PRIMUS KNOWLEDGE SOLUTIONS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 1999

Commission File Number: 0-26273

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

Washington 91-1350484
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

1601 Fifth Avenue, Suite 1900
Seattle, WA 98101
(Address of principal executive offices, including zip code)

(206) 292-1000
(Registrant's telephone number, including area code)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock $0.025 par value per share

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 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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the common stock on March 20,
2000, as reported on Nasdaq National Market System was approximately $793.7
million. Shares of common stock held by each executive officer and director
and by each person who owned 5% or more of the outstanding common stock as of
such date have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

The number of shares of the registrant's common stock outstanding on March 20,
2000, was 17,600,914.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report is incorporated by
reference from the registrant's definitive proxy statement, relating to the
Annual Meeting of Shareholders to be held in May 2000, which definitive proxy
statement shall be filed not later than 120 days after the end of the fiscal
year to which this report relates.

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PRIMUS KNOWLEDGE SOLUTIONS, INC.
FORM 10-K
TABLE OF CONTENTS

Item Page
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PART I
1. BUSINESS.......................................................... 2
2. PROPERTIES........................................................ 18
3. LEGAL PROCEEDINGS................................................. 18
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 18
4A. EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 18
PART II
5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.......................................................... 20
6. SELECTED CONSOLIDATED FINANCIAL DATA.............................. 21
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 21
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 29
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 30
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 30
11. EXECUTIVE COMPENSATION............................................ 30
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 30
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 30
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 30

"Primus," "Primus eServer," "Primus Interchange," "Primus eMarketing,"
"Primus eSales," and "Primus eSupport" are trademarks, registered trademarks,
or service marks of Primus. This Annual Report on Form 10-K also contains
trademarks and service marks of other companies, which are the property of
their respective owners.

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PART I

This Annual Report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as
may, will, should, expect, plan, intend, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the "Factors
Affecting Our Operating Results" below. These factors may cause our actual
results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this annual report to conform such
statements to actual results or to changes in our expectations.

ITEM 1. BUSINESS

Overview

Primus Knowledge Solutions, Inc. is a leading provider of eCRM software that
enables companies to maximize the value of customer interactions across
multiple communication channels and business processes thereby enhancing
customer relationships. Our solution addresses the unique challenges faced by
companies implementing an e-business strategy. Our product suite is designed
to be a comprehensive software solution that enables companies to effectively
manage all major points of customer contact, from marketing to sales to
customer support, and create value for both the company and the customer with
every interaction. Our software solutions can be deployed as a suite or as
individual products, depending on the company's preference and/or immediate
need.

To remain competitive in today's business environment, companies are
implementing e-business initiatives to enable them to interact with their
customers using both traditional and e-business communication channels,
including the Internet, in a way that will maximize the value of each customer
interaction. More specifically, these initiatives allow companies to market
their products, transact sales, manage customer service, and interact and
communicate with customers, partners and suppliers using the Internet and
other electronic means. Ultimately, each customer interaction must be
maximized for purposes of customer retention, cross-sell and up-sell
opportunities, and customer satisfaction to enhance customer relationships.
This market phenomenon where companies must provide an integrated, seamless
approach to engaging their customers, sales, marketing and support across all
communication channels is commonly referred to as eCRM.

Industry Background

The emergence of the Internet as a business medium has made it imperative
for companies across various industries to recreate the way they do business.
To remain competitive, companies are implementing e-business initiatives to
enable them to interact with their customers using both traditional and e-
business communication channels, including the Internet, in a way that will
maximize the value of each customer interaction. Early e-business initiatives
focused on providing basic Web sites that offered customers little more than
product information for marketing purposes. Today, e-business initiatives are
designed to provide customers with a unique online experience. More
specifically, these initiatives allow companies to market their products,
transact sales, manage customer service, and interact and communicate with
customers, partners and suppliers using the Internet and other electronic
means. Even the most traditional companies have found it difficult to ignore
the need to implement an e-business strategy.

The shift from traditional business practices to doing business online has
fundamentally changed the way that companies interact with and think about
their customers. Increasingly, companies now realize that they must

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personalize each customer experience by providing products and support based
on each customer's needs that exceed each customer's expectations. To
accomplish these goals, businesses must use the Internet as a primary channel
to communicate with customers by developing their Web presence. Companies must
also find ways to proactively target customers with rich, relevant
information. Therefore, companies now realize that they must leverage the Web
to proactively reach out to customers, create a personalized rich selling
environment and learn from each customer interaction, in order to respond to
customer inquiries in real-time and provide a consistent level of service 24
hours a day, seven days a week.

Given the changing nature of business today, there are inherent challenges
associated with becoming an e-business and interacting with customers in this
new environment. Customers now have higher expectations and experience lower
switching costs when changing vendors because competition is just a click
away. Customers also expect to have the same experience regardless of the
communication channel used to interact with a business. Companies must also
view each customer in an integrated way, meaning that their marketing, sales
and support business processes must work together. Further, companies must
realize that the customer is now an active, informed participant. Ultimately,
each customer interaction must be maximized for purposes of customer
retention, cross-sell and up-sell opportunities, and customer satisfaction to
enhance customer relationships.

Although companies have recognized the need to implement eCRM initiatives
that leverage the Internet to enhance customer relationships, the solutions
previously available have not been comprehensive enough to address all of
these challenges. There are various point solutions designed to address each
distinct business process, specifically marketing, sales and support, but
these solutions are limited to addressing the needs of each specific business
function. For example, the knowledge that a customer had a support interaction
about a product last week, can guide a company's next marketing initiative as
much as the knowledge of what a customer bought last quarter, can drive an
additional sale the next day. The value created by taking these disparate
internal systems and connecting them by using a knowledge-enabled approach
that benefits both the business and the customer is a valuable resource.
Although the value of integrating these various point solutions to maximize
the benefit of each customer interaction is apparent, previous attempts have
proven to be costly and inefficient and have failed to integrate each business
process in a seamless manner. There are also various solutions focused on
addressing specific communication channels like telephone, email or the Web,
but these solutions typically create discrete silos of information that are
not readily accessible across other communication channels the solutions are
servicing.

To adequately address today's market requirements, companies need an
integrated, comprehensive eCRM software solution that enables them to maximize
the value of customer interactions across multiple communication channels and
business processes thereby enhancing customer relationships. The Internet and
advances in technology enable e-businesses to actively enhance individual
customer interactions and leverage the knowledge captured on an individual
basis to enhance a company's interactions with all of its customers. The value
of this to an e-business becomes immediately apparent when customers believe
that they are being responded to in a proactive and holistic fashion. This is
the area where eCRM systems can have the most dramatic impact.

Primus Solution

We are a leading provider of eCRM software that enables companies to
maximize the value of customer interactions across multiple communication
channels and business processes thereby enhancing customer relationships. Our
solution addresses the unique challenges faced by companies implementing an
e-business strategy.

Our solution has the following key characteristics:

Comprehensive eCRM platform. Our solution is designed to enable companies to
integrate marketing, sales and support business processes seamlessly across
multiple communication channels. This eliminates the need to purchase various
point products designed to address discrete business functions and provides
for a more

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easily deployable, complete e-business solution. Companies can ensure that
institutional knowledge gained from interactions across all communication
channels, including the Internet, will be absorbed and communicated company-
wide so that the entire enterprise can apply this knowledge to future
interactions.

Holistic approach. Companies can maximize each customer interaction by
gaining a holistic view of the customer. Companies are able to enhance ongoing
customer relationships by integrating the three core front office business
processes, marketing, sales and support. In addition, from the customer's
perspective, it allows for seamless interaction throughout the customer
lifecycle.

Scalable Web architecture. Companies have proven our solution in demanding,
transaction heavy environments. For example, one company demonstrated that
Primus e-Support is scalable to over 500,000 user accesses per month. In
addition, many companies have purchased our solution to be used by thousands
of employees, and hundreds of thousands of their customers and partners on a
global basis.

Rapid ROI. Our solution can be rapidly implemented and easily customized,
thus allowing for minimum downtime before companies realize the benefits of
choosing our solution. In addition, the extensive business functionality
provided by our solution allows companies to realize more immediate benefits
such as reduced support costs, enhanced customer satisfaction and increased
productivity. By providing a comprehensive application suite, our solution
reduces the need for companies to go through the time-consuming task of
integrating various business processes.

Primus Strategy

Our objective is to further establish our leadership position in providing
Web-based, interactive customer relationship management software applications.

Our strategy to achieve this objective is to:

Extend our leadership in integrated eCRM solutions. In the near term, we
believe that our customers will demand greater functionality and product depth
from their eCRM solutions. We intend to broaden our current product suite to
integrate with all aspects of e-business solutions. This integration will both
extend across internal business functions, marketing, sales and support and
others, as well as extend across channels of customer communication, both
internal and external. Using this integrated approach, we will provide an even
more complete eCRM solution for leading-edge companies so that they can better
serve their customers' needs.

Target additional vertical markets and capitalize on business-to-business
opportunities. Initially, we focused our sales and marketing efforts on
serving the electronic support and problem-resolution needs of technology-
based industries such as software, hardware and telecommunications. More
recently, we have broadened the reach of our product suite to encompass
customer service and support in other industries with characteristics similar
to those of technology-based industries. In the emerging business-to-business
market space, companies are confronted with challenges such as a dynamic and
rapidly changing business environment, advanced technological functionality
and competitive differentiation based on service and support. We have
broadened our product functionality in order to pursue companies in the
emerging business-to-business vertical markets. Specifically, we have
established relationships with companies in the manufacturing, consumer
electronics and financial services industries. We will continue to pursue
companies in these sectors as well as additional opportunities in other
vertical markets.

Build additional strategic and distribution relationships. We intend to
strengthen and expand our current relationships and build new ones with
leading systems consultants and integrators. We believe that these strategic
relationships will provide us with additional sales opportunities and further
leverage our implementation resources. In addition, we are exploring
relationships with complementary software and other technology vendors.
Concurrently, we intend to establish an indirect distribution channel to
complement our direct sales force.

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Grow our international presence. To capitalize on the Internet as a global
communications medium we have established international offices in the United
Kingdom. Our product architecture is designed to support multiple languages.
Our product currently supports the display of content in Japanese, and we plan
to offer versions of our product in other languages as well.

Products

The Primus eCRM product suite is designed to be a comprehensive software
solution that enables companies to effectively manage all major points of
customer contact, from marketing to sales to customer support, and create
value for both the business and the customer with every interaction. Our
software solutions can be deployed as a suite or as individual products,
depending on the company's preference and/or immediate need. License fees for
our software depend upon the specific application licensed and typically are
based on a per-user basis, or, based on the number of users authorized to
access our software at any given time. Our typical license agreement provides
the licensee a perpetual, nontransferable license to use our software.

The following summarizes the current products that comprise the Primus eCRM
software suite:

Primus eServer

Primus eServer is the foundation of the Primus eCRM suite. It enables
eBusinesses to dynamically capture, share, and manage knowledge to enhance
their customers' experiences and increase the effectiveness of each
interaction. Primus eServer can be used to support all phases of the customer
lifecycle, from new requests for information or service, to secondary customer
interactions that would benefit from previous knowledge captured in the
knowledge base. An example of this is capturing the knowledge that a customer
has experienced repetitive customer service issues with a specific product,
and using that knowledge proactively to offer that customer a discounted
upgrade for a newly-released product that will solve their service issues.
Primus eServer is built on the Primus Associative Search Engine, which
provides sophisticated search functionality. Primus eServer provides:

. a flexible workflow system for integrating business processes

. natural language searching that allows users to query in their own words

. fast, accurate search results based on the Primus Associative Search
Engine, a Primus proprietary search algorithm

. real-time knowledge capture and publishing via the Web

Primus Interchange

Primus Interchange manages customer interactions across multiple channels of
communication. The product also includes sophisticated email management and
response software. When a customer email is submitted to the company, Primus
Interchange automatically analyzes the content of the email and searches the
knowledge base of Primus eServer, to return an email message that includes a
relevant solution or response to the inquiry. If a solution is unavailable,
the request is intelligently routed to the appropriate personnel within the
company. Primus Interchange provides:

. robust email management and routing

. auto-response email through integration with Primus eServer

. multi-channel communication management

. a fully customizable user interface

. integration capabilities to legacy systems

Primus eMarketing

Primus eMarketing provides an end-to-end integrated solution for creating,
managing and maintaining Web marketing content and managing personalized
Internet and email marketing campaigns. The application is

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designed to help a business acquire new customers and build relationships with
the customers they already have. Our emarketing applications were obtained as
a result of our December 1999 acquisition of Imparto Software Corporation.
Primus eMarketing provides:

. customizable, Web-based content templates to easily create and publish
marketing content and to execute Internet and email marketing campaigns

. Web response forms to capture customer input

. reporting and management tools to evaluate the effectiveness and results
of electronic campaigns

. a workflow management system that can be customized to unique internal
marketing processes

Primus eSales

Primus eSales is a Web-based application that offers a customer the ability
to define their purchase requirements, find the most appropriate product or
service, configure custom solutions that fit their needs and compare purchase
alternatives before placing an order. Primus eSales can enhance the
effectiveness of direct and indirect sales approaches, help drive revenues and
enable reduced operational costs. Our esales applications were obtained as a
result of our January 2000 acquisition of 2order.com, Inc. Primus eSales
provides:

. Web-based sales assistance based on customer input preferences and needs

. real-time sales configuration, price quotes and product/service
availability

. comparative purchasing capabilities

. personalization based on unique customer attributes

. real-time sales negotiation based on sale attribute tradeoff system

. integration tools for seamless integration to commerce and supply-chain
systems

. cross-selling and up-selling capabilities to maximize revenue potential
of each customer interaction

Primus eSupport

Primus eSupport provides a Web-based front end for customer self-service and
access to customer service solutions through the web 24 hours a day, seven
days a week. Primus eSupport application can be utilized by a company to
support multiple groups, including customers, partners and internal employees.
Consistent with our knowledge enabled approach, information captured from
unresolved self-service sessions is passed along to company personnel to avoid
re-entry and to ensure efficient resolution for the customer and the company.
Primus eSupport provides:

. an intuitive user interface and flexible workflow system to support
individual problem solving preferences

. natural language searching that allows users to query in their own words

. customer feedback capabilities for the self-service system

. an escalation workflow system

. real-time availability to new solutions added to the knowledge base

. standard reports to monitor and manage the effectiveness of the support
system

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Product Architecture

The following diagram illustrates the architecture of our Primus eCRM suite:

[FLOWCHART OF OUR eCRM PRODUCT SUITE]

Our products use a multi-tiered architecture to meet the eCRM needs of
today's businesses. We use industry-standard platforms, components and
communications interfaces to provide eCRM software that is designed to be
reliable, maintainable and scalable, and to provide high performance on a 24
hour basis. Our flexible architecture adapts to a range of needs, from a
single desktop to enterprise systems that support thousands of users.

