PEREGRINE SYSTEMS INC - 10-Q Quarterly Report

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

3611 VALLEY CENTRE DRIVE, SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices, including zip code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No ý

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No ý

The number of shares of the Registrant's common stock outstanding on October 31, 2004 was 15,017,033.

PEREGRINE SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PEREGRINE SYSTEMS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts; unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PEREGRINE SYSTEMS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts; unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PEREGRINE SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands; unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Peregrine Systems, Inc. (the Company or Peregrine) is a global provider of enterprise software. Peregrine's core business is providing information technology asset and service management software solutions that are designed to enable organizations in the private and public sectors to increase productivity, reduce costs and accelerate a return on investment by managing portfolios of information technology assets and streamlining service management operations.

From the Company's initial public offering in 1997 through the fiscal year ended March 31, 2002, Peregrine significantly expanded its product line through a series of acquisitions, broadening its business beyond its original core market. The Company began a major restructuring in 2002 amid concerns about liquidity. The non-core Supply Chain Enablement (Harbinger and Extricity) and Remedy businesses were sold in June 2002 and November 2002, respectively, and are treated as discontinued operations in the consolidated financial statements. During the fiscal year ended March 31, 2003, Peregrine sold other non-core product lines, including products used in fleet management, facility management, telecommunications management, and travel management. Peregrine's core software product suites, after divestiture of non-core products, are AssetCenter® and ServiceCenter®. AssetCenter and ServiceCenter support two main business processes: asset management and service management. Typically, the assets managed with Peregrine's products consist of information technology assets, such as computer and computer-networking hardware and software items, and other assets used to provide infrastructure to a business. The services managed with Peregrine's products usually consist of the service delivery and support processes necessary to troubleshoot, support and maintain those same information technology and infrastructure assets.

As further described in Note 4, in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7), the Company adopted "fresh-start" reporting as of July 18, 2003, the date on which the Company's fourth amended plan of reorganization (Reorganization Plan) under Chapter 11 of the United States Bankruptcy Code was approved by the United States Bankruptcy Court for the District of Delaware (Bankruptcy Court). The Company's emergence from Chapter 11 proceedings on August 7, 2003 called for a new basis of accounting. Under fresh-start reporting, the reorganization value of the entity is allocated to the entity's assets based on fair values, and liabilities are stated at the present value of amounts to be paid determined at current interest rates. The effective date for this new treatment is considered to be the close of business on July 18, 2003 for financial reporting purposes. Results of operations presented for periods prior to and including July 18, 2003 pertain to the Company prior to its reorganization (Predecessor Company). Results of operations presented for periods subsequent to July 18, 2003 pertain to the Company after its reorganization (Successor Company). Where a financial statement item applies to both the Successor and Predecessor Companies, we refer to the Company. As a result of the implementation of fresh-start reporting, the financial statements of the Company after July 18, 2003 are not comparable to the Company's financial statements for prior periods and are separated by a black line to highlight this lack of comparability. The Successor Company period from July 19, 2003 to December 31, 2003 is referred to as the "166 days ended December 31, 2003." The Predecessor Company period from April 1, 2003 to July 18, 2003 is referred to as the "109 days ended July 18, 2003."

On September 22, 2002 (Petition Date), Peregrine and its wholly-owned subsidiary, Peregrine Remedy, Inc. (Remedy), filed for voluntary protection under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court. The Company's Reorganization Plan was confirmed by the Bankruptcy Court on July 18, 2003 (Plan Confirmation Date). Peregrine and Remedy emerged from bankruptcy law protection on August 7, 2003 (Plan Effective Date). For detailed information on the Company's bankruptcy proceedings and restructuring activities, please review the information contained in Note 2 of the Company's consolidated financial statements contained in the Company's Annual Report on Form 10-K for the period ended March 31, 2003, filed with the Securities and Exchange Commission on April 30, 2004 and incorporated herein by reference (Fiscal 2003 Form 10-K).

The accompanying interim condensed consolidated financial statements have been prepared, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair presentation of the Company's consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America.

In the opinion of the Company's management, the unaudited financial information for the interim periods presented reflects all normal recurring adjustments, discontinued operations and fresh-start adjustments that the Company considers necessary to give a fair presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Fiscal 2003 Form 10-K. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of Peregrine's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ from the estimates made by management with respect to these items and other items that require management's estimates.

The consolidated financial statements include the accounts of Peregrine and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

As described in more detail in Note 2 of the Company's consolidated financial statements contained in its Fiscal 2003 Form 10-K, on September 22, 2002, Peregrine and Remedy filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code. The Bankruptcy Court confirmed the Reorganization Plan on July 18, 2003 and it became effective on August 7, 2003. From the Petition Date until August 7, 2003, the Company operated the business as a Debtor-in-Possession under the jurisdiction of the Bankruptcy Court.

As a result of its bankruptcy filing under Chapter 11, the Company was subject to the provisions of SOP 90-7 for the reporting periods subsequent to the Petition Date through adoption of fresh-start reporting. Pursuant to SOP 90-7, the financial statements were prepared on a going-concern basis that contemplated continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. The Predecessor Company was also required, among other things, to classify on the consolidated balance sheet liabilities arising prior to the Petition Date that were subject to compromise from those that were not subject to compromise, as well as liabilities arising after the Petition Date. The Predecessor Company ceased to accrue interest on certain liabilities arising prior to the Petition Date if it did not expect to ultimately pay the interest. The liabilities that were affected by the Reorganization Plan were reported at the estimated allowed amounts under the Reorganization Plan, even if they were ultimately settled for lesser amounts. Revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization of the business were reported separately as reorganization items. Such items may continue and will be reported separately subsequent to the adoption of fresh-start reporting. Interest expense during Chapter 11 proceedings was accrued only to the extent that it was paid during the proceedings or to the extent that it was probable that it will be an allowed priority, secured, or unsecured claim. Under these terms, for the 109 days ended July 18, 2003, the Predecessor Company did not accrue interest expense of $0.5 million.

The Company recognizes revenue in accordance with the provisions of Statement of Position No. 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9 (SOP 97-2), and Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," as amended by SAB 104, issued by the Securities and Exchange Commission. Peregrine's revenue is derived principally from software product licensing and related services. The Company's standard end-user license agreement provides for an initial fee for product use in perpetuity. License fees are generally due upon the granting of the license. Service revenue is composed of fees from maintenance (technical support and software updates), professional services (consulting), and training.

Revenue from license agreements with direct customers is recognized when all of the following conditions are met: a non-cancelable license agreement has been signed; the product has been delivered; there are no material uncertainties regarding customer acceptance; the fee is fixed or determinable; collection of the resulting receivable is deemed probable; risk of concession is deemed remote; and no other significant obligations of the Company to the customer exist. In certain circumstances, the Company may grant extended payment terms. If a payment is due more than ninety days after the license agreement is signed, the license fees are recognized as payments become due and payable provided all other conditions for revenue recognition are met. If provided in a license agreement, acceptance provisions generally grant customers a right of refund only if the licensed software does not perform in accordance with its published specifications. The Company believes the likelihood of non-acceptance in these situations is remote and generally recognizes revenue when all other criteria of revenue recognition are met. If the likelihood of non-acceptance cannot be determined to be remote, revenue is recognized upon the earlier of receipt of written acceptance or when the acceptance period has lapsed.

Revenue from maintenance services is recognized ratably over the term of the support period, generally one year. Consulting revenue is primarily related to installation and implementation services for the Company's software products, which are most often performed on a time and material basis under separate service agreements. Consulting services are not usually essential to the functionality of

the software. Revenue from consulting and training services is recognized as the respective services are performed.

For contracts with multiple obligations (e.g., current and future product delivery obligations, post-contract support or other services) the Company recognizes revenue using the residual method. Under the residual method, the Company allocates revenue to the undelivered elements of the contract based on vendor-specific objective evidence of their fair value. This objective evidence is the sales price of each element when sold separately or the annual renewal rate specified in the agreement for maintenance. The Company recognizes revenue allocated to undelivered products when all other criteria for revenue recognition have been met.

The Company also derives revenue from the sale of its software licenses, maintenance and post-contract support services through distributors. Revenue from sales made through distributors is recognized when the distributors have sold the software licenses or services to their customers and the criteria for revenue recognition under SOP 97-2 are met. Revenue from maintenance and post-contract support services sold through distributors is recognized ratably over the contractual period with the end user.

Computation of net income (loss) per share is performed in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires the Company to compute basic and diluted earnings per share data for all periods for which an income statement is presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Potentially dilutive securities represent incremental shares issuable upon exercise of the Company's equity and debt securities. For both the three months and the 166 days ended December 31, 2003, the Successor Company's diluted net loss per share excludes the effect of approximately 0.2 million shares issuable under employee stock options, as inclusion would be anti-dilutive. For the three months ended December 31, 2002, the Predecessor Company's diluted loss per share from continuing operations and net income exclude the effect of approximately 10.8 million shares issuable upon conversion of the convertible subordinated notes due November 2007, as inclusion would be anti-dilutive. For the nine months ended December 31, 2002 the Predecessor Company's diluted loss per share from continuing operations and net income per share exclude the effect of approximately 5.4 million shares issuable under employee stock options; and 10.8 million shares issuable upon conversion of the convertible subordinated notes due November 2007, as inclusion would be anti-dilutive.

A reconciliation of the numerator and denominator for diluted income per share from continuing operations calculations for the Predecessor Company for the 109 days ended July 18, 2003 is presented below (in thousands):

	Predecessor Company
	109 Days Ended July 18, 2003
Numerator:
Income from continuing operations for computation of basic income per share from continuing operations	$	373,937
Add back interest expense on convertible subordinated notes		4,435

Income from continuing operations for computation of diluted income per share from continuing operations	$	378,372

Denominator:
Weighted-average shares for computation of basic income per share from continuing operations		195,654
Unvested restricted shares		1,284
Incremental shares on assumed exercise of stock options, using the treasury stock method		564
Incremental shares on assumed conversion of subordinated notes		10,800

Weighted-average shares for computation of diluted income per share from continuing operations		208,302

Pursuant to the Reorganization Plan, the Company was recapitalized effective August 7, 2003. In accordance with the Reorganization Plan, 15 million new shares were issued and 2.65 million shares were reserved for issuance under stock option plans. Based on a settlement reached in November 2003, holders of the Company's old common stock received 4,016,250 new shares, or one share of the Company's new common stock for every 48.7548 shares of the old common stock held. Historical shares and per-share amounts have not been restated to reflect this recapitalization.

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, including Financial Accounting Standards Board (FASB) Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB Opinion No. 25" to account for its fixed stock option plans. Under this method, deferred compensation is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of Statement of Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123."

The following tables illustrate the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data).

		Successor Company Three Months Ended December 31, 2003			Predecessor Company Three Months Ended December 31, 2002
Net income (loss), as reported		$	(6,423	)	$	207,058
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects			—			36,324
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(861	)		(123,119	)

Pro forma net income (loss)		$	(7,284	)	$	120,263

Net income (loss) per share:
	Basic—as reported	$	(0.43	)	$	1.06
	Basic—pro forma	$	(0.49	)	$	0.62
	Diluted—as reported	$	(0.43	)	$	1.06
	Diluted—pro forma	$	(0.49	)	$	0.62

					Predecessor Company
		Successor Company 166 Days Ended December 31, 2003			Predecessor Company
		Successor Company 166 Days Ended December 31, 2003			109 Days Ended July 18, 2003			Nine Months Ended December 31, 2002
Net income (loss), as reported		$	(11,818	)	$	374,189		$	57,422
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects			—			551			54,297
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,000	)		(974	)		(181,888	)

Pro forma net income (loss)		$	(12,818	)	$	373,766		$	(70,169	)

Net income (loss) per share:
	Basic—as reported	$	(0.79	)	$	1.91		$	0.29
	Basic—pro forma	$	(0.85	)	$	1.91		$	(0.36	)
	Diluted—as reported	$	(0.79	)	$	1.82		$	0.29
	Diluted—pro forma	$	(0.85	)	$	1.82		$	(0.36	)

In November 2002, the Predecessor Company completed the sale of its Remedy business (see Note 3), which accelerated the recognition of substantially all deferred compensation charges related to

stock options. The deferred compensation charge related to that acceleration totaled approximately $24.4 million.

Other comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Foreign currency translation adjustments are the Company's only source of accumulated other comprehensive income (loss) for the periods presented. Comprehensive income (loss) consists of the following (in thousands):

	Successor Company Three Months Ended December 31, 2003			Predecessor Company Three Months Ended December 31, 2002
Net income (loss), as reported	$	(6,423	)	$	207,058
Foreign currency translation		1,839			(71	)

Comprehensive income (loss)	$	(4,584	)	$	206,987

				Predecessor Company
	Successor Company 166 Days Ended December 31, 2003			Predecessor Company
	Successor Company 166 Days Ended December 31, 2003			109 Days Ended July 18, 2003		Nine Months Ended December 31, 2002
Net income (loss), as reported	$	(11,818	)	$	374,189	$	57,422
Foreign currency translation		1,269			956		(7,020	)

Comprehensive income (loss)	$	(10,549	)	$	375,145	$	50,402

Fresh-start treatment requires that the Company adopt, as of the fresh-start effective date, all changes in accounting principles that the Company would otherwise be required to adopt within the twelve-month period following fresh-start adoption; however, for the Company, no changes in accounting principles fell into this category.

