchase capital equipment.
The Company had no amounts outstanding at December 31, 1998 under the line of
credit, which expired in March 1999. The Company had $1,463,000 outstanding
under the term loan at December 31, 1998. The term loan bears interest at prime
plus 1.00% (8.75% at December 31, 1998), matures March 2002, and is secured by
all assets of the Company. The debt agreements contain certain financial
covenants, which the Company was in compliance with or received waivers for at
December 31, 1998. The agreement also included the issuance of stock warrants
(see Note 8). The financing arrangement was renewed in April 1999 (see Note
14).

Maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Year ending December 31:
1999...................................................... $ 444
2000...................................................... 542
2001...................................................... 378
2002...................................................... 99
------
$1,463
======
</TABLE>

6. Federal Income Tax

At December 31, 1998, the Company had net operating loss and research and
development tax credit carryforwards (before potential limitations resulting
from changes in ownership) of approximately $24.8 million and $418,000,
respectively, which begin to expire in 2001, if not utilized. The tax
provisions for the year ended December 31, 1998 and the three months ended
March 31, 1999 consist entirely of foreign tax expense.

F-13
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

6. Federal Income Tax--(continued)

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

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------ --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $5,917 $ 8,418
Research and development tax credits..................... 256 418
Deferred revenue......................................... 952 1,590
Accrued expenses not currently deductible................ 172 482
Stock options............................................ 220 220
------ --------
Total deferred tax assets.................................. 7,517 11,128
Deferred tax liability accrual to cash adjustments......... (349) (283)
------ --------
Net deferred tax assets.................................... 7,168 10,845
Valuation allowance........................................ (7,168) (10,845)
------ --------
$ -- $ --
====== ========
</TABLE>

The effective rate differs from the U.S. federal statutory rate as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Income tax (benefit) at U.S. statutory rate of
34%........................................... $(1,999) $(2,035) $(3,590)
Losses producing no current tax benefit........ 1,999 2,035 3,590
Foreign taxes.................................. -- -- 45
------- ------- -------
Income tax provision........................... $ -- $ -- $ 45
======= ======= =======
</TABLE>

The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. The Company may have experienced such ownership changes
as a result of the various stock offerings and the utilization of the
carryforwards could be limited.

Due to the Company's history of net operating losses, the Company has
established a valuation allowance equal to its net deferred tax assets on the
basis that realization of such assets is not assured. The valuation allowance
increased $2,070,000, $2,197,000 and $3,677,000 during 1996, 1997, and 1998,
respectively.

7. Redeemable Convertible Preferred Stock

In February 1996, Primus completed a private offering of 6,910,568 shares of
Series A redeemable and convertible preferred stock (Series A) for $7,920,000,
net of offering costs of $580,000. In March 1997, Primus completed a private
offering of 1,000,000 shares of Series C preferred stock (Series C) for
$1,969,000, net of offering costs of $31,000. In July 1998, Primus completed a
private offering of 4,900,000 shares of Series D redeemable and convertible
preferred stock (Series D) for $12,213,000, net of offering costs of $37,000.

F-14
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

7. Redeemable Convertible Preferred Stock--(continued)

Holders of Series A, C, and D have preferential rights to dividends when and
if declared by the Board of Directors. The holders are entitled to the number
of votes equal to the number of shares of common stock into which the preferred
stock could be converted. In the event of liquidation, the holders of Series A,
C, and D have preferential right to liquidation payments of $1.23, $2.00, and
$2.50 per share, respectively, plus any accrued but unpaid dividends. The
preferred stock is convertible into common stock as provided by the Articles of
Incorporation (Articles) (all preferred stock is currently convertible into
0.333 shares of common stock, except Series A, which is convertible into .410
shares of common stock), at the option of the holder, or automatically upon the
vote or written consent of the holders of a majority of the shares of
applicable Series then outstanding, or upon the closing of an initial public
offering of the Company's common stock from which the net proceeds are at least
$10 million and at a price per share of at least $10.50, $15.00, and $30.00
with regard to Series A, C, and D, respectively.