Our Primus eServer software runs on either Windows NT or Sun Solaris systems
in single- or multi-processor configurations. Our client software runs in a
fully customizable interface accessed through a Web browser. The core tier of
our solution is the database server. The next tier is the application search
server that contains the search logic and knowledge domain model. The last
tier is comprised of web server interfaces that contain the personalization
and customization layers of the solution. We currently support Microsoft SQL
Server, Oracle and Versant databases.

Customer Support and Professional Services

We believe that high-quality customer support and professional services are
required for continued growth and increased sales of our products. We have
made significant investments to increase the size of our support and services
organization in the past and plan to continue to do so in the future. As of
December 31, 1999, our customer support and professional services organization
consisted of 51 employees.

Consulting. Our consulting teams work closely with our customers prior to
product implementation to review a customer's business objectives and
information technology infrastructure in order to assist the customer in
determining Primus solutions that will best suit the customer's needs.
Thereafter, our consultants install, integrate and implement our software in
the user's environment.

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

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

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Customers

Initially, our sales efforts targeted large enterprises in dynamic,
technology-related industries that offer external customer support. Recently,
we have broadened our sales focus to include additional verticals and
enterprises of a wide variety of sizes that are interested in implementing, or
in the process of building, an e-business strategy. As of December 31, 1999,
we had licensed our solution to approximately 95 domestic and international
customers. The following is a list of our customers that have purchased in
excess of $100,000 of software and related services:

IT--Software Accrue Software Novell
Attachmate Peregrine Systems
Best Software Pervasive Software
Brio Technology QAD
Checkpoint Software Sterling Commerce
MAPICS Versant
Microsoft Wind River
Network Associates

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IT--Hardware 3Com Micron
Amdahl Network Appliance
Compaq SGI
EMC Teradyne
Fujitsu Xerox
IBM (formerly Sequent)

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IT Services Client Logic Origin
EDS Softlab
Entex

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Telecommunications AT&T Motorola
EHPT Sweden AB Nortel Networks
Ericsson Rockwell
Jetstream Communications Sprint
KPN Williams
Lucent

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Internet Service Cable & Wireless RCN
Providers GTE Internetworking UUNet
PSInet

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Manufacturing 3M Caterpillar
BMW Simplex

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Other Acxiom Inacom
CGU Life Janeros Corporation
Dixons RSA Security
Giddings and Lewis Starbucks
Hello Direct

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Sales and Marketing

We market and sell our products primarily through a direct sales force. Our
sales strategy is to pursue targeted accounts through a combination of our
direct sales force and strategic relationships with third parties. We have
sales offices in Seattle, Atlanta, Boston, Chicago, Dallas, Minneapolis, Palo
Alto and Reston and in the United Kingdom. Our field sales force, which
includes both sales representatives and sales engineers, is organized into
regional teams, complemented by direct telesales based at our headquarters in
Seattle. We currently plan to add a significant number of sales
representatives and sales engineers in other domestic and international
locations. To date, significantly all of our efforts have been targeted at
customer-service and support organizations in the information technology and
telecommunications industries. These efforts are directed at key executives
and personnel responsible for the organizations' customer service and support
strategies and operations.

Our marketing department is focused on creating awareness of our products
and services and generating interest in our solution. We conduct comprehensive
marketing and branding programs, which may include direct mail, public
relations, Web-based lead generation, telemarketing lead generation,
advertising, trade shows and seminars. Many of our marketing activities are
done in collaboration with our strategic consulting and software partners. Our
marketing department also coordinates our participation in industry tradeshows
and forums, secures speaking engagements for our executives and establishes
and maintains close relationships with recognized industry analysts and our
customer base. As of December 31, 1999, our sales and marketing staff
consisted of 69 employees.

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

Product Development

We have been a leader in developing innovative eCRM software and were one of
the first companies to use associative problem-solving technology. We believe
that a technically skilled, highly productive software development
organization will continue to be a key component of our success. As of
December 31, 1999, our product development team consisted of 73 full-time
employees. Our current development efforts include completing the integration
of the products we obtained in the Imparto and 2order.com acquisitions with
our existing products.

Competition

The market for our products is new and rapidly evolving, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our suite of products compete
against various vendor software tools designed to address a specific element
or elements of the complete set of eCRM processes, including Internet
communications, esupport, esales and emarketing. We also face competition from
in-house designed products and third-party custom development efforts. Below
is a table of eCRM competitive vendors:

eCRM element Vendor(s)

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Internet Communications eGain, Kana and Mustang

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eSupport Brightware, Quintus and Servicesoft

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eSales Calico, Firepond, Selectica and Trilogy

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eMarketing Annuncio, Broadbase and E.piphany

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Combination Onyx and Silknet

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In addition, companies providing e-commerce and traditional customer
relationship management solutions that may compete with us include
Broadvision, Clarify, Oracle, Peoplesoft, Siebel and Vignette.

The principal competitive factors in our industry include:

. product ease-of-use
. vendor and product reputation
. the quality of customer support
. customer referenceability services, documentation and
training
. measurable economic return
. the quality, speed and
. product quality, performance and effectiveness of application
price deployment services

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

. product scalability . product integration with other
enterprise applications
. the availability of products on
the Internet and multiple
operating platforms

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

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

Proprietary Information

Our success depends in part on our ability to protect our proprietary
rights. To protect our proprietary rights, we rely primarily on a combination
of copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as
those contained in license agreements with consultants, vendors and customers.
We pursue the registration of certain of our trademarks and service marks in
the United States and in certain other countries, but we have not secured
registration of all our marks.

Employees

As of December 31, 1999, we had 223 employees, including 11 U.K.-based
employees. These included 69 in sales and marketing, 51 in client services and
support, 73 in product development and 30 in general and administration. None
of our employees are represented by a labor union. We have not experienced any
work stoppages, and we believe our relationship with our employees is good. In
addition, we regularly supplement our workforce with consultants.

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

Recent Acquisitions

On December 14, 1999, pursuant to an Agreement and Plan of Merger dated as
of December 12, 1999 we acquired Imparto Software Corporation. Imparto is a
provider of business-to-business mid-market solutions for building
relationship enabled websites that drive customer acquisition and customer
satisfaction. As a result of the acquisition, we issued 913,788 shares of our
common stock for all of the issued and outstanding capital stock of Imparto.
In addition, options and warrants to purchase capital stock of Imparto were
converted into options and warrants to acquire 86,212 shares of our common
stock. We have accounted for this transaction as a pooling of interest.

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On January 21, 2000, pursuant to an Agreement and Plan of Merger, dated as
of January 8, 2000, we acquired 2order.com, Inc. 2order.com develops and
markets software that acts as a personal sales assistant, helping buyers
define requirements and configure custom solutions. As a result of the
acquisition, we issued 1,506,127 shares of our common stock for all of the
issued and outstanding capital stock of 2order. In addition, options and
warrants to acquire capital stock of 2order were converted into options and
warrants to acquire 150,378 shares of our common stock. We have accounted for
this transaction as a pooling of interest.

Factors Affecting Our Future Operating Results

You should carefully consider the risks and uncertainties described below
and the other information in this Annual Report. They are not the only ones we
face. Additional risks and uncertainties that we are not aware of or that we
currently deem immaterial also may impair our business. If any of the
following risks actually occur, our business, financial condition and
operating results could be materially adversely affected and the trading price
of our common stock could decline.

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

We have incurred net losses in each quarter since inception and we expect to
continue to incur net losses for the foreseeable future. As of December 31,
1999, we had an accumulated deficit of $46.4 million. We expect to continue to
devote substantial resources to expand our product development, sales and
marketing and our customer support and professional service groups. As a
result, we will need to generate significant revenues to achieve and maintain
profitability. We may not be profitable in any future period. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

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

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

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

We derive a significant portion of our product license revenues in each
quarter from a small number of relatively large orders. Our operating results
for a particular fiscal quarter could be materially adversely affected if we
are unable to complete one or more substantial license sales or
implementations planned for that quarter.

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

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

. whether we are providing implementation services

. whether implementation is delayed or takes longer than expected

. variability in the mix of new and existing customers

11

Where we are implementing the software, we will account for the agreement as
an item of deferred revenue and will recognize the revenue over the period of
implementation. Most of our new customers begin implementation within 30 to 60
days of signing a license agreement. Once commenced, implementation of our
products typically ranges from 30 to 45 days, an improvement from prior years
when installations took 60 to 90 days. We can't, however, guarantee that
customers will begin implementation or that we will always be able to
implement our software within those time periods. Thus, all of our deferred
license revenue may not be recognized within the originally expected time
period.

Seasonality may adversely affect our quarterly operating results.

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

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

We released our first eCRM product in August 1996. As of December 31, 1999,
approximately 95 companies licensed one or more of our eCRM products.
Accordingly, the basis upon which you can evaluate our prospects in general,
and market acceptance of our products in particular, is limited. For our
business to succeed, the market for eCRM software will have to grow
significantly, and we will have to achieve broad market acceptance of our
products.

If e-business sales and marketing solutions are not widely adopted, we may
not be successful.

We are broadening our current product suite to integrate with various
aspects of e-business solutions. These products address a new and emerging
market for e-business sales and marketing solutions. The failure of this
market to develop, or a delay in the development of this market, would
seriously harm our business. The success of e-business sales and marketing
solutions depends substantially upon the continued growth and the widespread
adoption of the Internet as a primary medium for commerce and business
applications. The Internet infrastructure may not be able to support the
demands placed on it by the continued growth upon which our success depends.
Moreover, reliability, cost, accessibility, security 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.

We rely on sales of only one product family.

Product license revenues and related services from our Primus eServer and
Primus eSupport products accounted for approximately 96% of our total revenues
during fiscal 1999, and we expect these products to continue to account for a
substantial portion of our revenues through the first six months of fiscal
2000. As a result, factors adversely affecting the demand for these products
and our eCRM products in general, such as competition, pricing or
technological change, could materially adversely affect our business,
financial condition and operating results. Our future financial performance
will substantially depend on our ability to sell current versions of our
entire suite of eCRM products and our ability to develop and sell enhanced
versions of our eCRM products.

Factors outside our control may make our products less useful.

The effectiveness of our eCRM products depends in part on widespread
adoption and use of our software by an enterprise's personnel, partners and
customers and the value derived by each such usage. In addition, the

12

effectiveness of our knowledge-enabled approach is dependent upon a current
database. If customer-support personnel do not adopt and use our products,
necessary solutions will not be added to the database, and the database will
be inadequate. If an enterprise deploying our software fails to maintain a
current database, the value of our eCRM products to our users will be
impaired. Thus, successful deployment and broad acceptance of our eCRM
products will depend in part on the quality of the users' existing database of
solutions, which is outside our control.

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

The market for our products is new and rapidly evolving, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our suite of products competes
against various vendor software tools designed to address a specific or
elements of the complete set of eCRM processes, including Internet
communications, esupport, esales and emarketing. We also face competition from
in-house designed products and third-party custom development efforts.

In addition, companies providing e-commerce and traditional customer
relationship management solutions that may compete with us include
Broadvision, Clarify, Oracle, Peoplesoft, Siebel and Vignette.

The principal competitive factors in our industry include:

. vendor and product reputation . product ease-of-use

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

. product quality, performance . the quality, speed and
and price effectiveness of application
development services
. breadth of product
functionality and features . the effectiveness of sales and
marketing efforts
. product scalability
. product integration with other
. the availability of products on enterprise applications
the Internet and multiple
operating platforms

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

If we do not integrate Imparto's and 2order.com's technology quickly and
effectively, many of the potential benefits of these acquisitions may not be
realized.

We intend to integrate Imparto's and 2order.com's technology into our own
products. We cannot assure you that we will be able to integrate Imparto's and
2order.com's technology quickly and effectively. In order to obtain the
benefits of these acquisitions, we must make Imparto's and 2order.com's
technology, products and services operate together with our technology,
products and services. We may be required to spend additional time or money on
integration which would otherwise be spent on developing our business and
services or other matters. If we do not integrate these technologies
effectively or if management and technical staff spend too much time on
integration issues, it could harm our business, financial condition and
results of operations. In addition, the success of these acquisitions will
also depend on our ability to successfully integrate and manage the acquired
operations and retain or replace the key employees of the companies we
acquired.

13

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

Historically, we incorporated a database licensed from Versant into our
products. Presently, our products support Microsoft SQL Server, Oracle and
Versant databases. Because the products we have shipped to date, however, rely
on Versant's database, we continue to depend on Versant's ability to support
the database in a timely and effective manner.

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

To date, we have licensed our products primarily through our direct sales
force. Our future revenue growth will depend in large part on our ability to
recruit, train and manage additional sales and marketing personnel and to
expand our indirect distribution channels. We have experienced and continue to
experience difficulty in recruiting qualified sales and marketing personnel
and in establishing third-party relationships. We may not be able to
successfully expand our direct sales force or other distribution channels and
any such expansion may not result in increased revenues. Our business,
financial condition and operating results will be materially adversely
affected if we fail to expand our sales and marketing resources.

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

If sales of new licenses increased rapidly or if we were to sign a license
agreement for a particularly large or complex implementation, our customer
support and professional services personnel may be unable to meet the demand
for implementation services. In that case, if we were unable to retain or hire
highly trained consulting personnel or establish relationships with third-
party systems-integrators and consultants to implement our products, we would
be unable to meet customer demands for implementation and educational services
related to our products.

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

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

The market price of our common stock has increased substantially since our
initial public offering in July 1999. Consequently, potential employees may
perceive our equity incentives such as stock options as less attractive. In
that case, our ability to attract employees will be adversely affected.

Acquisitions could disrupt our business and harm our financial condition.

In order to remain competitive, we may find it necessary to acquire
additional businesses, products and technologies. In the event that we do
complete an acquisition, we could be required to do one or more of the
following:

. issue equity securities, which would dilute current shareholders'
percentage ownership

. assume contingent liabilities

. incur a one-time charge

. amortize goodwill and other intangible assets

We may not be able to successfully integrate any technologies, products,
personnel or operations of companies that we acquire. These difficulties could
disrupt our ongoing business, divert management resources and increase our
expenses.

