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

FORM 10-Q

Commission File Number 000-22209

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)

(858) 481-5000
(Registrant's telephone number, including area 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 February 28, 2005 was 15,074,216.

PEREGRINE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

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PART I—FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

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.

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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.

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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.

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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.

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PEREGRINE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     Company Operations

Business

        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 lines 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 (SCE, comprising 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.

Bankruptcy Proceedings and Restructuring Activities

        On September 22, 2002, Peregrine and its wholly-owned subsidiary, Peregrine Remedy, Inc. (Remedy), filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code. The plan of reorganization of the Company (the Reorganization Plan) was confirmed by the U.S. Bankruptcy Court for the District of Delaware (the Bankruptcy Court) on July 18, 2003 and it became effective on August 7, 2003. From September 22, 2002 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 American Institute of Certified Public Accountants Statement of Position No. 90-7, "Financial Reporting of Entities in Reorganization under the Bankruptcy Code" (SOP 90-7), for the reporting periods subsequent to September 22, 2002 through July 18, 2003. 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.

        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, 2004, filed with the Securities and Exchange Commission (SEC) on December 20, 2004.

Fresh-Start Reporting

        In accordance with SOP 90-7, the Company adopted fresh-start reporting as of July 18, 2003 as the Company's emergence from Chapter 11 bankruptcy proceedings resulted in a new reporting basis.

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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 of the new entity was considered to be the close of business on July 18, 2003 for financial reporting purposes. The fiscal periods prior to and including July 18, 2003 pertain to what is designated the "Predecessor Company," while the fiscal periods subsequent to July 18, 2003 pertain to what is designated the "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 Successor Company after July 18, 2003 are not comparable to the Predecessor Company's financial statements for prior periods and are separated by a black line to highlight this lack of comparability.

2.     Summary of Significant Accounting Policies

Basis of Presentation

        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.

        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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the period ended March 31, 2004. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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 revenue 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. These estimates and assumptions include, but are not limited to, assessing the following: the recoverability of accounts receivable, goodwill and other intangible assets, software development costs and deferred tax assets; the determination of the worldwide income tax provision and associated liabilities; and the determination of whether fees invoiced for license transactions are fixed or determinable and whether collection of the associated receivable is probable.

Revenue Recognition

        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 SEC. 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. Maintenance

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revenue consists of fees for technical support and software updates. Consulting and training revenue consists of fees earned for professional services provided to customers primarily on a time and material basis.

        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 and maintenance 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 services sold through distributors is recognized ratably over the contractual period with the end user.

Marketable Securities

        Marketable securities are accounted for in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Management determines the appropriate classification of marketable debt and equity securities at the time of purchase, and reevaluates this designation at each balance sheet date. The cost of investments sold is based on the specific identification method. For individual securities classified as available-for-sale the Company determines whether a decline in fair value below the amortized cost basis is other than

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temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings. The new cost basis is not changed for subsequent recoveries in fair value. Subsequent increases in the fair value of available-for-sale securities are included in other comprehensive income; subsequent decreases in fair value, if not an other-than-temporary impairment, are also included in other comprehensive income.

Computation of Net Income (Loss) Per Share

        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 (loss) 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 under the treasury stock method or the if-converted method.

        For the three and six months ended September 30, 2004, the Successor Company's diluted net loss per share excludes the effect of approximately 0.4 million shares and 0.3 million shares, respectively, issuable under employee stock options, because the options are anti-dilutive under the treasury stock method, as their exercise prices were greater than the average market price of the Company's common stock for those periods. In addition, the Successor Company's diluted net loss per share for the three and six months ended September 30, 2004 excludes the effects of approximately 0.1 million and 0.1 million potentially dilutive shares, respectively, issuable under employee stock options, as such options would be anti-dilutive given the Company's net loss for such periods.