The holders of a majority of the outstanding Series A, C, and D shares may
request redemption on or after January 31, 2003 at $1.48, $2.40, and $3.00 per
share, respectively, subject to adjustment, plus any declared but unpaid
dividends thereon. The redemption amount is payable in equal quarterly
installments over three years.

Following is a summary of terms and conditions for each series of redeemable
convertible preferred stock as of December 31, 1998 (in thousands, except share
data):

<TABLE>
<CAPTION>
Aggregate Aggregate
Shares Net Redemption Liquidation
Designated Outstanding Proceeds Value Value
---------- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Issued and outstanding:
Series A, par value
$0.001................ 6,910,568 6,910,568 $ 7,920 $10,228 $ 8,500
Series C, par value
$0.001................ 1,000,000 1,000,000 1,969 2,400 2,000
Series D, par value
$0.001................ 4,900,000 4,900,000 12,213 14,700 12,250
---------- ---------- ------- ------- -------
12,810,568 12,810,568 $22,102 $27,328 $22,750
========== ========== ======= ======= =======
</TABLE>

The difference between the original net proceeds and the redemption value of
the preferred stock is being accreted against earnings over the period ending
on the January 31, 2003 redemption date.

In addition, the Company has granted registration rights and rights of first
offer to the Series A, C, and D holders, and is precluded from carrying out
certain actions without the approval of the majority of the Series A, C, and D
holders voting as a group.

8. Shareholders' Equity

Convertible Preferred Stock

In September 1996, Primus completed a private offering of 500,000 shares of
Series B convertible preferred stock (Series B) for $981,000, net of offering
costs of $19,000. Holders of

F-15
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

8. Shareholders' Equity--(continued)

Series B have preferential rights to dividends when and if declared by the
Board of Directors. The holders are entitled to the number of votes equal to
the number of shares of common stock into which the preferred stock could be
converted. In the event of liquidation, the holders of Series B have
preferential rights to liquidation payments of $2.00 per share, plus any
accrued but unpaid dividends. The preferred stock is convertible into common
stock as provided by the Articles of Incorporation (Articles) (currently
convertible into 0.333 shares of common stock), at the option of the holder, or
automatically upon the vote or written consent of the holders of a majority of
the shares of applicable Series then outstanding, or upon the closing of an
initial public offering of the Company's common stock from which the net
proceeds are at least $10 million and at a price per share of at least $10.50.
The Company has granted rights of first offer to the Series B holders.

The approval of holders of a majority of shares of each of the Series A,
Series B, Series C and Series D Preferred Stock is required before the Company
can carry out any action required to be presented to holders of Common Stock.

The approval of holders of a majority of shares of each of the Series A,
Series C and Series D Preferred Stock affected by a proposed action is required
before the Company can (i) authorize or issue any security senior to, or on a
parity with the affected series; (ii) change any of the terms of the affected
series; (iii) proceed with any sale, merger or similar act of the Company
(other than a merger where the Company is the survivor and in which no senior
security is issued); (iv) declare any dividend or distribution with respect to
the affected series; (v) amend the Articles of Incorporation in any way that
would have a material adverse effect on the holders of the affected series
(including any increase in authorized shares of the affected series); and (vi)
proceed with any voluntary dissolution, liquidation or winding up.

The approval of holders of a majority of shares of the Series B Preferred
Stock is required before the Company can: (i) so long as at least 250,000
shares of Series B Preferred Stock are outstanding; (a) authorize or issue any
security senior to Series B, with respect to dividends or liquidation, or (b)
change any of the Series B terms (including any increase in authorized shares
of Series B Preferred Stock); and (ii) voting with the Series A Preferred Stock
as a single class; (a) proceed with any sale, merger or similar act of the
Company (other than a merger where the Company is the survivor and in which no
senior security is issued); (b) declare any dividend or distribution with
respect to the Common Stock or Series A or Series B Preferred Stock; (c)
proceed with any voluntary dissolution, liquidation or winding up; or (d)
redeem any stock, other than pursuant to the terms of the Series A Preferred
Stock, or the terms of any repurchase agreements with employees or consultants.