14

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

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

Our international operations are subject to additional risks.

Revenues from customers outside the United States represented approximately
$4.3 million in fiscal 1999, or 17% of our total 1999 revenues. We currently
customize our products for the Japanese market. In the future, we plan to
develop additional localized versions of our products. Localization of our
products will create additional costs and would cause delays in new product
introductions. In addition, our international operations will continue to be
subject to a number of other risks, including:

. costs of customizing products for foreign countries

. laws and business practices favoring local competition

. compliance with multiple, conflicting and changing laws and regulations

. longer sales cycles

. greater difficulty or delay in accounts receivable collection

. import and export restrictions and tariffs

. difficulties in staffing and managing foreign operations

. political and economic instability

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

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

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

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

Our ability to compete successfully also depends on the continued
compatibility and interoperability of our products with products and systems
sold by various third parties, including traditional CRM software sold by
Clarify, Onyx, Remedy, Siebel and Peoplesoft. Currently, these vendors have
open applications program interfaces, which facilitate our ability to
integrate with their systems. If any one of them should close their programs'
interface or if they should acquire one of our competitors, our ability to
provide a close integration of our products could become more difficult and
could delay or prevent our products' integration with future systems.

15

Our stock price has been volatile.

The market price of our common stock has been highly volatile and is subject
to wide fluctuations. We expect our stock price to continue to fluctuate:

. in response to quarterly variations in operating results

. in response to announcements of technological innovations or new
products by us or our competitors

. because of market conditions in the enterprise software industry

. in reaction to changes in financial estimates by securities analysts,
and our failure to meet or exceed the expectations of analysts or
investors

. in response to our announcements of significant acquisitions, strategic
relationships or joint ventures

. in response to sales of our common stock

Our efforts to protect our proprietary rights may be inadequate.

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

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

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

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

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

Our officers, directors and affiliated entities together beneficially own
approximately 32.8% of the outstanding shares of our common stock as of
December 31, 1999. As a result, these shareholders are able to

16

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

. election of directors

. certain amendments to our articles of incorporation

. merger or consolidation

. sale of all or substantially all our assets

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

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

Specific provisions of our articles of incorporation and bylaws and
Washington law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our shareholders.

Our articles of incorporation and bylaws establish a classified board of
directors, eliminate the ability of shareholders to call special meetings,
eliminate cumulative voting for directors and establish procedures for advance
notification of shareholder proposals. The presence of a classified board and
the elimination of cumulative voting may make it more difficult for an
acquirer to replace our board of directors. Further, the elimination of
cumulative voting substantially reduces the ability of minority shareholders
to obtain representation on the board of directors.

Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by our shareholders. The issuance of preferred stock could have
the effect of delaying, deferring or preventing a change of control of Primus
and may adversely affect the market price of the common stock and the voting
and other rights of the holders of common stock.

Washington law imposes restrictions on some transactions between a
corporation and significant shareholders. Chapter 23B.19 of the Washington
Business Corporation Act prohibits a target corporation, with some exceptions,
from engaging in particular significant business transactions with an
acquiring person, which is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after the acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members
of the target corporation's board of directors prior to the acquisition.
Prohibited transactions include, among other things:

. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person

. termination of 5% or more of the employees of the target corporation

. allowing the acquiring person to receive any disproportionate benefit as
a shareholder

A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of Primus.

The foregoing provisions of our charter documents and Washington law could
have the effect of making it more difficult or more expensive for a third
party to acquire, or could discourage a third party from attempting to acquire
Primus. These provisions may therefore have the effect of limiting the price
that investors might be willing to pay in the future of our common stock.

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

In October 1997, the American Institute of Certified Public Accountants
issued its Statement of Position 97-2, "Software Revenue Recognition," and
later amended its position by its Statement of

17

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

You should not unduly rely on forward-looking statements because they are
inherently uncertain.

You should not rely on forward-looking statements in this document. This
document contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future" and "intends," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this document.
The forward-looking statements contained in this document are subject to the
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks described above and elsewhere in this document.

ITEM 2. PROPERTIES

Our principal administrative, engineering, manufacturing, marketing and
sales facilities total approximately 49,750 square feet in an office tower in
Seattle. Our principal lease expires on October 31, 2005. We also lease other
domestic sales and services offices in Atlanta, Boston, Chicago, Dallas,
Minneapolis, Palo Alto and Reston. We maintain international offices in the
United Kingdom. We believe that our existing facilities are adequate to meet
current requirements and that additional or substitute space will be available
as needed to accommodate any expansion of operations.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders during our
fourth quarter.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by Item 10 of Form 10-K with respect to executive
officers of Primus is set forth below. Our executive officers are appointed by
the Board of Directors. There are no family relationships among any our
executive officers or directors.

Our executive officers as of March 20, 2000 are as follows:

Name Age Position
---- --- --------

Michael A. Brochu....... 46 President, Chief Executive Officer and Chairman of the Board
Elizabeth J. Huebner.... 42 Chief Financial Officer, Executive Vice President, Secretary and Treasurer
Patricia L. Cox......... 39 Vice President of Customer Services
Norman S. Guadagno...... 36 Vice President of Worldwide Marketing
Kim M. Nelson........... 44 Vice President of Worldwide Sales and Services
Edward L. Walter........ 50 Vice President of Product Development and Technology
Diana K. Wong........... 49 Vice President of Human Resources

18

Michael A. Brochu has served as our President and Chief Executive Officer
since November 1997 and was named Chairman of our Board in December 1998.
Mr. Brochu was President and Chief Operating Officer of Sierra On-Line, Inc.,
an interactive software publisher, from June 1994 until October 1997. Mr.
Brochu is also a member of the board of directors of Primus KK and is chairman
of the board of directors of OnHealth Network Company, a publicly-traded
Internet content provider of public-health information. Mr. Brochu received
his B.B.A. in accounting and finance from the University of Texas at El Paso.

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

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

Norman S. Guadagno has served as our Vice President of Worldwide Marketing
since June 1999. From February 1999 to June 1999, Mr. Guadagno was Vice
President of Product Management at MyGeek.com, a privately held electronic
commerce company. From April 1998 to February 1999, Mr. Guadagno was Vice
President of Marketing and General Manager of Pentawave, a software electronic
commerce company. Mr. Guadagno held several marketing and product management
positions at Oracle Corporation from February 1994 to February 1996 and
February 1997 to April 1998. From August 1996 to February 1997, he held a
senior product marketing and management position with Portal Software. Mr.
Guadagno received his B.A. in psychology from the University of Rochester and
his M.A. in psychology from Rice University.

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

Edward L. Walter has served as our Vice President of Product Development and
Technology since February 1999. Mr. Walter founded Simplications, LLC, a
developer of seminars on interactive product creations in June 1998 and served
as its managing partner until December 1998. From October 1995 to May 1998,
Mr. Walter was the Vice President of Engineering of Lexant, a software
company. From March 1991 to October 1994, he was the Vice President of
Engineering of Aldus Corporation, a software company. Mr. Walter currently
serves as an associate professor for the Institute of Design at the Illinois
Institute of Technology. Mr. Walter received his B.S. in psychology from Duke
University.

Diana K. Wong has served as our Vice President of Human Resources since
October 1999. From December 1998 to October 1999, Ms. Wong was the Executive
Vice President of Human Resources for Data Dimensions, a technical consulting
firm. From February 1993 to November 1998, Ms. Wong was a Vice President of
Human Resources for AT&T Wireless. Ms. Wong received her B.A. from California
State University Sacramento and her M.B.A. from the University of Washington.

19

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

Market Price of Common Stock

On June 30, 1999, the SEC declared effective the Company's Registration
Statement on Form S-1 (Registration No. 333-77477) as filed with the SEC in
connection with the Company's Initial Public Offering. The offering consisted
of 4,772,500 shares of Primus common stock, including 622,500 shares of common
stock offered pursuant to the exercise of the underwriters' over-allotment
option and 150,000 shares offered by selling shareholders. The aggregate price
of the shares offered and sold by Primus was approximately $50.8 million.
Proceeds to Primus, after accounting for $3.6 million in underwriting
discounts and commissions and approximately $1.0 million in other expenses
were $46.2 million.

Since our initial public offering, our common stock has traded on the Nasdaq
National Market under the symbol PKSI. The following table sets forth, for the
period indicated, the high and low closing prices of the common stock as
reported on the Nasdaq National Market. These prices do not include retail
markups, markdowns, or commissions.

COMMON STOCK PRICE

Period High Low
------ ------ ------

July 1, 1999--September 30, 1999............................ $31.88 $17.56
October 1, 1999--December 31, 1999.......................... $56.13 $24.38

The closing sale price of the common stock on December 31, 1999 was $45.31.
On March 20, 2000 the closing price reported on the Nasdaq National Market
System for the common stock was $100.88.

The market price of our common stock has fluctuated significantly.

Holders of Common Stock

As of March 20, 2000, there were approximately 246 shareholders of record of
our common stock and 17,600,914 shares of common stock outstanding.

Dividend Policy

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

Recent Sales of Unregistered Securities

During the period covered by this report on Form 10-K, we issued and sold
unregistered securities as follows:

. On March 18, 1999, we issued 1,333 shares of common stock, valued at
$6.00 per share, to an accredited investor in conjunction with a
donation for a charitable auction.

. On March 31, 1999, we issued 91,389 shares of common stock to five
current shareholders and five new accredited investors for $9.00 per
share or an aggregate price of $1,128,924.

. From January 1, 1999 through June 30, 1999, we granted stock options to
purchase an aggregate of 940,703 shares of common stock with exercise
prices ranging from $6.00 to $11.00 per share, under three of our stock
option plans.

. On December 14, 1999, we issued an aggregate of approximately 1,000,000
shares of our common stock in exchange for all of the outstanding
capital stock and options and warrants to purchase capital stock of
Imparto.

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

20

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data and other operating
information are derived from our consolidated financial statements. The
consolidated statement of operations and balance sheet data presented below
were derived from our audited consolidated financial statements. When you read
this selected consolidated financial data, it is important that you also read
the historical consolidated financial statements and related notes included in
this Form 10-K, as well as the section of this Form 10-K related to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Historical results are not necessarily indicative of future
results.

Fiscal Year Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands, except per share data)

Consolidated Statement
of Operations Data:(1)
Revenue............... $ 25,144 $ 9,562 $ 6,483 $ 2,874 $ 620
Cost of revenue....... 6,347 3,473 3,026 1,252 375
Sales and marketing... 17,161 10,707 4,762 3,501 2,118
Research and
development.......... 8,077 4,137 2,766 2,459 1,545
General and
administrative....... 5,924 3,888 1,789 1,483 1,111
Merger related costs.. 1,520 -- -- -- --
--------- --------- --------- --------- ---------
Loss from operations.. (13,885) (12,643) (5,860) (5,821) (4,529)
Other income (expense),
net.................... 1,134 (60) (40) 113 (53)
--------- --------- --------- --------- ---------
Loss before income
taxes................ (12,751) (12,703) (5,900) (5,708) (4,582)
Income tax expense
(benefit).............. 267 (57) 34 68 --
--------- --------- --------- --------- ---------
Net loss.............. $ (13,018) $ (12,646) $ (5,934) $ (5,776) $ (4,582)
========= ========= ========= ========= =========
Net loss available to
common shareholders.... $ (13,449) $ (13,191) $ (6,235) $ (5,984) $ (4,582)
========= ========= ========= ========= =========
Basic and diluted net
loss per common
share(2)............... $ (1.41) $ (3.21) $ (1.54) $ (1.53) $ (1.49)
Shares used in computing
basic and diluted net
loss per common share.. 9,523,586 4,111,270 4,036,979 3,914,998 3,068,301

December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands)

Consolidated Balance
Sheet Data:(1)
Cash and cash
equivalents.......... $ 16,023 $ 4,243 $ 826 $ 2,037 $ 227
Working capital
(deficit)............ 43,961 605 (1,564) 2,204 (923)
Total assets.......... 65,110 15,685 5,923 6,122 1,737
Total current
liabilities.......... 18,177 12,092 6,137 2,372 1,720
Long-term debt, net of
current portion...... -- 1,219 391 738 240
Redeemable convertible
preferred stock...... -- 23,157 10,399 8,128 --
Shareholders' equity
(deficit)............ 46,933 (20,783) (11,004) (5,115) (223)

- --------
(1) Reflects restatement for pooling of interests business combination. See
Note 13 of Notes to Consolidated Financial Statements.
(2) For further discussion of loss per common share see Note 1 of Notes to
Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by

21

terminology such as may, will, should, expect, plan, intend, anticipate,
believe, estimate, predict, potential or continue, the negative of such terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined in
the "Factors Affecting Future Operating Results" in Part I of this Annual
Report.

Overview

We are a leading provider of eCRM software that enables companies to
maximize the value of customer interactions across multiple communication
channels and business processes thereby enhancing customer relationships. Our
solution addresses the unique challenges faced by companies implementing an e-
business strategy. Our product suite is designed to be a comprehensive
software solution that enables companies to effectively manage all major
points of customer contact, from marketing to sales to customer support, and
create value for both the company and the customer with every interaction. Our
software solutions can be deployed as a suite or as individual products,
depending on the company's preference and/or immediate need.

To remain competitive in today's business environment, companies are
implementing e-business initiatives to enable them to interact with their
customers using both traditional and e-business communication channels,
including the Internet, in a way that will maximize the value of each customer
interaction. More specifically, these initiatives allow companies to market
their products, transact sales, manage customer service, and interact and
communicate with customers, partners and suppliers using the Internet and
other electronic means. Ultimately, each customer interaction must be
maximized for purposes of customer retention, cross-sell and up-sell
opportunities, and customer satisfaction to enhance customer relationships.

On December 12, 1999, Primus acquired Imparto Software Corporation, a
privately held software company and developer of emarketing software. In
connection with the transaction, we issued 913,788 shares of our common stock
in exchange for all outstanding shares of preferred stock, preferred stock
warrants, and common stock of Imparto, and we converted all outstanding
options to purchase Imparto common stock into options to purchase up to 86,212
shares of Primus common stock. The transaction was accounted for as a pooling
of interests. The consolidated financial statements have been prepared to
reflect the restatement of all periods presented to include the accounts of
Imparto. The historical results of the pooled entities reflect each of their
actual operating cost structures and, as a result, do not necessarily reflect
the cost structure of the newly combined entity. The combined consolidated
financial statements are now considered the historical financial statements of
Primus.