        For the 74 days ended September 30, 2003, the Successor Company's diluted net loss per share excludes the effect of approximately 0.3 million shares issuable under employee stock options, because the options are anti-dilutive under the treasury stock method, as their exercise prices were greater than the average market price of the Company's common stock for the period. In addition, the Successor Company's diluted net loss per share for the 74 days ended September 30, 2003 excludes the effects of approximately 0.1 million potentially dilutive shares, issuable under employee stock options, as such options would be anti-dilutive given the Company's net loss for such period.

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

        For the 18 days ended July 18, 2003 the Predecessor Company's diluted income per share excludes the effect of approximately 0.5 million shares, issuable under employee stock options, as inclusion would be anti-dilutive under the treasury stock method, as their exercise prices were greater than the average market price of the Company's common stock for the period. For the 109 days ended July 18, 2003, the Predecessor Company's diluted income per share from continuing operations and net income exclude the effect of approximately 12.4 million shares, issuable under employee stock options, as inclusion would be anti-dilutive under the treasury stock method, as their exercise prices were greater than the average market price of the Company's common stock for the period.

Recapitalization

        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 Predecessor Company's common stock received 4,016,250 new shares, or one share of the Successor Company's common stock for every 48.7548 shares of the Predecessor Company's common stock held. Historical shares and per-share amounts of the Predecessor Company have not been restated to reflect this recapitalization because the Successor Company is considered a new reporting entity.

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Stock-Based Compensation

        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," (APB 25), 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 Financial 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 (loss) income and net (loss) income 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). Assumptions used to value awards granted during the three and six months ended September 30, 2004 do not differ materially from those used during fiscal 2004.

Three Months

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Six Months

Comprehensive (Loss) Income

        Other comprehensive (loss) income 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 only item giving rise to accumulated other comprehensive (loss) income for the periods presented. Comprehensive (loss) income consists of the following (in thousands):

Three Months

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Six Months

        Foreign currency translation for the quarter ended September 30, 2004 of $(0.7) million includes increases in goodwill and identifiable intangibles of $0.3 million and $0.2 million, respectively, relating to the translation of intangible assets whose functional currency is other than the U.S. dollar. Foreign currency translation-current period for the six months ended September 30, 2004 of $(1.6) million includes increases in goodwill and identifiable intangibles of $0.1 million and $0.1 million, respectively, relating to the translation of intangible assets whose functional currency is other than the U.S. dollar.

        During the preparation of the financial statements for the period ended June 30, 2004, the Company noted that goodwill and identifiable intangibles attributable to foreign entities but recorded at the parent company level were not remeasured in the functional currencies of the entities to which they relate for periods subsequent to the Company's adoption of fresh-start reporting (July 18, 2003). Comprehensive loss for the six months ended September 30, 2004 includes $1.9 million which represents the cumulative effect of changes in foreign currency exchange rates on remeasuring goodwill and identifiable intangible assets from the functional currencies of the entities to which they relate to the reporting currency of the U.S. dollar from July 18, 2003 through March 31, 2004. For that period goodwill and intangible assets increased by $1.1 million and $0.8 million, respectively. The Company believes the effect of the adjustment to goodwill and identifiable intangible assets, stockholders' equity and comprehensive income (loss) as of and for the individual and year-to-date periods from July 18, 2003 through September 30, 2004 is not material. As a result of this adjustment, the accompanying Condensed Consolidated Balance Sheet as of September 30, 2004 appropriately reflects the translation effect resulting from the remeasurement in the respective functional currencies to the reporting currency of the U.S. dollar.