In February 2002, Peregrine's Board of Directors approved management's plans to discontinue the operations and business of the Company's SCE business. In accordance with APB 30, Peregrine has reported the results of operations of the SCE business as discontinued operations. The SCE business primarily comprised assets acquired in the Harbinger and Extricity transactions and offered software applications and services that automated and integrated business-to-business relationships. In June 2002, Peregrine sold all of the shares of its wholly-owned subsidiary, Peregrine Connectivity (the SCE business) to PCI International, Inc. (PCI), an entity affiliated with Golden Gate Capital LLC, for approximately $35 million in cash, before transaction costs, resulting in a loss on disposal of $47.8 million, including a $13.9 million accrual at March 31, 2002 for the estimated fiscal 2003 loss

from operations during the phase-out period. In connection with the SCE sale the Company also licensed to PCI certain intellectual property rights acquired in the Extricity acquisition.

In September 2002, the Company and Remedy entered into an agreement (Sale Agreement) with BMC Software, Inc. (BMC) pursuant to which BMC, subject to bid procedures approved by the Bankruptcy Court, acquired the assets and assumed substantially all the liabilities of the Remedy business for $355 million, subject to adjustments provided for in the Sale Agreement. In November 2002, the sale of Remedy to BMC was approved by the Bankruptcy Court and completed. In June 2003, Peregrine and BMC agreed on a final adjusted sale price of $348 million. As specified in the Sale Agreement, an indemnification holdback of $10 million of the sale's proceeds was placed into escrow for BMC and released to the Company in November 2003.

	Predecessor Company
	Three Months Ended December 31, 2002
Revenue	$	19,486
Impairments and amortization		(22,991	)
Operating costs and expenses		(3,815	)
Interest and other expenses		(16	)
Income taxes		(3,219	)

Loss from operations		(10,555	)
Income on disposal, net of income tax expense of $16,497		268,517

Income from discontinued operations, net of income taxes	$	257,962

	Predecessor Company
	109 Days Ended July 18, 2003		Nine Months Ended December 31, 2002
Revenue	$	252	$	145,327
Impairments and amortization		—		(22,991	)
Operating costs and expenses		—		(140,711	)
Phase-out loss accrual adjustment		—		13,881
Interest and other expenses		—		(2,159	)
Income taxes		—		(3,264	)

Income (loss) from operations		252		(9,917	)
Income on disposal, net of income tax expense of $16,497		—		266,592

Income from discontinued operations, net of income taxes	$	252	$	256,675

All remaining assets and liabilities pertaining to discontinued operations at March 31, 2003 were current in nature. During the quarter ended December 31, 2003, the Company collected the $10 million indemnification holdback and the remaining trade receivables of $2 million which had been recorded in other current assets at September 30, 2003. At December 31, 2003 there were no remaining assets and

liabilities were primarily tax-related payables. Predecessor Company revenue for the 109 days ended July 18, 2003 relate to the collection of a trade receivable that had extended payment terms. In connection with the Company's adoption of fresh-start reporting (see Note 4), all surviving assets and liabilities were reclassified to appropriate functional account balances.

The Company adopted the fresh-start reporting provisions of SOP 90-7 on July 18, 2003. Under SOP 90-7, fresh-start reporting should be applied when, upon emergence from bankruptcy law proceedings, the reorganization value of a company is less than the sum of all allowed claims and post-petition liabilities of the company and the holders of the old common shares receive fewer than fifty percent of the new voting shares in the reorganization. Reorganization value is the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after restructuring. On July 18, 2003, the Bankruptcy Court confirmed the Reorganization Plan, and it became effective August 7, 2003. As there were no material unsatisfied conditions existing as of July 18, 2003, the confirmation date of the Reorganization Plan, the Company adopted the fresh-start reporting provisions of SOP 90-7 on the Confirmation Date, which resulted in a new reporting basis for accounting purposes. Fresh-start reporting requires that the Company adjust the historical cost of its assets and liabilities to their fair value. Any amount remaining after allocation of the reorganization value of the Company to identified tangible and intangible assets is recorded as reorganization value in excess of amounts allocable to identified assets. As described below, the fair value of the new common stock for the reorganized Company was determined to be $270 million, which represents the business enterprise value (BEV) adjusted for, among other items, debt financing net of cash. The new debt totals $83 million, including secured factor loans, senior notes and non-interest bearing notes issued to satisfy pre-petition debt.

With the assistance of third-party financial advisors, management determined that the Company's BEV was within the range of $245 million to $309 million. For purposes of applying SOP 90-7, the Company has used a BEV of $277 million, representing management's best estimate of the Company's reorganized BEV. The BEV was based primarily on a discounted cash flow analysis using projected financial information. The valuation relied on a number of estimates and assumptions, which are inherently subject to significant uncertainties and contingencies beyond the control of the Company.

Once the BEV was determined, it was used to calculate the Company's reorganization value of approximately $504 million, which equals the value of the new common stock of approximately $270 million and the value of total liabilities of approximately $234 million as of July 18, 2003, including the new debt of $83 million. The new equity value was derived from the BEV adjusted for, among other items, debt financing net of cash.

Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in conformity with procedures specified by Statement of Financial Accounting Standards No. 141, "Business Combinations." The Company engaged an independent appraiser to assist in the allocation of the reorganization value to the reorganized Company's assets and liabilities by assisting management in its determination of the fair market value of the Company's intangible assets. Fair value adjustments affect the value of current assets, property and equipment, intangible assets, accrued liabilities and deferred revenue. Identifiable intangible assets consist of developed technology, trademarks and trade names, maintenance contracts and customer lists, and their useful lives range from five to six years. Reorganization value in excess of amounts allocable to identified assets will not be amortized, but will be subject to periodic evaluation for impairment. The effects of the Reorganization Plan and the

application of fresh-start reporting on the Company's consolidated balance sheet as of July 18, 2003 are as follows (dollars in thousands):

The term liabilities subject to compromise refers to liabilities incurred prior to the commencement of the Chapter 11 proceedings (see Note 1). These amounts represent the Company's estimate of known and potential pre-petition claims to be resolved in connection with the Chapter 11 proceedings. These claims remain subject to future adjustments. Adjustments may result from settlements, actions of the Bankruptcy Court such as reclassification of claims, rejection of executory contracts and unexpired leases, the determination of the value of any collateral securing claims, proofs of claim or other events. It is possible that such adjustments may be material. Payment terms for these amounts were established in connection with the Chapter 11 proceedings.

	Predecessor Company, July 18, 2003			Predecessor Company, March 31, 2003
Bank loans—factor arrangements	$	28,156		$	35,847
Motive claim		26,944			26,944
General unsecured claims		63,113			63,113
Stockholder litigation settlement		18,821			18,821
Convertible subordinated notes, including accrued interest		287,615			282,994

Liabilities subject to compromise		424,649			427,719
Effects of reorganization plan (see Note 4)		(424,649	)		—

Liabilities subject to compromise	$	—		$	427,719

As described in Note 1, on September 22, 2002, Peregrine Systems, Inc. and its wholly-owned Peregrine Remedy, Inc. subsidiary filed for voluntary protection from creditors under Chapter 11 of the United States Bankruptcy Code. As a result of the Company's Chapter 11 filing, its financial accounting has been subject to the provisions of SOP 90-7 for the reporting periods subsequent to September 22, 2002. Pursuant to SOP 90-7, revenue, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization of the business are reported separately as reorganization items. Reorganization items, net for the Successor Company consist entirely of professional fees directly related to the bankruptcy filing. Reorganization items, net for the Predecessor Company consist of the following (in thousands):

In the fiscal 2003 period, our Predecessor Company recorded a net reorganization charge of $9.4 million. Net reorganization items for the three months ended December 31, 2002 included $5.1 million of professional fees directly related to the Chapter 11 filing and lease abandonment expenses of $4.3 million.

	Predecessor Company
	109 Days Ended July 18, 2003			Nine Months Ended December 31, 2002
Professional fees	$	(8,279	)	$	(6,808	)
Reduction of previously accrued estimated lease exit cost adjusted to the allowed claim amount		—			21,405
Write-off of debt issuance costs		—			(5,435	)
Employee retention and benefits		(6,302	)		—
Acceleration of deferred compensation charges		(499	)		—
Gains on settlements with creditors		35,393			—
Increase to fresh-start basis of assets and liabilities		358,508			—
Lease abandonment expense		—			(4,302	)

	$	378,821		$	4,860

For the 109 days ended July 18, 2003, the Predecessor Company recorded a net reorganization gain of $378.8 million. Of this gain, $358.5 million resulted from the fair value adjustments to the Company's assets and liabilities with the adoption of fresh-start reporting. The Company also recognized a $35.4 million gain on its settlement with creditors upon exiting bankruptcy law protection. These gains were partially offset by costs directly related to the implementation of the Company's Reorganization Plan.

For the nine months ended December 31, 2002, the Predecessor Company recorded a net reorganization gain of $4.9 million. Net reorganization items for the nine months ended December 31, 2002 include charges of $6.8 million for professional fees directly related to the Chapter 11 filing, a $5.4 million write-off of debt issuance costs, and lease abandonment expense of $4.3 million. These charges were offset by a $21.4 million gain resulting from the reversal of a fiscal 2002 exit cost provision related to an abandoned facility that was settled in a more favorable fashion, as the accrued cost was reduced to the allowed claim amount upon the Chapter 11 filing.

Restructuring, impairments and other for the Predecessor Company consist of the following (in thousands):

	Predecessor Company
	Three Months Ended December 31, 2002
Loss on sale of investments	$	883
Gain on sale of non-core product lines		(927	)
Loss from abandoned fixed assets		1,781
Employee severance		472
Other		62

	$	2,271

	Predecessor Company
	109 Days Ended July 18, 2003			Nine Months Ended December 31, 2002
(Gain) loss on sale of investments	$	(1,239	)	$	653
Gain on sale of non-core product lines		—			(15,318	)
Loss from abandoned fixed assets		—			33,738
Loss from abandoned leases		—			33,295
Employee severance		—			19,822

	$	(1,239	)	$	72,190

For the Predecessor Company's 109 days ended July 18, 2003, restructuring, impairments and other represented a gain realized upon the sale of certain minority investments in other companies.

During June 2002, the Company began to implement a restructuring plan to reduce expenses in line with future revenue expectations and to focus operations on the core market. Employee severance charges include amounts paid to former employees who were laid off during the three months and nine months ended December 31, 2002 in connection with the Company's downsizing. Amounts were expensed when the employees were notified of their termination, as management had not approved a detailed restructuring plan that would allow the accrual of employee severance payments prior to employee termination notification.

The Company also decided to abandon numerous facilities in both domestic and foreign locations. At March 31, 2003, the remaining restructuring accrual was $5.9 million, which related primarily to foreign lease settlements. In the nine-month period ended December 31, 2003, the Company paid or otherwise settled approximately $3.7 million in lease termination settlements, leaving a balance of $2.2 million in the restructuring accrual at December 31, 2003. The remaining accrual will be paid during the remainder of fiscal 2004.

Identifiable intangible assets of the Successor Company were recognized in connection with the application of fresh-start reporting and consist of the following at December 31, 2003 (in thousands):

Developed technology	$	53,400
Trademarks and trade names		6,900
Maintenance contracts		33,600
Customer lists		31,200

		125,100
Less accumulated amortization		(10,456	)

	$	114,644

The liability method is used in accounting for income taxes and deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities.

The effective tax rates for the three months and the 166 days ended December 31, 2003 of the Successor Company and for the 109 days ended July 18, 2003 of the Predecessor Company were approximately (35.1)%, (24.5)% and 0.3%, respectively. The Company's income tax expense relates primarily to foreign taxes paid for which no offsetting tax benefits are available. During these periods, the Company did not recognize any benefit from federal or state income tax losses, because future benefit from losses was not likely to be realized. If tax benefits accrued by the Predecessor Company are realized in future periods, the benefit will be recorded as a reduction to reorganization value in excess of amounts allocable to identified assets.

The Company is required, as part of the process of preparing its unaudited condensed consolidated financial statements, to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax liability together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income. To the extent that the Company believes that recovery is not likely, it must establish a valuation allowance. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The Company has recorded a valuation allowance on a majority of net deferred tax asset balances as of December 31, 2003 and on substantially all of its net deferred tax asset balance as of March 31, 2003 because of uncertainties related to utilization of deferred tax assets, primarily related to net operating loss carry-forwards, before they expire. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.

Because of its size and the nature of its business, the Company is subject to routine compliance reviews by the Internal Revenue Service and other taxing authorities on various tax matters, including challenges to various positions the Company asserts. The Company has accrued monies for tax contingencies based upon its best estimate of the taxes ultimately expected to be paid, which it updates over time as more information becomes available. A significant portion of the Company's taxes payable balance comprises tax contingencies that have been recorded to address tax exposures. The Company is currently undergoing several examinations. While the Company believes it has adequately accrued monies for tax contingencies, the taxing authorities may assert that the Company owes taxes in excess of the reserves it has established.

The Successor Company leases certain buildings and equipment under non-cancelable operating lease agreements. The leases generally require the Successor Company to pay all executory costs such as taxes, insurance and maintenance related to the leased assets. Certain of the leases contain provisions for periodic rate escalations to reflect cost-of-living increases. Future minimum lease payments under non-cancelable operating leases (net of sublease payments) for the remainder of fiscal 2004 and for each of the subsequent four years from fiscal 2005 through 2008 totaled $1.4 million, $4.9 million, $4.3 million, $4.1 million and $4.0 million, respectively, and $21.5 million thereafter.

In June 1999, the Company entered into a series of leases covering up to approximately 540,000 square feet of office space in five buildings in San Diego, California. To the extent Peregrine did not require all of the space under these leases, it had the right to sublet excess space. During fiscal 2003, the Company notified its landlord of its intention to terminate the leases or move into a portion of the completed new facilities and sublease a portion to unaffiliated companies. During fiscal 2003, the Company rejected three of the five leases on these facilities, covering approximately 300,000 square feet, in connection with the bankruptcy proceedings. During fiscal 2004, the Company also rejected one of the other remaining leases, covering approximately 110,000 square feet, and it renegotiated the remaining lease to reflect a reduced amount of leased space. The future minimum lease payments indicated above reflect adjustments, modifications or rejections of leases implemented through the bankruptcy proceedings described in Note 2 of the Company's consolidated financial statements contained in its Fiscal 2003 Form 10-K.