Stock Options

The Company's stock option plans include the Employee Stock Option and
Restricted Stock Purchase Plan, the Nonemployee Director Stock Option Plan, and
the 1995 Stock Incentive Option Plan (the Plans). The Plans provide for the
granting of incentive stock options to employees and nonqualified stock options
to employees, directors, and consultants. Options granted under the Plans

F-16
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

8. Shareholders' Equity--(continued)

typically vest at variable rates, up to four years, determined by the Board of
Directors, and remain exercisable for a period not to exceed ten years. During
1998, the shareholders increased the number of shares available under the plans
by 666,667.

A summary of the Company's stock option activity and related weighted-average
exercise prices for the years ended December 31 follow:

<TABLE>
<CAPTION>
Outstanding Options
--------------------
Shares Weighted-
Available Number Average
for of Exercise
Grant Shares Prices
---------- --------- ---------
<S> <C> <C> <C>
Balance at January 1, 1996................ 833,333 1,751,838 $1.7843
Options granted......................... (482,448) 482,448 3.0000
Options canceled........................ 23,540 (192,598) 2.4563
Options exercised....................... -- (19,263) 0.9569
---------- --------- -------
Balance at December 31, 1996
(exercisable--1,286,914)................. 374,425 2,022,425 2.0182
Additional shares authorized............ 1,333,333 --
Options granted......................... (1,742,005) 1,742,005 3.0000
Options canceled........................ 251,168 (939,672) 1.9263
Options exercised....................... -- (30,718) 2.6570
---------- --------- -------
Balance at December 31, 1997
(exercisable--1,504,136)................. 216,921 2,794,040 2.6592
Additional shares authorized............ 666,667 --
Options granted......................... (635,953) 635,953 3.8536
Options canceled........................ 377,163 (420,760) 3.1601
Options exercised....................... -- (451,086) 1.7347
---------- --------- -------
Balance at December 31, 1998
(exercisable--1,413,005)................. 624,798 2,558,147 3.0363
Options granted......................... (637,420) 637,420 7.8036
Options canceled........................ 37,263 (174,762) 2.5151
Options exercised....................... -- (105,378) 2.6738
---------- --------- -------
Balance at March 31, 1999
(exercisable--1,289,804)................. 24,641 2,915,427 $4.1229
========== ========= =======
</TABLE>

F-17
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

8. Shareholders' Equity--(continued)

Information regarding the weighted-average remaining contractual life and
weighted average exercise price of options outstanding and options exercisable
at December 31, 1998 for selected exercise price ranges is as follows:

<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------- ----------------------------
Weighted- Weighted-
Range of Average Average
Exercise Number of Contractual Number of Exercise
Prices Options Life (Years) Options Price
-------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C>
$0.03 49,999 5.49 49,999 $0.03
0.80 1,000 4.90 1,000 0.80
1.65 17,295 5.29 17,295 1.65
2.25 277,638 6.12 276,283 2.25
3.00 1,966,814 8.76 1,068,428 3.00
4.50 174,083 9.48 -- --
6.00 71,318 9.78 -- --
--------- ---------
$0.03--$6.00 2,558,147 8.46 1,413,005 $2.73
========= =========
</TABLE>

The Company recognized $4,452, $1,969, and $706 during 1996, 1997, and 1998,
respectively, of consulting expense equal to the estimated fair value of
options granted to consultants.

Pro forma information regarding net loss is required by SFAS 123 and has been
determined as if the Company had accounted for its employee stock options under
the fair market value method of SFAS 123. The fair value of these options was
estimated at the date of grant using a minimum value option pricing model using
the multiple-option approach with the following weighted-average assumptions:
risk-free interest rates range from 4.45% to 5.61% in 1998, 5.71% to 6.75% in
1997; and 6.09% to 6.46% in 1996; an expected life of the options of five
years, and a dividend yield rate of 0% for all years.

