PRIME RESPONSE INC/DE, 10-Q, 2000-11-14

PRIME RESPONSE INC/DE
10-Q, 2000-11-14
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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 2000

[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Transition Period from _________________ to
_______________

Commission File Number 0-28873

PRIME RESPONSE, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 13-3972166
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

150 CambridgePark Drive
Cambridge, MA 02140
(Address of Principal Executive Offices, Including Zip Code)

Registrant's Telephone Number, Including Area Code: (617) 876-8300

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
----- -----

On November 10, 2000, 20,467,000 shares of the Registrant's Common Stock, $.01
par value, were outstanding.

<PAGE>

PRIME RESPONSE, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
-------
<S> <C>
Part I: Financial Information

ITEM 1: Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999............ 3

Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2000, and 1999.......................................................... 4

Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000, and 1999........................................................... 5

Notes to Consolidated Financial Statements............................................. 6-9

ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10-23

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk............................. 24

PART II: Other Information

ITEM 2: Changes in Securities and Use of Proceeds............................................. 24

ITEM 6: Exhibits and Reports on Form 8-K....................................................... 24

</TABLE>

2
<PAGE>

ITEM 1: FINANCIAL STATEMENTS

PRIME RESPONSE, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------------------
2000 1999
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................................ $ 32,058 $ 3,999
Accounts receivable, net of allowance for doubtful accounts of $901 and $147, respectively.......... 9,388 9,057
Prepaid and other current assets..................................................................... 2,490 2,595
--------- --------
Total current assets............................................................................... 43,936 15,651
Property and equipment, net............................................................................ 3,478 2,602
Intangible and other assets, net....................................................................... 7,394 7,262
--------- --------
Total assets....................................................................................... $ 54,808 $ 25,515
========= ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................................................... $ 3,624 $ 3,920
Short-term debt and capital lease obligations....................................................... 90 2,289
Accrued expenses and other liabilities.............................................................. 5,635 4,472
Accrued interest income............................................................................. 176 176
Deferred revenue.................................................................................... 3,966 6,074
--------- --------
Total current liabilities......................................................................... 13,491 16,931

Long-term debt and capital lease obligations........................................................... -- 311
Long-term accrued interest income...................................................................... 1,266 1,398

Commitments and contingencies

Redeemable common stock, $0.01 par value, 0 shares issued and outstanding at September 30, 2000, and
1,677,307 shares issued and outstanding at December 31, 1999......................................... -- 8,295

Series A redeemable convertible preferred stock, $0.01 par value, 1,155,000 shares authorized;
0 shares issued and outstanding at September 30, 2000, and 1,155,000 shares issued and outstanding at
December 31, 1999 (liquidation value: $51,546,000 at December 31, 1999).............................. -- 27,842

Series B redeemable convertible preferred stock, $0.01 par value, 1,700,000 shares authorized;
0 shares issued and outstanding at September 30, 2000, and 1,699,834 shares issued and outstanding at
December 31, 1999 (liquidation value: $21,263,000 at December 31, 1999).............................. -- 10,343

Series C redeemable convertible preferred stock, $0.01 par value, 3,000,000 shares authorized;
0 shares issued and outstanding at September 30, 2000, and 1,833,331 shares issued and
outstanding at December 31, 1999 (liquidation value: $11,000,000 at December 31, 1999)............... -- 4,891

Stockholders' equity (deficit):
Common stock, $0.01 par value: 27,750,000 shares authorized (including redeemable common
stock); 20,466,840 shares issued and outstanding at September 30, 2000
(net of 1,249,500 shares in treasury), and 6,453,506 issued
and outstanding at December 31, 1999............................................................ 207 65
Additional paid-in capital........................................................................ 155,295 6,520
Accumulated other comprehensive income loss....................................................... 22 (12)
Accumulated deficit............................................................................... (106,475) (46,127)
Treasury stock, 1,249,500 shares at cost.......................................................... (4,273) --
Note receivable from shareholder.................................................................. (2,545) (2,545)
Deferred compensation............................................................................. (2,180) (2,397)
--------- --------
Total stockholders' equity (deficit).............................................................. 40,051 (44,496)
--------- --------
Total liabilities and stockholders' equity........................................................ $ 54,808 $ 25,515
========= ========
</TABLE>

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

3
<PAGE>

PRIME RESPONSE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license............................................................. $ 3,315 $ 1,654 $ 13,656 $ 5,278
Services and support......................................................... 2,802 1,455 7,441 4,709
Applications hosting......................................................... 821 1,095 2,409 3,080
---------------------------------------------
Total revenues............................................................ 6,938 4,204 23,506 13,067

Cost of revenues:
Software license............................................................. 79 - 79 -
Services & support........................................................... 2,136 1,230 5,841 3,247
Applications hosting......................................................... 843 647 2,599 2,088
Non-cash cost of good sold................................................... 29 84 86 89
---------------------------------------------
Total cost of revenues.................................................... 3,087 1,961 8,605 5,424

Gross profit 3,851 2,243 14,901 7,643

Operating expenses:
Sales and marketing.......................................................... 6,718 2,985 19,987 8,524
Non-cash sales and marketing................................................. 852 16 2,162 35
Research and development..................................................... 2,770 2,632 8,079 6,712
Non-cash research and development............................................ 31 34 94 34
General and administrative................................................... 2,095 959 4,951 2,659
Non-cash general and administrative.......................................... 30 8 89 1,686
Amortization of goodwill and other intangible assets......................... - 308 - 931
---------------------------------------------
12,496 6,942 35,362 20,581

Other expense (income):
Interest income.............................................................. (637) (44) (1,539) (62)
Interest expense............................................................. 32 24 286 87
Interest expense related to beneficial conversion feature.................... - 2,500 - 2,500
Loss on foreign exchange..................................................... (18) (1) (34) 49
---------------------------------------------
Loss before income taxes........................................................ (8,022) (7,178) (19,174) (15,512)
Provision for income taxes...................................................... - 7 (74) 9
---------------------------------------------
Net loss..................................................................... (8,022) (7,185) (19,100) (15,521)
Preferred stock dividends and participation payment............................. - 3,068 41,234 4,356
---------------------------------------------
Net loss attributable to common stockholders.................................... (8,022) (10,253) (60,334) (19,877)

Net loss per share--basic and diluted........................................... $ (0.39) $ (1.35) $ (3.45) $ (2.72)
=============================================
Weighted average shares outstanding-basic and diluted........................... 20,466 7,671 17,486 7,318
=============================================
</TABLE>

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

4
<PAGE>

PRIME RESPONSE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows used in operating activities:
Net loss................................................................................. $(19,100) $(15,521)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization of property and equipment................................ 1,150 714
Amortization of goodwill and intangibles............................................... 1,342 931
Compensation expense related to stock options.......................................... 1,090 1,844
Provision for doubtful accounts........................................................ 754 --
Interest expense related to beneficial conversion feature.............................. -- 2,500
Changes in assets and liabilities:
Accounts receivable.................................................................. (1,790) (1,757)
Prepaid and other current assets..................................................... (660) (770)
Accounts payable..................................................................... (108) 538
Accrued expenses and other liabilities............................................... 1,450 (71)
Deferred revenue..................................................................... (1,662) 4,085
Other long term assets............................................................... (1,750) --
-------- -------
Net cash used in operating activities............................................... (19,284) (7,507)
-------- -------

Cash flows used in investing activities:
Purchase of property and equipment....................................................... (2,007) (1,117)
-------- -------
Net cash used in investing activities............................................... (2,007) (1,117)
-------- -------

Cash flows provided by financing activities:
Proceeds from initial public offering, net of issuance costs............................. 66,085 --
Proceeds from issuance of preferred stock (Series A, B and C) and warrants, net of
issuance costs......................................................................... -- 8,001
Proceeds from shareholder loans.......................................................... -- 2,500
Repayment of credit facility............................................................. (2,000) --
Payment of participation payment......................................................... (9,517) --
Purchase of treasury stock............................................................... (4,274) --
Repayment of capital leases.............................................................. (495) (225)
Increase in line of credit............................................................... -- 357
Dividends paid........................................................................... (934) --
Proceeds from exercise of stock options and warrants..................................... 505 --
-------- -------
Net cash provided by financing activities........................................... 49,370 10,633
-------- -------
Effect of exchange rate on cash........................................................... (20) (69)
-------- -------
Net increase in cash and cash equivalents................................................. 28,059 1,940
Cash and cash equivalents, beginning of period............................................ 3,999 530
-------- -------
Cash and cash equivalents, end of period.................................................. $ 32,058 $ 2,470
======== =======

Supplemental disclosure of non-cash transactions:
Conversion of series A, B and C preferred stock to common stock.......................... $ 39,405 $ --
======== =======
Payment of dividends in common stock..................................................... $ 4,578 $ --
======== =======
Participation payment paid in common stock............................................... $ 29,883 $ --
======== =======
Accretion of discount on preferred stock................................................. $ 1,329 $ --
======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

5
<PAGE>

PRIME RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

The Company

Prime Response, Inc. together with its consolidated subsidiaries ("Prime
Response" or "the Company") is a leading provider of integrated eMarketing
software solutions that enable businesses with large customer bases to create,
manage and execute highly targeted internet and traditional marketing campaigns
to build more loyal and profitable customer relationships. Prime Response's
customers consist primarily of Fortune 1000 businesses as well as leading e-
commerce businesses primarily based in the United States and Europe. Prime
Response sells its products through multiple distribution channels including
direct sales and resellers.