Approximately 1,200 claims were filed against the Company based on events that took place prior to its bankruptcy-law filing. Since August 2003, the Company has been spending substantial time and money on the process of analyzing and, as appropriate, objecting to claims that it believes are without merit or asserted for an inflated amount. The Company has been negotiating settlements to various claims. This process is expected to continue for several months. Through September 30, 2004, the Company has paid, settled or otherwise disposed of Class 8 claims with an original aggregate face amount of approximately $375 million (including approximately $133 million of duplicate, erroneous and otherwise invalid claims). Under the Reorganization Plan, Class 8 claims are general unsecured claims. To resolve these claims the Company has paid or agreed to pay over time approximately $43 million in cash. As of September 30, 2004, there were general unsecured claims asserted in the original aggregate face amount of approximately $9 million remaining to be resolved. There were also approximately $0.5 million in priority and administrative claims remaining to be resolved. These remaining general unsecured and other claims include claims that are asserted in a minimum amount

or an unliquidated amount, and such claims can be amended to higher amounts. Prior claim determinations are also subject to appeal. Because the total liability associated with the claims depends upon the final amounts asserted by claimants, the outcome of claims classification hearings by the Bankruptcy Court, claims objections, settlement negotiations, and potential litigation and appeals, the total amount to be paid by the Company is uncertain. The Company believes that its reserve is adequate to cover future payments of the Class 8 claims as well as the remaining priority and administrative claims. Management also believes that the aggregate payout of the Class 8 claims should be within and possibly below the range of likely payouts, of between $49 million and $65 million, determined by the various constituencies in the bankruptcy proceedings. However, payouts in excess of the reserved amounts would have an adverse effect on the Company's liquidity and financial condition. Because claims are still in dispute, the Company is unable to predict the ultimate payment amount or the period over which payments would be made.

One of the more significant unsecured claims was asserted by Microsoft Corporation and its MSLI, GP affiliate (collectively, Microsoft), for alleged unauthorized and unlicensed use of their software. Microsoft filed (i) a proof of claim in December 2002 seeking at least $3 million related to the Company's use of Microsoft products in the period prior to the bankruptcy law filing, (ii) an adversary complaint in January 2003 seeking monetary damages in an unspecified amount as well as injunctive relief and (iii) an administrative claim in September 2003 seeking monetary damages in an unspecified amount related to the period after the Company's bankruptcy law filing. The Company agreed with Microsoft that all of its claims and contentions should be decided in the context of the adversary complaint filed in the Bankruptcy Court. In March 2003, Peregrine filed an answer to Microsoft's adversary complaint denying the material allegations and raising affirmative defenses. Between October 2003 and June 2004, the Company engaged in settlement negotiations with Microsoft. In November 2003 the Company entered into a new enterprise license agreement with Microsoft. In June 2004 Peregrine entered into a settlement agreement with Microsoft that resolved the adversary complaint pursuant to which Microsoft dismissed the adversary complaint with prejudice and the Company granted Microsoft an allowed administrative claim and Class 8 claim under the Reorganization Plan. All payments required under the settlement agreement had previously been reserved as liabilities subject to compromise in the consolidated balance sheet.

Securities and Exchange Commission Enforcement Actions and Federal Investigations

In June and July 2003, the Company entered into agreements to settle a civil action brought against it by the Securities and Exchange Commission (SEC). Under terms of the settlement, the Company agreed to:

Because the Company is not current in its periodic reporting obligations to the SEC, it is not in compliance with the requirement of the settlement relating to violation of the federal securities laws. While the Company remains in discussions with the SEC, it cannot ensure that a further enforcement action will not be brought against it. Responding to any such enforcement action could be expensive and time-consuming for management and could damage the Company's reputation and ability to generate sales.

Since November 2002, five former employees of the Company have pleaded guilty to felonies as part of the government's ongoing investigations: a former treasury department employee who pleaded guilty to charges of conspiracy to commit bank fraud; the former CFO who pleaded guilty to charges of conspiracy to commit securities fraud; a former sales executive who pleaded guilty to charges of conspiracy to commit securities fraud; a former sales executive who pleaded guilty to charges of obstruction of justice; and the former treasurer who pleaded guilty to charges of conspiracy to commit wire fraud. In addition, eight former executives of the Company, including the Company's former CEO, one employee of the Company's former outside audit firm, and two employees of the Company's former business partners have been indicted on federal charges of conspiracy to commit securities fraud, securities fraud, wire fraud, bank fraud and falsifying books and records. The SEC filed civil suits against most of these individuals alleging related violations of the federal securities laws and rules under various theories of financial fraud, insider trading, falsification of books and records and financial reporting violations.

The SEC and the Department of Justice (DOJ) are continuing their investigations into a number of individuals, including certain former employees and directors and possibly current employees. While the Company is fully cooperating with the SEC and the DOJ in their investigations, it is possible that the SEC could bring civil actions against current employees or that the DOJ could bring criminal charges against the Company or current employees. Any such actions or charges could damage the Company's reputation among existing and potential customers, Peregrine's revenues, and employee morale.

In May 2004, Frederic Luddy, the Company's former chief technology officer, filed a complaint against the Company in the Court of Chancery for the State of Delaware seeking advancement of certain legal fees and expenses. Mr. Luddy is a defendant in a class action filed on behalf of former Peregrine stockholders under the federal securities laws, pending in the United States District Court for the Southern District of California (the Federal Securities Action), and in an action filed by the Peregrine Litigation Trustee as successor to certain rights and causes of action of Peregrine under the Reorganization Plan, pending in the Superior Court of the State of California for the County of San Diego (the Litigation Trustee Action). These actions seek to recover monetary damages from Mr. Luddy based on pre-bankruptcy events. Mr. Luddy's complaint alleged that Peregrine is required to advance or reimburse Mr. Luddy for his defense expenses in connection with the Federal Securities Action and the Litigation Trustee Action. His complaint also alleged that, pursuant to a paragraph of the Bankruptcy Court's order confirming the Reorganization Plan, his indemnity claim can be pursued in state court. In June 2004, the Company removed Mr. Luddy's complaint from Delaware state court to the Bankruptcy Court. The Company also filed a motion in Bankruptcy Court to dismiss the complaint on the basis that among other things, Mr. Luddy failed to file any proof of claim before the

Bankruptcy Court and that his claim is barred by the discharge injunction entered in connection with the Bankruptcy Court's approval of the Reorganization Plan. On August 9, 2004, Mr. Luddy filed a unilateral dismissal of his complaint, without prejudice, and on the same day filed a new complaint in the Delaware Court of Chancery, seeking the same relief as his prior complaint. The Company has removed Mr. Luddy's new complaint to the Bankruptcy Court and has filed a motion to dismiss the complaint. The Company believes Mr. Luddy's claims are without merit and intends to vigorously defend against his complaint. While the ultimate outcome is not currently determinable, in the opinion of management the matter will not materially affect the Company's financial position, results of operations or liquidity.

The Company is also involved in legal proceedings, claims, and litigation arising in the ordinary course of business. Although the ultimate results of these legal proceedings, claims and litigation are not currently determinable, in the opinion of management these matters will not materially affect the Company's financial position, results of operations or liquidity.

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

The following discussion and analysis of our financial condition, results of operations, liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes included in this report. Some of the information contained in this discussion and analysis, or set forth elsewhere in this report, includes forward-looking statements that involve risk and uncertainties. Readers should carefully review the information set forth under the caption "Risk Factors" contained in our Annual Report on Form 10-K for the year ended March 31, 2003, filed April 30, 2004, for a discussion of important factors that could cause actual results to differ materially from our historical or anticipated results described herein, or implied by the forward-looking statements in this report. We undertake no obligation to revise or update any forward-looking statements for any reason.

The information contained in this section is generally limited to the reporting periods covered by this report. Please note, however, that given the importance of liquidity to a company that has recently emerged from bankruptcy proceedings, we have supplemented our discussion of liquidity and capital resources for the first two quarters of fiscal 2004 and 2003 with a more current discussion of our liquidity and capital resources as of September 30, 2004.

Some of the financial results described in this section are historical. Until our periodic reports are up to date, investors will not have current financial information. For this reason, and based on the other risk factors contained in our Annual Report on Form 10-K for the year ended March 31, 2003, we believe trading in our securities at this time is highly speculative and involves a high degree of risk.

From our initial public offering in 1997 through 2001, we significantly expanded our product lines and business through a series of acquisitions, the most significant of which were:

As our operations grew through these acquisitions, our operating costs increased significantly. At the same time, the software industry began a downturn and we faced a challenging sales environment. These factors created a liquidity crisis for us that was exacerbated by covenant defaults under our credit facility as of the quarter ended December 31, 2001. This resulted in our required repayment of approximately $100 million of outstanding debt.

In January 2002, the Securities and Exchange Commission began an informal investigation into Peregrine and our former chief executive officer pertaining to transactions with Critical Path, Inc. that had taken place in the first half of fiscal 2001 and involved approximately $3.3 million in aggregate Peregrine revenue. In February 2002, Peregrine's Audit Committee initiated an independent investigation into the transactions with Critical Path. In early May 2002, the Audit Committee and, upon the Audit Committee's recommendation, the Board of Directors initiated a broad internal

investigation, obtained the resignations of our chief executive officer and chief financial officer at that time, among others, and publicly disclosed that we were conducting an internal investigation into potential accounting irregularities or frauds, including alleged accounting abuses by our senior management resulting in a substantive overstatement of revenue in prior periods. In mid-May 2002, we announced that we would restate our consolidated financial statements for all of fiscal years 2000 and 2001 and the first three quarters of fiscal 2002 (that is, the period from April 1999 through December 2001) as a result of the discovery of accounting irregularities during those periods and that our financial statements and related audit reports for the restatement period should not be relied upon.

As a result, in June 2002 our newly appointed chief executive officer and chief financial officer, and the rest of the management team, simultaneously focused on four immediate goals:

We streamlined our operations by divesting a number of businesses and non-core product lines and significantly reduced our personnel and cost structure. The divested Supply Chain Enablement (Harbinger and Extricity) and Peregrine Remedy businesses are treated as discontinued operations in the financial statements included in this report. The financial statements include the results of the following non-core product lines that were divested from July 2002 through December 2002: transportation management, facility management, telecommunications management and on-line travel booking systems.

On September 22, 2002, we filed for voluntary protection under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. Our fourth amended plan of reorganization (Reorganization Plan) was confirmed by the Bankruptcy Court on July 18, 2003. We emerged from bankruptcy law protection on August 7, 2003.

As a result of our bankruptcy law filing under Chapter 11, we were subject to the provisions of Statement of Position 90-7, "Financial Reporting of Entities in Reorganization under the Bankruptcy Code" (SOP 90-7) for the reporting periods subsequent to September 22, 2002. Pursuant to SOP 90-7, we were required, among other things, to classify on the consolidated balance sheet liabilities arising prior to the September 22, 2002 petition date that were subject to compromise from those that are not as well as liabilities arising post-petition. The liabilities that may be affected by the Reorganization Plan were reported at the estimated amounts that will be allowed under the Reorganization Plan, even if they were ultimately settled for lesser amounts. Revenue, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization of the business were reported separately as reorganization items.

As described in Note 4 of our notes to condensed consolidated interim financial statements included in this report, our Reorganization Plan was confirmed by the Bankruptcy Court on July 18, 2003 and was effective August 7, 2003. We have applied the fresh-start reporting provisions of SOP 90-7 in the quarter ended September 30, 2003. The effect of fresh-start reporting is discussed in Notes 1 and 4 of our notes to condensed consolidated financial statements included in this report.

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles (GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that they are made. These

estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

We adopted the fresh-start reporting provisions of SOP 90-7 on July 18, 2003. This resulted in a new basis of accounting. Under fresh-start accounting, the reorganization value of the entity, as described below, is allocated to the entity's assets based on fair values, and liabilities are stated at the present value of amounts to be paid determined at current interest rates. The determination of the reorganization value and fair value of assets relies on a number of estimates and assumptions, the ultimate outcome of which are inherently subject to significant uncertainties and contingencies beyond our control.

Reorganization value is the fair value of the entity before considering liabilities, and it approximates the amount a willing buyer would pay for the assets of the entity immediately after restructuring. With the assistance of third-party financial advisors, we determined the fair value of the new common stock for the reorganized Company to be $270 million, which represents the business enterprise value (BEV) adjusted for, among other items, debt financing net of cash. For purposes of applying SOP 90-7, we used a BEV of $277 million, representing our best estimate of the Company's reorganized BEV.

Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in conformity with procedures specified by Financial Accounting Standards (FAS) No. 141. We engaged an independent appraiser to assist in determining the fair market value of our identifiable intangible assets. Identifiable intangible assets consist of developed technology, trademarks and trade names, maintenance contracts and customer lists. The fair value of these identifiable intangible assets was estimated to be $125 million and was determined using the Company's estimated future cash flow discounted at the Company's weighted cost of capital of 12.0%. The identifiable intangible assets have estimated useful lives ranging from five to six years.

Any amount remaining after allocation of the reorganization value of the Company to identified tangible and intangible assets is recorded as reorganization value in excess of amounts allocable to identified assets. Reorganization value in excess of amounts allocable to identified assets will not be amortized, but will be subject to periodic evaluation for impairment at least annually.

Significant judgment is required in determining our worldwide income tax provision. In a global business, there are many transactions and calculations in which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities and segregation of foreign and domestic income and expense to avoid double taxation. We have accrued reserves for tax contingencies based upon our estimates of the

tax ultimately to be paid. This estimate is updated as more information becomes available. While these estimates are based upon the information available when these statements are issued, no assurance can be given that the final tax outcome of these matters will not differ from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and operating results in the period for which such determination is made.

