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

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

(Mark One)

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

For the Quarterly Period Ended September 30, 2005

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

For the transition period from to

Commission File Number 000-22209

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

~~DELAWARE~~ (~~State~~Exact orname ~~other jurisdiction~~ of ~~incorporation~~Registrant as orspecified ~~organization)~~in ~~95-3773312~~its ~~(IRS Employer Identification No.~~charter)

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

DELAWARE	95-3773312
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

~~(858) 481-5000 (Registrant's~~3611 ~~telephone~~VALLEY ~~number~~CENTRE DRIVE, SAN ~~including~~DIEGO, ~~area~~CALIFORNIA ~~code)~~ 92130

~~Indicate by check mark whether the Registrant~~ (~~1) has~~Address ~~filed all reports required to be filed by Section 13 or 15(d)~~ of ~~the Securities Exchange Act of 1934 during the~~principal ~~preceding~~executive ~~12 months~~offices ~~(or~~including ~~for~~zip ~~such shorter period that the Registrant was required to file such reports~~code)~~, 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~~858). ~~Yes ý No o~~ 481-5000

~~Indicate by check mark whether the registrant is a shell company~~ (asRegistrant’s ~~defined~~telephone number, inincluding ~~Exchange~~area ~~Act Rule 12b-2~~code)~~. Yes o No ý~~

Indicate by check mark whether the Registrant (1) 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~~during tothe preceding 12 months (or for such shorter period that the ~~distribution~~Registrant ofwas ~~securities~~required ~~under~~to file asuch ~~plan~~reports), ~~confirmed~~and by(2) has abeen subject to such filing requirements ~~court~~for the past 90 days. Yes ý x No o

~~The~~Indicate ~~number~~by ofcheck ~~shares~~mark whether of the Registrant's ~~common~~is ~~stock~~an ~~outstanding~~accelerated onfiler ~~July 31,~~(as ~~2005~~defined ~~was~~in ~~15,074,989~~Exchange Act Rule 12b-2). Yes x No o

Indicate by check mark ~~PEREGRINE~~whether ~~SYSTEMS, INC. QUARTERLY~~the ~~REPORT~~Registrant ONis ~~FORM~~a ~~10-Q TABLE~~shell OFcompany ~~CONTENTS~~ (as defined in Exchange Act Rule 12b-2). Yes o No x

PART I—FINANCIAL INFORMATION
	ITEM 1.	UNAUDITED FINANCIAL STATEMENTS	3
	ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	24
	ITEM 4.	CONTROLS AND PROCEDURES	24
PART II—OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS	26
	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	30
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	30
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	30
	ITEM 5.	OTHER INFORMATION	30
	ITEM 6.	EXHIBITS	30
SIGNATURES			31

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 x No o

The number of shares of the Registrant’s common stock outstanding on September 30, 2005 was 15,570,503.

PEREGRINE SYSTEMS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
ITEM 1.	UNAUDITED FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	27
ITEM 4.	CONTROLS AND PROCEDURES	27
PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	28
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	32
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	32
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	32
ITEM 5.	OTHER INFORMATION	32
ITEM 6.	EXHIBITS	32
SIGNATURES		33

PART I—FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

PEREGRINE SYSTEMS, INC. ~~Condensed Consolidated Balance Sheets (In thousands, except share and par value amounts)~~

			June 30, 2005			March 31, 2005
			(Unaudited)
ASSETS
Current Assets:
	Cash and cash equivalents		$	76,356		$	84,765
	Cash—restricted			4,455			4,325
	Accounts receivable, net of allowance for doubtful accounts			29,394			35,407
	Deferred taxes			4,127			4,620
	Other current assets			7,029			8,887
		Total current assets		121,361			138,004
Property and equipment, net				8,814			8,422
Identifiable intangible assets, net				80,649			86,942
Goodwill				182,550			184,835
Investments and other assets				2,062			2,113
		Total assets	$	395,436		$	420,316
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
	Accounts payable		$	4,207		$	4,106
	Accrued expenses			62,413			69,642
	Current portion of deferred revenue			56,955			66,086
	Current portion of notes payable			17,867			17,811
		Total current liabilities		141,442			157,645
Non-current Liabilities:
	Deferred revenue, net of current portion			4,139			5,906
	Notes payable, net of current portion			29,134			29,007
	Deferred taxes			5,040			4,923
		Total non-current liabilities		38,313			39,836
Commitments and Contingencies—Note 5
Stockholders' Equity
	Preferred stock, $0.0001 par value, 5.0 million shares authorized, no shares issued or outstanding			—			—
	Common stock, $0.0001 par value, 100.0 million shares authorized, 15.1 million and 15.0 million shares issued and outstanding, respectively			2			2
	Additional paid-in capital			271,160			271,150
	Subscriptions receivable			(36	)		(36	)
	Accumulated deficit			(53,027	)		(43,268	)
	Accumulated other comprehensive loss			(2,418	)		(5,013	)
		Total stockholders' equity		215,681			222,835
		Total liabilities and stockholders' equity	$	395,436		$	420,316

Condensed Consolidated Balance Sheets

~~The~~(In ~~accompanying~~thousands, ~~notes~~except ~~are~~share anand ~~integral~~par ~~part~~value ~~of these condensed consolidated financial statements.~~ amounts)

	September 30, 2005				March 31, 2005
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	54,914			$	84,765
Cash—restricted		4,912				4,325
Accounts receivable, net of allowance for doubtful accounts		27,716				35,407
Deferred taxes		4,151				4,620
Other current assets		7,652				8,887
Total current assets		99,345				138,004
Property and equipment, net		9,768				8,422
Identifiable intangible assets, net		74,853				86,942
Goodwill		182,694				184,835
Other assets		2,021				2,113
Total assets		$	368,681			$	420,316
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	4,285			$	4,106
Accrued expenses		64,010				69,642
Current portion of deferred revenue		48,268				66,086
Current portion of notes payable		17,909				17,811
Total current liabilities		134,472				157,645
Non-current Liabilities:
Deferred revenue, net of current portion		3,425				5,906
Notes payable, net of current portion		18,177				29,007
Deferred taxes		5,161				4,923
Total non-current liabilities		26,763				39,836
Commitments and Contingencies—Note 6
Stockholders’ Equity
Preferred stock, $0.0001 par value, 5.0 million shares authorized, no shares issued or outstanding		—				—
Common stock, $0.0001 par value, 100.0 million shares authorized, 15.1 million and 15.0 million shares issued and outstanding, respectively		2				2
Additional paid-in capital		280,548				271,114
Accumulated deficit		(61,366		)		(43,268		)
Unearned compensation		(8,591		)		—
Accumulated other comprehensive loss		(3,147		)		(5,013		)
Total stockholders’ equity		207,446				222,835
Total liabilities and stockholders’ equity		$	368,681			$	420,316

The accompanying ~~PEREGRINE~~notes ~~SYSTEMS, INC. Condensed~~are ~~Consolidated~~an ~~Statements~~integral part of ~~Operations (In~~these ~~thousands,~~condensed ~~except~~consolidated ~~per~~financial ~~share amounts; Unaudited)~~ statements.