Recent Accounting Pronouncements

        On December 16, 2004 the FASB issued Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," (SFAS 123R) requiring that the compensation cost relating to share-based payment transactions be measured and recognized in the financial statements using the fair value of the awards. This statement eliminates the alternative to use APB 25's intrinsic value method of accounting that was provided in SFAS 123. Under APB 25, issuing stock options to employees generally resulted in no recognition of compensation cost. SFAS 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance based awards and employee share purchase plans. SFAS 123R replaces SFAS 123 and supersedes APB 25. SFAS 123R is effective as of the first interim or annual reporting period that begins after June 15, 2005 and provides for alternative transition methods, including prospective and retrospective applications. The Company is required to adopt SFAS 123R on July 1, 2005. The Company is currently assessing the impact of

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SFAS 123R on its compensation strategies and financial statements and determining which transition alternative it will elect. The Company believes the adoption of SFAS 123R may have a material effect on its operating results if current compensation strategies are continued.

Reclassifications and Revisions

        Certain amounts previously reported have been reclassified to conform to the current presentation, including the reporting of foreign currency transaction gains (losses) expense separately from general and administrative expense.

3.     Marketable Securities

        The following is a summary of marketable securities at September 30, 2004. The Company held no such securities at March 31, 2004 (amounts in thousands).

        Other debt securities consist of auction rate securities which mature in December 2043. These securities have auction dates which are typically every thirty days resulting in a fair value which approximates carrying value. During the three and six months ended September 30, 2004 proceeds from sales of available-for-sale securities amounted to $12.0 million. There were no realized gains or losses as a result of those sales.

4.     Discontinued Operations

        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 $355.0 million, subject to adjustments provided for in the Sale Agreement. An indemnification holdback of $10.0 million of the sales proceeds was placed into escrow for BMC and released to the Company in November 2003.

        Results of discontinued operations for the 109 days ended July 18, 2003 consisted of revenues of $0.3 million and operating income of $0.3 million related to the collection of a Remedy related trade receivable that had extended payment terms and was not transferred as part of the sale.

5.     Restructuring and Other

        For the Predecessor Company's 109 days ended July 18, 2003, restructuring 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 and established an accrual for anticipated future charges for the plan. At March 31, 2004, the remaining accrual was $1.1 million, which related primarily to foreign lease settlements. In the six-month period ended September 30, 2004, the Company paid or otherwise settled approximately $0.6 million in lease termination liabilities, leaving a balance of $0.5 million in the accrual at September 30, 2004.

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6.     Reorganization Items

        As described in Note 1, on September 22, 2002, the Company and its Remedy 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 through July 18, 2003. 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 primarily of professional fees directly related to the bankruptcy filing net of $0.1 million of gains on settlements with creditors. Reorganization items, net for the Predecessor Company consist of the following (in thousands):

Three Months

Six Months

        For the 18 and 109 days ended July 18, 2003, the Predecessor Company recorded a net reorganization gain of $386.1 million and $378.8 million, respectively. 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 proceedings. These gains were partially offset by costs directly related to the implementation of the Company's Reorganization Plan.

7.     Segment Information

        Beginning in the second quarter of fiscal 2005 the Company changed its basis of segmentation from a single reportable segment to two reportable segments as a result of changes in the manner in which management evaluates the performance of the business. This change was made possible by

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improvements in internal financial reporting. The two reportable segments align with the internal management of worldwide business operations:

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Americas.    These include the Company's U.S. operations as well as its operations in Canada, Mexico and South America.



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EMEA/AP.    These include the Company's operations in Europe, the Middle East, Africa and the Asia Pacific Region.

        The Company's Chief Executive Officer evaluates segment financial performance based on segment revenues only. The Company's Chief Executive Officer does not evaluate the financial performance of each segment based on its respective operating income, assets or capital expenditures.

        The following table summarizes segment revenue for the three months ended September 30, 2004, the 74 days ended September 30, 2003 and the 18 days ended July 18, 2003 (dollars in thousands):

        The following table summarizes segment revenue for the six months ended September 30, 2004, the 74 days ended September 30, 2003 and the 109 days ended July 18, 2003 (dollars in thousands):

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8.     Income Taxes

        The liability method is used in accounting for income taxes. 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 Successor Company's three and six months ended September 30, 2004 were approximately (42.3)% and (14.4)%, respectively. The Company's income tax expense relates primarily to foreign taxes paid for which no offsetting tax benefits are available and interest accrued on certain tax contingencies. 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 Successor Company are realized in future periods, the benefit will be recorded as a reduction of tax expense.