We have recorded a valuation allowance on a majority of net deferred tax asset balances as of December 31, 2003 and on substantially all of our net deferred tax asset balance as of March 31, 2003 because of uncertainties related to utilization of deferred tax assets, primarily related to net operating loss carryforwards, before they expire. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.

For a description of our critical accounting policies regarding revenue recognition, valuation of long-lived assets and legal contingencies, please refer to the information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003.

As stated above, on July 18, 2003, the Bankruptcy Court confirmed the Reorganization Plan and it became effective on August 7, 2003. Results of operations presented for periods prior to and including July 18, 2003 pertain to our company prior to its reorganization (our Predecessor Company). The results of operations presented for periods after July 18, 2003 pertain to our company after its reorganization (our Successor Company). Where discussion applies to both the Predecessor Company and the Successor Company, we refer to the Company. As a result of the implementation of fresh-start accounting on July 18, 2003, the Successor Company's results of operations are not comparable to results reported in prior periods for the Predecessor Company, because of differences in the basis of reporting and the capital structure for the Predecessor Company and the Successor Company. See Note 4 of our notes to condensed consolidated interim financial statements included in this report for additional information about the consummation of the Reorganization Plan and implementation of fresh-start reporting.

As required by Item 303(b) of Regulation S-K, the discussion and analysis of results of operations covers all periods for which financial statements are presented, even those that relate to periods shorter than full three- and nine-month periods. However, for clarity of presentation, where the adoption of fresh-start reporting did not have a material effect on a particular line item, we have only compared the results of operations of our Successor Company and Predecessor Company on a combined basis for the three- and nine-month periods ended December 31, 2003 with the historical results of operations of the Predecessor Company for the three-and nine-month periods ended December 31, 2002.

The discussion and analysis of results of operations for the shortened periods are not directly comparable to the full three- and nine-month periods in the prior fiscal year. For example, our Successor Company's license revenue, maintenance revenue, amortization, income taxes, discontinued operations and reorganization items, net were all affected by the adoption of fresh-start reporting. Our Predecessor Company's results of operations are presented for the 109-day period ended July 18, 2003 beside our Successor Company's results of operations for the 166-day period ended December 31, 2003, as well as on a pro forma combined basis for the combined nine-month period, in order to facilitate a comparison with our Predecessor Company's results of operations for the nine-month period ended December 31, 2002. This information is provided for comparative purposes only, but the value of such a comparison may be limited. The pro forma combined financial information does not reflect the

results of operations that either our Predecessor Company or our Successor Company would have achieved for the full fiscal 2004 nine-month period. The pro forma combined financial information for the nine-month period ended December 31, 2003 is presented on a merely additive basis and does not give pro forma effect to our Predecessor Company's results as if the consummation of the Reorganization Plan and the related fresh-start and other adjustments had occurred at the beginning of the period presented.

With the adoption of fresh-start reporting, our Successor Company's assets and liabilities were adjusted to their estimated fair value as of July 18, 2003, which may not be comparable to the recorded value for these assets and liabilities presented for our Predecessor Company. In addition, our Successor Company has a significantly different capital structure from our Predecessor Company as a result of the Reorganization Plan and the adoption of fresh-start accounting. See Note 4 of the notes to our condensed consolidated interim financial statements included in this report for a reconciliation of the adjustments recorded in connection with the adoption of fresh-start reporting as of July 18, 2003.

The following tables set forth, for the periods indicated, selected consolidated statement of operations data as a percentage of total revenue.

		Successor Company Three Months Ended December 31, 2003		Predecessor Company Three Months Ended December 31, 2002
Revenues:
	Licenses		38.5	%	39.3	%
	Maintenance		53.8	%	43.6	%
	Consulting and training		7.7	%	17.1	%

	Total revenues		100.0	%	100.0	%

Costs and expenses:
	Cost of licenses		1.3	%	1.6	%
	Cost of maintenance		9.4	%	14.8	%
	Cost of consulting and training		8.3	%	18.7	%
	Sales and marketing		30.2	%	45.6	%
	Research and development		15.8	%	25.0	%
	General and administrative		26.2	%	46.6	%
	Amortization of intangibles		12.9	%	0.0	%
	Restructuring, impairments and other		0.0	%	3.8	%

	Total operating costs and expenses		104.1	%	156.1	%

Loss from continuing operations before reorganization, interest and income taxes		(4.1	)%	(56.1	)%
Reorganization items, net		(4.2	)%	(15.9	)%
Interest expense, net		(2.3	)%	(11.2	)%

Loss from continuing operations before income taxes		(10.6	)%	(83.2	)%
Income tax expense on continuing operations		(3.7	)%	(3.1	)%

Loss from continuing operations		(14.3	)%	(86.3	)%
Income from discontinued operations, net of income taxes		0.0	%	437.0	%

Net income (loss)		(14.3	)%	350.7	%

		Successor Company 166 Days Ended December 31, 2003		Predecessor Company 109 Days Ended July 18, 2003		Pro Forma Combined Nine Months Ended December 31, 2003		Predecessor Company Nine Months Ended December 31, 2002
Revenues:
	Licenses		39.1	%	27.8	%	34.9	%	33.9	%
	Maintenance		52.4	%	60.0	%	55.2	%	44.5	%
	Consulting and training		8.5	%	12.2	%	9.9	%	21.6	%

	Total revenues		100.0	%	100.0	%	100.0	%	100.0	%

Costs and expenses:
	Cost of licenses		1.1	%	1.5	%	1.3	%	3.0	%
	Cost of maintenance		9.5	%	10.6	%	9.9	%	12.6	%
	Cost of consulting and training		8.9	%	10.9	%	9.6	%	19.3	%
	Sales and marketing		28.6	%	30.0	%	29.1	%	53.7	%
	Research and development		16.3	%	18.3	%	17.0	%	26.3	%
	General and administrative		24.6	%	30.7	%	26.9	%	41.3	%
	Amortization of intangibles		13.1	%	0.0	%	8.1	%	0.0	%
	Restructuring, impairments and other		0.0	%	(2.5	)%	(1.0	)%	42.8	%

	Total operating costs and expenses		102.1	%	99.5	%	100.9	%	199.0	%

Loss from continuing operations before reorganization, interest and income taxes		(2.1	)%	0.5	%	(0.9	)%	(99.0	)%
Reorganization items, net		(7.1	)%	778.6	%	290.2	%	2.9	%
Interest expense, net		(2.7	)%	(8.4	)%	(4.9	)%	(17.8	)%

Income (loss) from continuing operations before income taxes		(11.9	)%	770.7	%	284.4	%	(113.9	)%
Income tax expense on continuing operations		(2.9	)%	(2.3	)%	(2.7	)%	(4.2	)%

Income (loss) from continuing operations		(14.8	)%	768.4	%	281.7	%	(118.1	)%
Income from discontinued operations, net of income taxes		0.0	%	0.5	%	0.2	%	152.3	%

Net income (loss)		(14.8	)%	768.9	%	281.9	%	34.2	%

Revenue comprises license fees, maintenance service fees and fees for consulting and training services. The three- and nine-month periods ended December 31, 2002 include revenue for non-core product lines that were subsequently sold in the fiscal year ended March 31, 2003 (fiscal 2003). As a result of the disposition of the non-core product lines, the results for the 109-day period ended July 18, 2003 and the three-month and 166-day periods ended December 31, 2003 do not include any non-core product line revenue.

Revenue totaled $48.7 million for the 109-day period ended July 18, 2003. All of this was related to core products (i.e., all products excluding non-core product lines divested during fiscal 2003). Revenue for the 109-day period ended July 18, 2003 includes $5.6 million of revenue for license transactions entered into prior to fiscal 2003, but for which all revenue recognition criteria were not satisfied until the subsequent period.

Revenue totaled $44.7 million and $79.9 million for the three-month and 166-day periods ended December 31, 2003, respectively.

Revenues for the Three-Month and Pro Forma Combined Nine-Month Periods Ended December 31, 2003 and Predecessor Company Revenues for the Three- and Nine-Month Periods Ended December 31, 2002 (dollars in thousands)

Revenue totaled $44.7 million for the three-month period ended December 31, 2003, down 24% from the $59.0 million of revenue for our Predecessor Company for the three-month period ended December 31, 2002. Revenue for core products and services for the three-month period ended December 31, 2003 was $44.7 million, down 22% from the $57.1 million of revenue for core products and services reported for our Predecessor Company for the three months ended December 31, 2002. The reasons for the decreases are discussed below.

Pro forma revenue totaled $128.6 million for the nine-month combined period ended December 31, 2003, down 24% from the $168.6 million in revenues reported for our Predecessor Company for the nine-month period ended December 31, 2002. Pro forma revenues for core products and services for the nine-month combined period ended December 31, 2003 was $128.6 million, down 18% from the $156.0 million of revenues for core products and services reported for our Predecessor Company for the nine-month period ended December 31, 2002. The reasons for the increases or decreases are discussed below.

We generally license our products to end-users under perpetual license agreements. License revenue for our Predecessor Company includes revenue from license transactions originally entered into prior to fiscal 2003. For these transactions, revenue was recognized in fiscal 2003 and fiscal 2004, when all the revenue recognition criteria were satisfied. The delay in recognizing this revenue arises from long-term installment payments, which are recognized as installments come due, and amounts related to products for which the expiration of certain product exchange or upgrade rights occurred in the later period. Commencing in fiscal 2003, we changed certain business practices by limiting the number of long-term installment contracts and contracts containing product exchange or upgrade rights. Upon the application of fresh-start accounting as of July 18, 2003, amounts to be recognized as revenue in future fiscal quarters by our Successor Company for such arrangements were eliminated because we have no significant future performance obligations under these agreements. Anticipated future collections of Predecessor Company extended pay receivables have been recorded as other assets in connection with the adoption of fresh-start accounting.

License revenue for the 109-day period ended July 18, 2003 totaled $13.5 million, of which $7.9 million was attributable to new license transactions entered into during the period and $5.6 million was attributable to license transactions initiated prior to fiscal 2003, but for which all revenue recognition criteria were met in the reported period.

License revenue for the three-month and 166-day periods ended December 31, 2003 totaled $17.2 million and $31.3 million, respectively. This license revenue resulted mostly from license transactions entered into during the period and does not include any revenue from license transactions initiated prior to fiscal 2003 as deferred revenue for such transactions was eliminated in the application of fresh-start reporting.

License Revenue for the Three-Month and Pro Forma Combined Nine-Month Periods Ended December 31, 2003 and Predecessor Company License Revenue for the Three- and Nine-Month Periods Ended December 31, 2002 (dollars in thousands)

License revenue for the three-month period ended December 31, 2003 totaled $17.2 million. For this period, all of the license revenue was attributable to license transactions entered into during the period. License revenue for our Predecessor Company for the three-month period ended December 31, 2002 totaled $23.2 million, including $0.5 million of license fees for non-core product lines that were subsequently sold in fiscal 2003. For the fiscal 2003 third quarter, $17.7 million of the core license revenue was attributable to new license transactions entered into during the quarter and $5.0 million was attributable to license transactions initiated prior to fiscal 2003, but for which revenue was first recognizable in the quarter. License revenue for core products for the three-month period ended December 31, 2003 decreased $0.5 million, from such license revenue for the three-month period ended December 31, 2002, excluding transactions initiated prior to fiscal 2003. As discussed above, there was no license revenue in the three-month period ended December 31, 2003 from transactions initiated in prior periods as deferred revenue was eliminated in the application of fresh-start reporting and due to changes in our business practices limiting the number of long-term installment contracts and contracts containing product exchange or upgrade rights.

Pro forma license revenue for the nine-month combined period ended December 31, 2003 totaled $44.8 million. For this period, $39.2 million of the pro forma license revenue was attributable to license transactions entered into during the period and $5.6 million was attributable to license transactions initiated prior to fiscal 2003, but for which all revenue recognition criteria were met in the period. License revenue for our Predecessor Company for the nine-month period ended December 31, 2002

totaled $57.2 million, including $2.1 million of license fees for non-core product lines that were subsequently divested in fiscal 2003. For the nine-month period ended December 31, 2002, $36.9 million of the core license revenue was attributable to license transactions entered into during the fiscal period and $18.2 million was attributable to core license transactions initiated prior to fiscal 2003, but for which revenue was first recognizable in fiscal 2003. Pro forma license revenue for core products for the nine-month combined period ended December 31, 2003 increased by $2.3 million, or 6%, from such license revenue for core products for the nine-month period ended December 31, 2002, excluding transactions initiated prior to fiscal 2003. The increase reflected higher unit sales as a result of market demand for new and additional licenses. Pro forma license revenue for transactions initiated prior to the reported period, but for which all revenue recognition criteria were met in the nine-month combined period ended December 31, 2003, decreased by $12.6 million, or 69%, from the license revenue for transactions initiated prior to the reported period, but for which all revenue recognition criteria were met in the nine-month period ended December 31, 2002. As discussed above, this decrease resulted from the adoption of fresh-start reporting and changes in our business practices limiting the number of long-term installment contracts and contracts containing product exchange or upgrade rights.

Most customers purchase maintenance services when buying new or additional licenses. Maintenance services consist primarily of providing enhancements and upgrades for our products along with customer support services for our products. Generally, maintenance contracts are entered into for one-year periods and are renewable annually at the customer's option. Maintenance contracts are generally prepaid by the customer and revenue is recognized ratably over the contract period.

As described earlier, we adopted the fresh-start reporting provisions of SOP 90-7 as of July 18, 2003. Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in accordance with FAS No. 141. In accordance with these pronouncements, we determined the fair market value of our assets and liabilities at July 18, 2003, including our deferred maintenance revenue balances. Accordingly, we reduced our deferred maintenance revenue balances by $6.3 million to reflect the fair value of existing maintenance contracts in place at July 18, 2003. This $6.3 million adjustment by our Successor Company will have the effect of reducing maintenance revenue over the maintenance contract periods. Of this amount, maintenance revenue was reduced by $1.8 million and $3.5 million in the three-month and 166-day periods ended December 31, 2003, respectively.