			Three Months Ended June 30, 2005			Three Months Ended June 30, 2004
Revenue:
	Licenses		$	13,497		$	11,145
	Maintenance			26,270			25,237
	Consulting and training			4,819			3,792
		Total revenue		44,586			40,174
Operating Costs and Expenses:
	Cost of licenses(1)			2,756			2,854
	Cost of maintenance			4,675			4,544
	Cost of consulting and training			5,158			3,885
	Sales and marketing			18,476			16,274
	Research and development			8,469			7,508
	General and administrative			11,542			12,819
	Amortization of intangible assets			3,348			3,376
	Restructuring, impairments and other			(198	)		—
		Total operating costs and expenses		54,226			51,260
Operating loss				(9,640	)		(11,086	)
	Foreign currency transaction losses, net			(1,065	)		(1,069	)
	Reorganization items, net			(233	)		(811	)
	Interest income			695			249
	Interest expense			(820	)		(1,216	)
	Other income			1,655			—
Loss before income taxes				(9,408	)		(13,933	)
	Income tax expense			(351	)		(1,279	)
		Net loss	$	(9,759	)	$	(15,212	)
Net loss per share, basic and diluted:
	Net loss per share		$	(0.65	)	$	(1.01	)
	Weighted-average shares used in computation, basic and diluted			15,074			15,022

~~The~~PEREGRINE SYSTEMS, INC. ~~accompanying~~Condensed ~~notes~~Consolidated Statements ~~are an integral part~~ of ~~these~~Operations (In ~~condensed~~thousands, ~~consolidated~~except ~~financial~~per ~~statements.~~share amounts; Unaudited)

	Three Months Ended September 30,						Six Months Ended September 30,
	2005			2004			2005			2004
Revenue:
Licenses	$	12,593		$	15,623		$	26,090		$	26,768
Maintenance	26,145			28,315			52,415			53,552
Consulting and training	5,626			3,996			10,445			7,788
Total revenue	44,364			47,934			88,950			88,108
Operating costs and expenses(1):
Cost of licenses(2)	2,870			2,774			5,626			5,628
Cost of maintenance	4,413			4,434			9,088			8,978
Cost of consulting and training	5,618			4,410			10,776			8,295
Sales and marketing	16,045			15,583			34,521			31,857
Research and development	8,045			6,824			16,514			14,332
General and administrative	10,593			12,192			22,135			25,011
Amortization of intangible assets	3,335			3,332			6,683			6,708
Restructuring, impairments and other	—			—			(198		)	—
Total operating costs and expenses	50,919			49,549			105,145			100,809
Operating loss	(6,555		)	(1,615		)	(16,195		)	(12,701		)
Foreign currency transaction gains (losses), net	(480		)	73			(1,545		)	(996		)
Reorganization items, net	(148		)	(335		)	(381		)	(1,146		)
Interest income	450			333			1,145			582
Interest expense	(721		)	(1,041		)	(1,541		)	(2,257		)
Other income	81			—			1,736			—
Loss before income taxes	(7,373		)	(2,585		)	(16,781		)	(16,518		)
Income tax expense	(966		)	(1,093		)	(1,317		)	(2,372		)
Net loss	$	(8,339	)	$	(3,678	)	$	(18,098	)	$	(18,890	)
Net loss per share, basic and diluted:
Net loss per share	$	(0.55	)	$	(0.24	)	$	(1.20	)	$	(1.26	)
Weighted-average shares used in computation, basic and diluted	15,077			15,052			15,076			15,037

(1) See Note 9 for details ~~PEREGRINE~~about ~~SYSTEMS, INC. Condensed~~stock ~~Consolidated~~compensation ~~Statements~~expense ofincluded ~~Cash~~in ~~Flows (In~~operating ~~thousands;~~costs ~~Unaudited)~~ and expenses.

			Three Months Ended June 30, 2005			Three Months Ended June 30, 2004
Cash flow from operating activities:
Net loss			$	(9,759	)	$	(15,212	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Amortization and depreciation			6,710			7,044
	Stock compensation expense			—			691
	Non-cash reorganization items			—			(26	)
	Foreign currency transaction losses, net			1,065			795
	Gain on recovery of previously paid financing fees			(490	)		—
	Gain on sale of investment			(198	)		—
Increase (decrease) in cash resulting from changes in:
	Accounts receivable			4,900			6,581
	Other assets			1,563			2,025
	Accounts payable			221			351
	Accrued expenses			(1,716	)		(2,051	)
	Deferred revenue			(8,925	)		(5,564	)
		Net cash used in operating activities		(6,629	)		(5,366	)
Cash flow from investing activities:
	Purchases of property and equipment			(1,201	)		(659	)
	Change in restricted cash			(178	)		9
	Proceeds from sale of investment			198			—
		Net cash used in investing activities		(1,181	)		(650	)
Cash flow from financing activities:
	Gain on recovery of previously paid financing fees			490			—
	Repayments of factored receivables			—			(2,454	)
	Repayment of long-term debt			—			(40	)
	Issuance of common stock, employee plans			10			134
		Net cash provided by (used in) financing activities		500			(2,360	)
		Effect of exchange rate fluctuations on cash		(1,099	)		(518	)
Net decrease in cash and cash equivalents				(8,409	)		(8,894	)
Cash and cash equivalents, beginning of period				84,765			105,946
Cash and cash equivalents, end of period			$	76,356		$	97,052

(2) Includes amortization expense related to developed technology of $2,452 and $2,451 for the three months ended September 30, 2005 and 2004, respectively, and $4,904 and $4,906 for the six months ended September 30, 2005 and 2004, respectively.

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

PEREGRINE SYSTEMS, INC. ~~NOTES~~ Condensed TOConsolidated Statements ~~CONDENSED~~of ~~CONSOLIDATED~~Cash ~~FINANCIAL~~Flows (In ~~STATEMENTS~~thousands; ~~(UNAUDITED~~Unaudited)

1. Company

	Six Months Ended September 30,
	2005			2004
Cash flow from operating activities:
Net loss	$	(18,098	)	$	(18,890	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation	13,317			14,024
Stock compensation expense	552			783
Non-cash reorganization items	—			(149		)
Foreign currency transaction losses, net	1,545			996
Gain on recovery of previously paid financing fees	(490		)	—
Gain on sale of investment	(198		)	—
Cash used to pay imputed interest on long-term debt and factored receivables	(701		)	(977		)
Increase (decrease) in cash resulting from changes in:
Accounts receivable	6,547			5,874
Other assets	1,211			3,336
Accounts payable	282			(3,154		)
Accrued expenses	(1,590		)	2,595
Deferred revenue	(18,284		)	(14,096		)
Net cash used in operating activities	(15,907		)	(9,658		)
Cash flow from investing activities:
Purchases of property and equipment	(2,833		)	(1,838		)
Proceeds from sale of property and equipment	—			309
Change in restricted cash	(635		)	(23		)
Purchase of marketable securities	—			(20,000		)
Proceeds from sale of investment	198			—
Proceeds from sale of marketable securities	—			12,000
Net cash used in investing activities	(3,270		)	(9,552		)
Cash flow from financing activities:
Gain on recovery of previously paid financing fees	490			—
Repayments of factored receivables	—			(3,076		)
Repayment of long-term debt	(10,336		)	(10,182		)
Issuance of common stock, employee plans	291			134
Net cash used in financing activities	(9,555		)	(13,124		)
Effect of exchange rate fluctuations on cash	(1,119		)	(92		)
Net decrease in cash and cash equivalents	(29,851		)	(32,426		)
Cash and cash equivalents, beginning of period	84,765			105,946
Cash and cash equivalents, end of period	$	54,914		$	73,520

~~Business~~ 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. 5

~~Peregrine's core~~PEREGRINE ~~software product suites are AssetCenter® and ServiceCenter®. AssetCenter and ServiceCenter support two main business processes: asset management and service management. Typically~~SYSTEMS, 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 INC. ~~The services managed with Peregrine's products usually consist of the service delivery and support processes necessary to troubleshoot,~~ ~~support~~NOTES ~~and~~TO ~~maintain those same information technology and infrastructure assets. In addition, the Company offers products in its Configuration Services suite which provides a consolidated accurate~~CONDENSED ~~view~~CONSOLIDATED ofFINANCIAL ~~all~~STATEMENTS ~~IT assets and allows customers to automatically discover, inventory, and better utilize all hardware, software, and network devices.~~ (UNAUDITED)

21. ~~Summary of Significant Accounting Policies~~ Company

~~Basis of Presentation~~ Business

~~The~~Peregrine ~~accompanying unaudited condensed consolidated financial statements as of June 30~~Systems, ~~2005 and for the three months ended June~~ ~~30,~~Inc. ~~2005 and 2004 have been prepared in accordance with~~ (the ~~instructions~~“Company” toor ~~Form 10-Q and Article 10 of Regulation S-X, and therefore do not necessarily include all~~“Peregrine”) ~~information~~is ~~and footnotes necessary for~~ a ~~fair~~global ~~statement~~provider of ~~the~~enterprise ~~Company'~~software. Peregrine’s ~~consolidated~~core ~~financial~~business ~~position,~~is providing ~~results~~information oftechnology ~~operations~~asset and ~~cash~~service ~~flows~~management ~~in accordance with accounting principles generally~~software ~~accepted in the United States~~solutions.