The consolidated financial statements include the accounts of Prime Response,
Inc. and its wholly-owned domestic and foreign subsidiaries. All intercompany
accounts and transactions have been eliminated. The balance sheet at September
30, 2000, and the statement of operations for the three and nine months ended
September 30, 2000 and 1999, and cash flows for the nine months ended September
30, 2000, and 1999 have been prepared without audit. In the opinion of
management, these financial statements reflect all adjustments that are
necessary for a fair presentation of the result for and as of the periods shown.
The results of operations for such periods are not necessarily indicative of the
results expected for a full fiscal year or for any future period. These
financial statements should be read in conjunction with the financial statements
and related notes included in the Company's Registration Statement on Form S-1
(file number 333-92461) filed with the Securities and Exchange Commission.

2. INITIAL PUBLIC OFFERING

On March 3, 2000, Prime Response completed an initial public offering (the
"IPO") of 3,500,000 shares of its common stock. On April 3, 2000, the
underwriters of the initial public offering exercised the over-allotment option
to purchase an additional 525,000 shares. All 4,025,000 shares covered by Prime
Response's Registration Statement on Form S-1, were sold by Prime Response at a
price of $18.00 per share, less an underwriting commission of $1.26 per share.
Net proceeds to the Company, after deducting underwriting commissions and
offering expenses, were approximately $65.4 million. Upon the consummation of
Prime Response's initial public offering on March 3, 2000, all of the then
outstanding Series A, B and C Preferred Stock automatically converted into
common stock. (See Note 6).

6
<PAGE>

3. SIGNIFICANT ACCOUNTING POLICIES

Net Loss per Share

Basic net loss per share is computed by dividing the net loss for the period
by the weighted average number of common shares outstanding during the period.
Diluted net loss per share does not differ from basic net loss per share since
potential common shares from conversion of preferred stock and exercise of stock
options and warrants are antidilutive for all periods presented.

Net loss per share for the three and nine months ended September 30, 2000 and
1999 is computed using the weighted average number of common shares outstanding.
Net loss available to common stockholders includes preferred stock dividends of
$0, $1.8 million, $3.1 million and $4.4 million for the three and nine months
ended September 30, 2000 and 1999, respectively, as well as participation
payments in cash and stock totalling $39.4 million for the nine months ended
September 30, 2000, in connection with the Series A, B and C preferred stock.
The number of shares to be issued for the participation payment is calculated
based on $12.00 per share.

Basic and diluted weighted average shares outstanding for the three and nine
months ended September 30, 2000 exclude the potential common shares from stock
options and warrants because to include such shares would have been
antidilutive. As of September 30, 2000, 3.1 million potential common shares were
outstanding.

Accounting Pronouncements

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 (as amended by SAB 101A and SAB 101B) will be required
in the Company's fourth quarter of the fiscal year 2000. The effects of applying
this guidance, if any, will be reported as a cumulative effect adjustment
resulting from a change in accounting principle. Prime Response does not
anticipate that the implementation of SAB 101 will have a material impact on its
financial statements.

4. OTHER ASSETS

During March 2000, Prime Response entered into an OEM software license
agreement with a provider of customer optimization technology. Prime Response
will pay royalties for all licenses sold that integrate the customer
optimization technology. Prime Response paid $1.0 million as an initial non-
refundable prepayment of these royalties. In addition, Prime Response received a
warrant to purchase 40,000 shares of common stock with an exercise price of
$9.73 per share and a five-year term. Prime Response has calculated the fair
value of the shares underlying the warrant to be $276,000 using the Black
Scholes model. The $1.0 million paid has been recorded as a long term asset on
the balance sheet with $276,000 being allocated to the warrants and the
remainder will be recorded as royalty expense in cost of sales as license sales
are recognized. During the quarter ended September 30, 2000, $79,000 was
recognized and recorded as a cost of license sale.

During July 2000, Prime Response entered into an OEM software license
agreement with a third party provider of enterprise portal software. Prime
Response will pay royalties for all licenses sold that integrate this third
party's enterprise portal software. Prime Response paid $0.8 million as an
initial non-refundable prepayment of these royalties. This $0.8 million has been
recorded as a long term asset at September 30, 2000 and will be recognized as a
cost of sales as license sales are recognized.

5. LONG-TERM DEBT

On October 28, 1999, Prime Response entered into an agreement with Greyrock
Capital which provided for a term loan of $2.0 million which was received by
Prime Response upon execution of the agreement. The agreement also allowed Prime
Response to borrow up to $3.0 million against outstanding receivable balances.
During March 2000, Prime Response repaid the $2.0 million term loan. The credit
facility was terminated during June 2000.

7
<PAGE>

During January 2000, Prime Response entered into an agreement with Kite
Limited evidenced by a promissory note in the amount of $4.3 million for the
repurchase of 1,249,500 shares of redeemable common stock from a former
shareholder at $3.42 per share. Prime Response repaid the note in full during
March 2000, and recorded the shares as treasury stock.

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK

Conversion

Upon the consummation of the IPO, the Series A, B and C preferred shares were
converted into a total of 6,324,000 shares of common stock. Each share of
Series A, B and C preferred stock converted into 3.1282, 0.7858 and 0.75 shares,
respectively, of common stock.

Dividends

Upon the consummation of the IPO, the holders of Series A and B preferred
stock received cumulative dividends in the amount of $3.59 and $0.51 per share,
respectively. Cumulative dividends on the Series A and B preferred stock were
$4.5 million and $1.0 million, respectively. All of the Series A dividends were
paid in 374,821 shares of common stock. Series B dividends were paid $0.9
million in cash and 6,661 in shares of common stock. The holders of Series C
preferred stock were not entitled to dividends.

Participation Payment

Upon the consummation of the IPO, the holders of Series A and C preferred
stock received, in addition to accrued dividends and the common stock conversion
feature, $20.52 and $3.00 per share, respectively, paid in 2,433,382 shares of
common stock. The holders of Series B preferred stock received, in addition to
accrued dividends and the conversion feature, $6.00 per share which was paid
with $9.5 million in cash and 56,875 in shares of common stock.

7. STOCKHOLDERS' EQUITY

Stock Options

In connection with the grant of certain stock options to employees during the
nine months ended September 30, 2000, Prime Response recorded deferred stock
compensation of approximately $0.3 million, representing the difference between
the estimated fair market value of the common stock on measurement date and the
exercise price. Compensation related to options, which vest over time, was
recorded as a component of stockholders' equity and is being amortized over the
vesting periods of the related options. Prime Response recorded compensation
expense of approximately $0.2 million and $0.8 million during the three and nine
months ended September 30, 2000, respectively, relating to the amortization of
deferred compensation recorded during 1999 and 2000, and the acceleration of a
former employees' options. Compensation expense is disclosed as a non-cash
expense in the consolidated Statement of Operations line items.

During the three months ended September 30, 2000, Prime Response issued
40,000 stock options to members of its newly formed Marketing Advisory Board.
These options are immediately vested. In connection with this grant, the Company
recorded non-cash compensation expense of $0.3 million.

8. COMPREHENSIVE INCOME

Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income includes certain changes in equity that are
excluded from net income, such as translation adjustments.

8
<PAGE>

Redeemable Common Stock

Andersen Consulting or its affiliate had the right to require Prime Response
to repurchase the 428,000 shares it purchased in December 1999 for $4.0 million.
The put right terminated upon the IPO and accordingly these shares were moved
from redeemable common stock to common stock upon the IPO. In addition, during
the nine months ended September 30, 2000, Prime Response repurchased 1,249,500
shares of common stock from a former shareholder that had the right to put these
shares to Prime Response prior to September 30, 2000. These shares were recorded
as redeemable common stock at December 31, 1999.