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

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
------- ------- -------
(In thousands,
Except Per Share Data)
<S> <C> <C> <C>
Loss available to common shareholders:
As reported..................................... $ 6,086 $ 6,286 $11,148
SFAS No. 123 pro forma net loss................. $ 6,292 $ 6,938 $11,403
Basic and diluted loss per share:
As reported..................................... $ 1.58 $ 1.62 $ 2.82
SFAS No. 123 pro forma.......................... $ 1.63 $ 1.79 $ 2.88
Weighted-average fair value of options
granted during the year.......................... $0.7965 $0.7353 $0.8595
</TABLE>

F-18
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

Under SFAS 123, compensation expense representing the fair value of the
option grant is recognized over the vesting period. The initial impact on pro
forma net loss may not be representative of compensation expense in future
years, when the effect of amortization of multiple awards would be reflected in
pro forma earnings.

Stock Warrants

In March of 1999, the Company issued warrants to acquire 5,000 shares of
common stock at an exercise price of $9.00 per share to a consultant. The value
of the warrants will be recognized over the related service period with final
valuation at the completion of the service period.

In 1998, the Company issued warrants to acquire 22,500 shares of common stock
at an exercise price of $6.00 per share to a bank in conjunction with the
financing arrangement. The fair value of the warrants was immaterial. The
warrants expire in the year 2005. In 1998, the Company also issued warrants to
acquire 55,999 shares of Series D preferred stock at exercise prices of $2.50
per share as part of the Series D financing. The Company recorded expense of
$28,000 related to the preferred stock warrants. The warrants expire in 2003 or
upon closing of an initial public offering.

In 1997, the Company issued warrants to acquire 21,667 shares of common stock
at an exercise price of $3.00 per share to consultants. The warrants expire in
the years 2005 and 2007 with regard to 8,333 and 6,667 warrants, respectively,
or upon the closing of an initial public offering, and in 2006 with regard to
6,667 warrants. The fair value of the warrants was immaterial.

In February 1996, the Company issued warrants to acquire 25,000 shares of
common stock at an exercise price of $3.00 per share in exchange for a loan
guarantee of which 16,667 have been subsequently exercised. In addition, the
Company issued warrants to acquire 8,000 shares of common stock at an exercise
price of $3.00 per share in exchange for consulting services. The fair value of
all of the warrants was immaterial. The warrants expire upon the closing of an
initial public offering of the Company's common stock. In years preceding 1996,
the Company issued warrants to acquire shares of common stock at prices of
$2.25 and $3.00 per share, of which 16,390 remain outstanding at December 31,
1998.

The Company valued all warrants using the Black-Scholes pricing model with
the following weighted-average assumptions: risk-free interest rates of 4.45%
to 5.61% in 1998, 5.71% to 6.75% in 1997, and 6.09% to 6.40% in 1996, an
expected life of three years, a dividend yield rate of 0% for all years, and
volatility of .6 for all years.

As of March 31, 1999, outstanding warrants were as follows:

<TABLE>
<CAPTION>
Number
------------------------------------ Exercise
Common Preferred Price
------ --------- --------
<S> <C> <C>
14,840 -- $2.25
39,550 -- 3.00
22,500 -- 6.00
5,000 -- 9.00
-- 55,999 2.50
------ ------
81,890 55,999
====== ======
</TABLE>

F-19
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

Common Stock Reserved

Common stock reserved for future issuance at December 31, 1998 is as follows:

<TABLE>
<S> <C>
Common stock warrants.......................... 76,890
Preferred stock warrants....................... 18,666
Common stock options........................... 3,182,945
Series A preferred stock....................... 2,833,333
Series B preferred stock....................... 166,666
Series C preferred stock....................... 333,333
Series D preferred stock....................... 1,633,333
---------
8,245,166
=========
</TABLE>

9. Employee Benefit Plan

The Company maintains a deferred contribution retirement plan for eligible
employees under the provisions of Internal Revenue Code Section 401(k).
Participants may defer up to 15% of their annual compensation on a pretax
basis, subject to maximum limits on contributions. Contributions by the Company
are at the discretion of the Board of Directors. No discretionary contributions
have been made by the Company to date.

10. Commitments

The Company leases office space under an operating lease expiring in October
2000. The Company also leases office equipment under capital leases.