InPeregrine’s core software ~~the~~product ~~opinion~~suites ofare ~~the~~AssetCenter® ~~Company's~~and ~~management,~~ServiceCenter®. ~~the~~AssetCenter ~~unaudited~~and ServiceCenter ~~financial~~support ~~information~~two ~~for~~main ~~the~~business ~~interim~~processes: ~~periods~~asset ~~presented~~management ~~reflects~~and ~~all~~service management. ~~normal~~Typically, ~~recurring~~the ~~adjustments~~assets ~~that~~managed ~~the~~with ~~Company~~Peregrine’s ~~considers~~products consist of ~~necessary~~information totechnology ~~give~~assets, asuch ~~fair~~as ~~statement.~~computer ~~These~~and ~~condensed~~computer-networking hardware ~~consolidated~~and ~~financial~~software ~~statements~~items, ~~should~~and beother ~~read~~assets inused ~~conjunction~~to ~~with~~provide ~~the~~infrastructure ~~consolidated~~to a ~~financial~~business. ~~statements~~The ~~included~~services inmanaged ~~the~~with ~~Company'~~Peregrine’s ~~Annual~~products ~~Report on~~usually ~~Form 10-K~~consist ~~for~~ of the ~~fiscal~~service ~~year~~delivery ~~ended~~and ~~March 31,~~support ~~2005~~processes ~~filed~~necessary ~~with~~to ~~the~~troubleshoot, ~~SEC~~support and onmaintain ~~July 1,~~those ~~2005~~same ~~(together~~information ~~with~~technology ~~the~~and ~~Company's~~infrastructure ~~Amendment No~~assets. 1 ~~to the Annual Report on~~In ~~Form 10-K/A~~addition, ~~for~~ the ~~fiscal~~Company ~~year~~offers ~~ended~~products ~~March 31,~~in ~~2005~~its ~~filed~~Configuration ~~with~~Services ~~the~~suite ~~SEC~~which provides ona ~~October 18,~~consolidated ~~2005,~~accurate ~~the~~view ~~"Amended~~of ~~Form 10-K").~~all ~~Operating~~IT ~~results~~assets ~~for~~and ~~interim~~allows ~~periods~~customers ~~are not~~to ~~necessarily~~automatically ~~indicative~~discover, ofinventory, ~~operating~~and ~~results~~better ~~for~~utilize anall ~~entire~~hardware, ~~fiscal~~software, and ~~year.~~network devices.

~~Computation~~2. Merger ~~of Net Loss Per Share~~ Agreement

~~Computation~~On ofSeptember 19, 2005, ~~net~~the ~~loss~~Company ~~per~~entered ~~share~~into isan ~~performed~~Agreement inand ~~accordance~~Plan of Merger (the “Merger Agreement”) with Hewlett-Packard Company (“HP”). Pursuant to the ~~provisions~~terms of ~~Statement~~the Merger ofAgreement, ~~Financial~~at ~~Accounting~~the ~~Standards~~effective ~~No. 128~~time of the merger, ~~"Earnings~~each ~~per~~share of the ~~Share"~~Company’s ~~("SFAS 128").~~common ~~SFAS 128~~stock ~~requires~~issued ~~the~~and ~~Company~~outstanding immediately prior to ~~compute~~the effective ~~basic~~time ~~and~~of ~~diluted~~the ~~net~~merger ~~income~~will ~~(loss)~~be ~~per~~converted ~~share~~into ~~data~~the ~~for~~right ~~all~~to ~~periods~~receive ~~for~~cash in ~~which~~the anamount ~~income~~of ~~statement~~$26.08. isThe ~~presented~~aggregate purchase price approximates $425 million. ~~Basic~~Consummation ~~net~~of the merger is subject to customary closing ~~income~~conditions, including (~~loss~~i) approval ~~per~~of ~~share~~the isMerger ~~computed~~Agreement by ~~dividing~~the stockholders ~~net~~of ~~income~~the Company, (~~loss~~ii) absence byof ~~the~~any ~~weighted~~law ~~average~~or ~~number~~order prohibiting the consummation of ~~common~~the ~~shares~~merger, ~~outstanding~~(iii) expiration ~~during~~or termination of the applicable ~~period.~~Hart-Scott-Rodino ~~Potentially~~Antitrust ~~dilutive~~Improvements ~~securities~~Act ~~represent~~of ~~incremental~~1976 waiting period ~~shares~~and ~~issuable~~receipt ~~upon~~of ~~exercise~~certain foreign antitrust approvals, and (iv) the accuracy of the ~~Company's~~representations ~~equity~~and ~~securities~~warranties ~~under~~of the ~~treasury~~parties ~~stock~~to ~~method~~the Merger Agreement. The ~~Options~~Merger toAgreement ~~purchase~~may ~~0.4 million~~be ~~and~~terminated ~~0.3 million~~by ~~shares~~either ofthe ~~common~~Company ~~stock~~or ~~were~~HP ~~outstanding~~under ~~during~~certain ~~the~~circumstances, ~~three~~and ~~months~~it ~~ended~~further ~~June 30~~provides that, ~~2005~~upon ~~and~~termination ~~2004,~~of ~~respectively,~~the Merger ~~but~~Agreement ~~were~~under ~~excluded~~certain ~~from~~circumstances, the ~~computation~~Company ofwill ~~net~~be ~~loss~~required ~~per~~to pay ~~share~~HP asa ~~inclusion~~customary ~~would~~termination ~~have~~fee ~~been~~in ~~anti-dilutive.~~the amount of $11.7 million.

63. Summary of Significant Accounting Policies

~~Stock-Based~~Basis ~~Compensation~~ of Presentation

The ~~Company~~accompanying ~~applies~~unaudited ~~the~~condensed ~~intrinsic~~consolidated financial ~~value-based~~statements ~~method~~as of ~~accounting prescribed by Accounting Principles Board ("APB") Opinion No.~~September 2530, ~~"Accounting~~2005 ~~for Stock Issued to Employees," ("APB 25"),~~ and ~~related interpretations, including Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting~~ for ~~Certain~~the ~~Transactions~~three ~~Involving~~and six ~~Stock~~months ~~Compensation:~~ended ~~An Interpretation of APB Opinion No.~~September ~~25" ("FIN 44") to account for its fixed stock option plans. Under this method~~30, ~~deferred~~2005 ~~compensation~~and is2004 ~~recorded~~have onbeen ~~the~~prepared ~~date~~in ~~of grant~~accordance ~~only~~with if the ~~current~~instructions ~~market~~to ~~price~~Form 10-Q ofand ~~the~~Article 10 ~~underlying stock exceeds the exercise price. Statement~~ of ~~Financial Accounting Standards No.~~ Regulation ~~123~~S-X, ~~"Accounting~~and ~~for~~therefore ~~Stock-Based~~do ~~Compensation" ("SFAS 123"),~~not ~~established~~necessarily ~~accounting~~include all information and ~~disclosure~~footnotes ~~requirements~~necessary ~~using~~for a fair~~-value~~ ~~based~~statement ~~method~~ of ~~accounting for stock-based employee compensation plans. As allowed by SFAS 123,~~ the Company’s ~~has~~consolidated financial ~~elected~~position, toresults ~~continue to apply the intrinsic value-based method~~ of ~~accounting~~operations ~~described above,~~ and ~~has~~cash ~~adopted~~flows ~~the~~in ~~disclosure~~accordance ~~requirements of Statement of Accounting~~with ~~Standards~~accounting ~~No. 148,~~principles ~~"Accounting~~generally ~~for~~accepted ~~Stock-Based~~in ~~Compensation—Transition~~the ~~and~~United ~~Disclosure, an amendment of FASB Statement No~~States. ~~123" ("SFAS 148").~~