Warrants

In connection with achieving designated sales targets, Andersen Consulting
vested in 10,500 and 31,500 shares of the Company's common stock underlying its
performance warrants during the three and nine months ended September 30, 2000,
respectively. Using the Black Scholes model, Prime Response calculated the fair
value of the shares underlying the warrants to be $37,000 and $176,000 during
the three and nine months ended September 30, 2000, respectively. This amount is
included as a non-cash sales and marketing expense for the three and nine months
ended September 30, 2000.

9. SEGMENT ANALYSIS

Prime Response earned all of its revenue from external customers. Prime
Response is organized into three segments, software licenses, services and
support and applications hosting, to reflect the key sales lines. The
distribution of revenues and total assets by geographic location is as follows
(in thousands):

<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
------------------------------------------- ------------------------------------------
REST REST
NORTH OF NORTH OF
AMERICA UK WORLD TOTAL AMERICA UK WORLD TOTAL
------- ------- ------- ------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses...... $ 1,647 $ 1,185 $ 483 $ 3,315 $ 351 $ 1,099 $ 204 $ 1,654
Services and support... 950 1,616 236 2,802 555 790 110 1,455
Applications hosting... - 821 - 821 - 1,095 - 1,095
-------- ------- ------- ------- -------- --------- -------- ---------
Total revenues....... $ 2,597 $ 3,622 $ 719 $ 6,938 $ 906 $ 2,984 $ 314 $ 4,204

Gross profit:
Software licenses...... $ 1,568 $ 1,185 $ 483 $ 3,236 $ 351 $ 1,099 $ 204 $ 1,654
Services and support... 51 555 31 637 (83) 177 47 141
Applications hosting... - (22) - (22) - 448 - 448
-------- ------- ------- ------- -------- --------- -------- ---------
Total gross profit... $ 1,619 $ 1,719 $ 514 $ 3,851 $ 268 $ 1,724 $ 251 $ 2,243
======== ======= ======= ======= ======== ========= ======== =========
</TABLE>

<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------------------------------------- ------------------------------------------
REST REST
NORTH OF NORTH OF
AMERICA UK WORLD TOTAL AMERICA UK WORLD TOTAL
------- ------- ------- ------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses...... $ 6,409 $ 5,149 $ 2,098 $13,656 $ 649 $ 3,935 $ 695 $ 5,278
Services and support... 2,510 4,213 718 7,441 1,503 2,893 313 4,709
Applications hosting... - 2,409 - 2,409 - 3,080 - 3,080
-------- ------- ------- ------- -------- --------- -------- ---------
Total revenues....... $ 8,919 $11,771 $ 2,816 $23,506 $ 2,152 $ 9,908 $ 1,008 $ 13,067

Gross profit:
Software licenses...... $ 6,330 $ 5,149 $ 2,098 $13,577 $ 649 $ 3,935 $ 695 $ 5,278
Services and support... (394) 1,718 190 1,514 146 1,122 105 1,373
Applications hosting... - (190) - (190) - 992 - 992
-------- ------- ------- ------- -------- --------- -------- ---------
Total gross profit... $ 5,936 $ 6,677 $ 2,288 $14,901 $ 795 $ 6,049 $ 800 $ 7,643

Total assets(1)...... $44,319 $ 8,270 $ 2,219 $54,808 $ 13,481 $ 11,392 $ 642 $ 25,515
======== ======= ======= ======= ======== ========= ======== =========

</TABLE>
(1) For 1999, the total asset numbers are as of December 31, 1999.

10. RELATED PARTY TRANSACTIONS

During the three and nine months ended September 30, 2000, Prime Response
recorded revenue totaling $108,000 and $162,000, respectively, from a company
which is partly owned by a significant shareholder of Prime Response. At
September 30, 2000, $121,700 remained outstanding from this related party.

During the three and nine months ended September 30, 2000, Prime Response
recorded revenue totaling $4,000 and $383,000, respectively, from a company
which is partly owned by a significant shareholder and which one of our
Directors holds a directorship position. At September 30, 2000, $84,000
remained outstanding from this related party.

9
<PAGE>

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. For this
purpose, statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements involve risks and uncertainties and are not guarantees of future
performance. Actual results may differ materially from those indicated in such
forward-looking statements as a result of certain factors including, but not
limited to, those set forth under the heading "Factors That May Affect
Results."

OVERVIEW

Prime Response is a leading provider of integrated eMarketing software
solutions that enable businesses with large customer bases to create, manage and
execute highly targeted Internet, wireless and traditional marketing campaigns
that build more loyal and profitable customer relationships. We have over 12
years of experience in the use of technology to plan and manage marketing
programs. We were founded in 1987 in the United Kingdom. Prior to 1999, our
corporate headquarters were in London, England, and our primary focus was on the
European market. In 1998, we began to increasingly target the North American
market, and in July 1999, moved our corporate headquarters to Cambridge,
Massachusetts.

Since 1995, we have incurred significant development costs to develop our
technology and new software products, particularly to introduce our latest
generation of Internet-based marketing management solutions. With the
introduction of these products, we anticipate that research and development
expenses will stabilize and will decrease as a percentage of total revenues. We
have expanded our direct sales force and increased marketing expenditures
related to the introduction of our new product offerings. We expect sales and
marketing expenses to continue to grow, in absolute dollars, but decrease as a
percentage of revenue.

We generate revenues principally from:

. licensing our software products directly to clients;

. providing related professional services, including implementation,
consulting, support and training; and

. providing applications hosting services, including providing marketing
database outsourcing services.

Our license agreements typically require our clients to pay an upfront
license fee for one or more software solutions for a specified number of
customer records in their database. The amount of the license fee varies
principally depending upon the size of the client's database and number of
databases. Clients can subsequently pay additional license fees to allow
additional entities within their corporate structure to access our applications,
to purchase additional solutions or when the size of their database increases.

10
<PAGE>

Andersen Consulting Relationship

On December 6, 1999, Prime Response and Andersen Consulting entered into a
joint marketing agreement and, along with an affiliate of Andersen Consulting, a
stock and warrant purchase agreement. Pursuant to the stock and warrant
purchase agreement, an affiliate of Andersen Consulting purchased 428,000 shares
of common stock and Andersen Consulting received a warrant to purchase 682,000
shares of common stock. This warrant has an exercise price of $9.35 per share
and vested on September 9, 2000. The aggregate purchase price paid by Andersen
Consulting for the shares of common stock and this warrant was $4.0 million.
Andersen Consulting has no performance obligations under the stock and warrant
purchase agreement or this warrant.

Prime Response has recorded the stock at $9.35 per share. The fair value of
the stock is $4,622,400. Prime Response calculated the fair value of the
warrants on date of grant using the Black Scholes model with the following
assumptions: 7 year useful life (life of warrants), 6.07% risk-free interest
rate, zero dividends and 85.19% volatility. Based on this calculation, the
extended fair value of the warrants is $6,536,080. Prime Response has recorded
an intangible asset of $7,010,000 which is equal to the excess of the aggregate
fair values of the common stock and warrants over the purchase price. This asset
is being amortized as a non-cash sales and marketing expense over its estimated
useful life of four years, which reflects the term of the marketing agreement.

Prime Response issued a performance warrant to purchase 375,000 shares of
common stock to Andersen Consulting. Of this amount, 300,000 shares will vest in
share increments determined by the extent to which $2.0 billion exceeds $357.8
million (which represents Prime Response's market capitalization at the time of
the initial public offering). An additional 75,000 shares will vest in
increments of 7,500 shares for each $100.0 million that Prime Response's market
capitalization exceeds $2.0 billion, up to a maximum market capitalization of
$3.0 billion. This warrant has an exercise price of $9.35 per share. As of
September 30, 2000, there had not been any vesting of the above performance
warrants. Prime Response also issued a performance warrant to purchase 375,000
shares of common stock to Andersen Consulting which will vest in increments of
10,500 shares for each $1.0 million of sales resulting from joint marketing
efforts up to $25.0 million and then in increments of 4,500 shares of common
stock for each $1.0 million of sales from $25.0 million to $50.0 million. This
warrant has an exercise price of $9.35 per share. As of September 30, 2000,
31,500 shares of the Company's common stock underlying these warrants had
vested.

All of the warrants discussed above have a seven-year term. In the event that
the marketing agreement is terminated as a result of a breach by Andersen
Consulting, no further vesting under the warrants will occur, but those warrants
already exercisable will remain exercisable during their term to the extent they
are vested at the time of the termination.