Before 1998, we recognized software license revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1.
Beginning in 1998, we have recognized software license revenue in accordance
with AICPA Statement of Position 97-2, "Software Revenue Recognition," which
provides specific industry guidance and stipulates that revenue recognized
from software arrangements is to be allocated to each element of the
arrangement based on the relative fair value of the elements. Under SOP 97-2,
the determination of fair value is based on objective evidence that is
specific to the vendor. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement have been delivered. The AICPA recently issued its Statement of
Position 98-9, which provides certain amendments to its Statement of Position
97-2 and is effective for transactions entered into beginning January 1, 2000.
We do not expect implementation of this latest AICPA pronouncement to
materially impact our revenue recognition practices.

Our revenue consists of software license revenue and related client services
revenue. For the foreseeable future, we expect substantially all of our
revenue will be derived from our eCRM software and related services. We market
our software and services on a worldwide basis through our direct sales
organization in the United States and the United Kingdom. In Japan, Primus KK,
a Japanese joint venture in which we hold a 14.3% minority interest,
distributes our products. Our international sales constituted 17% of our 1999,
15% of our 1998 revenue and less than 1% of our 1997 revenue. We believe that
international revenue, as a percentage of our total revenue, will fluctuate in
the future.

22

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

We currently recognize license revenue over the implementation period if
implementation services are included in the original license arrangement. As a
result, even where we have a signed license agreement for the purchase of our
software and have shipped the software, license revenue recognition depends on
whether we have begun implementation. For license agreements under which we
have no implementation responsibility, or where implementation is not
considered to be essential to the functionality of the software, we generally
recognize revenue from the agreement upon shipping the software.

For new customers, we generally enter into services agreements to implement
our software. Most of our new customers begin implementation within 30 to 60
days of signing a license agreement. Once commenced, implementation of our
products typically ranges from 30 to 45 days, an improvement from prior years
when installations took 60 to 90 days. Examples of situations under which we
have no implementation responsibility include additional license sales to
existing customers or customers who elect to use internal or third party
resources to implement the software.

We have invested heavily in product development and in building our sales,
marketing, finance and administrative and client services organizations. From
November 1997 through December 1999, we made a strategic investment in
building our executive management team to help us execute our long-term growth
strategy. We have incurred quarterly net losses since inception, and as of
December 31, 1999, had an accumulated deficit of $46.4 million. We anticipate
that our operating expenses will continue to increase substantially for the
foreseeable future as we continue to expand our product development, sales and
marketing and client-services staff.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of
total revenue represented by each item reflected in our Consolidated
Statements of Operations.

Fiscal Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ------------ -----------
(As a percentage of total revenue)

Revenue:
License.......................... 71% 65% 55%
Services......................... 29 35 45
----------- ------------ -----------
Total revenue.................. 100 100 100
----------- ------------ -----------
Cost of revenue:
License.......................... 4 4 1
Services......................... 21 32 46
----------- ------------ -----------
Total cost of revenue.......... 25 36 47
----------- ------------ -----------
Gross profit................... 75 64 53
----------- ------------ -----------
Operating expenses:
Sales and marketing.............. 68 112 73
Research and development......... 32 43 42
General and administrative....... 24 41 28
Merger related costs............. 6 -- --
----------- ------------ -----------
Total operating expenses....... 130 196 143
----------- ------------ -----------
Loss from operations........... (55) (132) (90)
Other income, net.................. 4 (1) (1)
----------- ------------ -----------
Loss before income taxes....... (51) (133) (91)
Income tax expense (benefit)....... 1 (1) 1
----------- ------------ -----------
Net loss....................... (52)% (132)% (92)%
=========== ============ ===========

23

Revenue

We derive our revenue from the sale of software licenses and related
services including support and maintenance contracts. Revenue was $25.1
million and $9.6 million in 1999 and 1998, respectively, representing an
increase in 1999 of $15.6 million, or 163%. Revenue was $9.6 million and $6.5
million in 1998 and 1997, respectively, representing an increase of $3.1
million, or 47%. Except for 1998, when one customer accounted for 11% of total
revenue, no single customer accounted for more that 10% of total revenue.

License Revenue. License revenue was $17.8 million, $6.2 million and $3.6
million in 1999, 1998 and 1997, respectively. The increase was due to greater
acceptance of our eCRM software in the marketplace, increased international
sales and increases in both the size and productivity of the sales force.
License revenue as a percentage of total revenue was 71%, 65% and 55% in 1999,
1998 and 1997, respectively. Sales personnel totaled 53, 44 and 17 as of
December 31, 1999, 1998 and 1997, respectively. The increase in international
license revenue from 1998 to 1999 was $2.0 million and from 1997 to 1998 was
$1.1 million. This increase was due primarily to the increased size and
productivity of our sales force and increased international sales as a result
of the opening of our United Kingdom sales office and sales through our
Japanese distributor.

Services Revenue. Services revenue was $7.4 million, $3.4 million and $2.9
million in 1999, 1998 and 1997, respectively. Maintenance and support contract
revenue increased $2.6 million and consulting fees increased $1.4 million in
1999. Services revenue increased 16% to $3.4 million in 1998 from $2.9 million
in 1997. The increase in services revenue from 1997 to 1998 was a result of a
$1.1 million increase in maintenance and support contract revenue offset by a
$621,000 decrease in consulting revenue. The increase in maintenance and
support contract revenue was a result of the increasing number of licenses
sold. The decrease in consulting revenue was primarily due to a $494,000
decrease in Imparto consulting revenue from 1997 to 1998 when Imparto
refocused its efforts away from a services based consulting organization into
developing web-based marketing automation software applications.

Services revenue represented 29%, 35% and 45% of our total revenue in 1999,
1998 and 1997, respectively. Services revenue as a percentage of total revenue
is declining due to the fact that license revenue is growing at a faster pace
than services revenue. The decline is primarily due to the fact that the
implementation period for our software has shortened. We expect the proportion
of services revenue to total revenue to fluctuate in the future, depending in
part on our customers' use of third-party consulting and implementation
services providers.

Cost of Revenue

Cost of License Revenue. Cost of license revenue includes royalties and fees
paid to third parties under license arrangements and costs related to media
and duplication of our products and manuals. Cost of license revenue was
$989,000, $375,000, and $97,000 in 1999, 1998 and 1997, respectively. The cost
of license revenue increased $614,000, or 164%, from 1998 to 1999 and
$278,000, or 287% from 1997 to 1998. Cost of license revenue as a percentage
of license revenue was 6%, 6% and 3% in 1999, 1998 and 1997, respectively. We
anticipate that our cost of license revenue will continue to increase in
absolute dollars and as a percent of license revenue which has varied in the
past due to the expected increase in the volume of software product sales and
the type of royalty agreements in place at the time.

Cost of Services Revenue. Cost of services revenue includes personnel and
other costs related to professional services and customer support. Cost of
services revenue was $5.4 million, $3.1 million and $2.9 million in 1999, 1998
and 1997, respectively. Cost of services revenue increased $2.3 million, or
73%, from 1998 to 1999 and $169,000, or 6%, from 1997 to 1998. The increases
in cost of services revenue for the comparable years was primarily a result of
hiring and training a consulting organization to implement our eCRM software.
Professional services and customer support personnel totaled 51, 29 and 19 as
of December 31, 1999, 1998 and 1997, respectively. Cost of services revenue as
a percentage of services revenue was 73%, 91% and 100% in 1999, 1998 and 1997,
respectively. The decrease in cost of services revenue as a percentage of
services revenue from 1997 and 1998 to 1999 was primarily due to higher
utilization of consulting-services personnel and growth of maintenance
revenue.

24

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, bonuses and commissions earned by sales and marketing personnel,
travel and costs associated with marketing programs, such as trade shows,
public relations and new product launches. Sales and marketing expenses were
$17.2 million, $10.7 million and $4.8 million in 1999, 1998 and 1997,
respectively. Sales and marketing expenses increased $6.5 million, or 60%,
from 1998 to 1999 and $5.9 million, or 125%, from 1997 to 1998. The increases
in each year from 1997 to 1999 are primarily due to the continued growth in
the number of our sales and marketing personnel as well as an increase in
commissions paid as a result of revenue growth. Sales and marketing employees
totaled 69, 56 and 27 as of December 31, 1999, 1998 and 1997, respectively.
Sales and marketing expenses as a percentage of total revenue was 68%, 112%
and 73% in 1999, 1998 and 1997, respectively. The fluctuation from 1997 to
1998 reflects the building of the sales and marketing infrastructure to
generate increased revenue and the launch of our United Kingdom office. The
decrease in sales and marketing expense as a percentage of revenues from 1998
and 1999 reflects a slower growth in the number of sales and marketing
personnel. We believe that a significant increase in our sales and marketing
efforts is essential for us to maintain market position and further increase
market acceptance of our products. Accordingly, we anticipate that we will
continue to invest significantly in sales and marketing for the foreseeable
future, and the dollar amount of sales and marketing expenses will increase in
future periods, although they may decline as a percentage of total revenue.

Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, program managers
and quality assurance personnel and payments to outside contractors. Research
and development expenses were $8.1 million, $4.1 million and $2.8 million in
1999, 1998 and 1997, respectively. Research and development expenses increased
$3.9 million, or 95%, from 1998 to 1999 and $1.4 million, or 50%, from 1997 to
1998. The increases in each year from 1997 to 1999 were primarily due to
increased hiring of software developers and quality-assurance staff to support
development of our new products, enhancements to our existing products and an
increase in compensation levels for development and quality-assurance
personnel. Research and development personnel totaled 73, 38 and 27 as of
December 31, 1999, 1998 and 1997, respectively. Research and development
expenses as a percentage of total revenue were 32%, 43% and 42% for 1999, 1998
and 1997, respectively. We believe that a significant increase in our research
and development investment is essential for us to maintain our market
position, to continue to expand our eCRM software and to develop additional
applications. Accordingly, we anticipate that we will continue to invest
significantly in product research and development for the foreseeable future,
and research and development expenses are likely to increase in future
periods. As such, we expect research and development costs as a percentage of
total revenue to fluctuate. In the development of our new products and
enhancements of existing products, the technological feasibility of our
software is not established until substantially all product development is
complete. Accordingly, software development costs eligible for capitalization
were insignificant, and all costs related to internal research and development
have been expensed as incurred.

General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative and information services personnel. General and administrative
expenses were $5.9 million, $3.9 million and $1.8 million in 1999, 1998 and
1997, respectively. General and administrative expenses increased $2.0
million, or 52%, from 1998 to 1999 and $2.1 million, or 117%, from 1997 to
1998. The increase in general and administrative expenses was primarily the
result of our hiring additional executive, finance, and administrative
personnel to support the growth of our business during these periods as well
as an increase in legal and professional fees associated with becoming a
public company. The increase in expense also reflects an increase in our
provision for doubtful accounts. General and administrative employees totaled
30, 27 and 17 as of December 31, 1999, 1998 and 1997, respectively. General
and administrative expenses as a percentage of total revenue were 24%, 41% and
28% in 1999, 1998 and 1997, respectively. The fluctuation of general and
administrative expense as a percentage of total revenue from 1998 to 1999
reflects the building of our infrastructure in 1998. We believe that our
general and administrative expenses will continue to increase as a result of
the continued expansion of our administrative staff and the expenses
associated with being a public company, including, but not limited to, annual
and other public-reporting costs, directors' and officers' liability
insurance, investor-relations programs and professional-services fees.

25

Merger Related Costs. Merger related costs were approximately $1.5 million
or 6% of net sales in 1999 and primarily consisted of brokerage and attorneys
fees. These costs were recorded in connection with the December 1999 merger
with Imparto that was accounted for under the pooling of interests method of
accounting.

Other Income, Net. Net other income and other expense was income of $1.1
million, expense of $60,000, and expense of $40,000 in fiscal 1999, 1998 and
1997 respectively. The variances from period to period are due to fluctuations
in the average combined cash and cash equivalents and short-term investment
balances. We expect to continue to yield investment income on its average
balance of combined cash and cash equivalents and short-term and long-term
investments at an average rate comparable to that experienced in 1999.

Income Taxes. We have not recorded any significant income tax benefits
related to the net operating losses in 1999, 1998 and 1997 as a result of the
uncertainties regarding the realization of the net operating losses. Income
tax expense recorded in 1999 primarily relates to our foreign operations. The
tax benefit recorded in 1998 primarily relates to a tax benefit from the
separate results of Imparto, net of tax expense from our foreign operations.
Tax expense recorded in 1997 primarily relates to tax expense from the
separate results of Imparto.

Net operating loss carryforwards for federal and state income tax reporting
purposes of approximately $49.0 million, of which $13.9 million is related to
deductions related to the exercise of non-qualified stock options, begin to
expire in 2001 if not utilized. The Internal Revenue Code contains provisions
that limit the use in any future period of net operating loss and credit
carryforwards upon the occurrence of certain events, including significant
change in ownership interests.

Quarterly Results of Operations

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

Three Months Ended
-------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(In thousands)

Consolidated Statement of
Operations Data:
Revenue:
License................ $ 6,004 $ 4,407 $ 4,468 $ 2,905 $ 2,449 $ 1,479 $ 1,297 $ 948
Services............... 2,606 2,183 1,503 1,068 892 922 834 741
------- ------- ------- ------- ------- ------- ------- -------
Total revenue.......... 8,610 6,590 5,971 3,973 3,341 2,401 2,131 1,689
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License................ 300 246 298 145 261 58 36 20
Services............... 1744 1,305 1,291 1,018 917 893 611 677
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue.. 2044 1,551 1,589 1,163 1,178 951 647 697
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 6,566 5,039 4,382 2,810 2,163 1,450 1,484 992
Operating expenses:
Sales and marketing.... 4818 4,797 4,270 3,276 3,779 3,384 2,219 1,325
Research and
development........... 2,802 2,081 1,707 1,487 1,013 1,155 1,137 832
General and
administrative........ 2,377 1,397 1,092 1,058 1,783 929 668 508
Merger related costs... 1,520 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 11,517 8,275 7,069 5,821 6,575 5,468 4,024 2,665
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (4,951) (3,236) (2,687) (3,011) (4,412) (4,018) (2,540) (1,673)
Other income (expense),
net.................... 684 481 (33) 2 20 (26) (42) (12)
------- ------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (4,267) (2,755) (2,720) (3,009) (4,392) (4,044) (2,582) (1,685)
------- ------- ------- ------- ------- ------- ------- -------
Income tax expense
(benefit).............. 40 27 173 27 45 -- (82) (20)
------- ------- ------- ------- ------- ------- ------- -------
Net loss............... $(4,307) $(2,782) $(2,893) $(3,036) $(4,437) $(4,044) $(2,500) $(1,665)
======= ======= ======= ======= ======= ======= ======= =======

26

The following table sets forth unaudited quarterly results of operations as
a percentage of revenue for 1999 and 1998.