        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 current tax liability together with assessing timing differences resulting from differing treatments of items for tax and financial reporting 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 substantially all of its net deferred tax asset balances as of September 30, 2004, and March 31, 2004 because of uncertainties related to utilization of deferred tax assets, primarily related to net operating loss carryforwards, before they expire. At such time, if any, as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. Reductions for deferred tax assets generated prior to the adoption of fresh-start reporting will be recorded as reductions of goodwill.

        The Company is currently reviewing the potential impact of the one-time favorable foreign dividend provisions enacted on October 22, 2004 as part of the American Jobs Creation Act of 2004 (the "Jobs Act"). The Jobs Act creates a temporary incentive for U.S. corporations to repatriate earnings of foreign subsidiaries by providing an elective 85% dividends received deduction for certain dividends paid during a specified period; for the Company, this would be applicable to either its fiscal year 2005 or its fiscal year 2006. The deduction is subject to numerous limitations and requirements, including the adoption of a specific domestic reinvestment plan for the repatriated funds. The Company has not yet determined whether it will repatriate future earnings of some of its foreign subsidiaries under the Jobs Act but will decide within the timeframe the incentive is available. Unremitted earnings on which no deferred taxes have been provided amounted to approximately $44.5 million at March 31, 2004.

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

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        Due to the adoption of fresh-start reporting, any adjustments to the Company's tax assets or liabilities that existed prior to the adoption of fresh-start reporting are recorded as adjustments to goodwill. For the three and six months ended September 30, 2004 the Company recorded net reductions to goodwill totaling approximately $0.4 million and $0.6 million, respectively, for adjustments to the Company's tax assets and liabilities that existed prior to the adoption of fresh-start reporting. These adjustments related mainly to the release of certain tax reserves as management has determined the Company no longer has exposure for the associated matters.

9.     Contingent Liabilities

Bankruptcy Claims

        Approximately 1,200 claims were filed against the Company based on events that took place prior to its bankruptcy-law filing. Through February 28, 2005, the Company has paid, settled or otherwise disposed of general unsecured claims (Class 8) asserted against it with an original aggregate face amount of approximately $380.6 million. To resolve these claims the Company has paid or agreed to pay over time approximately $45.0 million in cash. As of February 28, 2005, there were general unsecured claims asserted in the original aggregate face amount of approximately $3.5 million remaining to be resolved. There were also approximately $1.7 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 the Company is uncertain. The Company believes that it has set aside adequate reserves for payments of the Class 8 claims as well as the remaining priority and administrative claims and that the aggregate Class 8 claims payment should be within and possibly below the range of payments projected at between $49.0 million and $65.0 million by the various constituencies in the bankruptcy proceedings. Payments exceeding the reserved amounts could have an adverse effect on the Company's financial position, results of operations or liquidity. Because claims remain in dispute, the Company is unable to predict the 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 $3.0 million related to the Company's use of Microsoft products in the period prior to the bankruptcy 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 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 have been accrued and reported on the consolidated balance sheet.

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Securities and Exchange Commission Enforcement Actions and Federal Government Investigations

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

•

be enjoined from violating federal securities laws;



•

comply on an accelerated basis with the rules regarding management's reporting on internal controls in accordance with the Sarbanes-Oxley Act of 2002;



•

retain an internal auditor to assist with the accurate reporting of the Company's financial results;



•

establish a corporate compliance program and retain a compliance officer to perform an ongoing review of the effectiveness of the Company's governance systems;



•

commence a training program for the Company's officers and employees to prevent violations of federal securities laws; and



•

make a public statement that discloses the condition of the Company's internal control structure and its procedures for financial reporting on the effective date of its Reorganization Plan.