Prime Response is obligated to pay Andersen Consulting a commission if
designated sales tragets are met. The first five transactions were paid at a 50%
rate, and all subsequent transactions were paid at a 20% rate. The first five
transactions were completed during the second quarter of 2000 and Prime Response
paid $1.2 million to Andersen Consulting. During the third quarter of 2000,
Prime Response recorded a commission to Andersen Consulting at the 20% rate in
the amount of $150,000. The commissions are included in sales and marketing
expenses.

Prime Response is obligated to engage Andersen Consulting for consulting
services of at least $1.0 million before December 31, 2001. As of September 30,
2000, approximately $0.7 million had been expended. In addition, if designated
sales targets are met, Andersen Consulting is obligated to provide up to $1.0
million in funding for joint marketing efforts, business development personnel,
structure feedback and sales support. The majority of the $1.4 million
commission earned by Andersen Consulting in the nine months ended September 30,
2000 will be used to fund these activities. None of these funds had been
expended as of September 30, 2000. The expenditure of these funds will be
controlled by a committee comprised of both Andersen Consulting and Prime
Response personnel.

11
<PAGE>

RESULTS OF OPERATIONS
The following table sets out selected financial data as a percentage of
revenue for the periods indicated:

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software licenses................................................ 47.8% 39.3% 58.1% 40.4%
Services and support............................................. 40.4% 34.6% 31.7% 36.0%
Applications hosting............................................. 11.8% 26.1% 10.2% 23.6%
--------- -------- -------- --------
Total Revenues................................................. 100.0% 100.0% 100.0% 100.0%

Cost of revenues:
Software licenses................................................ 1.1% 0.0% 0.3% 0.0%
Services and support............................................. 30.8% 29.3% 24.8% 24.9%
Applications hosting............................................. 12.2% 15.4% 11.1% 15.9%
Non-cash cost of good sold....................................... 0.4% 2.0% 0.4% 0.7%
--------- -------- -------- --------
Total cost of revenues......................................... 44.5% 46.7% 36.6% 41.5%

Gross profit...................................................... 55.5% 53.3% 63.4% 58.5%

Operating expenses:
Sales and marketing.............................................. 96.8% 71.0% 85.0% 65.2%
Non-cash sales and marketing..................................... 12.3% 0.4% 9.2% 0.3%
Research and development......................................... 39.9% 62.6% 34.4% 51.4%
Non-cash research and development................................ 0.5% 0.8% 0.4% 0.3%
General and administrative....................................... 30.2% 22.8% 21.0% 20.3%
Non-cash general and administrative.............................. 0.4% 0.2% 0.4% 12.9%
Amortization of intangible assets................................ 0.0% 7.3% 0.0% 7.1%
--------- -------- -------- --------
180.1% 165.1% 150.4% 157.5%

Other expense (income):
Interest income.................................................. (9.2)% (1.1)% (6.5)% (0.5)%
Interest expense................................................. 0.5% 0.5% 1.2% 0.7%
Interest expense related to beneficial conversion feature........ 0.0% 59.5% 0.0% 19.1%
Loss on foreign exchange......................................... (0.3)% 0.0% (0.1)% 0.4%
--------- -------- -------- --------
Loss before income taxes.......................................... (115.6)% (170.7)% (81.6)% (118.7)%
Provision for income taxes........................................ 0.0% 0.2% (0.3)% 0.1%
--------- -------- -------- --------
Net loss.......................................................... (115.6)% (170.9)% (81.3)% (118.8)%
Preferred stock dividends and participation payment............... 0.0% 72.9% 175.4% 33.3%
--------- -------- -------- --------
Net loss attributable to common stockholder....................... (115.6)% (243.8)% (256.7)% (152.1)%
========= ======== ======== ========
</TABLE>

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

The following discussion reviews the results of operations for the three
and nine months ended September 30, 2000 (the "2000 Quarter" and "2000 Period"),
respectively, compared to the three and nine months ended September 30, 1999
(the "1999 Quarter" and "1999 Period"), respectively.

Revenues

Total revenues increased by $2.7 million, or 65.0%, to $6.9 million for the
2000 Quarter from $4.2 million for the 1999 Quarter, and by $10.4 million, or
79.9% to $23.5 million for the 2000 Period from $13.1 million for the 1999
Period.

Software Licenses. Software license revenues increased by $1.7 million, or
100.4%, to $3.3 million for the 2000 Quarter from $1.6 million for the 1999
Quarter, and by $8.4 million, or 158.7% to $13.7 million for the 2000 Period
from $5.3 million for the 1999 Period. Software license revenues increased to
47.8% of total revenues for the 2000 Quarter from 39.3% of total revenues for
the 1999 Quarter and to 58.1% of total revenues for the 2000 Period from 40.4%
of total revenues for the 1999 Period. The increase in software license revenues
was due primarily to growing market acceptance of our Prime@Vantage and
[email protected] products which were released for general availability during
December 1999.

Services and Support. Revenues from services and support increased by $1.3
million, or 92.6%, to $2.8 million for the 2000 Quarter from $1.5 million for
the 1999 Quarter, and by $2.7 million, or 58.0% to $7.4 million for the 2000
Period from $4.7 million for the 1999 Period. These revenues increased to 40.4%
of total revenues for the 2000 Quarter from 34.6% of total revenues for the 1999
Quarter. For the 2000 Period, these revenues were 31.7% of total revenues
compared to 36.0% during the 1999 Period. The dollar increase in service and
support revenues was due primarily to an increase in the number of sales of
software licenses, which resulted in increased demand for services and sales of
software maintenance and technical support.

12
<PAGE>

Applications Hosting. Revenues from applications hosting decreased by $0.3
million or 25.0%, to $0.8 million for the 2000 Quarter from $1.1 million for the
1999 Quarter, and by $0.7 million, or 21.8% to $2.4 million for the 2000 Period
from $3.1 million for the 1999 Period. These revenues represented 11.8% of total
revenues for the 2000 Quarter compared to 26.1% of total revenues for the 1999
Quarter, and 10.2% of total revenues for the 2000 Period compared to 23.6% of
total revenues for the 1999 Period. The dollar decrease in applications hosting
revenue is primarily due to reduced volume in the services provided to existing
customers during the 2000 Quarter and Period as well as the expiration of
certain contracts at the end of 1999. During the 2000 Period, one new contract
was signed. The decrease as a percentage of revenues is due primarily to the
increase in revenues from software licenses as the Company continues to shift
its focus to increasing software license revenue.

Cost of Revenues

Total cost of revenues increased by $1.1 million, or 57.4%, to $3.1 million
for the 2000 Quarter from $2.0 million for the 1999 Quarter, and by $3.2
million, or 58.7% to $8.6 million for the 2000 Period from $5.4 million for the
1999 Period.

Software License. Software license costs include the commission earned under
an OEM agreement for our Prime@Vantage Optimizer product. These costs were
$79,000 for the 2000 Quarter and Period compared to none for the 1999 Quarter
and Period.

Services and Support. Services and support costs include salary expense and
other related costs for our professional services, maintenance and telephone
support staffs, as well as third-party contractor expenses. Services and support
costs increased by $0.9 million, or 73.7%, to $2.1 million in the 2000 Quarter
from $1.2 million in the 1999 Quarter, and by $2.6 million or 79.9% to $5.8
million for the 2000 Period from $3.2 million for the 1999 Period. Services and
support costs were 76.2% of services and support revenues for the 2000 Quarter,
compared to 84.5% of such revenues for the 1999 Quarter, and 78.5% of total
revenues for the 2000 Period compared to 69.0% for the 1999 Period. The increase
in services and support costs for the 2000 Period was primarily due to (i)
implementation services provided to our "early adopter" customers and (ii) a lag
in hiring professional service consultants which resulted in the use of more
expensive outside contractors to complete several implementations.

Applications Hosting. Costs attributable to applications hosting consist
primarily of personnel-related costs and equipment maintained for the provision
of services to clients. These costs increased by $0.2 million, or 30.3%, to $0.8
million for the 2000 Quarter, from $0.6 million for the 1999 Quarter, and by
$0.5 million, or 24.5% to $2.6 million for the 2000 Period from $2.1 million for
the 1999 Period. These costs were 102.7% of applications hosting revenues for
the 2000 Quarter, compared to 59.1% of such revenues for the 1999 Quarter, and
107.9% of total revenues for the 2000 Period compared to 67.8% for the 1999
Period. The increase in these costs as a percentage of outsourcing revenue for
the 2000 Quarter and the 2000 Period is primarily due to (i) costs associated
with the implementation of a disaster recovery system and (ii) the decreasing
revenue base.