Future minimum rental payments under noncancelable capital and operating
leases with initial terms in excess of one year are as follows as of December
31, 1998:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(In thousands)
-----------------
<S> <C> <C>
1999................................................... $ 34 $ 687
2000................................................... 34 473
2001................................................... 25 --
---- ------
93 $1,160
======
Less amounts representing interest..................... (11)
----
Present value of minimum payments...................... 82
Less current portion................................... 28
----
Total long-term obligations............................ $ 54
====
</TABLE>

Rent expense for the years ended December 31, 1996, 1997, and 1998 was
$365,000, $520,000, and $662,000, respectively.

F-20
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

11. Related-Party Transactions

TCI, a significant shareholder, became a reseller of the SolutionBuilder
product in Japan during 1997. The agreement provided for the sale to TCI of the
SolutionBuilder product and support services aggregating $2 million, of which
$1,395,427 has been deferred as of December 31, 1998. Revenue recognized in
1997 and 1998 and the three months ended March 31, 1999 was $30,000, $575,000,
and $0, respectively. The revenue is recognized as TCI and its distributor,
Primus KK, sell product to end-users.

12. Earnings Per Share

The following represents the calculations for earnings per share:

<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net loss (A)............ $ (5,878) $ (5,985) $ (10,603) $ (1,626) $ (1,863)
Preferred stock
accretion.............. (208) (301) (545) (80) (215)
--------- --------- --------- --------- ---------
Loss available to common
shareholders (B)....... $ (6,086) $ (6,286) $ (11,148) $ (1,706) $ (2,078)
========= ========= ========= ========= =========
Weighted-average number
of common shares (C)... 3,857,448 3,883,514 3,957,310 3,903,007 4,313,329
========= ========= =========
Pro forma adjustment for
convertible preferred
stock.................. 4,062,740 4,966,667
--------- ---------
Pro forma weighted-
average shares (D)..... 8,020,050 9,279,996
========= =========
Loss per share:
Basic and diluted
(B)/(C).............. $(1.58) $(1.62) $(2.82) $(0.44) $(0.48)
Pro forma basic and
diluted (A)/(D)...... (1.32) (0.20)
</TABLE>

Outstanding warrant and stock options to purchase shares of common stock were
excluded from the computation of diluted earnings per share because their
effect was antidilutive (see Note 8 for additional stock option information) as
follows:

<TABLE>
<CAPTION>
December 31, March 31,
----------------------------- -------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Options.................. 2,022,425 2,794,040 2,558,147 2,966,471 2,915,427
Warrants................. 49,390 71,057 95,556 76,890 100,556
</TABLE>

F-21
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

13. International Operations

Information regarding revenues by geographic regions is as follows:

<TABLE>
<CAPTION>
Three Months
Year Ended December Ended
31, March 31,
-------------------- -------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
North America........................... $2,422 $5,158 $7,180 $1,334 $2,490
International........................... -- 31 1,430 31 1,421
------ ------ ------ ------ ------
Total revenues........................ $2,422 $5,189 $8,610 $1,365 $3,911
====== ====== ====== ====== ======
</TABLE>

Information regarding long lived assets by geographic region is as follows:

<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
------------- ------------
1997 1998 1999
------ ------ ------------
(in thousands)
<S> <C> <C> <C>
North America................................... $1,208 $1,827 $1,818
International................................... -- 87 104
------ ------ ------
Total long lived assets....................... $1,208 $1,914 $1,922
====== ====== ======
</TABLE>

14. Subsequent Events

Initial Public Offering

In April 1999, the Board of Directors authorized management to file a
Registration Statement with the Securities and Exchange Commission to permit
the Company to offer its common stock to the public. If the offering is
consummated under terms presently anticipated, each outstanding share of Series
A redeemable convertible preferred stock will convert into 0.410 shares of
common stock, and all other preferred stock will convert into 0.333 shares of
common stock. Unaudited pro forma shareholders' equity reflects the assumed
conversion of the preferred stock into common stock and the assumed conversion
of redeemable convertible preferred stock warrants into common stock warrants
as of March 31, 1999.