Three Months Ended
--------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(In thousands)

Consolidated Statement of
Operations Data:
Revenue:
License................ 69.7 % 66.9 % 74.8 % 73.1 % 73.3 % 61.6 % 60.9 % 56.1 %
Services............... 30.3 33.1 25.2 26.9 26.7 38.4 39.1 43.9
----- ----- ----- ----- ------ ------ ------ -----
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ------ ------ ------ -----
Cost of revenue:
License................ 3.5 3.7 5.0 3.5 7.8 2.4 1.7 1.2
Services............... 20.2 19.8 21.6 25.8 27.5 37.2 28.7 40.1
----- ----- ----- ----- ------ ------ ------ -----
Total cost of revenue.. 23.7 23.5 26.6 29.3 35.3 39.6 30.4 41.3
----- ----- ----- ----- ------ ------ ------ -----
Gross profit........... 76.3 76.5 73.4 70.7 64.7 60.4 69.6 58.7
Operating expenses:
Sales and marketing.... 56.0 72.8 71.5 82.5 113.2 140.9 104.1 78.4
Research and
development........... 32.5 31.6 28.6 37.4 30.3 48.1 53.4 49.3
General and
administrative........ 27.6 21.2 18.3 26.6 53.4 38.7 31.3 30.1
Merger related costs... 17.7 -- -- -- -- -- -- --
----- ----- ----- ----- ------ ------ ------ -----
Total operating
expenses.............. 133.8 125.6 118.4 146.5 196.9 227.7 188.8 157.8
----- ----- ----- ----- ------ ------ ------ -----
Loss from operations.... (57.5) (49.1) (45.0) (75.8) (132.2) (167.3) (119.2) (99.1)
Other income (expense),
net.................... 7.9 7.3 (.6) .1 .6 (1.1) (2.0) (0.7)
----- ----- ----- ----- ------ ------ ------ -----
Loss before income
taxes.................. (49.6) (41.8) (45.6) (75.7) (131.6) (168.4) (121.2) (99.8)
----- ----- ----- ----- ------ ------ ------ -----
Income tax expense
(benefit).............. .5 .4 2.9 .7 1.3 -- (3.8) (1.2)
Net loss............... (50.1)% (42.2)% (48.5)% (76.4)% (132.9)% (168.4)% (117.4)% (98.6)%
===== ===== ===== ===== ====== ====== ====== =====

The trends discussed above in the annual comparisons of operating results
generally apply to the comparison of operating results for the four quarters
in the 12-month period ended December 31, 1999 and 1998. The fourth quarter of
1999 also included costs related to the merger with Imparto. Our quarterly
operating results have varied widely in the past, and we expect that they will
continue to fluctuate in the future as a result of a number of factors, many
of which are outside our control.

Liquidity and Capital Resources

Prior to our initial public offering, we primarily financed our operations
through the private sale of our equity securities. To a lesser extent, we
financed our operations through equipment financing and traditional lending
arrangements. In July 1999, we completed our initial public offering and
issued 4,622,500 shares of common stock at an initial public offering price of
$11.00 per share. We received approximately $46.2 million in cash, net of
underwriting discounts, commissions, and other offering costs.

As of December 31, 1999, we had cash and cash equivalents of $16.0 million
and available-for-sale securities of $37.1 million, representing an increase
of $46.0 million from cash and investments held as of December 31, 1998. As of
December 31, 1999, our working capital was $44.0 million compared to $605,000
at December 31, 1998.

Our operating activities resulted in net cash outflows of $7.5 million and
$9.0 million in 1999 and 1998, respectively. The decrease in operating cash
outflows from 1998 to 1999 was due primarily to an increase in deferred
revenue offset by an increase in accounts receivable.

Investing activities used cash of $36.0 million and $3.6 million in 1999 and
1998, respectively. Investing activities used cash primarily for the purchase
of short-term securities following our initial public offering and the
purchase of capital equipment.

27

Financing activities provided cash of $55.3 million and $15.9 million in
1999 and 1998, respectively. In 1999 cash provided by financing activities was
primarily due to the proceeds from our initial public offering in July, offset
in part by payments on our long term debt.

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

. enter new markets for our products and services

. increase research and development spending

. increase sales and marketing activities

. develop new distribution channels

. improve our operational and financial systems

. broaden our professional services capabilities

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

Impact of Year 2000 Issue

We have experienced no disruption to our operations as a result of the "Year
2000" issue. The "Year 2000" issue is the result of computer programs being
unable to differentiate between the year 1900 and the year 2000 because they
were written using two digits rather than four to define the applicable year.
This programming flaw could result in a system failure or miscalculations with
respect to current programs. We established a Year 2000 Committee with
representatives from all of the functional areas at Primus to engage in a
comprehensive review of our computer systems and software applications and
equipment that utilize date sensitive computer chips. Based on this review, we
determined that some of our software, hardware and equipment had to be
modified or replaced so that they would properly utilize dates beyond December
31, 1999. These replacements and modifications were completed by December 31,
1999. Furthermore, we contacted key business partners, including third-party
suppliers, services providers, distributors, wholesalers and other entities
with whom we do business to determine their compliance with year 2000
requirements. All mission critical facilities, equipment, and systems were
monitored by an on-site team on December 31, 1999 with no reported
disruptions. As of December 31, 1999, we had completed all phases of our year
2000 project including contingency planning for critical aspects of our
operations. Although we have experienced no year 2000 compliance problems to
date, some problems may not surface until several months after January 1,
2000. Accordingly, we are continuing to monitor our operations and our
business partners for year 2000 compliance problems. Were any such problems to
arise that we were unable to identify and correct in a timely manner, our
operations could be adversely affected. In addition, although we do not expect
that the cost to fix any year 2000 problems that may be identified would be
material, the costs of upgrading or replacing any non-compliant systems or
equipment could exceed our expectations and adversely affect our operating
results.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities in June 1998. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. SFAS No. 133, as amended by SFAS No. 137, Accounting
for Derivative

28

Instruments and Hedging Activities, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of this statement is
not expected to have a material impact on our consolidated financial
statements.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements" which we expect to adopt no later than January 1, 2000. SAB No.
101 provides guidance on revenue recognition issues. We do not expect the
implementation of this SAB to materially impact our revenue recognition
practices.

The American Institute of Certified Public Accountants recently issued
Statement of Position (SOP) No. 98-9 that provides certain amendments to SOP
No. 97-2 and is effective for transactions entered into beginning January 1,
2000. This pronouncement is not expected to materially impact our revenue
recognition practices.

Subsequent Event

On January 21, 2000, we acquired 2order.com, Inc. 2order.com develops and
markets software that acts as a personal sales assistant, helping buyers
define requirements and configure custom solutions. 2order.com was
incorporated in Georgia in 1991 under the name Business Systems Design, Inc.
As a result of the acquisition, we issued 1,506,127 shares of our common
stock, $.025 par value per share, in exchange for all issued and outstanding
capital stock and assumed all outstanding options and warrants of 2order.com,
which represents 150,378 shares of our common stock. The acquisition will be
accounted for as a pooling of interests business combination, and accordingly,
our consolidated financial statements presented in future reports will be
restated to include the accounts and results of operations of 2order.com.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes and change in the
market values of our investments.

Interest Rate Risk. The Company is exposed to the impact of short-term
changes in interest rates. The Company's exposure primarily relates to the
Company's investment portfolio. The Company invests its excess cash in high
quality corporate and municipal debt instruments. Investments in both fixed
rate and floating rate interest earning instruments carries a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted by a rise in interest rates, while floating rate securities
may produce less income than expected if interest rates fall. As a result,
changes in interest rates may cause the Company to suffer losses in principal
if forced to sell securities that have declined in market value or may cause
the Company's future investment income to fall short of expectations. Our
investment portfolio is designated as available-for-sale, and accordingly is
presented at fair value in the consolidated balance sheet.

The Company protects and preserves its invested funds with investment
policies and procedures that limit default, market and reinvestment risk. The
Company has not utilized derivative financial instruments in its investment
portfolio.

In 1999, the effects of changes in interest rates on the fair market value
of our marketable investment securities and our earnings were insignificant.
At December 31, 1999, our investment portfolio included approximately $4.5
million in variable rate investments, primarily all of which are due after
2000. Fixed rate investments at December 31, 1999 of approximately $32.6
million had a weighted average interest rate of 6.34% and are primarily due in
2000. We believe that the impact on the fair market value of our securities
and our earnings in 2000 from a hypothetical 10% increase in interest rates
would be insignificant.

Foreign Currency Risk. We develop products in the United States and sell
them in North America, Asia and Europe. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Since our sales are
currently priced in U.S. dollars and translated to local currency amounts, a
strengthening of the dollar could make our products less competitive in
foreign markets. The Company has one foreign subsidiary whose expenses are
incurred in its local currency. As exchange rates vary, its expenses, when
translated, may vary from expectations and adversely impact overall expected
profitability.

29

Our operating results have not been significantly affected by exchange rate
fluctuations in 1999. If, in 2000, the US dollar uniformly decreases in
strength by 10% relative to the currency of our foreign sales subsidiary, our
operating results would likely not be significantly effected.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and Supplementary Data of the Company
are listed under Part IV, Item 14, of this Form 10-K.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

In accordance with General Instruction G(3) to Form 10-K, except as
indicated in the following sentence, the information called for by Items 10,
11, 12 and 13 is incorporated by reference from the registrant's definitive
proxy statement pursuant to Regulation 14A for the 2000 Annual Meeting of
Shareholders. As permitted by General Instruction G(3) to Form 10-K and
Instruction 3 to Item 401(b) of Regulation S-K, the information on executive
officers called for by Item 10 is included in Part I of this Annual Report on
Form 10-K.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

1. Report of KPMG LLP dated February 29, 2000 (See Page F-2 hereof).

2. Consolidated Balance Sheets as of December 31, 1999 and 1998. (See Page
F-3 hereof).

3. Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 (See Page F-4 hereof).

4. Consolidated Statements of Shareholder's Equity (Deficit) and
Comprehensive Loss for the years ended December 31, 1999, 1998 and
1997. (See Page F-5 hereof).

5. Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997. (See Page F-6 hereof).

6. Notes to Consolidated Financial Statements. (See pages F-7 through F-21
hereof).

(a)(2) Financial Statement Schedules

Schedule No. Description
------------ -----------

Schedule II Valuation and Qualifying Accounts

Other schedules are not provided because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.

30

(a)(3) Exhibits

(a) Exhibits. The following is a complete list of Exhibits filed as part
of this Form 10-K.

Exhibit
No. Description
------- -----------

2.1 Agreement and Plan of Merger, dated December 12, 1999, among the
registrant, San Antonio Acquisition, Inc. and Imparto Software
Corporation.(2)
2.2 Agreement and Plan of Merger dated as of January 8, 2000 by and among
the registrant, Austin Acquisition, Inc. and 2 order.com, Inc.(3)
3.1 Fourth Amended and Restated Articles of Incorporation of the
registrant.(1)
3.2 Second Amended and Restated Bylaws of the registrant.(1)
4.1 Registration Rights Agreement, dated July 22, 1998, as amended, by and
among the registrant, TransCosmos USA Inc., TransCosmos Inc.,
Encompass Group, Inc., Oak Investment Partners VI L.P., Oak VI
Affiliates Fund, L.P., Norwest Equity Partners, V, Piper Jaffray,
Inc., and Snowden L.P.(1)
4.2 Third Amendment to Registration Rights Agreement, dated December 12,
1999 by and among the registrant, Trans Cosmos USA Inc., Trans Cosmos
Inc., Encompass Group, Inc., Oak Investment Partners VI L.P., Oak VI
Affiliates Fund, L.P. and Norwest Equity Partners, V.
4.3 Registration Rights Agreement, dated January 21, 2000, by and among
the registrant and the Investors listed on Schedule A thereto.
10.1 Separation Agreement, dated as of November 6, 1998, by and between the
registrant and Steven L. Sperry.(1)
10.2 Joint Venture Agreement, dated November 16, 1995, by and between the
registrant and Trans Cosmos, Inc.(1)
10.3 First Amendment to Joint Venture Agreement, dated September 26, 1997,
by and among the registrant, Trans Cosmos, Inc., and Best Career
Company.(1)
10.4 Exclusive Distribution License Agreement, dated September 26, 1997, by
and between the registrant and Trans Cosmos Inc.(1)
10.5 First Right of Refusal, dated September 26, 1997, by and between the
registrant and Primus K.K.(1)
10.6 Software Marketing and Distribution Agreement, dated March 31, 1998,
by and between the registrant and Primus Knowledge Solutions K.K.(1)
10.7 Amended and Restated Value Added Reseller License Agreement, dated
December 31, 1997, by and between the registrant and Versant Object
Technology Corporation.(1)
10.8 Form of Change of Control Agreement entered into by the registrant,
Michael A. Brochu, Elizabeth J. Huebner, Kim M. Nelson, Patricia L.
Cox, Edward L. Walter and Diana K. Wong.(1)
10.9 Employee Stock Option and Restricted Stock Award Plan, as adopted by
registrant's board of directors on November 29, 1993.(1)
10.10 Non-Employee Director Stock Option Plan, as adopted by registrant's
board of directors on November 1, 1994.(1)
10.11 1995 Stock Incentive Compensation Plan, as amended and restated on
March 12, 1996 and amended on February 10, 1998.(1)
10.12 1999 Stock Incentive Compensation Plan.(1)
10.13 1999 Employee Stock Purchase Plan.(1)
10.14 Office Lease Agreement, dated July 25, 1995, by and between the
registrant and Westlake Center Associates Limited Partnership.(1)
10.15 Lease Amendment 1, dated February 1, 1999, by and between the
registrant and Westlake Center Associates Limited Partnership.(1)

31

Exhibit
No. Description
------- -----------

10.16 Services Agreement, dated February 13, 1998, by and between the
registrant and Encompass Globalization, Inc.(1)
21.1 Subsidiaries of the registrant.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.

(b) Reports on Form 8-K

On December 13, 1999 we filed a Form 8-K reporting that we entered
into a definitive merger agreement with Imparto Software Corporation.

On December 20, 1999 we filed a Form 8-K reporting the resignation of
Ernst & Young LLP as our principal accountants.