~~The~~In the opinion of the Company’s ~~used~~management, the ~~following~~unaudited ~~assumptions~~financial information for the interim periods presented reflects all normal recurring adjustments that the Company considers necessary to ~~value~~give ~~awards~~a ~~granted~~fair ~~during~~statement. These condensed consolidated financial statements should be read in conjunction with the ~~three~~consolidated financial ~~months~~statements ~~ended~~included ~~June 30,~~in ~~2005~~the ~~and~~Company’s ~~2004:~~Annual Report on Form 10-K for the fiscal

	Three Months Ended June 30, 2005		Three Months Ended June 30, 2004
Risk-free interest rate	3.81	%	2.97	%
Expected life (in years)	4.70		3.00
Expected volatility	67	%	77	%
Expected dividends	None		None

~~The~~year ~~following~~ended ~~tables~~March 31, ~~illustrate~~2005 ~~the~~filed ~~effect~~with onthe ~~net~~Securities ~~loss~~ and ~~net~~Exchange ~~loss~~Commission ~~per~~(“SEC”) on ~~share~~July 1, if2005 (together with the Company’s ~~had~~Amendment ~~applied~~No. 1 to the Annual ~~fair~~Report ~~value~~on ~~recognition~~Form 10-K/A ~~provisions~~for ofthe ~~SFAS 123~~fiscal toyear ~~stock-based~~ended ~~employee~~March 31, ~~compensation~~2005 ~~(in~~filed ~~thousands~~with the SEC on October 18, ~~except~~2005, ~~per~~the ~~share~~“Amended ~~data~~Form 10-K”). Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

~~Three~~Computation ~~Months~~ of Net Loss Per Share

		Three Months Ended June 30, 2005			Three Months Ended June 30, 2004
Net loss, as reported		$	(9,759	)	$	(15,212	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects			—			691
Deduct: Stock-based employee compensation expense determined under a fair-value based method for all awards, net of related tax effects			(1,280	)		(1,659	)
Pro forma net loss		$	(11,039	)	$	(16,180	)
Net loss per share:
	Basic and diluted—as reported	$	(0.65	)	$	(1.01	)
	Basic and diluted—pro forma	$	(0.73	)	$	(1.08	)

Computation of net 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 net income (loss) per share data for all periods for which an income statement is presented. Basic net income (loss) per share is 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 options to purchase the Company’s common stock determined under the treasury stock method. During the three months ended September 30, 2005 and 2004, options to purchase 0.8 million and 0.5 million shares of common stock, respectively, were outstanding but were excluded from the computation of net loss per share because their inclusion would have been anti-dilutive. During the six months ended September 30, 2005 and 2004, options to purchase 0.5 million and 0.4 million shares of common stock, respectively, were outstanding but were excluded from the computation of net loss per share because their inclusion would have been anti-dilutive.

~~Comprehensive Loss~~ Stock-Based Compensation

~~Other~~The ~~comprehensive~~Company ~~loss~~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” (“FIN 44”) to account for its fixed stock option plans. Under this method, deferred compensation is ~~defined~~recorded ason the ~~change~~date inof ~~equity~~grant only if the current market price of athe ~~business~~underlying ~~enterprise~~stock ~~during~~exceeds athe ~~period~~exercise ~~from~~price. ~~transactions~~Statement ~~and~~of ~~other~~Financial Accounting ~~events~~Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), established accounting and ~~circumstances~~disclosure requirements ~~from~~using a fair-value based method of accounting for stock-based ~~non~~employee compensation plans. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic value-~~owner~~based ~~sources~~method of accounting described above, and has adopted the disclosure requirements of Statement of Accounting Standards No. 148, ~~The~~“Accounting ~~foreign~~for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123” (“SFAS 148”).

7On 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 financial statements using the fair value of the awards. This statement eliminates the use of APB 25’s intrinsic value method of accounting as 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. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. In April 2005, the SEC amended Regulation S-X to delay the date for compliance with SFAS 123R to the first interim or annual reporting period of a registrant’s first fiscal year beginning after September 15, 2005. As a result, the Company is required to adopt SFAS 123R on

~~currency translation adjustment is the only item giving rise to accumulated other comprehensive loss for the periods presented. Comprehensive loss consists of the following (in thousands):~~ 7

~~Three~~April 1, 2006. The ~~Months~~ Company is currently assessing the impact of 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 will have a material effect on its operating results if current compensation strategies continue.

	Three Months Ended June 30, 2005			Three Months Ended June 30, 2004
Net loss, as reported	$	(9,759	)	$	(15,212	)
Foreign currency translation—current period		2,595			(935	)
Foreign currency translation—prior periods		—			1,897
Comprehensive loss	$	(7,164	)	$	(14,250	)

The Company used the following assumptions to value stock option awards granted during the three and six months ended September 30, 2005 and 2004, respectively:

Foreign currency translation for the three months ended June 30, 2005 of $2.6 million includes decreases in goodwill and identifiable intangibles of $0.9 million and $0.5 million, respectively, relating to the translation of intangible assets whose functional currency is other than the U.S. dollar.

	Three Months Ended September 30,						Six Months Ended September 30,
	2005			2004			2005			2004
Risk-free interest rate		3.81	%		3.26	%		3.81	%		3.18	%
Expected life (in years)		4.7			3.0			4.7			3.0
Expected volatility		67	%		77	%		67	%		77	%
Expected dividend yield		None			None			None			None

~~Foreign~~The ~~currency~~following ~~translation~~tables ~~for~~illustrate the ~~three~~effect ~~months~~on ~~ended~~net ~~June 30,~~loss ~~2004 of $0.9 million includes decreases in goodwill~~ and ~~identifiable~~net ~~intangibles~~loss ofper ~~$0.2 million~~share ~~and~~had ~~$0.1 million,~~the ~~respectively,~~Company ~~relating~~applied to the ~~translation~~fair ofvalue ~~intangible~~recognition ~~assets~~provisions ~~whose~~of ~~functional~~SFAS 123 ~~currency~~to stock-based isemployee ~~other~~compensation ~~than~~(in ~~the~~thousands, ~~U.S.~~except ~~dollar.~~per share data):

During the preparation of the financial statements for the three months 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 on July 18, 2003 in connection with its emergence from bankruptcy proceedings. Comprehensive loss for the three months ended June 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 adjustments 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 June 30, 2004 is not material.

	Three Months Ended September 30,						Six Months Ended September 30,
	2005			2004			2005			2004
Net loss, as reported	$	(8,339	)	$	(3,678	)	$	(18,098	)	$	(18,890	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects	552			92			552			783
Deduct: Stock-based employee compensation expense determined under a fair-value based method for all awards, net of related tax effects	(1,889		)	(831		)	(3,081		)	(2,490		)
Pro forma net loss	$	(9,676	)	$	(4,417	)	$	(20,627	)	$	(20,597	)
Net loss per share:
Basic and diluted—as reported	$	(0.55	)	$	(0.24	)	$	(1.20	)	$	(1.26	)
Basic and diluted—pro forma	$	(0.64	)	$	(0.29	)	$	(1.37	)	$	(1.37	)

~~Recent~~Comprehensive ~~Accounting Pronouncements~~ Loss

~~On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," ("SFAS 123R") requiring~~Other ~~that~~comprehensive ~~the~~loss ~~compensation~~is ~~cost~~defined ~~relating~~as ~~to share-based payment transactions be measured and recognized in financial statements using~~ the ~~fair~~change ~~value of the awards. This statement eliminates the use of 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~~a ~~awards~~business ~~(with limited~~enterprise ~~exceptions).~~during ~~SFAS 123R covers~~ a ~~wide~~period ~~range~~from oftransactions ~~share-based~~and ~~compensation~~other ~~arrangements~~events ~~including share options, restricted share plans, performance based awards~~ and ~~employee~~circumstances ~~share purchase plans.~~from ~~SFAS 123R~~non-owner ~~replaces SFAS 123 and supersedes APB 25~~sources. InThe ~~March 2005,~~foreign ~~the~~currency ~~Securities~~translation ~~and~~adjustment ~~Exchange~~is ~~Commission (~~the ~~"SEC")~~only ~~issued Staff Accounting Bulletin No. 107~~item ~~("SAB 107")~~giving ~~regarding~~rise ~~the~~to ~~SEC's~~accumulated ~~interpretation~~other ofcomprehensive ~~SFAS 123R~~loss ~~and the valuation of share-based payments~~ for ~~public companies. In April 2005,~~ the ~~SEC~~periods ~~amended~~presented. ~~Regulation S-X~~Comprehensive toloss ~~delay~~consists ~~the date for compliance with SFAS 123R to the first interim or annual reporting period~~ of ~~a registrant's first fiscal year beginning after June 15, 2005. As a result,~~ the ~~Company~~following is(in ~~required to adopt SFAS 123R on~~ thousands):