Maintenance revenue for the 109-day period ended July 18, 2003 totaled $29.2 million. Maintenance revenue for this period was for core products only, as non-core products were divested in the fiscal year ended March 31, 2003.

Maintenance revenue for the three-month and 166-day periods ended December 31, 2003 totaled $24.1 million and $41.9 million, respectively, all of which was related to core products.

Maintenance Revenue for the Three-Month and Pro Forma Combined Nine-Month Periods Ended December 31, 2003 and Predecessor Company Maintenance Revenue for the Three- and Nine-Month Periods Ended December 31, 2002 (dollars in thousands)

Maintenance revenue for the three-month period ended December 31, 2003 totaled $24.1 million. Maintenance revenue for our Predecessor Company for the three-month period ended December 31, 2002 totaled $25.7 million, including $0.9 million for non-core product lines. Maintenance revenue for core products in the three-month period ended December 31, 2003 decreased by $0.7 million, or 3%, from maintenance revenue for core products for our Predecessor Company for the three-month period ended December 31, 2002. Of this decrease, $1.8 million resulted from the adoption of fresh-start reporting. The negative impact of fresh-start reporting more than offset the overall growth of maintenance revenue in our core products of $1.1 million, or 4%. The growth occurred mainly because the revenue attributable to additional licenses covered by maintenance contracts exceeded the revenue lost from cancellations, in whole or in part, of maintenance contracts during the renewal process. Maintenance fees are amortized evenly over the contract period, so the results for the three-month period ended December 31, 2003 also reflects the full impact of our expanded customer base and related increases in new or additional licenses from the beginning of fiscal 2003 to December 31, 2003.

Pro forma maintenance revenue for the nine-month combined period ended December 31, 2003 totaled $71.0 million. Maintenance revenue for our Predecessor Company for the nine-month period ended December 31, 2002 totaled $75.0 million, including $5.2 million for non-core product lines. Pro forma maintenance revenue for core products in the nine-month combined period ended December 31, 2003 increased by $1.2 million, or 2%, from maintenance revenue for core products for our Predecessor Company for the nine-month period ended December 31, 2002. Pro forma maintenance revenue for the nine-month combined period ended December 31, 2003 reflects a $3.5 million reduction resulting from the adoption of fresh-start reporting. This negative impact from the adoption of fresh-start partially offset the overall growth in maintenance in our core products of $4.7 million, or 7%. The growth occurred mainly because the revenue attributable to additional licenses covered by maintenance contracts exceeded the revenue lost from maintenance contract cancellations, in whole or in part,

during the renewal process. Maintenance fees are amortized evenly over the contract period, so the pro forma results for the nine-month combined period ended December 31, 2003 also reflects the full impact of our expanded customer base and related increases in new or additional licenses from the beginning of fiscal 2003 to December 31, 2003.

Consulting and training services include a range of professional and educational services intended to help our customers use our software products more effectively. Beginning in June 2002, as part of expense-cutting initiatives, we reduced our consulting staff and began to refer customers more frequently to third-party service providers for general consulting services. We began to focus on supplementing our customers' and the third-party service providers' project teams with consultants possessing specialized knowledge of the more complex aspects of our products and the best practices for integrating our products into the customers' business operations.

The following table summarizes consulting and training revenue for the three-month period ended December 31, 2003 and consulting and training revenue for our Predecessor Company for the three-month period ended December 31, 2002 (dollars in thousands):

Revenue for consulting and training services totaled $3.4 million for the three-month period ended December 31, 2003. Revenue for consulting and training services totaled $10.1 million for our Predecessor Company for the three-month period ended December 31, 2002, including $0.5 million of consulting and training revenue for non-core product lines. Consulting and training revenue related to our core products decreased in the three-month period ended December 31, 2003 by $6.2 million, or 64%, compared to consulting and training revenue related to our core products for our Predecessor Company for the three-month period ended December 31, 2002, primarily as a result of the change in our consulting services strategy.

The following table summarizes pro forma consulting and training revenue for the nine-month combined period ended December 31, 2003 and consulting and training revenue for our Predecessor Company for the nine-month period ended December 31, 2002 (dollars in thousands):

Pro forma revenue for consulting and training services totaled $12.8 million for the nine-month combined period ended December 31, 2003. Revenue for consulting and training services totaled $36.3 million for our Predecessor Company for the nine-month period ended December 31, 2002, including $5.3 million of consulting and training revenue for non-core product lines. Pro forma consulting and training revenue related to our core products decreased in the nine-month combined period ended December 31, 2003 by $18.3 million, or 59%, compared to the consulting and training revenue related to our core products for our Predecessor Company for the nine-month period ended December 31, 2002, primarily as a result of the change in our consulting services strategy.

We organize our business operations according to three major geographic territories:

The following table summarizes total revenue by geographic territory for the three-month period ended December 31, 2003 and revenue for our Predecessor Company for the three-month period ended December 31, 2002 (dollars in thousands):

Revenue for the Americas territory totaled $24.1 million for the three-month period ended December 31, 2003, a decrease of $14.9 million, or 38%, from the revenue for our Americas territory for our Predecessor Company for the three-month period ended December 31, 2002. Of the decrease, $2.0 million resulted from the fact we were no longer selling the non-core products we had divested in fiscal 2003. Americas consulting and training revenue declined $4.2 million as we began to refer our customers more frequently to third-party service providers for general consulting services. Maintenance revenue for the Americas territory also decreased in the three-month period ended December 31, 2003 from maintenance revenue for the Americas territory related to our core products for our Predecessor Company for the three-month period ended December 31, 2002. Maintenance revenue for the Americas territory for this period decreased by $2.5 million because of lower maintenance renewal rates and by $1.2 million because of the adoption of fresh-start reporting. In addition, revenue decreased by $4.9 million because license revenue was recognized in the three-month period ended December 31, 2003 for transactions entered into prior to fiscal 2003. As discussed above, revenue related to pre-fiscal 2003 transactions decreased because of the adoption of fresh-start reporting and changes in our business practices limiting the number of long-term installment contracts and contracts containing product exchange or upgrade rights.

Revenue for the EMEA territory totaled $18.9 million for the three-month period ended December 31, 2003, an increase of $0.5 million, or 3%, over the revenue for the EMEA territory for our Predecessor Company for the three-month period ended December 31, 2002. License revenue in EMEA for the three-month period ended December 31, 2003 was substantially the same as license revenue in the same period in the previous year. EMEA maintenance revenue in the three-month period ended December 31, 2003 increased by $3.1 million when compared to the maintenance revenue for our Predecessor Company for the three-month period ended December 31, 2002, primarily because of revenue attributable to new licenses sold that were subject to maintenance contracts, combined with strong maintenance renewals. EMEA consulting and training revenue decreased $1.9 million due to our change in strategy regarding consulting services.

Revenue for the AP territory totaled $1.7 million for the three-month-period ended December 31, 2003, an increase of $0.1 million from the revenue for the AP territory for our Predecessor Company for the three-month period ended December 31, 2002. The increase in the fiscal 2004 period is because of increased demand for our products in this territory.

The following table summarizes total pro forma revenue by geographic territory for the nine-month combined period ended December 31, 2003 and revenue for our Predecessor Company for the nine-month period ended December 31, 2002 (dollars in thousands):

Pro forma revenue for the Americas territory totaled $76.0 million for the nine-month combined period ended December 31, 2003, a decrease of $36.5 million, or 32%, from the revenue for our Predecessor Company for the nine-month period ended December 31, 2002. Of the decrease, $12.5 million resulted from the fact we were no longer selling the non-core products we had divested in fiscal 2003. Pro forma consulting and training revenue for the Americas territory declined $11.2 million for the nine-month combined period ended December 31, 2003 as we began to refer our customers more frequently to third-party service providers for general consulting services. Pro forma license revenue for the Americas territory for this period was affected by a $7.8 million decrease in revenue recognized related to transactions initiated prior to fiscal 2003, primarily as a result of the adoption of fresh-start reporting. Pro forma Americas maintenance revenue decreased $6.7 million in this combined period compared to the Americas maintenance revenue related to core products for our Predecessor Company for the nine-month period ended December 31, 2002, with $2.3 million of the decrease resulting from the fresh-start adjustment. The remainder of the decrease was the result of lower renewal rates in the combined period. Increased license revenue related to core products offset a portion of these decreases.

Pro forma revenue for the EMEA territory totaled $47.8 million for the nine-month combined period ended December 31, 2003, a decrease of $3.7 million, or 7%, over the revenue for the EMEA territory for our Predecessor Company for the nine-month period ended December 31, 2002. Pro forma license revenue in EMEA for the nine-month combined period ended December 31, 2003 related to pre-fiscal 2003 transactions decreased $4.8 million. This decrease in revenue recognized related to transactions initiated prior to fiscal 2003 is the result of a change in business practice and the adoption of fresh-start reporting. Of the total decline, $6.9 million reflected the lower consulting and training

revenue caused by our change in strategy. Pro forma license and maintenance revenue increased in the EMEA region for the combined period, offsetting a portion of these revenue decreases.

Pro forma revenue for the AP territory totaled $4.7 million for the nine-month combined period ended December 31, 2003, up $0.3 million, or 6%, from the revenue for the AP territory for our Predecessor Company for the nine-month period ended December 31, 2002. The rise resulted from increased license and maintenance revenue and improved execution of a new indirect, or partner, sales model we began using in this region in June 2002.

Prior to July 2002, the Predecessor Company granted a number of stock options at an exercise price below the then fair market value of the common stock. The difference between the fair market value at the date of grant and the exercise price is recorded as deferred compensation on the date of grant, and compensation expense is recognized over the vesting period of the option. In November 2003, the Predecessor Company completed the sale of its Remedy business (see Note 3 to the Condensed Consolidated Statement), which accelerated the recognition of substantially all deferred compensation charges related to stock options. Since July 2002, substantially all stock option grants have been granted with exercise prices equal to the fair market value at the date of grant. As a result, there has been a substantial decrease in compensation charges related to stock options since November 2003. The deferred compensation charges are reflected in operating cost and expenses as noted below.

The cost of software licenses primarily consists of third-party software royalties, product packaging, documentation and production and distribution costs. The cost of licenses represented 3% and 4% of pro forma license revenue for the three- and nine-month pro forma combined periods ended December 31, 2003, respectively. The cost of licenses represented 4% and 9% of license revenue for our Predecessor Company for the three- and nine-month periods ended December 31, 2002, respectively. This decrease resulted primarily from cost reductions implemented in the latter portion of fiscal 2003, including the outsourcing of most of our product distribution. License costs were also lower in the fiscal 2004 periods because of the disposition of non-core products in fiscal 2003.

The cost of maintenance services primarily consists of personnel, facilities and system costs related to technical support services to our customers on maintenance contracts. The cost of maintenance represented 17% and 18% of maintenance revenue in the three- and nine-month pro forma combined periods ended December 31, 2003, respectively. The cost of maintenance represented 34% and 28% of maintenance revenue in the three- and nine-month periods ended December 31, 2002, respectively. The cost of maintenance for the three- and nine-month pro forma combined periods ended December 31, 2003 totaled $4.2 million and $12.8 million, respectively, a decrease of $4.6 million and $8.5 million, respectively, over the cost of maintenance for the three- and nine-month periods ended December 31, 2002. Of the decrease, $3.1 million and $4.2 million were related to stock option compensation charges in the three- and nine-month periods ended December 31, 2002, respectively. The remaining cost decreases resulted from actions implemented in fiscal 2003 to reduce operating costs, including a reduction in workforce and facilities costs related to maintenance functions. We also experienced cost reductions from our fiscal 2003 divestiture of non-core product lines.

The cost of consulting and training services primarily consists of personnel, facilities and system costs associated with providing these services. The cost of consulting and training services also includes fees paid to third-party subcontractors providing services on our behalf. The cost of consulting and training represented 109% and 97% of pro forma consulting and training revenue for the three- and nine-month pro forma combined periods ended December 31, 2003, respectively. The cost of consulting and training represented 109% and 90% of consulting and training revenue for the three- and nine-month periods ended December 31, 2002, respectively. The cost of consulting and training services in the 2003 periods decreased $7.3 million and $20.2 million, respectively, from the year-earlier periods. Of the decrease, $3.1 million and $4.2 million were related to stock option compensation charges in the three- and nine-month periods ended December 31, 2002, respectively. The remaining cost decreases resulted mostly from our reduction in workforce as we revised our strategy for these services.

Sales and marketing expenses primarily consist of personnel costs, including sales commissions and travel costs, facilities and system costs related to our sales, including technical pre-sales, and marketing functions. The costs of advertising and marketing promotions are also included in sales and marketing expenses. Sales and marketing expenses in the three- and nine-month pro forma combined periods ended December 31, 2003 were $13.5 million and $37.5 million, respectively, a decrease of $13.4 million and $53.0 million, respectively, from the three- and nine-month periods ended December 31, 2002. Of the decrease, $10.7 million and $14.5 million were related to stock option compensation charges in the three and nine-month periods ended December 31, 2002, respectively. The decrease also reflects cost reductions implemented in fiscal 2003 as part of our restructuring plan, including a reduction in workforce, facilities consolidation and a decrease in marketing promotion activities. We closed several sales offices around the world as we focused direct sales efforts on North America and major European markets. Beginning in the first half of fiscal 2003, we began to rely more on third-party distributors to sell our products and services in markets in which we chose not to maintain a significant direct sales presence, such as in Asia and Latin America.