On December 29, 1999 we filed a Form 8-K reporting the acquisition of
Imparto Software Corporation.

- --------
(1) Incorporated by reference herein to the Registration Statement of Form S-
1 and all amendments thereto filed with the Securities and Exchange
Commission on April 30, 1999 (Registration No. 333-77477).

(2) Incorporated by reference herein to the Registration Statement on Form 8-
K filed with the Securities and Exchange Commission on December 13, 1999
(File No. 0-26273).

(3) Incorporated by reference herein to the Registration Statement on Form 8-
K filed with the Securities and Exchange Commission on February 4, 2000
(File No. 0-26273).

32

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Primus Knowledge Solutions, Inc.

/s/ Michael A. Brochu
By: _________________________________
Michael A. Brochu
President, Chief Executive
Officer and Chairman of the Board

March 23, 2000
________________
Date

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Michael A. Brochu President, Chief Executive March 23, 2000
______________________________________ Officer and Chairman of ______________
Michael A. Brochu the Board (Principal Date
Executive Officer)

/s/ Elizabeth J. Huebner Executive Vice President, March 23, 2000
______________________________________ Chief Financial Officer, ______________
Elizabeth J. Huebner Secretary and Treasurer Date
(Principal Financial and
Accounting Officer)

/s/ Antonio M. Audino Director March 23, 2000
______________________________________ ______________
Antonio M. Audino Date

/s/ Promod Haque Director March 23, 2000
______________________________________ ______________
Promod Haque Date

/s/ Fredric W. Harman Director March 23, 2000
______________________________________ ______________
Fredric W. Harman Date

/s/ Yasuki Matsumoto Director March 23, 2000
______________________________________ ______________
Yasuki Matsumoto Date

/s/ Janice C. Peters Director March 23, 2000
______________________________________ ______________
Janice C. Peters Date

33

PRIMUS KNOWLEDGE SOLUTIONS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997...................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) and
Comprehensive Loss for the Years Ended December 31, 1999, 1998 and 1997.. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Schedule II Valuation and Qualifying Accounts............................. S-1

F-1

INDEPENDENT AUDITORS' REPORT

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

We have audited the consolidated financial statements of Primus Knowledge
Solutions, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Primus
Knowledge Solutions, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole presents fairly, in all material
respects, the information set forth therein.

KPMG LLP

Seattle, Washington
February 29, 2000

F-2

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,
----------------
1999 1998
------- -------
(In thousands,
except share
amounts)

ASSETS
Current assets:
Cash and cash equivalents................................. $16,023 $ 4,243
Short-term investments.................................... 37,055 2,833
Accounts receivable, net of allowance for doubtful
accounts of $696 and $378 at December 31, 1999 and 1998,
respectively............................................. 8,110 5,124
Prepaid expenses and other current assets................. 950 497
------- -------
Total current assets.................................. 62,138 12,697
Property and equipment, net................................. 2,548 2,077
Accounts receivable, long-term.............................. -- 600
Other assets................................................ 424 311
------- -------
Total assets.......................................... $65,110 $15,685
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... 1,318 662
Accrued liabilities....................................... 3,781 1,872
Compensation-related accruals............................. 2,888 1,490
Current portion of long-term debt......................... -- 444
Deferred revenue, including related-party amounts of
$1,516 and $1,395 at December 31, 1999 and 1998,
respectively............................................. 10,190 7,624
------- -------
Total current liabilities............................. 18,177 12,092
------- -------
Long-term debt, net of current portion...................... -- 1,219
Redeemable convertible preferred stock; issued and
outstanding no shares and 12,810,568 shares at December 31,
1999 and 1998, respectively................................ -- 23,157
Commitments, contingencies and subsequent event:
Shareholders' equity (deficit):
Preferred stock; $.001 par value; authorized 15,000,000
shares:
Convertible preferred stock; issued and outstanding no
shares and 763,193 shares at December 31, 1999 and
1998, respectively..................................... -- 1
Common stock, $.025 par value; authorized 50,000,000
shares; issued and outstanding 15,602,698 and 4,438,145
shares at December 31, 1999 and 1998, respectively....... 390 111
Additional paid-in capital................................ 93,214 12,535
Deferred stock-based compensation......................... (114) --
Accumulated other comprehensive loss...................... (110) (1)
Accumulated deficit....................................... (46,447) (33,429)
------- -------
Total shareholders' equity (deficit).................. 46,933 (20,783)
------- -------
Total liabilities and shareholders' equity (deficit).. $65,110 $15,685
======= =======

See accompanying notes to consolidated financial statements.

F-3

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands, except share
and per share amounts)

Revenue:
License, including amounts from related
parties of $1,353, $575 and $30 in 1999,
1998 and 1997, respectively................ $ 17,784 $ 6,173 $ 3,558
Services.................................... 7,360 3,389 2,925
--------- --------- ---------
Total revenue........................... 25,144 9,562 6,483
--------- --------- ---------
Cost of revenue:
License..................................... 989 375 97
Services.................................... 5,358 3,098 2,929
--------- --------- ---------
Total cost of revenue................... 6,347 3,473 3,026
--------- --------- ---------
Gross profit............................ 18,797 6,089 3,457
--------- --------- ---------
Operating expenses:
Sales and marketing......................... 17,161 10,707 4,762
Research and development.................... 8,077 4,137 2,766
General and administrative.................. 5,924 3,888 1,789
Merger related costs........................ 1,520 -- --
--------- --------- ---------
Total operating expenses................ 32,682 18,732 9,317
--------- --------- ---------
Loss from operations.................... (13,885) (12,643) (5,860)
Other income.................................. 1,533 187 103
Other expense................................. (399) (247) (143)
--------- --------- ---------
Loss before income taxes................ (12,751) (12,703) (5,900)
Income tax expense (benefit).................. 267 (57) 34
--------- --------- ---------
Net loss................................ (13,018) (12,646) (5,934)
Preferred stock accretion..................... (431) (545) (301)
--------- --------- ---------
Net loss available to common
shareholders........................... $ (13,449) $ (13,191) $ (6,235)
========= ========= =========
Basic and diluted net loss per common share... $ (1.41) $ (3.21) $ (1.54)
========= ========= =========
Shares used in computing basic and diluted net
loss per common share........................ 9,523,586 4,111,270 4,036,979
========= ========= =========

See accompanying notes to consolidated financial statements.

F-4

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
LOSS

Convertible Accumulated
preferred stock Common stock Additional Deferred other Total
-------------------- --------------------- paid-in stock-based comprehensive Accumulated shareholders'
Shares Par value Shares Par value capital compensation loss deficit equity (deficit)
--------- --------- ---------- --------- ---------- ------------ ------------- ----------- ---------------
(In thousands, except share amounts)

Balance at December
31, 1996.......... 500,000 $ 1 4,017,024 $100 $ 9,633 $ -- $ -- $(14,849) $ (5,115)
Exercise of stock
options and
warrants.......... -- -- 30,718 1 80 -- -- -- 81
Stock options and
warrants issued in
exchange for
services.......... -- -- -- -- 9 -- -- -- 9
Sale of Imparto
convertible
preferred stock,
net............... 28,391 -- -- -- 257 -- -- -- 257
Redeemable
convertible
preferred stock
accretion......... -- -- -- -- (301) -- -- -- (301)
Comprehensive
loss--net loss.... -- -- -- -- -- -- -- (5,934) --
----- --------
Total
comprehensive
loss........... -- -- -- -- -- -- -- (5,934) (5,934)
--------- ---- ---------- ---- ------- ----- ----- -------- --------
Balance at December
31, 1997.......... 528,391 1 4,047,742 101 9,678 -- -- (20,783) (11,003)
Exercise of stock
options and
warrants.......... -- -- 469,292 12 822 -- -- -- 834
Stock options and
warrants issued in
exchange for
services.......... -- -- -- -- 36 -- -- -- 36
Repurchase of
common stock...... -- -- (78,889) (2) (471) -- -- -- (473)
Sale of Imparto
convertible
preferred stock,
net............... 234,802 -- -- -- 3,015 -- -- -- 3,015
Redeemable
convertible
preferred stock
accretion......... -- -- -- -- (545) -- -- -- (545)
Comprehensive loss:
Foreign currency
translation
loss............. -- -- -- -- -- -- (1) -- --
Net loss.......... -- -- -- -- -- -- -- (12,646) --
----- --------
Total
comprehensive
loss........... -- -- -- -- -- -- (1) (12,646) (12,647)
--------- ---- ---------- ---- ------- ----- ----- -------- --------
Balance at December
31, 1998.......... 763,193 1 4,438,145 111 12,535 -- (1) (33,429) (20,783)
Exercise of stock
options and
warrants.......... -- -- 694,745 18 1,982 -- -- -- 2,000
Stock options and
warrants issued in
exchange for
services.......... -- -- 19,700 -- 672 -- -- -- 672
Repurchase of
common stock...... -- -- (14,099) -- (104) -- -- -- (104)
Sale of common
stock in initial
public offering,
net of of offering
costs............. -- -- 4,622,500 116 46,105 -- -- -- 46,221
Conversion of
redeemable
convertible
preferred stock
into common
stock............. -- -- 4,799,992 120 23,468 -- -- -- 23,588
Conversion of
convertible
preferred stock
into common
stock............. (500,000) (1) 166,666 4 (3) -- -- -- --
Sale of common
stock, net........ -- -- 129,972 3 1,239 -- -- -- 1,242
Sale of Imparto
convertible
preferred stock,
net............... 481,884 -- -- -- 7,584 -- -- -- 7,584
Conversion of
Imparto
convertible
preferred stock... (745,077) -- 745,077 18 (18) -- -- -- --
Deferred stock-
based
compensation...... -- -- -- -- 185 (114) -- -- 71
Redeemable
convertible
preferred stock
accretion......... -- -- -- -- (431) -- -- -- (431)
Comprehensive loss:
Foreign currency
translation
loss............. -- -- -- -- -- -- (4) -- --
Unrealized loss on
short-term
investments...... -- -- -- -- -- -- (105) -- --
Net loss.......... -- -- -- -- -- -- -- (13,018) --
----- --------
Total
comprehensive
loss........... -- -- -- -- -- -- (109) (13,018) (13,127)
--------- ---- ---------- ---- ------- ----- ----- -------- --------
Balance at December
31, 1999.......... -- $-- 15,602,698 $390 $93,214 $(114) $(110) $(46,447) $ 46,933
========= ==== ========== ==== ======= ===== ===== ======== ========

See accompanying notes to consolidated financial statements.

F-5

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(13,018) $(12,646) $(5,934)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation....................... 743 36 9
Depreciation and amortization.................. 1,244 567 495
Equity in loss of joint venture................ -- -- 50
Changes in assets and liabilities:
Accounts receivable............................ (2,386) (2,893) (1,093)
Prepaid royalties and other current assets..... (453) (191) 196
Other assets................................... (113) (260) (2)
Accounts payable and accrued liabilities....... 2,565 1,528 165
Compensation-related accruals.................. 1,398 844 355
Deferred revenue............................... 2,566 4,054 2,498
-------- -------- -------
Net cash used in operating activities........ (7,454) (8,961) (3,261)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.............. (39,576) (2,833) (1,311)
Maturities of short-term investments............. 5,249 610 1,000
Purchases of property and equipment.............. (1,715) (1,342) (346)
-------- -------- -------
Net cash used in investing activities........ (36,042) (3,565) (657)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt......... 807 1,822 206
Repayments of long-term debt..................... (2,470) (967) (306)
Proceeds from (repayments of) line of credit..... -- (500) 500
Proceeds from issuance of common stock, net...... 47,463 -- --
Proceeds from issuance of Imparto convertible
preferred stock, net............................ 7,584 3,015 257
Proceeds from issuance of redeemable convertible
preferred stock, net............................ -- 12,213 1,969
Repurchase of common stock....................... (104) -- --
Proceeds from exercise of stock options and
warrants........................................ 2,000 361 81
-------- -------- -------
Net cash provided by financing activities.... 55,280 15,944 2,707
-------- -------- -------
Translation adjustment............................ (4) (1) --
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents................................. 11,780 3,417 (1,211)
Cash and cash equivalents at beginning of year.... 4,243 826 2,037
-------- -------- -------
Cash and cash equivalents at end of year.......... $ 16,023 $ 4,243 $ 826
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........... $ 150 $ 187 $ 143
======== ======== =======
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Accretion on redeemable convertible preferred
stock........................................... $ 431 $ 545 $ 301
Conversion of redeemable convertible preferred
stock into common stock......................... 23,588 -- --
Common stock issued in exchange for options and
warrants........................................ -- 473 --
======== ======== =======

See accompanying notes to consolidated financial statements.

F-6

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and Summary of Significant Accounting Policies

Description of Business

Primus Knowledge Solutions, Inc. and subsidiaries (Primus or the Company) is
a leading provider of electronic customer relationship management (eCRM)
software that enables companies to maximize the value of customer interactions
across multiple communication channels and business processes thereby
enhancing customer relationships.

The Company's primary market is comprised largely of technology companies.
Sales are primarily generated through a domestic and European field sales
organization. The Company develops their products, which are sold domestically
and internationally, at its Seattle, Washington headquarters.

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

Basis of Presentation

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

In December 1999, the Company merged with Imparto Software Corporation
(Imparto) in a combination accounted for as a pooling-of-interests (note 13).
The consolidated financial statements and notes thereto for all periods prior
to the combination are restated to include the accounts and results of
operations of Imparto.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Short-Term Investments

The Company considers all short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value and unrealized
holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of other comprehensive loss
until realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.

A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary results in a reduction in its
carrying amount to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. Premiums and discounts are
amortized or accreted over the life of the related security as an adjustment
to yield using the effective interest method. Dividend and interest income are
recognized when earned.

Property and Equipment

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

On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) No. 98-1, "Accounting
for the Costs of Software Developed or Obtained for

F-7

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1. Description of Business and Summary of Significant Accounting
Policies--(Continued)

Internal Use." The adoption of SOP No. 98-1 did not have a material effect on
the Company's capitalization policy. The Company's capitalized software
consists primarily of external direct costs for software licenses.

Investment in Primus KK

In December 1995, Primus invested $50,000 for a 50% interest in Primus KK, a
Japanese distributor, with Trans Cosmos Inc., a Japanese company (TCI), a
significant shareholder of the Company. Primus accounted for its investment
using the equity method and wrote down its investment to zero in March 1997 as
a result of recognizing the Company's portion of the investee's losses to
date. In September 1997, Primus and TCI renegotiated their agreement, reducing
Primus' ownership to 14.3%. The investment is accounted for using the cost
method.