The non-cash cost of revenues decreased to $29,000 for the 2000 Quarter from
$84,000 for the 1999 Quarter, and to $86,000 for the 2000 Period from $89,000
for the 1999 Period. This expense represents the amortization of stock
compensation expense in connection with the granting of stock options. The
expense results from the difference between the estimated fair market value of
the common stock on measurement date and the exercise price of the option, which
is being recognized over the vesting period.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, public relations and marketing materials and trade shows.
Sales and marketing expenses increased by $3.7 million, or 125.1%, to $6.7
million for the 2000 Quarter, from $3.0 million for the 1999 Quarter, and by
$11.5 million, or 134.5% to $20.0 million for the 2000 Period from $8.5 million
for the 1999 Period. Sales and marketing expenses increased to 96.8% of total
revenues for the 2000 Quarter, compared to 71.0% for the 1999 Quarter, and to
85.0% of total revenues for the 2000 Period from 65.2% for the 1999 Period. The
increase in such expenses during the 2000 Quarter and the 2000 Period was
primarily due to: (i) commission expense of $0.2 million and $1.4 million earned
by Andersen Consulting during the 2000 Quarter and the 2000 Period,
respectively; and (ii) increases in staffing and personnel related costs, as we
continued to expand our direct sales force and expand our presence in North
America. We anticipate that sales and marketing expenses will continue to
increase in absolute dollars, but decrease as a percentage of revenue, as we
further expand our direct sales force and invest in the marketing and promotion
of our new generation of eMarketing management software products.

13
<PAGE>

The non-cash sales and marketing expense increased to $0.9 million for the
2000 Quarter, from $16,000 for the 1999 Quarter, and to $2.2 million for the
2000 Period from $35,000 for the 1999 Period. This expense represents (i) the
amortization of stock compensation in connection with the granting of stock
options, which results from the difference between the estimated fair market
value of the common stock on measurement date and the exercise price of the
option which is being recognized over the vesting period; (ii) the amortization
of the intangible asset recorded in connection with the Andersen Consulting
agreement; (iii) the value of the 10,500 and 31,500 warrants earned by Andersen
Consulting during the 2000 Quarter and 2000 Period, respectively, and (iv) the
value of the 40,000 stock options granted during the 2000 quarter to members of
the newly formed Marketing Advisory Board.

Research and Development. Research and development expenses consist primarily
of personnel and equipment-related costs directly associated with the
development of both our existing and future products. Research and development
expenses increased by $0.2 million, or 5.2%, to $2.8 million for the 2000
Quarter, from $2.6 million for the 1999 Quarter, and by $1.4 million or 20.4% to
$8.1 million for the 2000 Period from $6.7 million for the 1999 Period. Research
and development expenses decreased to 39.9% of total revenues in the 2000
Quarter, from 62.6% for the 1999 Quarter, and to 34.4% for the 2000 Period from
51.4% for the 1999 Period. The dollar increase in expenses for the 2000 Period
reflects the spending on third party contractors who perform quality assurance
and support for earlier versions of our product and the acquisition of equipment
to support research and development activities. These research and development
activities include new product releases, integration efforts to integrate our
products with other third party software products and porting and certification
of our products across multiple hardware platforms, operating systems and
databases. During the 2000 Period, the Company announced three new product
releases, Prime@Vantage Wireless, the first technology solution to provide
integrated 1:1 marketing capabilities via wireless channels; and Prime@Vantage
Optimizer, a product which allows real-time optimization across all emarketing
target channels and offers; and Marketing Mission Control, a product which
permits integration of application data and information sources into a single
interface. The percentage decrease in costs was primarily due to (i) the
completion of the development activity associated with our new Prime@Vantage and
[email protected] products, which occurred during fiscal 1999; and (ii) the
increase in our revenue base.

The non-cash research and development expense was $31,000 for the 2000 Quarter
and $34,000 for the 1999 Quarter, and $94,000 for the 2000 Period and $34,000
for the 1999 Period. This expense represents the amortization of stock
compensation expense in connection with the granting of stock options. The
expense results from the difference between the estimated fair market value of
the common stock on measurement date and the exercise price of the option, which
is being recognized over the vesting period.

General and Administrative. General and administrative expenses consist
primarily of employee salaries and related expenses for executive, finance and
administrative personnel as well as external professional fees, certain
centrally-borne costs and the provision for doubtful accounts. General and
administrative expenses increased by $1.1 million, or 118.5%, to $2.1 million
for the 2000 Quarter, from $1.0 million for the 1999 Quarter, and by $2.3
million or 86.2% to $5.0 million for the 2000 Period from $2.7 million for the
1999 Period. These expenses increased to 30.2% of total revenues for the 2000
Quarter, from 22.8% for the 1999 Quarter, and to 21.0% for the 2000 Period from
20.3% for the 1999 Period. The increase in dollars and as a percentage of
revenues was primarily attributable to the $0.6 million provision for doubtful
accounts that the Company recorded in the 2000 Quarter in connection with two
license sale receivables for which collectibility became uncertain during the
2000 Quarter.

The non-cash general and administrative expense increased to $30,000 for the
2000 Quarter, from $8,000 for the 1999 Quarter, and decreased to $89,000 for the
2000 Period from $1.7 million for the 1999 Period. This expense represents the
amortization of stock compensation expense in connection with the granting of
stock options and restricted shares. The expense results from the difference
between the estimated fair market value of the common stock on measurement date
and the exercise price of the option, which is being recognized over the vesting
period. The $1.7 million expense for the 1999 Period resulted from compensation
expense related to restricted shares which was recorded on the grant date.

Amortization of Goodwill and Other Intangible Assets. Amortization expense
decreased by $0.3 million, or 100%, to none for the 2000 Quarter, from $0.3
million for the 1999 Quarter, and by $0.9 million or 100% to none for the 2000
Period from $0.9 million for the 1999 Period. This expense was solely
attributable to the acquisition of certain intellectual property rights and
other intangible assets related to the MIND software product, which are fully
amortized.

Interest Income. Interest income increased by $0.6 million, or 100%, to $0.6
million for the 2000 Quarter, from $44,000 for the 1999 Quarter, and by $1.5
million or 100% to $1.5 million for the 2000 Period from $62,000 for the 1999
Period. The increase is due to interest income earned on proceeds from
the Company's initial public offering.

Interest Expense. Interest expense increased to $32,000 for the 2000 Quarter,
from $24,000 for the 1999 Quarter, and to $0.3 million for the 2000 Period from
$87,000 for the 1999 Period. The increase is primarily due to interest expense
on the Company's credit facility, which was obtained in November 1999 and
terminated in June 2000.

Interest Expense Related to Beneficial Conversion Feature. Interest expense
related to beneficial conversion feature was $2.5 million for the nine months
ended September 30, 1999. Interest expense related to beneficial conversion
feature for the nine months ended September 30, 1999 results from the issuance
of promissory notes which were immediately convertible into series C preferred
stock with the conversion amount determinable by dividing the principal amount
of the notes by $3.00, which represents a discount from the fair value of the
common stock on the date of issuance. The values attributable to the conversion
feature on each note represent an incremental yield, or a beneficial conversion
feature, which are recognized as additional interest on the notes.

14
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

On March 3, 2000 we completed our Initial Public offering in which we sold
3,500,000 shares of common stock at $18.00 per share. During April 2000, the
underwriters of the IPO exercised their over-allotment option to purchase an
additional 525,000 shares. Net proceeds to the Company after deducting
underwriting commissions and estimated offering expenses were approximately
$65.4 million. Prior to the IPO, our primary source of funding had been through
the private sale of convertible preferred stock and attached warrants, which
totaled $39.1 million in aggregate net proceeds as of December 31, 1999.

In October 1999, we entered into a $5.0 million financing arrangement with
Greyrock Capital, a Bank of America company, providing an upfront term loan of
$2.0 million with the balance being funded against our receivables position
within the United States and in the United Kingdom. The arrangement has a 12-
month renewable term. The $2.0 million that was borrowed during 1999 was repaid
during March 2000 with the proceeds from the IPO. The credit facility was
terminated during June 2000.

Cash and cash equivalents were $32.1 million at September 30, 2000, compared
to $4.0 million at December 31, 1999. In addition, working capital at September
30, 2000, was $30.4 million compared to $(1.3) million at December 31, 1999. The
increase from December 31, 1999 is primarily attributable to the proceeds from
the IPO.

Net cash used in operating activities was $19.3 million during the nine
months ended September 30, 2000, and $7.5 million during the nine months ended
September 30, 1999. The majority of the cash used in operating activities during
the nine months ended September 30, 2000 results from costs incurred building an
infrastructure to penetrate the North American market.