Research and development (R&D) expenses primarily consist of personnel, facilities and systems costs associated with our R&D efforts. R&D expenses also include the cost of services for consultants or other third parties that we hire from time to time to augment our own R&D personnel. No software development cost was capitalized during the periods presented, as costs incurred between technological feasibility and product releases were minimal. R&D expenses were $7.1 million and $21.9 million for the three- and nine-month pro forma combined periods ended December 31, 2003, respectively, a reduction of $7.7 million and $22.4 million, respectively, from the three- and nine-month periods ended December 31, 2002. Of the decrease, $6.1 million and $8.4 million were related to stock option compensation charges in the three- and nine-month periods ended December 31, 2002, respectively. The remainder of the decrease resulted primarily from a reduction in workforce in connection with the sale of several non-core product lines in fiscal 2003.

General and administrative (G&A) expenses consist of personnel, facilities and systems costs related to our operations. G&A also includes the cost of business insurance and professional fees, including legal, accounting, investment banking and other advisory fees, except for fees directly related to our bankruptcy reorganization, which are accounted for under Reorganization Items, Net.

G&A expenses for the three- and nine-month pro forma combined periods ended December 31, 2003 totaled $11.7 million and $34.6 million, respectively, down $15.7 million and $35.0 million, respectively, from the three- and nine-month periods ended December 31, 2002. The decreases reflect restructuring efforts implemented in fiscal 2003. Of the decrease, $7.6 million and $10.4 million were related to stock option compensation charges in the three and nine-month periods ended December 31, 2002, respectively. G&A savings were also realized by reducing professional fees, personnel, closing underutilized facilities, reducing telecommunication costs and the cost of supporting our internal systems. G&A costs for the three- and nine-month pro forma combined periods ended December 31, 2003 include approximately $3.6 million and $11.5 million, respectively, in professional fees for service providers that assisted with our restructuring, investigation and other activities related to the previously mentioned accounting irregularities, the strategic positioning of our core products, and audit and tax services. These items accounted for $7.0 million and $25.2 million, respectively, in G&A costs for the three- and nine-month periods ended December 31, 2002. Fees directly related to our bankruptcy-law filing under Chapter 11 are included in Reorganization Items, Net discussed below.

Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in conformity with procedures specified by Statement of Financial Accounting Standards No. 141, "Business Combinations." We engaged an independent appraiser to assist in the allocation of the reorganization value to our Successor Company's assets and liabilities by determining the fair market value of its intangible assets. Identifiable intangible assets consist of developed technology, trademarks and trade names, maintenance contracts and customer lists. With the adoption of fresh-start reporting, our Successor Company determined the fair value of these identifiable intangibles to be $125.1 million, and to have useful lives ranging from five to six years. For the three-month and 166-day periods ended December 31, 2003, our Successor Company recorded non-cash charges for amortization of intangibles of $5.8 million and $10.5 million, respectively.

Restructuring, impairments and other for our Predecessor Company consist of the following (in thousands):

	Predecessor Company
	Three Months Ended December 31, 2002
Loss on sale of investments	$	883
Gain on sale of non-core product lines		(927	)
Loss from abandoned fixed assets		1,781
Employee severance		472
Other		62

	$	2,271

	Predecessor Company
	109 Days Ended July 18, 2003			Nine Months Ended December 31, 2002
(Gain) loss on sale of investments	$	(1,239	)	$	653
Gain on sale of non-core product lines		—			(15,318	)
Loss from abandoned fixed assets		—			33,738
Loss from abandoned leases		—			33,295
Employee severance		—			19,822

	$	(1,239	)	$	72,190

For the 109-day period ended July 18, 2003, restructuring, impairments and other represented a gain for our Predecessor Company realized upon the sale of certain minority investments in other companies.

During June 2002, our Predecessor Company began to implement a restructuring plan to reduce expenses in line with future revenue expectations and to focus operations on its core market. These restructuring activities continued during the three- and nine-month periods ended December 31, 2002. In the three-month period ended December 31, 2002, restructuring, impairments and other expenses included charges of $1.8 million for losses from abandoning fixed assets and $0.5 million for employee severance. In the nine-month period ended December 31, 2002, restructuring, impairments and other expenses included charges of $33.3 million for losses from abandoned leases, $33.7 million for losses from abandoning fixed assets and $19.8 million for employee severance. The three- and nine-month charges were reduced somewhat by a fiscal 2003 gain on the sale of non-core product lines.

As discussed above, as a result of our bankruptcy-law filing, as of September 22, 2002, we became subject to the provisions of SOP 90-7 for the reporting periods subsequent to September 22, 2002. Pursuant to SOP 90-7, revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from our Predecessor Company's reorganization of the business through the bankruptcy proceedings are reported separately as reorganization items, except for the sale of the assets of our wholly-owned subsidiary, Peregrine Remedy, which is recorded in discontinued operations. Our Successor Company may also incur future charges, primarily related to bankruptcy-proceeding professional fees in future periods.

Reorganization items, net for our Predecessor Company consist of the following (in thousands):

Our Predecessor Company recorded a net reorganization charge of $9.4 million in the three months ended December 31, 2002. Net reorganization items included $5.1 million of professional fees directly related to the Chapter 11 filing and lease abandonment expenses of $4.3 million.

For the 109-day period ended July 18, 2003, the Predecessor Company recorded a net reorganization gain of $378.8 million. Of this gain, $358.5 million resulted from the fair value adjustments to our assets and liabilities with the adoption of fresh-start reporting. We also recognized a $35.4 million gain on our settlement with creditors upon exiting bankruptcy. These gains were partially offset by our costs directly related to the implementation of our Reorganization Plan.

For the nine months ended December 31, 2002, the Predecessor Company recorded a net reorganization gain of $4.9 million. Net reorganization items for the nine-month period ended December 31, 2002 include charges of $6.8 million for professional fees directly related to the Chapter 11 filing, a $5.4 million write-off of debt issuance costs, and lease abandonment charges of $4.3 million. These charges were offset by a $21.4 million gain resulting from the reversal of a fiscal 2002 lease exit cost provision. The exit cost provision related to an abandoned facility for which the accrued cost was reduced to the allowed claim amount in connection with initiating our Chapter 11 proceedings.

Reorganization items, net for the three-month and 166-day periods ended December 31, 2003 totaled $1.9 million and $5.7 million, respectively, and consisted primarily of professional fees directly related to our bankruptcy proceedings.

Net interest expense included interest expense and amortized costs related to our borrowings, net of investment income. Net interest expense decreased for the three- and nine-month pro forma combined periods ended December 31, 2003 to $1.0 million and $6.3 million, respectively, down $5.6 million and $23.7 million, respectively, from the three- and nine- month periods ended December 31, 2002. The net interest expense decrease reflects lower interest expense and higher interest income in the fiscal 2004 periods. Interest expense was greater in the fiscal 2003 periods because in June 2002 we entered into relatively high cost financing arrangements to address, in part, our liquidity crisis until we completed the sale of our Remedy business in November 2002. Interest income available to offset interest expense was greater in the fiscal 2004 periods, reflecting higher available cash balances to invest.

Income tax expense totaled $1.7 million for the three-month period ended December 31, 2003, compared to expenses of $1.8 million for the three-month period ended December 31, 2002. Income

tax expense totaled $3.4 million for the nine-month pro forma combined period ended December 31, 2003, compared to expenses of $7.1 million for the nine-month period ended December 31, 2002. Our tax expense represented 35.1% of our loss from continuing operations before income taxes for the three-month period ended December 31, 2003. Our tax expense represented 0.9% of our income from continuing operations before income taxes for the nine-month pro forma combined period ended December 31, 2003. Our tax expense represented 3.7% and 3.7%, respectively, of our loss from continuing operations before income taxes for the three- and nine-month periods ended December 31, 2002.

As part of our efforts to raise cash and reduce expenses, we sold our Supply Chain Enablement (SCE) and Remedy businesses in June and November 2002, respectively. These businesses are treated as discontinued operations in the condensed consolidated financial statements included in this report.

The SCE business offered software applications and services that automated and integrated business-to-business relationships. In June 2002, Peregrine sold all of the shares of its wholly-owned Peregrine Connectivity (the SCE business) subsidiary to PCI International, Inc., an entity affiliated with Golden Gate Capital LLC, for approximately $35 million in cash. The $47.8 million loss on the disposal of SCE was provided for in fiscal 2002. For the nine-month period ended December 31, 2002, results from discontinued operations include income from SCE of $1.1 million. There was no SCE activity in the three-month period ended December 31, 2002.

In September 2002, Peregrine and Remedy entered into an agreement with BMC Software, Inc. (BMC) pursuant to which BMC, subject to bid procedures approved by the Bankruptcy Court, acquired the assets and assumed substantially all the liabilities of the Remedy business for $355 million, subject to certain adjustments provided for in the acquisition agreement. In November 2002, the sale of Remedy to BMC was approved by the Bankruptcy Court and completed. In June 2003, Peregrine and BMC agreed on a final adjusted sale price of $348 million. Income from discontinued operations related to Remedy for the 109-day period ended July 18, 2003 totaled $0.3 million. No amounts related to Remedy will affect the results of our Successor Company, due to the adoption of fresh-start reporting treatment. Remedy's discontinued operations provided income of $258.0 million and $255.6 million in the three- and nine-month periods ended December 31, 2002, respectively, primarily from the gain on sale.

Given the importance of liquidity to a company that has recently emerged from bankruptcy proceedings, we have supplemented our discussion of liquidity and capital resources for the three- and nine-month periods ended December 31, 2003 and 2002 with a more current discussion of our liquidity and capital resources as of September 30, 2004.

Our principal liquidity requirements are for working capital and capital expenditures. We currently plan to fund our liquidity requirements with cash on hand and cash flow from operations. During fiscal 2004 and fiscal 2003, our principal liquidity requirements were for operating expenses and working capital. We funded these liquidity requirements from cash on hand that was primarily generated from the disposal of our non-core product lines and our SCE and Remedy businesses and from short term loans in fiscal 2003.

Our cash and cash equivalent balances, excluding restricted cash and short-term investments, totaled $115.4 million and $234.3 million at December 31, 2003 and March 31, 2003, respectively. Items that increased or decreased these balances are described below. For all of fiscal 2004, we had approximately $2.0 million of capital expenditures, primarily for leasehold improvements for a modest

expansion of our San Diego headquarters and to acquire enhancements to software applications we use internally. Fiscal 2004 capital expenditures were funded from cash on hand and operating cash flows.

Our Predecessor Company used $46.2 million of cash in operating activities in the 109-day period ended July 18, 2003. Our Predecessor Company reported net income from continuing operations of $373.9 million for this period. However, most of the income was non-cash in nature, because it resulted from the adoption of fresh-start reporting treatment. During the period, our Predecessor Company used $42.9 million of cash for reorganization items related to implementing our Reorganization Plan, which accounts for most of the decrease in the period.

Cash from investing activities increased $27.1 million because that amount of restricted cash became available for general use in accordance with our Reorganization Plan.

Cash used in financing activities is attributable to the repayment in part by our Predecessor Company of $24.3 million of principal and interest on factor loans and $86.5 million, in addition to other consideration, to the holders of convertible subordinated notes in accordance with the Reorganization Plan. Overall cash decreased by $126.2 million, mostly because of the implementation of our Reorganization Plan.

For the 166-day period ended December 31, 2003, the Successor Company provided $4.2 million in cash from operating activities. Our Successor Company reported a net loss of $11.8 million, including non-cash charges of $13.6 million for amortization and depreciation. Of the amortization charge, $10.5 million was related to the new identifiable intangibles established with the adoption of fresh-start reporting treatment as of July 18, 2003. The changes in working capital also contributed to the increase in cash from operating activities.

During the 166-day period, our Successor Company collected the $10.0 million released from escrow as part of the Remedy sale. Our Successor Company also invested $1.3 million in capital expenditures and committed an additional $1.0 million to restricted cash, related mostly to new real estate leases.

Our Successor Company re-paid $6.4 million of its factor loan obligation. Overall, cash increased $7.4 million in the 166-day period.

Our Predecessor Company's cash and cash equivalent balances, excluding restricted cash and short-term investments, totaled $240.5 million and $83.5 million at December 31, 2002 and March 31, 2002, respectively. Items that increased or decreased these balances are described below.

Our Predecessor Company used $130.6 million in net cash in operating activities in the nine-month period ended December 31, 2002. Our Predecessor Company used cash in its operations in the nine-month period ended December 31, 2002 mainly because there was a net loss from continuing operations of $199.3 million reduced by certain non-cash charges incurred in connection with implementing various cost reduction programs. Much of the loss in this nine-month period resulted from charges related to these cost reduction programs.

Investing activities generated $5.9 million in net cash in the nine-month period ended December 31, 2002. In this period, $17.6 million of cash was generated from the maturity of short-term investments and $15.9 million was generated from the sale of non-core product lines. However, this increase in cash was offset somewhat by $27.1 million in cash that became restricted in connection with

claims by various parties that were settled later in fiscal 2003 or in fiscal 2004 as part of the bankruptcy law proceedings.

The Predecessor Company used $105.3 million in cash in financing activities in the nine-month period ended December 31, 2002, primarily in connection with net payments of $98.8 million to factor banks. Discontinued operations increased cash on a net basis by $385.2 million in the nine months ended December 31, 2002. The sale of Remedy, as described above, is the primary reason for this increase in cash.

As of September 30, 2004, the end of our fiscal 2005 second quarter, our Successor Company had non-trade obligations, including accrued interest, of approximately $55.9 million and cash of approximately $85.0 million, of which $5.0 million was restricted. The non-trade obligations consisted of $44.5 million in senior notes (including accrued interest), $9.7 million in deferred payment obligations related to bankruptcy settlements (net of imputed interest) and $1.7 million of factor loans.