Fair Value of Financial Instruments

At December 31, 1999 and 1998, the recorded amounts of cash and cash
equivalents, short-term investments, accounts receivable and payable, prepaid
expenses and other current assets, accrued liabilities and compensation-
related accruals reflected in the financial statements approximate fair value
due to the short-term nature of the instruments. It was not practicable to
estimate the fair value of the Company's investment in Primus KK.

Revenue Recognition

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

On January 1, 1998, the Company adopted the provisions of Statement of
Position 97-2, "Software Revenue Recognition" (SOP 97-2), which provides
specific industry guidance and stipulates that revenue recognized from
software arrangements is to be allocated to each element of the arrangement
based on the relative fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support, installation, or
training. Under SOP 97-2, the determination of fair value is based on
objective evidence that is specific to the vendor. If such evidence of fair
value for each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value does exist
or until all elements of the arrangement are delivered. The adoption of SOP
97-2 did not have a material effect on revenue recognition or the Company's
results of operations.

Revenues from software license agreements are recognized over the software
implementation period (if sold with initial implementation services) or upon
delivery of software (if sold without implementation services) if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to elements of the arrangement. Elements included in multiple
element arrangements consist of software products, upgrades, enhancements,
customer support services, or consulting services. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or
the expiration of the acceptance period. The Company enters into reseller
arrangements that typically provide for sublicense fees based on a percentage
of list price. Sublicense fees are generally recognized when reported by the
reseller upon relicensing of the Company's product to end-users. The Company's
agreements with its customers and resellers do not contain product return
rights.

F-8

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1. Description of Business and Summary of Significant Accounting
Policies--(Continued)

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

Research and Development

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

Advertising

Advertising costs are expensed as incurred. Advertising expense was
approximately $461,000, $394,000 and $218,000 during the years ended December
31, 1999, 1998, and 1997, respectively.

Federal Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is dispersed across different geographic areas
throughout North America, Europe, and Japan. One customer's purchases
represented approximately 11% of 1998 revenues. During 1999 and 1997, no
single customer accounted for 10% or more of total revenues. The Company does
not require collateral or other security to support credit sales, but provides
an allowance for bad debts based on historical experience and specifically
identified risks.

The Company is also subject to risks related to the significant balances of
cash, cash equivalents, short-term and long-term investments. The Company's
portfolio, however, is diversified and consists primarily of highly rated
money market funds and short-term investment-grade securities.

Foreign Currency Translation

The functional currency of the Company's foreign subsidiary is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars
at the exchange rate in effect on the balance sheet date. Revenues and
expenses are translated at the average rates

F-9

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1. Description of Business and Summary of Significant Accounting
Policies--(Continued)

of exchange prevailing during the year. The net gain or loss resulting from
translation is shown as foreign currency translation adjustment within
accumulated other comprehensive loss as a component of shareholders' equity
(deficit). Gains and losses on foreign currency transactions are included in
the consolidated statement of operations. There were no significant foreign
currency transaction gains or losses in 1999, 1998 or 1997.

Stock-Based Compensation

The Company accounts for its stock option plans for employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense related to fixed employee stock options is recorded
only if, on the date of grant, the fair value of the underlying stock exceeded
the exercise price. The Company has adopted the disclosure-only requirements
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees and provide
pro forma net income and pro forma earnings per share disclosures as if the
fair-value based method of accounting in SFAS No. 123 had been applied to
employee stock option grants.

Loss Per Share

In accordance with SFAS No. 128, "Earnings Per Share," the Company has
reported both basic and diluted net loss per common share for each period
presented. Basic net loss per common share is computed on the basis of the
weighted-average number of common shares outstanding for the year. Diluted net
loss per common share is computed on the basis of the weighted-average number
of common shares plus dilutive potential common shares outstanding. Dilutive
potential common shares are calculated under the treasury stock method.
Securities that could potentially dilute basic income per share consist of
outstanding stock options and warrants and convertible preferred stock. Net
loss available to common shareholders includes net loss and preferred stock
accretion. As the Company had a net loss available to common shareholders in
each of the periods presented, basic and diluted net loss per common share are
the same. All potential common shares outstanding at December 31, 1999, 1998
and 1997 were excluded from the computation of diluted net loss per common
share because they were anti-dilutive and potential common shares consisted of
options and warrants to purchase approximately 3,559,000 common shares at
December 31, 1999. At December 31, 1998 and 1997, potential common shares
included preferred stock convertible into approximately 5,232,000 and
3,361,000 common shares and options and warrants to purchase approximately
2,708,000 and 2,866,000 common shares, respectively.

Other Comprehensive Loss

On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income (loss) and its components in a full set
of financial statements. Comprehensive loss consists of net loss, foreign
currency translation adjustments and net unrealized losses from securities
available-for-sale and is presented in the accompanying statements of
shareholders' equity (deficit) and comprehensive loss. SFAS No. 130 requires
only additional disclosures in the financial statements; it does not affect
the Company's financial position or operations.

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and

F-10

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1. Description of Business and Summary of Significant Accounting
Policies--(Continued)

disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

Reclassifications

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

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities in June 1998. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. SFAS No. 133, as amended by SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial statements.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements" which the Company adopted January 1, 2000. SAB No. 101 provides
guidance on revenue recognition issues. The Company has determined the impact
of SAB No. 101 on the Company's financial statements is not material.

The American Institute of Certified Public Accountants recently issued
Statement of Position (SOP) No. 98-9 that provides certain amendments to SOP
No. 97-2 and is effective for transactions entered into beginning January 1,
2000. This pronouncement is not expected to materially impact the Company's
revenue recognition practices.

Note 2. Cash and Cash Equivalents

Cash and cash equivalents consist of the following:

December 31,
--------------
1999 1998
------- ------
(In thousands)

Cash...................................................... $ 5,065 $ 676
Commercial paper.......................................... 5,971 2,285
Money market funds........................................ 4,987 1,282
------- ------
$16,023 $4,243
======= ======

F-11

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 3. Short-Term Investments

Short-term investments consist of the following available-for-sale
securities:

December 31,
--------------
1999 1998
------- ------
(In thousands)

Commercial paper and short-term obligations.............. $ 8,031 $2,432
Corporate notes and bonds................................ 24,524 401
Market auction preferreds................................ 4,500 --
------- ------
$37,055 $2,833
======= ======

The gross unrealized holding loss was $105,000 at December 31, 1999 and
amortized cost approximated fair value at December 31, 1998.

Maturities of available-for-sale securities were as follows at December 31,
1999:

Amortized Cost Fair Value
-------------- ----------
(In thousands)

Due within one year............................ $28,672 $28,624
Due within two years........................... 8,488 8,431

The gross realized gains and losses on sales of available-for-sale
securities were insignificant in 1999, 1998 and 1997.

Note 4. License Agreements

The Company has entered into various agreements that allow for incorporation
of licensed technology into its products. The Company incurs royalty fees
under these agreements that are based on a predetermined fee per license sold.
Royalty costs incurred under these agreements are recognized over the periods
that the related revenues are recognized and are included in cost of revenues.
These amounts totaled approximately $810,000, $166,000 and $287,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.

Note 5. Property and Equipment

Property and equipment consists of the following:

December 31,
--------------
1999 1998
------ ------
(In
thousands)

Computer equipment....................................... $3,614 $2,497
Furniture, fixtures, and equipment....................... 1,084 724
Software................................................. 523 361
Leasehold improvements................................... 61 19
------ ------
5,282 3,601
Less accumulated depreciation and amortization........... (2,734) (1,524)
------ ------
$2,548 $2,077
====== ======

F-12

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 5. Property and Equipment--(Continued)

Depreciation and amortization expense was approximately $1,244,000, $567,000
and $495,000 for the years ended December 31, 1999, 1998 and 1997. Effective
July 1999, the Company changed its estimated useful life of computer equipment
from five years to three years. The Company changed its estimated useful life
based upon management's belief that three years is a better match of the
actual use of the computer equipment. For computer equipment held in July
1999, the change in their remaining estimated useful lives resulted in the
Company recognizing an additional $382,007, or $0.04 per weighted average
basic and diluted common share, of depreciation expense in 1999. All computer
equipment additions since July 1999 have been depreciated using estimated
useful lives of three years.

Note 6. Financing Arrangements

In January 1999, the Company entered into an agreement with a bank to
provide an additional $400,000 of working capital in the form of a note
payable. The Company borrowed approximately $400,000 under the note, all of
which was repaid prior to December 31, 1999. The note was due January 2000 and
bore interest at prime plus 0.75%. In connection with the note, the Company
issued warrants to purchase 767 shares of common stock for $13.04 per share
(note 9).

In March 1998, the Company entered into a financing arrangement with a bank
that provided up to $3,000,000 under a line of credit to support working
capital and up to $2,000,000 under a term loan to purchase capital equipment.
The line of credit expired in March 1999. In April 1999, the Company
restructured this financing arrangement to provide a $5 million line of credit
and a $1 million term loan. The line of credit matures in April 2000 and bears
interest at a rate of prime plus 0.75%. The term loan is available for
advances for one year during which time interest only is payable at prime plus
1% and after which principal and interest payments are due in equal monthly
payments over 3 years beginning April 2000. The Company had no borrowings
outstanding under the line of credit or term loan at December 31, 1999. All
assets of the Company secure the arrangement. The agreement includes certain
financial covenants including those requiring the Company to maintain minimum
levels of working capital, liquidity and profitability, which the Company was
in compliance with at December 31, 1999. In connection with the financing
arrangement, the Company issued warrants to purchase 23,333 and 22,500 shares
of common stock at an exercise price of $10.50 and $6.00 in 1999 and 1998,
respectively (note 9).

In April 1998, the Company entered into an agreement with a bank that
provides for borrowing of up to $600,000. The note is due January 2000 and
bears interest at prime plus 0.75%. All assets of the Company secure the note.
No amount was outstanding under this note at December 31, 1999. In connection
with the note, the Company issued warrants to purchase 1,534 shares of common
stock for $13.04 per share (note 9).

Note 7. Income Taxes

The components of income (loss) before income taxes are as follows:

Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
(In thousands)

U.S. operations............................ $(13,125) $(12,847) $(5,900)
International operations................... 374 144 --
-------- -------- -------
$(12,751) $(12,703) $(5,900)
======== ======== =======

F-13

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 7. Income Taxes--(Continued)

The components of income tax expense (benefit) are as follows:

Year Ended
December 31,
----------------
1999 1998 1997
---- ----- ----
(In thousands)

Current:
Federal................................................. $-- $(102) $34
Foreign taxes........................................... 267 45 --
---- ----- ---
Income tax expense (benefit).............................. 267 $ (57) $34
==== ===== ===

Income tax expense (benefit) differed from the amounts computed by applying
the U.S. federal income tax rate of 34% to loss before income taxes as a
result of the following:

Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(In thousands)

Income tax benefit at U.S. statutory rate of
34%.......................................... $(4,335) $(4,319) $(2,006)
Non-deductible expenses, including merger
related costs................................ 278 46 21
Change in valuation allowance, net of intra-
period allocations........................... 4,180 4,212 2,019
Foreign taxes................................. 144 4 --
------- ------- -------
Income tax expense (benefit).................. $ 267 $ (57) $ 34
======= ======= =======

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:

December 31,
------------------
1999 1998
-------- --------
(In thousands)

Deferred tax assets:
Net operating loss carryforwards.................... $ 16,752 $ 9,268
Research and development tax credits................ 762 418
Deferred revenue.................................... 2,125 1,590
Accrued expenses not currently deductible........... 408 482
Other............................................... 586 220
-------- --------
Total deferred tax assets............................. 20,633 11,978
Deferred tax liability--accrual to cash adjustments... (112) (283)
-------- --------
Net deferred tax assets............................... 20,521 11,695
Valuation allowance................................... (20,521) (11,695)
-------- --------
$ -- $ --
======== ========

Due to the Company's history of net operating losses, the Company has
established a valuation allowance equal to its net deferred tax assets on the
basis that realization of such assets is not assured. The valuation allowance
increased approximately $8.8 million, $4.3 million and $1.7 million during
1999, 1998, and 1997, respectively.

F-14

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 7. Income Taxes--(Continued)

At December 31, 1999, the Company had net operating loss carryforwards of
approximately $49 million, which begin to expire in 2001, if not utilized.
Approximately $13.9 million of the net operating loss carryforwards at
December 31, 1999 result from deductions associated with the exercise of non-
qualified employee stock options, the realization of which would result in a
credit to shareholders' equity (deficit). The Tax Reform Act of 1986 limits
the use of net operating loss and tax credit carryforwards in certain
situations where changes occur in the stock ownership of a company. The
Company may have experienced such ownership changes as a result of the various
stock offerings and the utilization of the carryforwards could be limited.

Note 8. Redeemable Convertible Preferred Stock

In February 1996, Primus completed a private offering of 6,910,568 shares of
Series A redeemable convertible preferred stock (Series A) for $7,920,000, net
of offering costs of $580,000. In March 1997, Primus completed a private
offering of 1,000,000 shares of Series C redeemable convertible preferred
stock (Series C) for $1,969,000, net of offering costs. In July 1998, Primus
completed a private offering of 4,900,000 shares of Series D redeemable
convertible preferred stock (Series D) for $12,213,000, net of offering costs.
Concurrent with the Company's initial public offering in 1999, all outstanding
redeemable convertible preferred stock was converted into 4,799,992 shares of
common stock. All preferred stock converted into 0.333 shares of common stock,
except Series A, which converted into 0.410 shares of common stock.

The difference between the original net proceeds from redeemable convertible
preferred stock and the conversion value of $23,588,000 represents the
accretion of the redemption value of the redeemable convertible preferred
stock through the date of the initial public offering.

Holders of Series A, C, and D had preferential rights to dividends when and
if declared by the Board of Directors. The holders were entitled to the number
of votes equal to the number of shares of common stock into which the
preferred stock could be converted. In the event of liquidation, the holders
of Series A, C, and D had preferential right to liquidation payments of $1.23,
$2.00, and $2.50 per share, respectively, plus any accrued but unpaid
dividends. The holders of a majority of the outstanding Series A, C, and D
shares could have requested redemption on or after January 31, 2003 at $1.48,
$2.40, and $3.00 per share, respectively, subject to adjustment, plus any
declared but unpaid dividends thereon.