Employee Stock Purchase and Incentive Plans

In April 1999, the Board increased the shares reserved under the 1995 Stock
Incentive Compensation Plan by 500,000 and adopted the 1999 Stock Incentive
Compensation Plan and the Employee Stock Purchase Plan. These actions were
subsequently approved by the Company's shareholders. A total of 1,166,667
shares of common is reserved under the Stock Incentive Compensation Plan, plus
annual increases as defined in the plan document. The Employee Stock Purchase
Plan authorizes the issuance of 600,000 shares of common stock, plus annual
increases as defined by the plan document.

F-22
<PAGE>

PRIMUS KNOWLEDGE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Information as of and for the three months ended March 31, 1998 and 1999 is
unaudited)

Reverse Stock Split and Capitalization Change

In April 1999, the Board of Directors authorized a 1-for-3 reverse stock
split of the Company's common stock. The reverse split was subsequently
approved by the Company's shareholders and became effective on May 3, 1999. The
related common stock and per-share data in the accompanying financial
statements has been retroactively stated to reflect the reverse stock split.

Bank Financing

In April 1999, the Company renewed its financing arrangement with the bank,
which provides a $5 million line of credit and a $1 million term loan. The line
of credit matures in April 2000, and bears interest at rates of Prime plus
0.75%. The term loan is available for advances for 1 year during which time
interest only is payable at prime plus 1% after which principal and interest
payments are due in equal monthly payments over 3 years beginning April 2000.
The arrangement is secured by all assets of the Company. The agreement includes
certain financial covenants including those requiring the Company to maintain
minimum levels of working capital, liquidity and minimum levels of
profitability. In connection with the arrangement the Company issued warrants
to purchase 23,333 shares of common stock at an exercise price of $10.50. The
fair value of the warrants of $108,700 will be expensed over the term of the
loan. The warrants were valued using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 5.3%, expected life of three
years, volatility of .6 and no expected dividends.

Issuance of Stock and Stock Options

F-23
<PAGE>

BACK COVER

[SAMPLE SOLUTIONBUILDER, SOLUTIONEXPLORER, AND SOLUTIONPUBLISHER SCREENS
ACCOMPANIED BY THE LOGOS FOR EACH PRODUCT.]

<PAGE>

[PRIMUS LOGO]
<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 15. Recent Sales of Unregistered Securities

Since April 1, 1996, the registrant has issued and sold unregistered
securities as follows. The numbers below reflect a 1-for-3 reverse stock split
of the registrant's common stock effected in May 1999.
1. On May 8, 1996, the registrant issued a warrant to purchase 3,833 shares of
common stock, with an exercise price of $3.00 per share, to a member of the
registrant's board of directors for consulting services.
2. On September 27, 1996, the registrant issued 500,000 shares of Series B
preferred stock, which are convertible into 166,667 shares of common stock,
to an affiliate of a current shareholder for an aggregate consideration of
$1,000,000.
3. On March 27, 1997 and March 31, 1997, the registrant issued an aggregate of
1,000,000 shares of Series C preferred stock, which are convertible into
333,333 shares of common stock, to one current shareholder for an aggregate
consideration of $2,000,000.
4. On September 30, 1997, the registrant issued a warrant to purchase 8,333
shares of common stock, with an exercise price of $1.00 per share, to a
consultant in exchange for services.
5. On November 4, 1997, the registrant issued a warrant to purchase 6,667
shares of common stock, with an exercise price of $3.00 per share, to a
consultant in exchange for services.
6. On March 20, 1998, the registrant issued a warrant for the purchase of
22,500 shares of common stock, with an exercise price of $6.00 per share,
to a bank in connection with a debt financing.
7. On June 29, 1998, the registrant issued warrants for the purchase of an
aggregate of 56,000 shares of Series D preferred stock, convertible into an
aggregate of 18,667 shares of common stock, with an aggregate exercise
price of $140,000, to four current shareholders in connection with a bridge
loan.
8. On July 22, 1998, the registrant issued an aggregate of 4,900,000 shares of
Series D preferred stock, which are convertible into 1,633,333 shares of
common stock, to five current shareholders and two accredited investors for
an aggregate consideration of $12,250,000.
9. On March 18, 1999, the registrant issued 1,333 shares of common stock,
valued at $6.00 per share, to an accredited investor in conjunction with a
donation for a charitable auction.
10. On March 31, 1999, the registrant issued 91,389 shares of common stock to
five current shareholders and five new accredited investors for $9.00 per
share or an aggregate price of $822,498.
11. From April 1, 1996 through April 1, 1999, the registrant granted stock
options to purchase an aggregate of 3,329,244 shares of common stock with
exercise prices ranging from $3.00 to $9.00 per share, under the
registrant's three stock option plans. Of these options, options for
1,728,324 shares have been cancelled without being exercised, options for
606,428 shares have been exercised and options 2,611,443 shares remained
outstanding as of April 1, 1999.
12. In April 1999, we agreed to issue 18,400 shares of common stock to a Primus
KK employee.