Capital expenditures were $2.0 million during the nine months ended September
30, 2000 and $1.1 million during the nine months ended September 30, 1999. Due
to the expansion of staff and the scope of activities we are expanding our
office facilities which will require additional investment in furniture and
equipment. The Company has entered into a ten year lease agreement for its new
corporate headquarters to lease approximately 15,000 square feet of space in
Brighton, Massachusetts. In connection with this move the Company has also
entered into a Construction Management Agreement to build out this space for an
estimated cost of approximately $1.0 million. In addition, we intend to continue
to invest in our systems infrastructure to better support our clients, improve
the ongoing efficiency of our product development process and facilitate
internal communications and virtual team working.

Net cash provided by financing activities was $49.4 million during the nine
months ended September 30, 2000, and $10.6 million during the nine months ended
September 30, 1999. During the nine months ended September 30, 2000 we completed
our IPO and received net proceeds of $65.4 million after deducting underwriting
commissions and offering expenses. From these net proceeds, the Company repaid
certain indebtedness totalling $6.3 million and paid dividends and participation
payments on the preferred stock totalling $10.5 million.

Our strategic initiatives include (i) the rollout of our software products:
Prime@Vantage, [email protected], Prime@Vantage Wireless, Prime@Vantage
Optimizer, and Marketing Mission Control, (ii) the integration of our products
with various other third party software products and platforms and (iii) the
expansion of our North American operations. These initiatives as well as
personnel additions and the funding of operating losses will require a
substantial amount of working capital.

15
<PAGE>

Prime Response is obligated to engage Andersen Consulting for consulting
services of at least $1.0 million during the period from contract execution to
December 31, 2001. As of September 30, 2000, approximately $0.7 million had been
expended. In addition, if designated sales targets are met, Andersen Consulting
is obligated to provide up to $1.0 million in funding for joint marketing
efforts, business development personnel, structure feedback and sales support.
None of these funds had been expended as of September 30, 2000. The expenditure
of these funds will be controlled by a committee comprised of both Andersen
Consulting and Prime Response personnel.

As a result of our losses, we do not expect to pay United States income taxes
in the foreseeable future.

It is the Company's belief that its existing balance of cash and cash
equivalents will be sufficient to meet the Company's working capital and
anticipated capital expenditure needs for at least the next 12 months.
Thereafter, the Company may require additional sources of funds to continue to
support our business. There can be no assurance that such capital, if needed,
will be available or will be available on terms the Company finds acceptable.

FACTORS THAT MAY AFFECT RESULTS

The following important factors, among other things, could cause Prime
Response's actual operating results to differ materially from those indicated or
suggested by forward-looking statements made in this Form 10-Q or presented
elsewhere by management from time to time.

WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES, AND WE MAY NOT BE PROFITABLE IN
THE FUTURE.

In 1995, we began to transition from a marketing database service bureau
to a software company. Since that time, we have incurred substantial operating
losses. We cannot be certain if or when we will become profitable. Failure to
achieve profitability within the timeframe expected by investors or to maintain
profitability may adversely affect the market price of our common stock. In
recent periods, we have increased expenditures in certain areas, particularly in
sales and marketing in the United States and in product development. We expect
our sales and marketing expenses to continue to increase. As a result, we expect
to incur net losses and negative operating cash flow for the foreseeable future.
Although we have experienced revenue growth in recent periods, we cannot be
certain that these growth rates are sustainable, or that we will ever generate
revenues at a level sufficient to cover our anticipated expenses, if at all.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE BECAUSE WE DEPEND ON A SMALL
NUMBER OF LARGE ORDERS.

We derive a significant portion of our software license revenues in each
quarter from a small number of relatively large orders. The criteria for a
client's acceptance of a product may delay our ability to recognize revenue
from the products we ship. Our operating results for a particular fiscal
period could be materially adversely affected if we are unable to complete
those transactions, or satisfy our clients' acceptance criteria, on schedule
at anticipated levels.

DISAPPOINTING QUARTERLY REVENUES OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL.

Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. Therefore, you should not
rely on period-to-period comparisons of revenues or results of operations as
an indication of future performance. If our quarterly revenues or operating
results fall below the expectations of investors or securities analysts, the
price of our common stock could fall substantially.

Our quarterly license revenues or operating results may fluctuate as a
result of a variety of factors, including the following:

. software license revenues in any quarter depend on contracts closed,
orders shipped and the satisfaction of clients' acceptance criteria in
that quarter;

. the market in which we compete is relatively new and rapidly evolving;

. we expect that, for the foreseeable future, revenues will come from
licenses to a small number of clients, so delays, cancellations of orders,
or an inability by any of our customers to pay for software that they have
accepted or acceptance of our software by a few clients can significantly
impact revenues or operating results within a quarter;

<PAGE>

. our sales cycle is relatively long; and

. revenues will be affected by the timing of introduction of new
products or product enhancements by us or our competitors.

Any decline in license revenues could also cause a decline in our services
and support revenues in the same quarter or in subsequent quarters.

SEASONAL TRENDS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE, WHICH
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

In the future, we may experience seasonality in our business, particularly
because we do a significant percentage of our business in Europe, which
typically experiences a slowdown in business during August, and because our
products typically involve a significant initial investment, the availability
of which is often dependent on a client's fiscal period. Accordingly, we may
generate lower revenues during the summer months and higher revenues during the
calender year-end months. If we do experience these revenue fluctuations,
market analysts and investors may not be able to predict our quarterly or
annual operating results, and if we fail to meet expectations of market
analysts or investors, the price of our common stock could decline.

OUR RESULTS OF OPERATIONS WOULD BE ADVERSELY AFFECTED IF OUR INVESTMENTS IN
PERSONNEL AND INFRASTRUCTURE DO NOT CORRESPOND WITH THE TIMING OF REVENUE
GENERATED AS A RESULT OF SUCH INVESTMENTS.

Most of our expenses, such as employee compensation, sales and marketing
expenses, computer equipment costs and rent for properties, are either
relatively fixed in the short term or incurred in advance of sales. Moreover,
our expense levels are based in part on our expectations regarding future
revenues. As a result, if revenues for a particular quarter are below
expectations, we will most likely not be able to proportionately reduce
operating expenses for that quarter. Therefore, a shortfall in revenues would
have a disproportionate effect on our expected operating results for that
quarter and could cause the trading price of our common stock to decline.

WE INCUR CHARGES AGAINST OUR EARNINGS WHICH COULD HAVE AN ADVERSE IMPACT ON
OUR RESULTS OF OPERATIONS.

We have issued warrants which become exercisable upon the attainment of
certain revenue targets and market capitalization levels. Because we cannot
predict if and when these targets will be attained, we cannot predict when
charges to expenses related to these warrants will be incurred. Furthermore,
the amount of these charges will depend on the price of our common stock when
the warrants are earned.

WE HAVE RELEASED A NEW PRODUCT FAMILY AND ARE DEPENDENT ON ITS MARKET
ACCEPTANCE.

We have released the latest generation of our marketing management
solutions--Prime@Vantage, which introduces a new software architecture,
[email protected], which introduces new functionality, including the ability to
generate immediate and personalized marketing initiatives over the internet,
Prime@Vantage Wireless which provides integrated 1:1 marketing capabilities via
wireless channels, Prime@Vantage Optimizer, which allows real-time optimization
across all emarketing target channels and offers, and Marketing Mission Control,
which permits integration of application data and information sources into a
single interface. Achievement of our overall business goals is dependent upon
the sustained market acceptance at desired pricing levels of these new products.
If these products do not achieve and sustain market acceptance due to bugs, a
lack of functionality considered important in the marketplace, or any other
reason, we will experience a material adverse effect on our business, prospects,
operating results and financial condition.

17
<PAGE>

OUR FAILURE TO INCREASE OUR UNITED STATES REVENUES AND OPERATIONS WOULD
ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION.

Although to date a significant portion of our revenues have been derived
from our international operations, and the growth of such revenues will remain
an important factor to the successful growth of our business, we believe that
we must continue to expand our marketing and sales activities, product and
service offerings and operations in the United States in order to achieve and
maintain profitability. Our failure to effectively manage expansion in the
United States could have a material adverse effect on the delivery of our
products and services, our ability to attract and retain key personnel and our
business operations and prospects.

WE MAY NOT BE ABLE TO CONTINUE TO DEVELOP NEW PRODUCTS OR ENHANCE EXISTING
PRODUCTS ON A TIMELY BASIS.

To be competitive, we must continue to develop and introduce on a timely
basis new products and product enhancements. Our failure to develop and
introduce new products and enhancements successfully and on a timely basis, or
the failure of new products to achieve and sustain market acceptance, could
have a material adverse effect on our business, prospects, operating results
and financial condition. We are obligated under a limited number of client
contracts to deliver new products or product enhancements by specified dates,
and failure to do so could result in the loss of one or more of those clients
or expose us to contractual liability. We have in the past encountered
circumstances that made it impractical to provide required enhancements to a
customer, and we may be unable to do so on future occasions.