	Three Months Ended September 30,						Six Months Ended September 30,
	2005			2004			2005			2004
Net loss, as reported	$	(8,339	)	$	(3,678	)	$	(18,098	)	$	(18,890	)
Foreign currency translation—current period	617			(665		)	3,212			(1,600		)
Foreign currency translation—prior periods	—			—			—			1,897
Comprehensive loss	$	(7,722	)	$	(4,343	)	$	(14,886	)	$	(18,593	)

~~April 1, 2006.~~For ~~The~~the ~~Company~~three ismonths ~~currently~~ended ~~assessing~~September 30, 2005, the ~~impact~~foreign currency translation gain of ~~SFAS~~$0.6 ~~123R~~million onincludes ~~its~~an ~~compensation~~increase of ~~strategies~~$0.6 ~~and~~million ~~financial~~in ~~statements~~goodwill and ~~determining~~an ~~which~~insignificant ~~transition~~impact ~~alternative~~on ~~it will~~identifiable ~~elect.~~intangible ~~The~~assets ~~Company~~relating ~~believes~~to the ~~adoption~~translation of ~~SFAS 123R~~such ~~will~~assets ~~have~~whose afunctional currency ~~material~~is ~~effect~~not onthe ~~its~~U.S. ~~operating~~dollar. ~~results~~For ifthe ~~current~~three ~~compensation strategies are continued.~~

~~Reclassifications and Revisions~~ 8

~~Certain~~months ~~amounts~~ended ~~previously~~September 30, 2004, ~~reported~~the ~~have~~foreign ~~been~~currency ~~reclassified~~translation toloss ~~conform~~of ~~to the current presentation~~$0.7 ~~Amounts~~million ~~reclassified~~includes ~~include amortization expense related to~~increases ~~developed~~of ~~technology~~$0.3 ~~resulting~~million inand an$0.2 ~~increase~~million in ~~cost~~goodwill ofand ~~licenses~~identifiable ~~and~~intangible assets, arespectively, ~~decrease~~relating into ~~amortization~~the ~~expense~~translation of ~~$2,455~~such ~~for~~assets ~~the~~whose functional ~~three~~currency ~~months~~is ~~ended~~not ~~June 30,~~the ~~2004~~U.S. dollar.

For the six months ended September 30, 2005, the foreign currency translation gain of $3. ~~Income~~2 million ~~Taxes~~ includes decreases of $0.3 million and $0.5 million in goodwill and identifiable intangible assets, respectively, relating to the translation of such assets whose functional currency is not the U.S. dollar. For the six months ended September 30, 2004, the foreign currency translation loss of $1.6 million includes increases of $0.1 million each in goodwill and identifiable intangible assets relating to the translation of such assets whose functional currency is not the U.S. dollar.

~~The~~During ~~liability~~the ~~method~~preparation isof the ~~used~~financial statements for the three months 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 ~~accounting~~the functional currencies of the entities to which they relate for ~~income~~periods subsequent ~~taxes~~to the Company’s adoption of fresh-start reporting on July 18, 2003 in connection with its emergence from bankruptcy proceedings. Comprehensive ~~Deferred~~loss ~~tax~~for ~~assets~~the ~~and~~six ~~liabilities~~months ~~are~~ended ~~determined~~September 30, ~~based~~2004 includes $1.9 million which represents the cumulative effect of changes in foreign currency exchange rates on ~~differences~~remeasuring ~~between~~goodwill and identifiable intangible assets from the ~~financial~~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. The $1.9 million increase includes goodwill and ~~tax~~intangible ~~basis~~assets increases of ~~assets~~$1.1 million and ~~liabilities~~$0.8 million, respectively. The Company believes the effect of the adjustments to comprehensive loss for the six months ended September 30, 2004 is not material.

The effective tax rate for the three months ended June 30, 2005 was approximately 3.7%. The Company's income tax expense for the three months ended June 30, 2005 relates primarily to interest accrued on certain tax contingencies net of benefit for foreign losses expected to be realized during fiscal 2006. During the three months ended June 30, 2005 and 2004, the Company did not recognize any benefit from federal or state income tax losses, because future benefit from such losses was not more likely than not expected to be realized. If tax benefits for losses incurred subsequent to the adoption of fresh-start reporting are realized in future periods, the benefit will be recorded as a reduction of tax expense. Reclassifications

~~The Company~~Certain isamounts ~~required,~~that aswere previously ~~part~~reported ofhave ~~the~~been ~~process~~reclassified ofto ~~preparing~~conform ~~its unaudited condensed consolidated financial statements,~~ to ~~estimate income taxes in each of~~ the ~~jurisdictions in which it~~current ~~operates~~presentation. ~~This~~Amounts ~~process~~reclassified ~~involves~~include ~~estimating~~amortization ~~the~~expense ~~current~~related ~~tax~~to developed ~~liability~~technology ~~together~~resulting ~~with~~in ~~assessing~~an ~~timing~~increase ~~differences~~in ~~resulting~~cost ~~from differing treatments~~ of ~~items~~licenses ~~for tax~~ and ~~financial reporting purposes.~~a ~~These~~decrease ~~differences result~~ in ~~deferred~~amortization ~~tax~~expense ~~assets~~of ~~and liabilities~~$2.5 ~~The~~million ~~Company~~and ~~must then assess the likelihood that its deferred tax assets will be recovered from future taxable income~~$4.9 Tomillion ~~the~~for ~~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~~three ~~assets~~ and ~~liabilities~~six ~~and~~months ~~any~~ended ~~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 June~~September 30, ~~2005 and March 31~~2004, ~~2005 because of uncertainties related to utilization of deferred tax assets, primarily related to net operating loss carryforwards, before they expire~~respectively. ~~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.~~

~~The Company is 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")~~4. Income 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 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 during fiscal year 2006. Unremitted earnings on which no deferred taxes have been provided amounted to approximately $37.3 million at June 30, 2005. Taxes

~~Because of~~The ~~its~~liability ~~size~~method ~~and~~is ~~the~~used ~~nature~~in ofaccounting ~~its~~for ~~business,~~income taxes. ~~the~~Deferred ~~Company~~tax isassets ~~subject~~and toliabilities ~~routine~~are ~~tax~~determined ~~compliance~~based ~~reviews~~on bydifferences between the ~~Internal~~financial ~~Revenue~~reporting ~~Service~~ and ~~other~~tax ~~taxing~~basis ~~authorities,~~of ~~including challenges~~assets toand ~~various~~ liabilities.

9The effective tax rates for the three and six months ended September 30, 2005 were approximately 13.1% and 7.8%, respectively. The Company’s income tax expense for the three and six months ended September 30, 2005 relates primarily to interest accrued on certain tax contingencies and taxes on foreign operations for which no U.S. federal benefit can be recorded. During the three and six months ended September 30, 2005 the Company did not recognize any benefit from federal or state income tax losses, because future benefit from such losses was not more likely than not expected to be realized. If tax benefits for losses incurred subsequent to the adoption of fresh-start reporting are realized in future periods, the benefit will be recorded as a reduction of tax expense.