        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 federal securities laws. While the Company remains in discussions with the SEC, it can give no assurance that a further enforcement action will not be brought against it by the SEC. Responding to any such enforcement action could be expensive and time-consuming for management and could adversely affect the Company's reputation and ability to generate sales.

        A number of the Company's former employees, including its former chief financial officer, treasurer, assistant treasurer and two former sales executives, have pleaded guilty to various felony charges in connection with Peregrine's past accounting irregularities and are awaiting sentencing. A number of other former employees, including Peregrine's former chief executive officer and chairman, chief operating officer, two executive vice presidents of worldwide sales, the vice president of finance and chief accounting officer and other sales and finance executives, have been charged with various felonies in connection with the Company's accounting irregularities and are awaiting trial. An Arthur Andersen partner who formerly was the Company's lead auditor also was indicted in connection with these events. The criminal charges generally relate to the manipulation of the Company's apparent financial condition, misleading investors, hindering the government's investigation or conspiracy. In most of these cases, the SEC filed a civil action against the individuals alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules promulgated thereunder.

        The Department of Justice and the SEC are continuing their investigations into a number of individuals formerly associated with Peregrine. While the Company is fully cooperating with the SEC and the DOJ in their investigations and the Company is not aware that Peregrine or any of its current employees is a subject or target of investigation, it is possible that the SEC could bring further civil actions against the Company or that the DOJ could bring criminal charges against the Company. Any such actions or charges could adversely affect the Company's reputation among existing and potential customers and adversely affect the Company's revenue, stock price and employee morale.

        On July 5, 2002, the Company received a letter from the Committee on Energy and Commerce of the U.S. House of Representatives with a subpoena for documents pursuant to Rules X and XI of the U.S. House of Representatives concerning the Company's accounting irregularities. The Company provided the Committee on Energy and Commerce the documents it subpoenaed. The Company is not aware of any other activities by the Committee relating to it.

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Luddy v. Peregrine

        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 suit filed on behalf of former Peregrine stockholders under the federal securities laws, pending in the U.S. 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 him 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 in his prior complaint. The Company removed Mr. Luddy's new complaint to the Bankruptcy Court and filed a new motion to dismiss his complaint. Mr. Luddy, in turn, filed a motion to remand the case to state court. On November 10, 2004, the Bankruptcy Court denied Mr. Luddy's motion for remand and found that it had jurisdiction to consider the complaint. Also on November 10, 2004, the Bankruptcy Court granted in part and denied in part the Company's motion to dismiss, without prejudice to the Company's right to renew the motion later, after discovery and formal fact finding. On February 23, 2005, Mr. Luddy filed an amended complaint, which the Company answered on March 15, 2005. Discovery is scheduled to be completed by May 2005, but no trial date has been set. Peregrine believes Mr. Luddy's claims are without merit and intends to vigorously defend against them. While the 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.

Other Litigation

        The Company is 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 the Company's financial position, results of operations or liquidity.

10.   Subsequent Events

Sale of Investment

        In January 2005 the Company received a $4.2 million initial payment in connection with the sale of one of its cost-method investments. The Company was carrying this investment at $3.1 million as of September 30, 2004 and March 31, 2004. The Company will recognize a $1.1 million gain on this sale in the fiscal 2005 fourth quarter. In addition to the $4.2 million initial payment received, the Company has rights to receive up to $0.5 million of additional proceeds from the sale of this investment upon final resolution of purchase contingencies. Given the uncertainties surrounding the contingencies, amounts subsequently received, if any, will be recorded as an additional gain on the sale in the period received. At September 30, 2004, the carrying amount of the investment is included in other current assets.

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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 condensed 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 fiscal year ended March 31, 2004, filed December 20, 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 we have supplemented our discussion of liquidity and capital resources for the three months ended September 30, 2004 with a more current discussion of our liquidity and capital resources as of December 31, 2004.