Our business plan for fiscal 2005 contemplates the expenditure of a significant amount of cash for product development, infrastructure improvements and sales and marketing efforts. These expenditures and efforts are intended to support our current operations and position us for future growth. Our current business plan differs in material respects from the business plan and projections we included in our disclosure statement in support of our fourth amended Reorganization Plan in connection with our bankruptcy proceedings. As a result, the projections included in the disclosure statement do not reflect anticipated financial results based on our current business plan.

Approximately 1,200 claims were filed against us based on events that took place prior to our bankruptcy filing. Through August 31, 2004, the aggregate face amount of the general unsecured (Class 8) claims asserted against us, plus the amounts we scheduled for payment for Class 8 claims without a claim asserted against us totaled approximately $384 million. After eliminating duplicate claims, claims filed in error, or claims that were invalid for some other reason, we were left with approximately 500 Class 8 claims totaling $251 million. Claim amounts are amended from time to time by the creditors and potential creditors asserting them and sometimes are filed with a face amount that is the minimum amount asserted by the creditor. The amounts sought by such creditors can be increased. There are also ongoing disputes in the Bankruptcy Court regarding whether certain claims are properly classified as general unsecured claims under Class 8 of the Reorganization Plan, which are payable in cash, or as subordinated claims under Class 9 of the Reorganization Plan. Class 9 creditors share in the pool of common shares already issued and reserved for these claims. For these and other reasons, the total potential liability associated with Class 8 claims is difficult to determine. In connection with agreeing to the Reorganization Plan, the various constituencies independently analyzed the claims and determined that the total payout on the Class 8 general unsecured claims was likely to be between $49 million and $65 million.

Since August 2003, we have been spending substantial time and money on the process of analyzing and, as appropriate, objecting to claims that we believe are without merit or asserted for an inflated amount. We have negotiated settlements to various claims. This process is expected to continue for several months. Based on the Reorganization Plan, any claims that we do not dispute or that are determined to be valid by the Bankruptcy Court after we have made an objection may be paid under one of two options, at the creditor's election: We may be required either to pay 70% of the allowed amount of the claim, with 60% being paid in cash on the date of settlement and the remaining 10% paid out over a four-year period in equal annual installments or to pay 100% of the allowed amount of the claim, with 20% being paid in cash on the date of settlement and the remaining 80% being paid

out over a four-year period in equal annual installments. We have also agreed with some creditors to pay 65% of the allowed amount of the claim in cash on the date of settlement and nothing more.

We began paying claims on the effective date of the Reorganization Plan and continue to pay as claims are settled, liquidated, or otherwise resolved. Through September 30, 2004, we have paid, settled or otherwise disposed of Class 8 claims with an original aggregate face amount of approximately $375 million (including approximately $133 million of duplicate, erroneous and otherwise invalid claims). To resolve these claims we have paid or agreed to pay over time approximately $43 million in cash. As of September 30, 2004, there were general unsecured claims asserted in the original aggregate face amount of approximately $9 million remaining to be resolved. There were also approximately $0.5 million in priority and administrative claims remaining to be resolved. These remaining general unsecured and other claims include claims that are asserted in a minimum amount or an unliquidated amount and the claims can be amended to higher amounts. Prior claim determinations are also subject to appeal. Because the total liability associated with the claims depends upon the final amounts asserted by claimants, the outcome of claims classification hearings by the Bankruptcy Court, claims objections, settlement negotiations, and potential litigation and appeals, the total amount to be paid by us is uncertain. We believe that we have set aside adequate reserves for payments of the Class 8 claims as well as the priority and administrative claims and that the aggregate payout should be within and possibly below the range of likely payouts determined by the various constituencies in the bankruptcy proceedings. However, payouts in excess of the reserved amounts would have an adverse effect on our liquidity and financial condition. Because claims are still in dispute, we are unable to predict the payment amount or the period over which payments would be made.

For a discussion of the terms of the Reorganization Plan confirmed by the Bankruptcy Court on July 18, 2003, please refer to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Plan of Reorganization" in our Annual Report on Form 10-K for the period ended March 31, 2003.

No new accounting pronouncements that could affect our financial statements have been issued during the three months ended December 31, 2003 or since our previous disclosures in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended March 31, 2003.

There are significant risk factors that currently impact or may impact our business, financial condition or future operating results. Readers should carefully consider these factors before making an investment decision with respect to our common stock. These risk factors are detailed beginning on page 56 in our Annual Report on Form 10-K for the year ended March 31, 2003.

As of December 31, 2003, there were no material changes to the information previously reported under Item 7A in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003.

As required by paragraph (b) of Rule 13a-15 under the Securities Exchange Act of 1934, as of the last day of the period covered by this report, management, including our chief executive officer and

chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of that date.

Our chief executive officer and chief financial officer have concluded that significant deficiencies, including material weaknesses, continued to exist in our internal controls over financial reporting at the end of the fiscal period covered by this report. Their conclusion was based on a number of factors, including the fact that we cannot yet prepare timely financial information and, therefore, were not filing periodic reports during fiscal 2004; the difficulty in assembling all relevant contemporaneous documentation for significant transactions; significant turnover in management and our finance staff; the other factors disclosed in both our Annual Report on Form 10-K for the year ended March 31, 2003 under the caption "Changes in Internal Control Over Financial Reporting—Deficiencies in Internal Control Over Financial Reporting and our Current Report on Form 8-K filed October 15, 2004 regarding the condition of our internal controls over financial reporting under the caption "Item 8.01 Other Events." Readers should carefully review the information set forth under the caption "Changes in Internal Control Over Financial Reporting" included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003; the information set forth under the caption "Item 8.01 Other Events" included in our Current Report on Form 8-K filed October 15, 2004, and the information set forth below under "Changes in Internal Control Over Financial Reporting."

In view of the fact that the financial information presented in this report was prepared in the absence of effective internal controls over financial reporting, we devoted a significant amount of time and resources to the analysis of the financial statements contained in this report. In particular, we reviewed all significant account balances and transactions reflected in the financial statements contained in this report and otherwise analyzed the transactions underlying our financial statements to verify the accuracy of the financial statements contained in this report.

Nevertheless, there can be no assurance that either this review process or our existing disclosure controls and procedures will prevent or detect all errors and all fraud, if any, or result in accurate and reliable disclosure. A control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Additionally, judgments in decision-making can be faulty and breakdowns in internal controls can occur because of simple errors or mistakes that are not detected on a timely basis.

During the period covered by this report, our senior management continued their efforts to remedy the significant deficiencies, including material weaknesses, in our internal controls over financial reporting. We worked with a cash management firm to assist us in monitoring our cash position and controlling our expenditures. We strengthened our revenue recognition policy and procedures in an attempt to ensure proper revenue recognition and we implemented a revenue recognition educational program for our personnel.

We are including information in this report about material changes to our internal controls over financial reporting for the period subsequent to September 8, 2004, which was the filing date of our Quarterly Report on Form 10-Q for the 2004 fiscal first quarter ended June 30, 2003, in order to provide readers with a current understanding of our internal control over financial reporting. Readers should carefully review the discussion of the deficiencies and material changes in our internal control over financial

reporting for the period prior to April 30, 2004 set forth under the caption "Changes in Internal Control Over Financial Reporting" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003; and set forth under the caption "Item 8.01 Other Events" in our Current Report on Form 8-K filed October 15, 2004 and in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2003 and September 30, 2003.

As previously disclosed, we have undertaken a project specifically focusing on the Company's internal controls and procedures, including compliance with the requirements of the Sarbanes-Oxley Act of 2002. RSM McGladrey, Inc., a global accounting firm, is assisting us with this project to implement effective accounting policies and procedures. We have categorized the project into six phases: risk assessment, documentation, recommendations, remediation, internal testing and external testing.

Risk Assessment. In March 2004, RSM McGladrey assisted us in completing a detailed risk assessment of internal controls and procedures in our North American and EMEA operations under the evaluation guidelines of the 1992 Committee of Sponsoring Organizations of the Treadway Commission.

Documentation. We have developed a worldwide, formally documented revenue recognition policy, which our chief financial officer approved. As of November 1, 2004, our finance staff, with assistance from RSM McGladrey, had substantially completed the documentation of other policies, processes and controls that currently exist for our North American operations and the documentation of policies, processes and controls that currently exist for our EMEA operations was approximately 90% complete. We have concluded that our AP and Latin American operations are immaterial for purposes of this portion of the project.

Recommendations. RSM McGladrey has substantially completed the recommendations phase for North American operations, and is awaiting final input from the EMEA operations to complete recommendations for those operations. The remediation required by the recommendations for the North America operations and the EMEA operations is extensive and will require significant work and time commitments.

Remediation. Progress on remediation has been hindered to date by insufficient resources and significant turnover in our finance organization. In August 2004, we hired a new executive vice president, Kenneth Saunders, to direct initiatives aimed at improving our financial operations and infrastructure. Mr. Saunders succeeded David Sugishita, who left Peregrine in July 2004. Mr. Saunders assumed responsibilities as chief financial officer on November 1, 2004, succeeding Ken Sexton. In August 2004 we also hired a new vice president of finance, corporate controller and chief accounting officer, Russell Clark, and a new internal auditor, Julie Bahadori. Ms. Bahadori reports directly to the Audit Committee of our Board of Directors and replaces our former internal auditor, who left the company in June 2004. Between the time our former internal auditor left and Ms. Bahadori joined us, the internal audit functions were handled on an interim basis by our compliance officer, John Skousen, who reports directly to our Corporate Governance and Nominating Committee for his compliance responsibilities and who reported to the Audit Committee for internal audit responsibilities. RSM McGladrey assists us with our internal audit functions and, for these internal audit functions, reports directly to our Audit Committee. Additionally, we have hired two managers of business processes and controls who are directly responsible for managing the project. With our new personnel, we expect to progress more effectively on the remediation phase of the project.

Internal and External Testing. After the remediation phase is complete, certain policies, processes, procedures and controls must operate effectively for a period of time and will need to be tested by management to confirm operating effectiveness before management will be in a position to conclude that our internal controls over financial reporting are effective.

Given the number of specific recommendations and the length of time required for remediation, as well as for internal and external testing, it is unlikely that we will be able to conclude that our internal controls over financial reporting are effective as specified by the Sarbanes-Oxley Act with respect to our fiscal year ending March 31, 2005, and even if we are able to reach such a conclusion, we will not have done so in time to allow our independent auditors an opportunity to test our internal controls to determine whether they can attest that our internal controls are effective as specified by the Sarbanes-Oxley Act.

In June 2003, we entered into an agreement to settle a civil action brought against us by the SEC. Because we are not current in our reporting obligations to the SEC, we are not in compliance with the provision of the settlement requiring that we not violate certain provisions of the federal securities laws. The SEC and the Department of Justice (DOJ) are continuing their investigations into a number of individuals, including certain former employees and directors and possibly current employees. The DOJ's investigation of Peregrine remains open. While we remain in discussions with the SEC, and are fully cooperating with the SEC and the DOJ in their investigations, it is possible that the SEC could bring a further civil action against Peregrine or actions against current employees, or that the DOJ could bring criminal charges that could have an adverse effect on our reputation among existing and potential customers, on our revenues, and on employee morale.

Approximately 1,200 claims were filed against us based on events that took place prior to our bankruptcy filing. The original aggregate face amount of the these claims plus the amounts we scheduled for payment without a claim asserted against us totaled approximately $384 million. After eliminating duplicate claims, claims filed in error, or claims that were invalid for some other reason, we were left with approximately 500 general unsecured claims totaling approximately $251 million. For more information regarding these unsecured claims, see "Management's Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources—Bankruptcy Claims" beginning on page 47 of this report.

One of the more significant unsecured claims was asserted by Microsoft Corporation and its MSLI, GP affiliate (collectively, Microsoft), for alleged unauthorized and unlicensed use of their software. Microsoft filed (i) a proof of claim in December 2002 seeking at least $3 million related to our use of Microsoft products in the period prior to the bankruptcy law filing, (ii) an adversary complaint in January 2003 seeking monetary damages in an unspecified amount as well as injunctive relief and, (iii) an administrative claim in September 2003 seeking monetary damages in an unspecified amount related to the period after our bankruptcy law filing. We agreed with Microsoft that all of its claims and contentions should be decided in the context of the adversary complaint filed in the Bankruptcy Court. In March 2003, we filed an answer to Microsoft's adversary complaint denying the material allegations and raising affirmative defenses. Between October 2003 and June 2004, we engaged in settlement negotiations with Microsoft. In November 2003 we entered into a new enterprise license agreement with Microsoft. In June 2004 we entered into a settlement agreement with Microsoft that resolved the adversary complaint pursuant to which Microsoft dismissed the adversary complaint with prejudice and we granted Microsoft an allowed administrative claim and Class 8 claim under the Reorganization Plan. All payments required under the settlement agreement had previously been reserved as liabilities subject to compromise in the consolidated balance sheet.

To assist the Securities and Exchange Commission (SEC) in its investigation, in August 2002 we provided to the SEC, pursuant to a confidentiality agreement, an extensive report and supporting materials containing the preliminary findings and conclusions of our outside counsel, Latham & Watkins, regarding its investigation into, among other things, our accounting irregularities (the Latham Report). After our bankruptcy filing in September 2002, the Official Committee of Unsecured Creditors filed a motion to appoint a trustee and, as an exhibit to their motion, filed a copy of the Latham Report under seal. Thereafter, a party in interest, Copley Press, Inc., which owns the San

Diego Union Tribune, petitioned the Bankruptcy Court to unseal the pleadings and other documents filed under seal, including the Latham Report. We filed a motion to have certain filings unsealed in whole or in part and to have redacted certain portions of some unsealed filings to protect third parties' privacy rights, to protect confidential information, and for other valid reasons; however, we opposed the unsealing of the Latham Report. Among other things, we argued that the Latham Report was intended as a preliminary report and thus as a starting point for the government investigations, and that it contained confidential commercial information. At the hearing on Copley's motion, the Bankruptcy Court held that the Latham Report had been improperly filed, and struck it from the record. Copley appealed the Bankruptcy Court's decision to the United States District Court for the district of Delaware. On July 12, 2004, the District Court issued a decision reversing the Bankruptcy Court's decision and ordering the Bankruptcy Court to have the Latham Report returned to the record, under seal, and engage in an access analysis to determine what portions of the Latham Report, if any, should be unsealed. We have filed a Notice of Appeal of the District Court's decision to the United States Court of Appeals for the Third Circuit. We also have filed a motion with the Third Circuit seeking to stay the District Court's July 12, 2004 order pending a resolution of our appeal.