~~positions the~~The Company ~~asserts.~~is ~~The~~required, ~~Company~~as ~~has~~part ~~accrued~~of ~~for~~the ~~tax~~process ~~contingencies~~of preparing ~~based~~its ~~upon~~unaudited ~~its~~condensed ~~best~~consolidated ~~estimate~~financial ofstatements, ~~the~~to estimate income taxes ~~ultimately~~in ~~expected~~each toof bethe ~~paid~~jurisdictions ~~and~~in ~~updates~~which ~~these~~it ~~accruals~~operates. ~~over~~This process ~~time~~involves asestimating ~~more information~~the ~~becomes~~current ~~available.~~tax Aliability ~~significant~~together ~~portion~~with ofassessing timing ~~the~~differences ~~Company's~~resulting ~~taxes~~from ~~payable~~differing ~~balance~~treatments ~~comprises~~of ~~liabilities~~items for tax ~~contingencies~~and financial ~~that~~reporting ~~have~~purposes. ~~been~~These ~~recorded~~differences toresult ~~address~~in deferred tax ~~exposures~~assets and liabilities. The Company ~~is currently~~must ~~undergoing~~then ~~several~~assess ~~examinations~~the bylikelihood ~~taxing~~that ~~authorities~~its indeferred tax ~~various~~assets ~~jurisdictions~~will be recovered from future taxable income. ~~While~~To the extent that the Company believes that recovery is not likely, it ~~has~~must ~~established~~establish ~~appropriate~~a ~~reserves~~valuation allowance. Significant management judgment is required in determining the provision for ~~tax~~income ~~contingencies~~taxes, ~~the~~deferred ~~taxing~~tax assets and liabilities and any ~~authorities~~valuation ~~may~~allowance ~~assert~~recorded ~~that~~against ~~the~~net deferred tax assets. The Company ~~owes~~has recorded ~~taxes~~a invaluation ~~excess~~allowance ofon ~~the~~substantially ~~reserves~~all itof ~~has~~its ~~established.~~net

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 months ended June 30, 2005, the Company recorded net decreases to goodwill totaling approximately $1.4 million 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

~~4. Segment~~deferred tax asset balances as of September 30, 2005 and ~~Geographic~~March 31, ~~Information~~ 2005 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.

The Company's ~~two~~is ~~reportable~~reviewing ~~segments~~the potential impact of the one-time favorable foreign dividend provisions enacted on October 22, ~~which~~2004 as ~~align~~part ~~with~~of the ~~internal~~American ~~management~~Jobs Creation Act of ~~worldwide~~2004 ~~business~~(the ~~operations~~“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, ~~are~~this aswould ~~follows:~~be applicable to 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 during fiscal year 2006. Unremitted earnings on which no deferred taxes have been provided amounted to approximately $37.3 million at March 31, 2005.

~~The~~Because of its size and the nature of its business, the Company's ~~Chief~~is ~~Executive~~subject ~~Officer~~to ~~(its~~routine ~~chief~~tax ~~operating~~compliance ~~decision~~reviews ~~maker)~~by ~~evaluates~~the ~~segment~~Internal Revenue ~~financial~~Service ~~performance~~and ~~based~~other ontaxing ~~segment~~authorities, ~~revenues~~including ~~only~~challenges to various positions the Company asserts. The Company's ~~Chief~~has ~~Executive~~accrued ~~Officer~~for tax contingencies ~~does~~based ~~not~~upon ~~evaluate~~its best estimate of the ~~financial~~taxes ~~performance~~ultimately expected to be paid and updates these accruals over time as more information becomes available. A significant portion of ~~each~~the ~~segment~~Company’s ~~based~~taxes onpayable ~~its~~balance ~~respective~~comprises liabilities ~~operating~~for ~~income,~~tax ~~assets~~contingencies orthat ~~capital~~have ~~expenditures~~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.

~~The~~Due to the adoption of fresh-start reporting, ~~following~~any ~~table~~adjustments ~~summarizes~~to ~~segment~~the ~~revenue~~Company’s ~~for~~tax assets or liabilities that existed prior to the ~~three~~adoption of fresh-start reporting are recorded as adjustments to goodwill. For the six months ended ~~June~~September 30, 2005, ~~and~~the ~~June~~Company recorded a net decrease to goodwill totaling approximately $1.3 ~~30,~~million for ~~2004~~adjustments ~~(dollars~~to inthe ~~thousands):~~Company’s tax assets and liabilities that existed prior to the adoption of fresh-start reporting.

		Three Months Ended June 30, 2005			Three Months Ended June 30, 2004
Segment revenue:
	Americas	$	24,881		$	22,586
	EMEA/AP		19,705			17,588
Total		$	44,586		$	40,174
% of total revenue:
	Americas		56	%		56	%
	EMEA/AP		44	%		44	%
			100	%		100	%

The reorganization of the Company upon emergence from bankruptcy proceedings caused an ownership change under Section 382 of the Internal Revenue Code. Such ownership change resulted in significant limitations being placed on the utilization of the Predecessor Company’s pre-change tax attributes, including net operating loss carry forwards, capital loss carry forwards, tax credits and certain built-in losses and effectively eliminated a substantial portion of the Predecessor Company’s total pre-change tax attributes. For the year ended March 31, 2005 and forward, the Company is limited to utilizing approximately $4.7 million (tax effected) of such pre-change tax attributes annually to offset any post-change income. References to the “Predecessor Company” herein pertain to the fiscal periods prior to and including July 18, 2003. If the Company were to undergo an ownership change in the future, it is possible the post-change losses could be significantly limited.

5. ~~Commitments~~ Segment and ~~Contingencies~~ Geographic Information

~~Federal~~Operating ~~Government~~segments ~~Investigations~~are defined as components of an enterprise about which separate financial information is available and evaluated ~~Proceedings~~regularly ~~Relating~~by toour ~~Historical~~chief ~~Accounting~~operating ~~Irregularities~~decision maker in allocating resources and assessing performance. The Company’s operating segments are managed separately because each segment represents a strategic business unit that offers different products or services.

~~In early~~Beginning ~~2002,~~in the ~~Department~~second quarter of ~~Justice~~fiscal ~~(the~~year ~~"DOJ") and~~ 2006, the ~~SEC~~Company ~~opened~~reorganized ~~investigations~~its ~~into~~management ~~Peregrine~~structure ~~relating~~and tochanged ~~the~~its ~~accounting~~internal financial ~~improprieties that took place prior to 2002~~reporting. ~~In June 2003,~~As ~~the SEC filed~~ a ~~partially-settled~~result, ~~civil action against Peregrine in~~ the ~~United~~Company ~~States~~changed ~~District~~its ~~Court~~basis ~~for~~of ~~the~~

~~Southern District~~segmentation of California alleging violations of the Securities Act of 1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules promulgated thereunder. In the same month, the Company's settlement with the SEC was approved by the District Court, resolving the civil complaint. The SEC separately withdrew a request for monetary damages and disgorgement in July 2003. Under the terms of the settlement, the Company agreed, among other things, to be enjoined from ~~violating the federal securities laws. Because~~two ~~the~~reportable ~~Company~~segments ~~has~~based ~~not filed its SEC periodic reports~~ on ageography ~~timely basis, it has not been in compliance with the requirement of the settlement pertaining~~ to ~~refraining~~three ~~from~~reportable ~~violating~~segments ~~federal~~based ~~securities~~on ~~laws.~~products ~~To the Company's knowledge, the SEC is not considering a further enforcement action against it,~~ and ~~the Company is not a target of any ongoing investigation, but it can not be sure that a further enforcement action or criminal proceeding will not be brought against it~~services. ~~Responding to any such actions could be expensive and time-consuming for management and could have an adverse effect on the Company's reputation and ability to generate sales.~~

~~Bankruptcy~~The ~~Reorganization;~~Company’s ~~Claims~~three ~~Litigation~~ reportable operating segments are Licenses, Maintenance, and Consulting and Training. The Licenses segment develops and markets licenses to use software products. The Maintenance segment provides after-sale support for software products. The Consulting and Training segment provides fee-based consulting and training services related to software products.