OUR SALES CYCLE IS RELATIVELY LONG AND DIFFICULT TO PREDICT.

The decision by a prospective client to purchase our products frequently
involves several functional departments within its business. In addition, the
purchase and implementation of our products typically involve a significant
cost to our clients, including training and integration costs. These
implementations can also include a substantial commitment of resources by our
clients or their consultants over an extended period of time. As a result, our
sales cycle generally ranges from three to nine months, with our average sales
cycle lasting approximately six months. Consequently, the relatively long and
unpredictable nature of our sales cycle makes it difficult to predict our
revenues.

INTENSE COMPETITION MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING
RESULTS.

The market for internet-based integrated eMarketing solutions is becoming
intensely competitive. If we are unable to compete effectively, our business,
prospects, financial condition and operating results would be materially
adversely affected. Some of our current and potential competitors have greater
name recognition and substantially greater financial, technical, marketing,
management, service, support and other resources than we do. Therefore, they
may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards, or client requirements.

In addition, we expect that new competitors will enter the market with
competing products as the size and visibility of the market opportunity
increases. We also expect that competition will increase as a result of
consolidations and formations of alliances among industry participants.
Increased competition could result in pricing pressures, reduced margins, and
failure of our products to achieve or maintain market acceptance.

WE DEPEND ON A FEW INDUSTRIES FOR MOST OF OUR SALES, AND WE MAY NOT CONTINUE TO
BE SUCCESSFUL IN THOSE MARKETS AND IN EXPANDING BEYOND THOSE LIMITED MARKETS.

A substantial portion of our revenues have been derived from sales to
communications and media businesses, financial institutions, and retail and e-
commerce businesses. In order to reach and maintain profitability, we must
continue to succeed in these markets. We may not be successful in doing so. In
addition, we must expand the number of markets we address in order for our
business to grow as planned, and we may not be successful in doing so.

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IF WE ARE UNABLE TO MANAGE OUR GROWTH AND THE RELATED EXPANSION IN OUR
OPERATIONS EFFECTIVELY, OUR BUSINESS MAY BE HARMED.

Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires effective planning and
management. Our growth has placed, and our anticipated future operations will
continue to place, a significant strain on our management, information systems,
network and other resources. To manage future growth effectively, we must
continue to improve our financial and accounting systems and controls, enhance
our reporting systems and procedures, integrate new personnel and manage
expanded operations. We will also need to hire additional personnel and we may
be unable to recruit qualified employees as needed.

WE ARE LARGELY DEPENDENT ON OUR INTERNATIONAL OPERATIONS.

In addition to our presence in the United States, we have offices in five
other countries and customers in more than 19 other countries. In the nine
months ended September 30, 2000, 62% of our total revenues resulted from sales
outside North America, reflecting our historical presence in the United Kingdom
and elsewhere in Europe and Asia-Pacific. Although we believe that we must
increase our operations in the United States to reach and maintain
profitability, we must also continue to expand our sales in international
markets for our business to grow as planned. This may require us to establish
additional international operations and hire additional personnel. Our failure
to do so in a timely and effective manner would have a material adverse effect
on our business, prospects, financial condition and operating results. Our
operations and our plans to expand internationally may be affected by a number
of risks, including:

. challenges inherent in managing geographically dispersed operations;

. the need to develop local distribution channels through third parties;

. multiple, conflicting and changing governmental laws and regulations;
and

. foreign currency exchange rate fluctuations.

OUR FAILURE TO EXPAND OUR DIRECT SALES FORCE WOULD IMPEDE OUR REVENUE GROWTH
AND FINANCIAL CONDITION.

To increase our revenues, we must increase the size of our direct sales
force. It can take a considerable amount of time to hire, train and integrate
new sales personnel. In addition, there is intense competition for qualified
sales personnel. We may not be successful in attracting, integrating,
motivating or retaining qualified personnel for these positions on a timely
basis or at all. A failure to do so would have a material adverse effect on our
business and operating results.

FAILURE TO EXPAND OUR RELATIONSHIPS WITH CONSULTING FIRMS AND SYSTEMS
INTEGRATORS WOULD IMPEDE ACCEPTANCE OF OUR PRODUCTS AND GROWTH OF OUR REVENUES.

Consultants, systems integrators, and service providers who recommend,
install and support our products with their customers are a major source of our
sales. To increase our revenues and implementation capabilities, we must
continue to develop and expand relationships with consultants, systems
integrators, service providers and other potential industry partners. A failure
to do so would have a material adverse effect on our ability to generate
increased revenues. Consultants, systems integrators and service providers may
market or recommend products that compete with ours. Moreover, if these firms
fail to implement our products successfully for their clients, we may not have
the resources to implement our products on the schedule required by the client,
which could have a material adverse effect on our ability to generate increased
revenues.

OUR BUSINESS WILL BE ADVERSELY AFFECTED IF INTERNET SOLUTIONS ARE NOT WIDELY
ADOPTED.

Because one of our new products addresses, among other markets, the
emerging market for internet marketing solutions, our future success depends in
part upon the widespread adoption of the internet as a primary medium for
commerce and business applications. The failure of this market to develop, or a
delay in

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the development of this market, would have a material adverse effect on our
business, financial condition and operating results. The internet has
experienced, and is expected to continue to experience, significant user and
traffic growth, which has, at times, caused user frustration with slow access
and download times. The internet infrastructure may not be able to support the
demands placed on it by the continued growth upon which our success in part
depends. Moreover, critical issues concerning the commercial use of the
internet, such as security, reliability, cost, accessibility, taxation of e-
commerce and quality of service, remain unresolved and may negatively affect
the growth of internet use or the attractiveness of commerce and business
communication over the internet. In addition, the internet could suffer
declines in its viability due to delays in the development or adoption of new
standards and protocols to handle increased activity or due to increased
government regulation and taxation of internet commerce.

OUR REVENUES MIGHT BE HARMED BY A RESISTANCE TO ADOPT OUR SOFTWARE BY INTERNAL
INFORMATION TECHNOLOGY DEPARTMENTS.

Some businesses may have already made a substantial investment in other
third-party or internally developed software designed to integrate data from
disparate sources and analyze this data or manage marketing campaigns. These
businesses may be reluctant to abandon these investments in favor of our
software. In addition, information technology departments of potential clients
may resist purchasing our software for a variety of other reasons, particularly
the potential displacement of their historical role in creating and running
software and concerns that packaged software products are not sufficiently
customizable for their enterprises. If the demand for our products does not
grow for any of these reasons, our revenues may be harmed.

IF OUR SECURITY SYSTEM IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER.

We must securely receive and transmit confidential information over public
networks and maintain that information on internal systems. Our failure to
prevent security breaches could damage our reputation, expose us to risk of
loss or liability, result in a loss of our clients and adversely affect our
ability to obtain new clients. Although we have implemented network security
measures, our servers are vulnerable to computer viruses, which could lead to
interruptions, delays or loss of data. We may be required to expend significant
capital and other resources to license encryption technology and additional
technologies to protect against security breaches or to alleviate problems
caused by any breach.

OUR FAILURE TO OPERATE OUR PROFESSIONAL SERVICES ORGANIZATION AT A PROFIT WOULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION.

Our failure to operate our professional services organization at a profit
would have a material adverse effect on our operating results and financial
condition. To gain initial acceptance of our products by clients in our
targeted industries, we may elect on occasion to assist customers with the
implementation of our products at a loss. In the past, our cost of services
revenues have been significantly higher than our services revenues. We cannot
be certain that our professional services organization will achieve or sustain
profitability.

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LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.

Our future success depends to a significant degree on the skills,
experience and efforts of James Carling, our founder and Chief Technology
Officer, Peter J. Boni, our President and Chief Executive Officer, Allen Swann,
our President, International, Paul Lavallee, our President, Americas, and
Frederick Phillips, our Chief Financial Officer. The loss of the services of
any of these individuals could have a material adverse effect on us. We also
depend on the ability of our executive officers and other members of senior
management to work effectively as a team. The loss of one or more of our
executive officers and other members of senior management could have a material
adverse effect on us. Many of our executive officers, members of senior
management or other employees are not subject to an agreement that prohibits
them from competing with us after the termination of their employment with us.
We do not maintain "key man" insurance on any of our executive officers or
senior management personnel.

WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO SUCCEED.