The sales and issuances of these securities were exempt from registration
under the Securities Act pursuant to Rule 701 promulgated thereunder on the
basis that these options were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to written contracts relating to
consideration, as provided by Rule 701, or pursuant to Section 4(2) of the
Securities Act on the basis that the transactions did not involve a public
offering.

II-1
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement.

3.1+ Form of Fourth Amended and Restated Articles of Incorporation of the
registrant.

3.2+ Form of Second Amended and Restated Bylaws of the registrant.

5.1+ Opinion of Perkins Coie LLP as to the legality of the shares.

10.1+ Registration Rights Agreement, as amended July 22, 1998, by and
among the registrant, TransCosmos USA Inc., TransCosmos Inc.,
Encompass Group, Inc., Oak Investment Partners VI L.P., Oak VI
Affiliates LLC, Northwest Equity Partners V, Piper Jaffray, Inc.,
and Snowden L.P.

10.2+ Separation Agreement, dated as of November 6, 1998, by and between
the registrant and Steven L. Sperry.

10.3+ Joint Venture Agreement, dated November 16, 1995, by and between the
registrant and Trans Cosmos, Inc.

10.4+ First Amendment to Joint Venture Agreement, dated September 26,
1997, by and among the registrant, Trans Cosmos, Inc., and Best
Career Company.

10.5**+ Exclusive Distribution License Agreement, dated September 26, 1997,
by and between the registrant and Trans Cosmos Inc.

10.6+ First Right of Refusal, dated September 26, 1997, by and between the
registrant and Primus KK.

10.7**+ Software Marketing and Distribution Agreement, dated March 31, 1998,
by and between the registrant and Primus Knowledge Solutions KK.

10.8**+ Amended and Restated Value Added Reseller License Agreement, dated
December 31, 1997, by and between the registrant and Versant Object
Technology Corporation.

10.9**+ Software License Agreement dated June 27, 1997, by and between the
registrant and 3Com Corporation.

10.10**+ Amendment No. 1 to Software License Agreement, dated June 25, 1997,
by and between the registrant and 3Com Corporation.

10.11+ Amendment No. 2 to Software License Agreement, dated September 26,
1997, by and between the registrant and 3Com Corporation.

10.12**+ Third Amendment to Software License Agreement and Second Amendment
to Support and Maintenance Agreement, dated August 27, 1998, by and
between the registrant and 3Com Corporation.

10.13**+ Support and Maintenance Agreement, dated June 27, 1997, by and
between the registrant and 3Com Corporation.

10.14+ Amendment No. 1 to Support and Maintenance Agreement, dated June 25,
1997, by and between the registrant and 3Com Corporation.

10.15+ Form of Change of Control Agreement, to be entered into by the
registrant, Michael A. Brochu, Elizabeth J. Huebner, Kim M. Nelson,
Patricia L. Cox and Edward L. Walter.

10.16+ Employment Agreement, dated June 19, 1998, by and between the
registrant and Elizabeth J. Huebner.

10.17+ Employee Stock Option and Restricted Stock Award Plan, as adopted by
registrant's board of directors on November 29, 1993.

10.18+ Non-Employee Director Stock Option Plan, as adopted by registrant's
board of directors on November 1, 1994.