OnThe ~~September 27, 2002, the~~ Company ~~and~~does ~~its~~not ~~wholly-owned~~separately ~~subsidiary,~~allocate ~~Peregrine Remedy, Inc., filed voluntary petitions under Chapter 11 of the U.S.~~operating ~~Bankruptcy~~expenses ~~Code.~~to ~~The~~these ~~plan of reorganization of the Company (the "Reorganization Plan") was confirmed by the U.S. Bankruptcy Court in the District of Delaware (the "Bankruptcy Court") on July 18~~segments, ~~2003,~~nor ~~and~~does it ~~became~~allocate ~~effective~~specific onassets ~~August 7, 2003. Unless otherwise indicated, all references~~ to ~~"old common stock" pertain to the Company's common stock, par value $0~~these segments.~~001~~ ~~per share~~Therefore, ~~that~~segment ~~was~~information ~~cancelled~~reported onincludes ~~August 7,~~only ~~2003 in connection with the Company's emergence from Chapter 11 bankruptcy proceedings~~revenue, ~~and all references to "new common stock" pertain to the~~cost ~~Company's~~of ~~common stock~~revenue, ~~par value $0.0001 per share, from~~ and ~~after~~gross ~~the effective date of the Reorganization Plan~~profit. ~~References to the "Predecessor Company" herein pertain to the fiscal periods prior to and including July 18, 2003.~~

~~Class 8 General Unsecured Claims. Approximately 1,200 general unsecured claims were filed against the Company based on~~The ~~events~~following ~~that~~table ~~took~~summarizes ~~place~~reportable ~~prior~~segment todata ~~the~~for ~~bankruptcy filing. The Company began paying claims on~~ the ~~effective~~three ~~date of the Reorganization Plan~~ and ~~continues~~six ~~to pay based on settlement terms or as claims are~~months ~~settled.~~ended ~~Through June~~September 30, 2005, inand ~~order to resolve these claims~~2004, ~~the~~respectively ~~Company has paid or agreed to pay over time approximately $45.0 million~~ (in cash. As of June 30, 2005, there were general unsecured claims asserted in the original aggregate face amount of approximately $0.3 million remaining to be resolved. The Company believes amounts accrued at June 30, 2005 are sufficient to resolve the claims. thousands):

Class 7/9 Reserve Shares. Under the Company's Reorganization Plan, 600,000 shares of new common stock (the "Class 7/9 Reserve Shares"), representing 4% of the 15,000,000 shares of new common stock issued on the effective date of the Reorganization Plan, were held in reserve by Peregrine, in its capacity as stock disbursing agent under the Reorganization Plan, to be allocated between Class 7 and Class 9 under the Reorganization Plan. The allocation was to be based on whether the amount finally paid to resolve Class 8 general unsecured claims falls below, within, or above the range of $49.0 million and $65.0 million, which were the estimates of Class 8 payments determined by the various constituencies in the bankruptcy proceedings. As the Company has determined that the final amount needed to resolve Class 8 claims will be below $49.0 million, all of these 600,000 shares were allocated to Class 9. As a result of the settlement agreement among representatives of the classes within Class 9, the Equity Class within Class 9 (i.e., holders, as of the effective date of the Reorganization Plan, of the Predecessor Company's common stock) were entitled to receive 85%, or 510,000, of such shares, and the Securities Class within Class 9 (i.e., purchasers of old common stock involved in a class action brought against the Predecessor Company that was resolved under the Reorganization Plan) were entitled to receive 15%, or 90,000, of such shares. The Class 7/9 Reserve Shares were distributed in a process that began on August 30, 2005.

	Three Months Ended September 30,					Six Months Ended September 30,
	2005		2004			2005			2004
License revenue	$	12,593	$	15,623		$	26,090		$	26,768
Cost of licenses	2,870		2,774			5,626			5,628
Gross profit	$	9,723	$	12,849		$	20,464		$	21,140
Maintenance revenue	$	26,145	$	28,315		$	52,415		$	53,552
Cost of maintenance	4,413		4,434			9,088			8,978
Gross profit	$	21,732	$	23,881		$	43,327		$	44,574
Consulting and training revenue	$	5,626	$	3,996		$	10,445		$	7,788
Cost of consulting and training	5,618		4,410			10,776			8,295
Gross profit	$	8	$	(414	)	$	(331	)	$	(507	)
Total revenue	$	44,364	$	47,934		$	88,950		$	88,108
Total cost of revenue	12,901		11,618			25,490			22,901
Gross profit	$	31,463	$	36,316		$	63,460		$	65,207

11The following table summarizes revenue from the principal geographic areas in which the Company operates based on the location of the entity to which the products or services were delivered (in thousands):

Administrative Claims and Luddy v. Peregrine. Administrative claims are claims related to obligations the Company purportedly incurred after it filed for bankruptcy law protection during the administrative period of the bankruptcy case. In order to be paid, administrative claims must meet certain requirements under the Reorganization Plan and bankruptcy laws. The only material remaining administrative liability results from a complaint filed in May 2004 against the Company by the Company's former chief technology officer, Frederic Luddy, in the Court of Chancery for the State of Delaware. Mr. Luddy's complaint alleged that Peregrine is required to advance or reimburse him for his defense expenses in connection with ongoing civil litigation related to the Company's accounting improprieties, but to which the Company is not a party. In June 2004, the Company removed Mr. Luddy's complaint from Delaware state court to the Bankruptcy Court. On November 10, 2004, the Bankruptcy Court found that it had jurisdiction to consider the complaint, and the court granted in part and denied in part the Company's motion to dismiss Mr. Luddy's complaint, without prejudice, to the Company's right to renew the motion later after discovery and formal fact finding. Discovery has not yet commenced and no trial date has been set. The Company 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.

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Revenue:
United States	$	20,244	$	26,475	$	42,636	$	47,790
EMEA(3)	19,496		18,194		36,290		33,783
Rest of world	4,624		3,265		10,024		6,535
Total revenue	$	44,364	47,934		$	88,950	$	88,108

~~Other~~(3) EMEA is ~~Litigation~~ comprised of Europe, the Middle East and Africa.

~~The Company is also involved in legal proceedings, claims, and litigation arising from the ordinary course of business~~6. Commitments ~~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.~~ Contingencies

~~6. Restructuring,~~Federal ~~Impairments~~Government Investigations and ~~Other~~ Proceedings Relating to Historical Accounting Irregularities

~~For~~In ~~the~~early ~~three~~2002, ~~months~~the Department ~~ended~~of ~~June 30,~~Justice ~~2005,~~(the ~~restructuring,~~“DOJ”) ~~impairments~~ and ~~other~~the ~~totaled~~SEC ~~$0.2 million,~~opened ~~attributable~~investigations ~~to a $0.2 million escrow~~into ~~payment~~Peregrine ~~received~~relating ~~from~~to athe ~~sale~~accounting ofimproprieties ~~one~~that oftook ~~the~~place ~~Company's~~prior ~~investments~~to 2002. ~~that~~In ~~had~~June 2003, ~~been~~the ~~previously~~SEC ~~impaired.~~