The Latham Report also has been filed in court, under provisional seal, by one of our former directors, John J. Moores, in connection with two lawsuits pending against him and others (not including Peregrine) in San Diego, California. One action was filed as a class action on behalf of former Peregrine shareholders under the federal securities laws and is currently pending in the United States District Court for the Southern District of California (the Federal Securities Action). The other action was filed by the Peregrine Litigation Trustee as successor to certain rights and causes of action of Peregrine under the Reorganization Plan, and is pending in the Superior Court of the State of California for the County of San Diego (the Litigation Trustee Action). Mr. Moores is a defendant in both actions and has filed the Latham Report, under temporary seal, in both actions in connection with motions to dismiss the complaints against him. We have filed motions in both cases to have the Latham Report stricken from the record or, as an alternative, to have the Latham Report, or portions of it, permanently sealed. Our motion in the Litigation Trustee Action was scheduled to be heard on September 17, 2004; however, in August 2004, one of the parties filed a peremptory challenge to the state court judge and, at this time, all hearing dates have been vacated pending the setting of new dates by the judge to be assigned. Our motion in the Federal Securities Action is scheduled to be heard on March 4, 2005.

In May 2004, Frederic Luddy, our former chief technology officer, filed a complaint against us in the Court of Chancery for the State of Delaware seeking advancement of certain legal fees and expenses. Mr. Luddy is a defendant in the Litigation Trustee Action and the Federal Securities Action, which seek to recover monetary damages from Mr. Luddy based on events preceding our bankruptcy filings. Mr. Luddy's complaint alleged that Peregrine is required to advance or reimburse Mr. Luddy monies for his defense expenses in connection with the Federal Securities Action and the Litigation Trustee Action. His complaint also alleges that, pursuant to a paragraph of the Bankruptcy Court's order confirming our Reorganization Plan, his indemnity claim can be pursued in state court. In June 2004, we removed Mr. Luddy's complaint from Delaware state court to the Bankruptcy Court. We also filed a motion in Bankruptcy Court to dismiss the complaint on the basis, among other things, that Mr. Luddy failed to file any proof of claim before the Bankruptcy Court and that his claim is barred by the discharge injunction entered in connection with the Bankruptcy Court's approval of our Reorganization Plan. On August 9, 2004, Mr. Luddy filed a motion in Bankruptcy Court seeking to voluntarily dismiss his complaint, without prejudice, and on the same day filed a new complaint in the Delaware Court of Chancery, seeking the same relief as his prior complaint. We have removed Mr. Luddy's new complaint to the Bankruptcy Court and we have filed a motion to dismiss the complaint. We believe Mr. Luddy's claims are without merit and we intend to vigorously defend against

them. While the ultimate outcome is not currently determinable, in the opinion of management the matter will not materially affect our financial position, results of operations or liquidity.

We are also involved in legal proceedings, claims, and litigation arising from the ordinary course of business. Although the ultimate results of these legal proceedings, claims and litigation are not currently determinable, in the opinion of management these matters will not materially affect our financial position, results of operations or liquidity.

(b) Peregrine Systems, Inc. filed or furnished the following Current Reports on Form 8-K during the quarter ended December 31, 2003:

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

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

PART I—FINANCIAL INFORMATION
	ITEM 1.	UNAUDITED FINANCIAL STATEMENTS	3
	ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	48
	ITEM 4.	CONTROLS AND PROCEDURES	48
PART II—OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS	52
	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	54
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	54
	ITEM 5.	OTHER INFORMATION	54
	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	54
SIGNATURES			55
CERTIFICATIONS

			Successor Company December 31, 2003			Predecessor Company March 31, 2003
			(unaudited)
ASSETS
Current Assets:
	Cash and cash equivalents		$	115,431		$	234,314
	Cash—restricted			3,791			29,942
	Accounts receivable, net of allowance for doubtful accounts			40,102			41,719
	Assets of discontinued operations			—			14,171
	Deferred taxes			9,261			—
	Other current assets			12,339			6,849

		Total current assets		180,924			326,995
	Property and equipment, net			7,388			11,332
	Identifiable intangible assets, net			114,644			—
	Reorganization value in excess of amounts allocable to identified assets			184,129			—
	Investments and other assets			5,642			10,489

		Total assets	$	492,727		$	348,816

LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
	Accounts payable		$	12,547		$	5,481
	Accrued expenses			68,986			74,441
	Liabilities of discontinued operations			—			13,378
	Current portion of deferred revenue			56,386			72,131
	Current portion of notes payable			22,999			—

		Total current liabilities		160,918			165,431

Non-current Liabilities:
	Deferred revenue, net of current portion			7,440			19,665
	Notes payable, net of current portion			54,439			—
	Deferred taxes			10,541			—

		Total non-current liabilities		72,420			19,665

	Total liabilities not subject to compromise			233,338			185,096

Liabilities subject to compromise				—			427,719

Commitment and Contingencies—Notes 10 and 11
Stockholders' Equity (Deficit)
	Preferred stock, 5 million shares authorized, no shares issued or outstanding at December 31, 2003			—			—
	Common stock, 100 million shares authorized, 15 million shares issued and outstanding at December 31, 2003			2			197
	Additional paid-in capital			270,000			3,874,166
	Subscriptions receivable			(64	)		(70	)
	Accumulated deficit			(11,818	)		(4,119,304	)
	Unearned portion of deferred compensation			—			(551	)
	Treasury stock, at cost			—			(10,697	)
	Accumulated other comprehensive income (loss)			1,269			(7,740	)

		Total stockholders' equity (deficit)		259,389			(263,999	)

		Total liabilities and stockholders' equity (deficit)	$	492,727		$	348,816

			Successor Company Three Months Ended December 31, 2003			Predecessor Company Three Months Ended December 31, 2002
Revenues:
	Licenses		$	17,229		$	23,209
	Maintenance			24,061			25,742
	Consulting and training			3,423			10,084

		Total revenues		44,713			59,035

Costs and Expenses:
	Cost of licenses			596			922
	Cost of maintenance			4,185			8,763
	Cost of consulting and training			3,718			11,011
	Sales and marketing			13,519			26,934
	Research and development			7,077			14,777
	General and administrative			11,736			27,485
	Amortization of intangible assets			5,754			—
	Restructuring, impairments and other			—			2,271

		Total operating costs and expenses		46,585			92,163

Loss from continuing operations before reorganization, interest, and income taxes				(1,872	)		(33,128	)
	Reorganization items, net			(1,857	)		(9,367	)
	Interest expense, net			(1,027	)		(6,594	)

Loss from continuing operations before income taxes				(4,756	)		(49,089	)
	Income tax expense on continuing operations			(1,667	)		(1,815	)

	Loss from continuing operations			(6,423	)		(50,904	)
	Income from discontinued operations, net of income taxes			—			257,962

	Net income (loss)		$	(6,423	)	$	207,058

Net income (loss) per share, basic:
	Loss per share from continuing operations		$	(0.43	)	$	(0.26	)
	Income per share from discontinued operations			—			1.32

	Net income (loss) per share		$	(0.43	)	$	1.06

	Basic shares used in computation			15,000			195,333

Net income (loss) per share, diluted:
	Loss per share from continuing operations		$	(0.43	)	$	(0.26	)
	Income per share from discontinued operations			—			1.32

	Net income (loss) per share		$	(0.43	)	$	1.06

	Diluted shares used in computation			15,000			195,333

						Predecessor Company
			Successor Company 166 Days Ended December 31, 2003			Predecessor Company
			Successor Company 166 Days Ended December 31, 2003			109 Days Ended July 18, 2003			Nine Months Ended December 31, 2002
Revenues:
	Licenses		$	31,281		$	13,525		$	57,195
	Maintenance			41,853			29,176			75,032
	Consulting and training			6,799			5,954			36,328

		Total revenues		79,933			48,655			168,555

Costs and Expenses:
	Cost of licenses			906			706			5,022
	Cost of maintenance			7,626			5,152			21,276
	Cost of consulting and training			7,089			5,289			32,613
	Sales and marketing			22,889			14,588			90,523
	Research and development			12,994			8,908			44,327
	General and administrative			19,637			14,951			69,631
	Amortization of intangible assets			10,456			—			—
	Restructuring, impairments and other			—			(1,239	)		72,190

		Total operating costs and expenses		81,597			48,355			335,582

Income (loss) from continuing operations before reorganization, interest, and income taxes				(1,664	)		300			(167,027	)
	Reorganization items, net			(5,663	)		378,821			4,860
	Interest expense, net			(2,164	)		(4,088	)		(29,964	)

Income (loss) from continuing operations before income taxes				(9,491	)		375,033			(192,131	)
	Income tax expense on continuing operations			(2,327	)		(1,096	)		(7,122	)

Income (loss) from continuing operations				(11,818	)		373,937			(199,253	)
	Income from discontinued operations, net of income taxes			—			252			256,675

Net income (loss)			$	(11,818	)	$	374,189		$	57,422

Net income (loss) per share, basic:
	Income (loss) per share from continuing operations		$	(0.79	)	$	1.91		$	(1.02	)
	Income per share from discontinued operations			—			—			1.31

	Net income (loss) per share		$	(0.79	)	$	1.91		$	0.29

	Basic shares used in computation			15,000			195,654			195,183

Net income (loss) per share, diluted:
	Income (loss) per share from continuing operations		$	(0.79	)	$	1.82		$	(1.02	)
	Income per share from discontinued operations			—			—			1.31

	Net income (loss) per share		$	(0.79	)	$	1.82		$	0.29

	Diluted shares used in computation			15,000			208,302			195,183

	Predecessor Company Three Months Ended December 31, 2002
Professional fees	$	(5,065	)
Lease abandonment expense		(4,302	)

	$	(9,367	)

		Successor Company Three Months Ended December 31, 2003		Predecessor Company Three Months Ended December 31, 2002		Change
		Successor Company Three Months Ended December 31, 2003		Predecessor Company Three Months Ended December 31, 2002		Amount			Percent
*Total revenue*
	Core	$	44,713	$	57,070	$	(12,357	)	(22	)%
	Non-core		—		1,965		(1,965	)	(100	)%

	Total	$	44,713	$	59,035	$	(14,322	)	(24	)%

						Pro Forma Combined Nine Months Ended December 31, 2003
		Successor Company 166 Days Ended December 31, 2003		Predecessor Company 109 Days Ended July 18, 2003				Predecessor Company Nine Months Ended December 31, 2002		Change
		Successor Company 166 Days Ended December 31, 2003		Predecessor Company 109 Days Ended July 18, 2003				Predecessor Company Nine Months Ended December 31, 2002		Amount			Percent
*Total Revenue*
	Core	$	79,933	$	48,655	$	128,588	$	156,011	$	(27,423	)	(18	)%
	Non-core		—		—		—		12,544		(12,544	)	(100	)%

	Total	$	79,933	$	48,655	$	128,588	$	168,555	$	(39,967	)	(24	)%

		Successor Company Three Months Ended December 31, 2003
				Predecessor Company Three Months Ended December 31, 2002
						Change
						Amount			Percent
*Licenses*
	Core, new	$	17,229	$	17,714	$	(485	)	(3	)%
	Core, pre-fiscal 2003 transactions		—		4,950		(4,950	)	(100	)%

	Total core		17,229		22,664		(5,435	)	(24	)%
	Non-core		—		545		(545	)	(100	)%

Total		$	17,229	$	23,209	$	(5,980	)	(26	)%

										Change
		Successor Company 166 Days Ended December 31, 2003		Predecessor Company 109 Days Ended July 18, 2003		Pro Forma Combined Nine Months Ended December 31, 2003		Predecessor Company Nine Months Ended December 31, 2002		Change
		Successor Company 166 Days Ended December 31, 2003		Predecessor Company 109 Days Ended July 18, 2003		Pro Forma Combined Nine Months Ended December 31, 2003		Predecessor Company Nine Months Ended December 31, 2002		Amount			Percent
*Maintenance*
	Core	$	41,853	$	29,176	$	71,029	$	69,825	$	1,204		2	%
	Non-core		—		—		—		5,207		(5,207	)	(100	)%

Total		$	41,853	$	29,176	$	71,029	$	75,032	$	(4,003	)	(5	)%

						Change
		Successor Company Three Months Ended December 31, 2003		Predecessor Company Three Months Ended December 31, 2002		Change
		Successor Company Three Months Ended December 31, 2003		Predecessor Company Three Months Ended December 31, 2002		Amount			Percent
*Consulting and training*
	Core	$	3,423	$	9,597	$	(6,174	)	(64	)%
	Non-core		—		487		(487	)	(100	)%

Total		$	3,423	$	10,084	$	(6,661	)	(66	)%

	Predecessor Company Three Months Ended December 31, 2002
Professional fees	$	(5,065	)
Lease abandonment charges		(4,302	)

	$	(9,367	)

Date: November 4, 2004	PEREGRINE SYSTEMS, INC (Registrant)

	By:	/s/ KENNETH J. SAUNDERS Executive Vice President & Chief Financial Officer (Principal Financial Officer)
	By:	/s/ RUSSELL C. CLARK Vice President Finance, Corporate Controller & Chief Accounting Officer (Principal Accounting Officer)