</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.19+ 1995 Stock Incentive Compensation Plan, as amended and restated on
March 12, 1996 and amended on February 10, 1998.

10.20+ 1999 Stock Incentive Compensation Plan.

10.21++ 1999 Employee Stock Purchase Plan.

10.22+ Office Lease Agreement, dated July 25, 1995, by and between the
registrant and Westlake Center Associates Limited Partnership.

10.23+ Lease Amendment 1, dated February 1, 1999, by and between the
registrant and Westlake Center Associates Limited Partnership.

10.24**+ Services Agreement, dated February 13, 1998, by and between the
registrant and Encompass Globalization, Inc.

21.1+ Subsidiaries of the registrant.

23.1++ Consent of Ernst & Young LLP.

23.2+ Consent of Perkins Coie LLP (contained in the opinion filed as
Exhibit 5.1).

23.3+ Consent of International Data Corporation.

23.4+ Consent of The Aberdeen Group.

24.1+ Power of Attorney.

27.1+ Financial Data Schedule.

99.1+ Report of Ernst & Young LLP, Independent Auditors, on Financial
Statement Schedule.
</TABLE>
- --------

** Registrant has sought confidential treatment pursuant to Rule 406 for
portions of the referenced exhibit.
+ Previously filed.
++ Filed herewith.

(b) Financial Statement Schedules

Schedule II--Valuation and Qualifying Accounts

All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements of the
registrant or related notes thereto.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 18th day of June, 1999.

Primus Knowledge Solutions, Inc.

/s/ Michael A. Brochu
___________________________________
Michael A. Brochu, President

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 Registration Statement has been signed by the following persons
in the capacities indicated below on the 18th day of June, 1999.

<TABLE>
<S> <C>
/s/ Michael A. Brochu President, Chief Executive Officer and
________________________________________ Chairman of the Board (Principal Executive
Michael A. Brochu Officer)

/s/ Elizabeth J. Huebner Vice President, Chief Financial Officer,
________________________________________ Secretary and Treasurer (Principal
Elizabeth J. Huebner Financial and Accounting Officer)

* Antonio M. Audino Director
________________________________________
Antonio M. Audino

* Promod Haque Director
________________________________________
Promod Haque

* Fredric W. Harman Director
________________________________________
Fredric W. Harman

* Yasuki Matsumoto Director
________________________________________
</TABLE> Yasuki Matsumoto

*By /s/ Elizabeth J. Huebner
-------------------------------
Elizabeth J. Huebner
Attorney-in-Fact

II-4
<PAGE>

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

PRIMUS KNOWLEDGE SOLUTIONS, INC.
March 31, 1999
(In thousands)

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- --------- -------- ------------ ---------
Additions
-------------------
Balance Charged Charged to
of to Costs Other Balance
Beginning and Accounts-- Deduction -- at End
Description of Period Expenses Describe Describe(1) of Period
----------- --------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $-- $70 $-- $-- $ 70
Year ended December 31,
1997
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 70 -- -- -- $ 70
Year ended December 31,
1998
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 70 $301 -- -- $371
Three months ended March
31, 1999
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $371 -- -- -- $371
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
3.1+ Form of Fourth Amended and Restated Articles of Incorporation of the
registrant.

3.2+ Form of Second Amended and Restated Bylaws of the registrant.

5.1+ Opinion of Perkins Coie LLP as to the legality of the shares.

10.2+ Separation Agreement, dated as of November 6, 1998, by and between
the registrant and Steven L. Sperry.

10.3+ Joint Venture Agreement, dated November 16, 1995, by and between the
registrant and Trans Cosmos, Inc.

10.4+ First Amendment to Joint Venture Agreement, dated September 26,
1997, by and among the registrant, Trans Cosmos, Inc., and Best
Career Company.

10.5**+ Exclusive Distribution License Agreement, dated September 26, 1997,
by and between the registrant and Trans Cosmos Inc.

10.6+ First Right of Refusal, dated September 26, 1997, by and between the
registrant and Primus K.K.

10.7**+ Software Marketing and Distribution Agreement, dated March 31, 1998,
by and between the registrant and Primus Knowledge Solutions K.K.