Note 9. Shareholders' Equity

Convertible Preferred Stock

In September 1996, Primus completed a private offering of 500,000 shares of
Series B convertible preferred stock (Series B) for $981,000, net of offering
costs. Concurrent with the Company's initial public offering, all 500,000
shares of Series B outstanding were converted into 166,666 shares of common
stock. Series B had preferential rights to dividends when and if declared by
the Board of Directors. The holders were entitled to the number of votes equal
to the number of shares of common stock into which the preferred stock could
be converted. In the event of liquidation, the holders of Series B had
preferential rights to liquidation payments of $2.00 per share, plus any
accrued but unpaid dividends.

Prior to the merger with Imparto in 1999, convertible preferred stock
included 745,077 shares of Series A, B, C and D convertible preferred stock
(Imparto Preferred Stock) (note 13). In 1999, Imparto sold 481,884 shares of
Imparto Preferred Stock for approximately $7.6 million, net of offering costs.
In 1998, Imparto sold 234,802 shares of Imparto Preferred Stock for
approximately $3.0 million, net of offering costs. In 1997, Imparto sold
28,391 shares of Imparto Preferred Stock for approximately $257,000, net of
offering costs. Concurrent with

F-15

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 9. Shareholders' Equity--(Continued)

the merger with Imparto, the Imparto Preferred Stock converted into 745,077
shares of the Company's common stock. Imparto Preferred Stock gave certain
rights to holders similar to the Company's Series B convertible preferred
stock.

Common Stock

In April 1999, the Board of Directors authorized a 1-for-3 reverse stock
split of the Company's common stock and, in connection with the stock split,
the Company adjusted the authorized shares in its capitalization. The common
stock and per-share data in the accompanying consolidated financial statements
have been retroactively restated to reflect the reverse stock split.

In July 1999, the Company sold 4,622,500 shares of common stock in an
initial public offering. The aggregate price of the shares offered and sold by
Primus was approximately $50.8 million. Proceeds to Primus, after accounting
for $3.6 million in underwriting discounts and commissions and approximately
$1 million in other expenses, were $46.2 million.

Stock Options

The Company's fixed stock option plans include the Employee Stock Option and
Restricted Stock Award Plan, the Nonemployee Director Stock Option Plan, the
1995 Stock Incentive Compensation Plan, the 1999 Stock Incentive Compensation
Plan, and the 1999 Nonofficer Employee Stock Compensation Plan. The use of the
1995 Stock Incentive Option Plan for grants of new awards terminated in 1999.
In connection with the merger with Imparto in December 1999, the Company
assumed outstanding options to purchase common stock originally issued under
Imparto's stock option plan (Acquired Options) (see note 13). All of the
Acquired Options have been adjusted to give effect to the conversion under the
terms of the Agreement and Plan of Merger with Imparto. No additional options
will be granted under the Imparto stock option plan. The Company's stock
option plans, as well as the assumed stock option plan, are hereby
collectively referred to as the "Option Plans." The Option Plans provide for
the granting of incentive stock options to employees and nonqualified stock
options to employees, directors, and consultants. Options granted under the
Option Plans typically vest over four years and remain exercisable for a
period not to exceed ten years. During 1999, the shareholders increased the
number of shares available under the Option Plans by 2,666,667.

F-16

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 9. Shareholders' Equity--(Continued)

A summary of the Company's stock option activity for the years ended
December 31 follows:

Outstanding Options
--------------------
Weighted-
Shares Average
Available Number of Exercise
for Grant Shares Prices
---------- --------- ---------

Balance at December 31, 1996................... 469,712 2,027,949 $ 2.01
Additional shares authorized................... 1,333,333 -- --
Options granted................................ (1,752,599) 1,752,599 2.99
Options forfeited.............................. 259,692 (948,204) (1.92)
Options exercised.............................. -- (30,710) (2.66)
---------- --------- ------
Balance at December 31, 1997................... 310,138 2,801,634 2.65
Additional shares authorized................... 666,667 -- --
Options granted................................ (701,194) 701,194 3.60
Options forfeited.............................. 389,468 (433,072) (3.11)
Options exercised.............................. -- (452,618) (1.73)
---------- --------- ------
Balance at December 31, 1998................... 665,079 2,617,138 2.99
Additional shares authorized................... 2,666,667
Options granted:
Price less than market....................... (53,833) 53,833 6.56
Price equal to market........................ (1,912,086) 1,912,086 19.51
Options forfeited.............................. 305,510 (443,218) (4.66)
Options exercised.............................. -- (594,449) (2.90)
---------- --------- ------
Balance at December 31, 1999................... 1,671,337 3,545,390 $11.76
========== ========= ======

Total exercisable options and their weighted average exercise price at
December 31, 1999, 1998 and 1997 were 1,124,521, 1,419,589 and 1,509,151
shares and $3.12, $2.72 and $2.36, respectively. Additional information
regarding options outstanding and options exercisable at December 31, 1999 for
selected exercise price ranges follows:

Outstanding Exercisable
---------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number of Exercise Contractual Number of Exercise
Exercise Prices Options Price Life (Years) Options Price
--------------- --------- --------- ------------ --------- ---------

$ 0.03 - 2.25 248,190 $ 1.65 5.68 217,347 $ 1.73
3.00 - 3.00 1,307,174 3.00 7.77 817,606 3.00
3.65 - 8.25 655,227 6.69 8.94 70,802 4.68
9.00 - 20.41 797,897 15.88 9.43 12,290 10.50
22.44 - 54.81 501,318 36.57 9.83 6,476 33.75
55.56 - 55.56 35,584 55.56 9.94 -- --
--------- ---------
$ 0.03 - 55.56 3,545,390 $11.76 8.53 1,124,521 $ 3.12
========= =========

Employee Stock Purchase Plan

In April 1999, the Company adopted the Employee Stock Purchase Plan (ESPP).
Under the terms of the ESPP, the Company is authorized to issue up to 600,000
shares of common stock, plus annual increases as

F-17

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 9. Shareholders' Equity--(Continued)

defined by the plan document. The ESPP enables employees to purchase shares of
the Company's common stock at a discounted price through after-tax payroll
deductions. Shares are offered to employees in 24-month offering periods that
include four consecutive six-month purchase periods. Eligible employees elect
to have deducted from 1% to 10% of their base compensation up to $25,000 per
year. The amounts deducted can be used to purchase the Company's common stock
at the lesser of 85% of the fair value on the first day of the offering period
or 85% of the fair value on last day of the purchase period (purchase date).
The purchase price for the first offering beginning in July 1999 shall be the
lesser of 100% of the initial public offering price before underwriter's
discount or 85% of fair value on purchase date. At December 31, 1999, 562,754
shares remained available for purchase under the plan.

Warrants

A summary of the Company's warrant activity for the years ended December 31
follows:

Outstanding Warrants
--------------------------
Number
of Weighted-Average
Shares Exercise Prices
-------- ----------------

Balance at December 31, 1996...................... 49,390 $ 2.77
Warrants issued................................. 15,000 3.00
Warrants exercised.............................. -- --
-------- ------
Balance at December 31, 1997...................... 64,390 2.82
Warrants issued................................. 42,700 6.91
Warrants exercised.............................. (16,667) (3.00)
-------- ------
Balance at December 31, 1998...................... 90,423 4.72
Warrants issued................................. 35,767 8.95
Warrants exercised.............................. (112,223) (5.81)
-------- ------
Balance at December 31, 1999...................... 13,967 $ 6.80
======== ======

Stock-Based Compensation

In 1999, the Company issued certain fixed options to employees under the
Option Plans with an exercise price less than the fair value of the underlying
common stock on the date of grant. The Company also issued certain options and
warrants to purchase common stock to non-employees in connection with
financing arrangements and consulting agreements in 1999 and prior years. The
value of these awards is being recognized as either compensation or interest
expense over the underlying awards' service periods. The Company recognized
expense of approximately $743,000, $36,000 and $9,000 in 1999, 1998 and 1997
related to these options and warrants.

Pro forma information regarding net loss and net loss per share required by
SFAS No. 123 has been determined as if the Company had accounted for its
employee stock options and stock purchase plan under the fair market value
method. The fair value of options and stock purchase rights was estimated at
the date of grant using the Black-Scholes option pricing model. The fair value
of options granted under the Option Plans was estimated using the following
weighted-average assumptions: risk-free interest rate of 6.19% in 1999; 5.38%
in 1998; and 5.79% in 1997; expected option life of five years, dividend yield
rate of 0%, and volatility of 91.16% in 1999. Options granted by the Company
in 1998 and 1997 and by Imparto prior to its merger with the Company were
valued using the minimum value method and therefore volatility was not
applicable. The fair value of stock

F-18

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 9. Shareholders' Equity--(Continued)

purchase rights under the ESPP was estimated using the following weighted-
average assumptions in 1999: stock price $17.56, exercise price $11.00, risk-
free interest rate of 6.19%; expected life of 1.25 years, dividend yield rate
of 0%, and volatility of 91.16%.

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

Year Ended December
31,
----------------------
1999 1998 1997
------- ------- ------
(In thousands, except
per share data)

Loss available to common shareholders:
As reported....................................... $13,449 $13,191 $6,235
SFAS No. 123 pro forma net loss................... 17,124 13,491 6,888
Basic and diluted net loss per share:
As reported....................................... 1.41 3.21 1.54
SFAS No. 123 pro forma............................ 1.80 3.28 1.71
Weighted-average fair value of options granted
during the year:
Price less than market............................ 17.61 -- --
Price equal to market............................. 14.37 1.21 0.76
------- ------- ------
Weighted-average fair value of ESPP................. $ 11.09 $ -- $ --
======= ======= ======

Note 10. Employee Benefit Plan

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

Note 11. Commitments

The Company leases office space under operating leases with various
expiration dates through 2001. Future minimum rental payments, are as follows
as of December 31, 1999:

Operating Leases
----------------
(In thousands)

2000........................................................ $722
2001........................................................ 110
----
$832
====

Rent expense was approximately $1.3 million, $817,000 and $566,000 for 1999,
1998 and 1997, respectively.

Note 12. Related-Party Transactions

In 1997, Primus KK, a distributor whose majority shareholder is also a
significant shareholder of the Company, became a reseller of the Company's
products and support services in Japan. The Company does not

F-19

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 12. Related-Party Transactions--(Continued)

recognize any revenue on sales of the Company's product or support services to
Primus KK until it is sold through by Primus KK to end-users. Revenues
recognized under the reseller agreements total approximately $1.4 million,
$575,000, and $30,000 in 1999, 1998 and 1997, respectively, and revenue
deferred at December 31, 1999 and 1998 was approximately $1.5 million and $1.4
million, respectively.

Note 13. Business Combination

On December 12, 1999, the Company entered into an Agreement and Plan of
Merger with a California corporation, Imparto Software Corporation (Imparto)
and exchanged 913,788 shares of the Company's common stock for all of the
issued and outstanding capital stock of Imparto. In addition, the Company
assumed, on a converted basis, 86,212 of options and warrants to purchase
capital stock of Imparto outstanding at the time of merger. The combination
was accounted for under the pooling-of-interests method of accounting, and
accordingly, the consolidated financial statements for all periods prior to
the combination are restated to include the accounts and results of operations
of Imparto. Imparto had the same fiscal year-end as the Company, and there
were no adjustments to conform accounting methods or eliminate intercompany
transactions. In connection with the merger, the Company incurred
approximately $1.5 million in merger-related costs primarily for investment
banking, legal and other professional fees in the fourth quarter of 1999.

Results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying consolidated financial
statements are as follows:

Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
(In thousands)

Revenues:
Primus...................................... $ 24,179 $ 8,610 $ 5,189
Imparto..................................... 965 952 1,294
-------- -------- -------
$ 25,144 $ 9,562 $ 6,483
======== ======== =======
Net income (loss):
Primus...................................... $ (5,287) $(10,603) $(5,985)
Imparto..................................... (7,731) (2,043) 51
-------- -------- -------
$(13,018) $(12,646) $(5,934)
======== ======== =======

Note 14. Business Segment Information

The Company and its subsidiaries are principally engaged in the design,
development, marketing and support of its eService family of eProducts:
eSupport and eMarketing. Substantially all revenues result from the licensing
of the Company's software products and related consulting and customer support
(maintenance) services. The Company's chief operating decision-maker reviews
financial information presented on a consolidated basis, accompanied by
disaggregated revenue information.

F-20

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 14. Business Segment Information--(Continued)

The majority of the Company's revenues are derived from customers in the
United States. The Company's international sales are principally in Europe and
Japan. The following geographic information is presented for years ended
December 31, 1999, 1998 and 1997:

Year Ended December
31,
---------------------
1999 1998 1997
------- ------ ------
(In thousands)

United States........................................ $20,894 $8,132 $6,452
International........................................ 4,250 1,430 31
------- ------ ------
Total revenues..................................... $25,144 $9,562 $6,483
======= ====== ======

Note 15. Subsequent Event

On January 21, 2000, pursuant to an Agreement and Plan of Merger, dated as
of January 8, 2000, the Company merged with 2order.com, Inc., a Georgia
corporation (2order.com). 2order.com develops and markets software that acts
as a personal sales assistant, helping buyers define requirements and
configure custom solutions. 2order.com was incorporated in Georgia in 1991
under the name Business Systems Design, Inc. As a result of the merger, Primus
issued 1,506,127 shares of the Company's common stock, $.025 par value per
share in exchange for all issued and outstanding capital shares and assumed
all outstanding options and warrants of 2order.com, which represents, on a
converted basis, 150,378 shares of the Company's common stock. The Merger will
be accounted for as a pooling-of-interests business combination, and
accordingly, the Company's historical consolidated financial statements
presented in future reports will be restated to included the accounts and
results of operations of 2order.com. The following unaudited proforma data
summarizes the combined results of operations of the Company and 2order.com as
if the combination had been consummated on December 31, 1999.

Year Ended December
31,
----------------------
1999 1998 1997
------- ------- ------
(In thousands,
except per share data)

Revenues............................................ $27,318 $12,219 $7,496
======= ======= ======
Net loss............................................ $17,115 $15,441 $6,966
======= ======= ======
Loss per common share............................... $ 1.77 $ 3.49 $ 1.60
======= ======= ======

F-21

SCHEDULE II

PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

Balance at
Beginning Charged Balance at
Allowance For Doubtful Accounts of Year to Expense Write-offs End of Year
- ------------------------------- ---------- ---------- ---------- -----------
(In thousands)

Year ended December 31, 1999...... 378 318 -- 696
Year ended December 31, 1998...... 70 334 (26) 378
Year ended December 31, 1997...... 70 -- -- 70

S-1