        Most 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 fiscal year ended March 31, 2004, we believe trading in our securities at this time is highly speculative and involves a high degree of risk.

OVERVIEW

        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:

•

Apsylog in September 1997, in which we acquired our AssetCenter product, for approximately $38.6 million;



•

Telco Research Corporation in March 2000 for approximately $112.7 million;



•

Harbinger Corporation in June 2000 for approximately $1.8 billion;



•

Loran Network Holding Corporation in September 2000 for approximately $88.1 million;



•

IBM Corporation's Tivoli Service Desk suite of products in December 2000 for a total net price of approximately $50.2 million;



•

Extricity, Inc. in April 2001 for approximately $185.2 million; and



•

Remedy Corporation in August 2001 for approximately $1.4 billion.

        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 during the quarter ended December 31, 2001. This resulted in our required repayment of approximately $100.0 million of outstanding debt.

        In January 2002, the SEC began an informal investigation into Peregrine and our then chief executive officer, Stephen Gardner, pertaining to transactions with Critical Path, Inc. that had taken place in the first half of fiscal 2001 and involved $3.3 million in 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 its recommendation, the Board of Directors initiated a broad internal investigation, obtained the resignations of Mr. Gardner and our chief financial officer at that time, Matthew Gless, among others, and publicly disclosed that we were

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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 for 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 we also announced that our financial statements and related audit reports for the restatement period should not be relied upon.

        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:

•

Accelerating the process of reducing our operating costs;



•

Obtaining third-party funding arrangements;



•

Selling non-core assets to fund ongoing operations; and



•

Managing the business to conserve cash.

        We streamlined our operations by divesting a number of businesses and non-core product lines and significantly reduced our personnel and cost structure. We also implemented a restructuring plan to reduce expenses in line with future revenue expectations.

        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 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 AICPA 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 through July 18, 2003. 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 separately from those that were not, as well as liabilities arising post-petition. The liabilities that were potentially affected by the Reorganization Plan were reported at the estimated amounts that would 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.

        We 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 Note 1 of our notes to consolidated financial statements included in our Annual Report on Form 10-K for the period ended March 31, 2004.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our consolidated financial statements are prepared in accordance with generally accepted accounting principles. 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 these estimates, judgments and assumptions 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

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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:

•

Fresh-Start Reporting;



•

Revenue Recognition;



•

Valuation of Long-Lived Assets;



•

Legal Contingencies; and



•

Accounting for Income Taxes.

Fresh-Start Reporting

        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 reporting, 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 reorganization. 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 adjusted for debt financing and other liabilities net of cash. For purposes of applying SOP 90-7, we used a business enterprise value of $277 million, representing our best estimate of the Company's reorganized business enterprise value.

        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" (SFAS 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, customer contracts and customer lists. The fair value of these identifiable intangible assets was estimated to be $125.1 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 goodwill. Goodwill is not amortized, but is subject to periodic evaluation for impairment at least annually.

Revenue Recognition

        As described below, significant management judgment and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences could result in the amount and the timing of our revenue for any period if our management made different judgments or utilized different estimates. Our revenue is derived principally from software product licensing and related services. Our standard end-user license agreement provides for an initial fee for use of our products in perpetuity. License fees are generally due upon the granting of the license. Maintenance revenue consists of fees for technical support and software updates. Consulting and training revenue is for fees earned for professional services provided to customers primarily on a time and material basis. We recognize revenue in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9 (SOP 97-2), and Staff Accounting

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Bulletins No. 101, "Revenue Recognition in Financial Statements" and No. 104, "Revenue Recognition," issued by the SEC.

        We recognize revenue from license agreements with direct customers 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 we have no other significant obligations. Estimates on collectibility are made by management on a transaction-by-transaction basis. 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. We believe the likelihood of non-acceptance in these situations is remote and we generally recognize revenue when all other criteria for revenue recognition are met. If such determination cannot be made, revenue is recognized upon the earlier of receipt of written acceptance or when the acceptance period has lapsed.