Qualified personnel are in great demand throughout the software industry.
Our success depends in large part upon our ability to attract, train, motivate
and retain highly skilled employees, particularly sales and marketing personnel
and other senior personnel. Our failure to attract and retain the highly-
trained technical personnel that are integral to our product development,
professional services and support teams may limit the rate at which we can
develop new products or product enhancements. This could have a material
adverse effect on our business, prospects, operating results and financial
condition.

WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY RIGHTS.

Our success depends to a significant degree upon the protection of our
software and other proprietary technology rights. We rely on trade secret,
copyright and trademark laws and confidentiality agreements with employees and
third parties, all of which offer only limited protection. Moreover, the laws
of the countries in which we develop and market our products may afford little
or no effective protection of our proprietary technology. The reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it. This could have a material adverse effect on us. Legal
proceedings to enforce our intellectual property rights could divert the time
and attention of management, be expensive and involve uncertainty of success.

CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS,
COPYRIGHTS OR PATENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

If any of our products are alleged to violate third-party proprietary
rights, we may be required to reengineer our products or seek to obtain
licenses from third parties to continue offering our products without
substantial reengineering. Any efforts to reengineer our products or obtain
licenses from third parties may be unsuccessful and, in any case, could
substantially increase our costs and have a material adverse effect on us. We
do not conduct comprehensive patent searches to determine whether the
technology used in our products infringes patents held by third parties. In
addition, 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.

CLAIMS BY OTHER COMPANIES THAT OUR NAMES INFRINGE THEIR PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

Third parties have claimed, and may in the future claim, that our company
name or our product names violate their trademark or trade name rights. We have
applied for registration of some of our trademarks in the United States, Canada
and the European Community but have not yet received any approvals. Our use of
the names Prime Response, Prime@Vantage and [email protected], as well as the
use of other names, may result in costly litigation, divert management's
attention and resources, cause product shipment delays, or require us to pay
damages or to enter into royalty or license agreements. We may be required to
stop using

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certain names currently used for our products. Any of these events could have a
material adverse effect on our business, prospects, operating results and
financial condition.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS FAIL TO PERFORM
PROPERLY.

Software products as complex as ours may contain undetected errors, or
bugs, which result in product failures, or otherwise fail to perform in
accordance with client expectations. Our products may be particularly
susceptible to bugs or performance degradation because of the emerging nature
of internet technologies and the stress that may be placed on our products by
the full deployment of our products over the internet. Product performance
problems could result in loss of or delay in revenues, loss of market share,
failure to achieve market acceptance, diversion of development resources, or
injury to our reputation, any of which could have a material adverse effect on
our business, prospects, operating results and financial condition.

WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS
RELATING TO OUR CLIENTS' MARKETING EFFORTS.

Our products may be critical to our clients' marketing efforts. If one of
our products fails, a client may assert a claim for substantial damages against
us, regardless of our responsibilities for such failure. Although our form of
license agreement contains provisions limiting liability, product liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. There can be no assurance that our product liability,
errors and commissions or general liability insurance will prove sufficient to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim.

ACQUISITIONS COULD CAUSE FINANCIAL OR OPERATIONAL PROBLEMS.

Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands and
competitive pressures. To this end, we may choose to acquire new and
complementary businesses, products, or technologies instead of developing them
ourselves. We may face competition for acquisition targets from larger and more
established companies with greater financial resources, making it more
difficult for us to complete acquisitions. We do not know if we will be able to
complete any acquisitions, or whether we will be able to successfully integrate
any acquired business, operate it profitably or retain its key employees.
Integrating any business, product or technology we acquire could be expensive
and time-consuming, could disrupt our ongoing business and could distract our
management. In addition, in order to finance any acquisitions, we might need to
raise additional funds through public or private equity or debt financings. In
that event, we could be forced to obtain financing on terms that are not
favorable

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to us and, ultimately, our stockholders. Specifically, in the case of an equity
financing, the issuance of additional stock would result in dilution to our
stockholders, and in the case of a debt financing, we may be forced to accept
restrictions on our ability to incur additional debt, make prepayments on
certain indebtedness, make acquisitions and other investments, issue additional
capital stock and engage in mergers and consolidations, all of which could
impede our long term plans for expansion and on our ability to pay dividends to
our stockholders. If we are unable to integrate any acquired entities, products
or technologies effectively, our business, financial condition and operating
results will suffer. In addition, any amortization of goodwill or other assets
or charges resulting from the costs of acquisitions could harm our business and
operating results.

OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION OF THE INTERNET AND OTHER
LEGAL UNCERTAINTIES, WHICH COULD NEGATIVELY IMPACT OUR OPERATIONS.

Laws and regulations directly applicable to communications or commerce over
the internet are becoming more prevalent. The United States Congress recently
enacted internet laws regarding privacy, copyrights, taxation and other
matters. In addition, the European Union recently enacted privacy regulations.
The laws governing the use of the internet, however, remain largely unsettled,
even in areas where there has been some legislative action. It may take years
to determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the internet. In addition, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad,
that may impose additional burdens on companies conducting business online. The
adoption or modification of laws or regulations relating to the internet could
adversely affect our business. In particular, new regulations affecting the use
of unsolicited e-mail advertising would impair our clients' marketing efforts
and could reduce the demand for our products.

PRIVACY CONCERNS AND LEGISLATION MAY LIMIT THE INFORMATION OUR CLIENTS CAN
GATHER, WHICH COULD REDUCE THE DEMAND FOR OUR PRODUCTS.

Privacy concerns may cause website visitors to resist providing personal
data or avoid websites that track the internet behavioral information necessary
to support online profiling capabilities. Even the perception of security or
privacy concerns, whether or not valid, may have a similar effect. The European
Union recently adopted a directive addressing data privacy that may limit the
collection and use of certain information regarding internet users. This
directive may limit our clients' ability to target advertising or collect and
use information in certain European countries. In addition, legislative or
regulatory requirements may heighten these concerns if businesses must notify
website users that the data captured after visiting their websites may be used
to direct product promotion and advertising to that user. Other countries and
political entities, such as the European Union, have adopted these types of
restrictions. The United States may adopt similar legislation or regulatory
requirements. If privacy legislation is enacted or consumer privacy concerns
are not adequately addressed, our business, prospects, financial condition and
operating results could be harmed.

Websites typically use bits of information keyed to a specific server, file
pathway or directory location, commonly referred to as "cookies," which are
placed on a customer's hard drive, possibly without the customer's knowledge or
consent, to track demographic information and target advertising. Our clients
may use cookies for a variety of reasons, including the collection of data
derived from the customer's internet activity. Most currently available
internet browsers allow our clients' customers to remove cookies at any time or
to prevent cookies from being stored on their hard drives. In addition, some
commentators, privacy advocates and governmental bodies have suggested limiting
or eliminating the use of cookies. Any reduction or limitation in the use of
cookies could limit the effectiveness of our clients' sales and marketing
efforts. The Federal Trade Commission and several states are investigating the
use by internet companies of personal information. New regulations regarding
the use of personal information could adversely impact the demand for our
products.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not engage in trading market risk sensitive instruments or
purchasing hedging instruments or "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has not
purchased options or entered into swaps or forward or futures contracts.

PART II: OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(A) Sales of Unregistered Securities

None

(B) Use of Proceeds from Sales of Registered Securities

On March 8, 2000, the Company completed an initial public offering of its
Common Stock, $0.01 par value per share. The managing underwriters in the
offering were FleetBoston Robertson Stephens, Dain Rauscher Wessels, SG Cowen
and DLJdirect (the "Underwriters"). On April 3, 2000, the Company sold an
additional 525,000 shares of Common Stock to the underwriters to cover
over-allotments. The shares of Common Stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (the "Registration Statement") (Reg. No. 333-92461) that was declared
effective by the SEC on March 2, 2000. The offering commenced on March 3, 2000.
After all 4,025,000 shares of Common Stock registered under the Registration
Statement, were sold at a price to the public of $18.00 per share, the aggregate
proceeds to the Company were $72,450,000. In connection with the offering, the
Company paid an aggregate of $5,071,500 in underwriting discounts to the
Underwriters. From the net proceeds of the offering, the Company paid an
aggregate of $10.5 million to General Atlantic Partners, LLC, a 10% shareholder
in the Company, and $4.3 million to Kite Limited, a 10% shareholder in the
Company. During the period from the offering to September 30, 2000, the Company
has used the proceeds for general corporate purposes, including working capital
and product development and the repayment of certain indebtedness.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 27.1 Financial Data Schedule

(b) Reports on Form 8-K

None

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

November 14, 2000 PRIME RESPONSE, INC.

By /s/ Frederick H. Phillips
----------------------------
Frederick H. Phillips
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)