        For contracts with multiple obligations (e.g., current and future product delivery obligations, post-contract support or other services), we recognize revenue using the residual method. Under the residual method, we allocate 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. We recognize revenue allocated to undelivered products when all of the other criteria for revenue recognition have been met.

        Revenue from maintenance services is recognized ratably over the contractual period, generally one year. Consulting revenue is primarily derived from software product integration services, which we typically perform on a time and material basis under separate service agreements. In our judgment, consulting services are not usually considered essential to the functionality of the software. Training revenue derives from instructor-led and online educational services provided relating to our products. As a result, we recognize license revenue upon delivery of the software, which generally is prior to the delivery of the consulting and training services. Revenue from consulting and training services are recognized as the respective services are performed.

        The Company also derives revenue from the sale of its software licenses and maintenance 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 services sold through distributors is recognized ratably over the contractual period with the end user.

Impairment of Long-Lived Assets

        We evaluate the recoverability of our long-lived assets, including property and equipment and certain identifiable intangible assets, exclusive of goodwill, in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). Goodwill is tested for impairment in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." SFAS 144 requires us to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors that could trigger an impairment review include:

•

Significant underperformance relative to historical or projected future operating results;



•

Significant changes in the manner of use of the assets or the strategy for our overall business;



•

Significant decrease in the market value of the assets; and



•

Significant negative industry or economic trends.

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        When we determine that the carrying amount of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators, we assess the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying amount over its fair value. Fair value is generally determined based on the estimated future discounted cash flows over the remaining useful life of the asset using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. The assumptions supporting the cash flows, including the discount rates, are determined using our best estimates as of the date of the impairment review.

Legal Contingencies

        We are currently involved in various claims and legal proceedings. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination of whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based on the best information available at the time in accordance with SFAS No. 5, "Accounting for Contingencies." As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. See "Legal Proceedings," beginning on page 35 of this report and Note 6 of our notes to condensed consolidated financial statements for a description of our material legal proceedings.

Accounting for Income Taxes

        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 to ultimately be paid. This estimate is updated as new 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 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 financial position, results of operations or liquidity in the period for which such determination is made.

        We have recorded a valuation allowance on substantially all of our net deferred tax asset balances as of September 30, 2004, and March 31, 2004 because of uncertainties related to utilization of deferred tax assets, primarily related to net operating loss carryforwards, before they expire. At such time, if any, as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. Reductions for deferred tax assets generated prior to the adoption of fresh-start reporting will be recorded as reductions to goodwill.

RESULTS OF OPERATIONS

        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

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(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 reporting 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 1 of our notes to consolidated financial statements included in our Annual Report on Form 10-K for the period ended March 31, 2004 for additional information about the consummation of the Reorganization Plan and the 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 six-month periods. However, for clarity of presentation, where the adoption of fresh-start reporting did not have a material effect, we have only compared the results of operations of our Successor Company for the three- and six-month periods ended September 30, 2004 with the historical results of operations of the Successor and Predecessor Company on a combined basis for the three- and six-month periods ended September 30, 2003.

        The discussion and analysis of results of operations for the shortened periods are not directly comparable to the full three- and six-month periods in the current 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 accounting. In order to provide an informative comparison of results of operations with our Successor Company's results for the three-month period ended September 30, 2004, our Predecessor Company's results of operations are presented for the 18-day period ended July 18, 2003 beside our Successor Company's results of operations for the 74-day period ended September 30, 2003, as well as on a pro forma combined basis for the combined three-month period. Similarly, 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 74-day period ended September 30, 2003, as well as on a pro forma combined basis for the combined six-month period, in order to facilitate a comparison with our Successor Company's results of operations for the six-month period ended September 30, 2004. 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 three- and six-month periods. The pro forma combined financial information for the three- and six-month periods ended September 30, 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.

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

Three Months