~~7. Other Income~~ 11

~~During~~filed ~~the~~a partially-settled ~~three~~civil ~~months~~action ~~ended~~against ~~June 30,~~Peregrine ~~2005,~~in the ~~Company~~United ~~received~~States ~~cash~~District Court infor the ~~amount~~Southern District of ~~$2.1 million~~California ~~related~~alleging toviolations of the Securities ~~settlement~~Act of a1933, ~~dispute~~as ~~with~~amended a(the “Securities Act”) and the Securities ~~customer~~Exchange ~~arising~~Act ~~from~~of a1934, ~~software~~as ~~license~~amended ~~agreement~~(the ~~entered~~“Exchange ~~into~~Act”) inand ~~March~~the rules ~~2002~~promulgated thereunder. In ~~connection with~~ the ~~settlement~~same month, the Company’s ~~also~~settlement ~~agreed~~with tothe ~~issue~~SEC ~~new~~was approved ~~software~~by ~~licenses~~the toDistrict ~~the~~Court, ~~customer~~resolving ~~which~~ the ~~customer~~civil ~~will~~complaint. ~~evaluate~~The ~~and~~SEC separately ~~may~~withdrew ~~decide to install at~~ a ~~later~~request ~~date.~~for Ofmonetary ~~the~~damages ~~cash~~and ~~received,~~disgorgement ~~$1.2~~in July ~~million~~2003. Under ~~has~~the ~~been~~terms ~~accounted~~of ~~for~~the assettlement, the ~~resolution~~Company ofagreed, aamong ~~gain~~other ~~contingency~~things, ~~that~~to be ~~arose~~enjoined ~~prior~~from toviolating the ~~Company's~~ ~~application~~federal ofsecurities ~~fresh-start~~laws. ~~reporting~~Because ~~effective~~the ~~July 18,~~Company ~~2003~~has not infiled ~~connection~~its ~~with~~SEC ~~the~~periodic ~~emergence~~reports ~~from~~on ~~bankruptcy~~a ~~and~~timely isbasis, ~~recorded~~it ashas ~~other~~not ~~income~~been in compliance with the ~~accompanying~~requirement ~~consolidated statements~~ of ~~operations.~~the ~~The~~ settlement ~~also~~pertaining ~~included~~to ~~the~~refraining ~~payment~~from violating offederal ~~accrued~~securities ~~interest~~laws. ~~and~~To the ~~recovery~~Company’s ofknowledge, ~~legal expenses incurred by~~ the ~~Company~~SEC tois ~~litigate~~not considering ~~and~~a ~~ultimately~~further ~~settle~~enforcement ~~this~~action ~~dispute.~~against ~~The Company~~it, ~~has~~and ~~recorded~~ the ~~remaining~~Company ~~cash~~is ~~received~~not ~~under~~a target ~~the~~of ~~settlement~~any ofongoing ~~$0.2 million~~investigation, ~~and~~but ~~$0.7 million~~it ascan ~~interest~~not ~~income~~be ~~and~~sure that a ~~reduction~~further enforcement ofaction ~~general~~or ~~and~~criminal ~~administrative~~proceeding ~~expenses reflecting~~will ~~the~~not ~~recovery~~be ofbrought ~~legal~~against ~~costs,~~it. Responding ~~respectively,~~to inany ~~the~~such ~~accompanying~~actions ~~consolidated~~could ~~statements~~be ofexpensive ~~operations,~~and astime-consuming ~~such~~for management ~~amounts~~and ~~were~~could ~~earned~~have oran ~~incurred~~adverse ~~subsequent~~effect toon the Company'’s ~~adoption~~reputation ofand ~~fresh-start~~ability ~~reporting.~~to generate sales.

~~Also~~Bankruptcy ~~included~~Reorganization; inClaims ~~other income for the three months ended June 30, 2005 is $0.5 million from the recovery of previously paid financing fees.~~ Litigation

12On September 22, 2002, the Company and its wholly-owned subsidiary, Peregrine Remedy, Inc., 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 in the District of Delaware (the “Bankruptcy Court”) on July 18, 2003, and it became effective on August 7, 2003. Unless otherwise indicated, all references to “old common stock” pertain to the Company’s common stock, par value $0.001 per share, that was cancelled on August 7, 2003 in connection with the Company’s emergence from Chapter 11 bankruptcy proceedings, and all references to “new common stock” pertain to the Company’s common stock, par value $0.0001 per share, from and after the effective date of the Reorganization Plan. References to the “Predecessor Company” herein pertain to the fiscal periods prior to and including July 18, 2003.

Class 8 General Unsecured Claims. ~~Subsequent~~ Approximately ~~Events~~ 1,200 general unsecured claims were filed against the Company based on events that took place prior to the bankruptcy filing. The Company began paying claims on the effective date of the Reorganization Plan and continues to pay based on settlement terms or as claims are settled. Through September 30, 2005, in order to resolve these claims, the Company has paid or agreed to pay over time approximately $45.0 million in cash. As of September 30, 2005, there were general unsecured claims asserted in the original aggregate face amount of approximately $0.3 million remaining to be resolved. Bankruptcy related claims to be paid in cash over time at September 30, 2005 total $36.1 million. The Company believes amounts accrued at September 30, 2005 are sufficient to resolve the claims.

~~During August~~Class ~~2005,~~7/9 Reserve Shares. Under the Company’s ~~issued~~Reorganization toPlan, ~~certain~~600,000 ~~key~~shares ~~employees~~of anew ~~total~~common ofstock ~~468~~(the “Class 7/9 Reserve Shares”),~~500~~ ~~restricted~~representing 4% of the 15,000,000 shares of new common stock issued on the effective date of the Reorganization Plan, ~~$0.0001~~were ~~par~~held ~~value~~in reserve by Peregrine, ~~pursuant~~in toits capacity as stock disbursing agent under the ~~Company's~~Reorganization ~~2003~~Plan, ~~Equity~~to ~~Incentive~~be allocated between Class 7 and Class 9 under the Reorganization Plan. The allocation was to be based on whether the amount finally paid to resolve Class 8 general unsecured claims falls below, ~~representing~~within, anor ~~aggregate~~above ~~value~~a range of ~~approximately~~$49.0 million and $965.0 million, which ~~will~~were bethe ~~recognized~~estimates asof ~~compensation~~Class 8 ~~expense~~payments ~~ratably~~determined ~~over~~by athe ~~three-year~~various constituencies ~~vesting~~in ~~period~~the bankruptcy proceedings. ~~The shares~~As ofthe ~~restricted~~Company ~~stock~~has ~~vest~~determined that inthe ~~three~~final ~~equal~~amount ~~installments~~needed onto ~~August~~resolve Class 8 claims will be below $49.0 million, ~~2006~~all of the 600,000 ~~2007~~shares ~~and~~were ~~2008~~allocated to Class 9. As ~~Additionally,~~a result of the ~~Company~~settlement ~~issued~~agreement ~~options~~among torepresentatives ~~purchase~~of the classes ~~286~~within Class 9,~~000~~ ~~shares~~the Equity Class within Class 9 (i.e. holders, as of ~~its~~the ~~common~~effective ~~stock~~date ~~with~~of ~~exercise~~the ~~prices~~Reorganization atPlan, of the ~~fair~~Predecessor ~~market~~Company’s common ~~value~~stock) was entitled to receive 85%, or 510,000, of such shares, and the Securities ~~underlying~~Class within Class 9 (i.e. purchasers of old common stock involved onin a class action brought against the ~~grant~~Predecessor ~~date.~~Company that was resolved

On September 19, 2005, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Hewlett-Packard Company ("HP"). Pursuant to the terms of the Merger Agreement, at the effective time of the merger, each share of the Company's common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive cash in the amount of $26.08. The aggregate purchase price approximates $425 million. Consummation of the merger is subject to customary closing conditions, including (i) approval of the Merger Agreement by the stockholders of the Company, (ii) absence of any law or order prohibiting the consummation of the merger, (iii) expiration or termination of the applicable Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting period and receipt of certain foreign antitrust approvals, and (iv) the accuracy of the representations and warranties of the parties to the Merger Agreement. The Merger Agreement may be terminated by either the Company and HP under certain circumstances, and further provides that, upon certain terminations of the Merger Agreement, the Company will be required to pay HP a termination fee in the amount of $11.7 million. 12

13under the Reorganization Plan) was entitled to receive 15%, or 90,000, of such shares. The Class 7/9 Reserve Shares were distributed in a process that began on August 30, 2005.

Administrative Claims and Luddy v. Peregrine. Administrative ~~ITEM~~claims are claims related to obligations the Company purportedly incurred after it filed for bankruptcy law protection during the administrative period of the bankruptcy case. In order to be paid, administrative claims must meet certain requirements under the Reorganization Plan and bankruptcy laws. The only material remaining administrative liability results from a complaint filed in May 22004 against the Company by the Company’s former chief technology officer, Frederic Luddy, in the Court of Chancery for the State of Delaware. ~~MANAGEMENT'S~~ ~~DISCUSSION~~Mr. Luddy’s complaint ~~AND~~alleged ~~ANALYSIS~~that OFPeregrine ~~FINANCIAL~~is ~~CONDITION~~required ~~AND~~to ~~RESULTS~~advance OFor ~~OPERATIONS~~ reimburse him for his defense expenses in connection with ongoing civil litigation related to the Company’s accounting improprieties, but to which the Company is not a party. In June 2004, the Company removed Mr. Luddy’s complaint from Delaware state court to the Bankruptcy Court. On November 10, 2004, the Bankruptcy Court found that it had jurisdiction to consider the complaint, and the court granted in part and denied in part the Company’s motion to dismiss Mr. Luddy’s complaint, without prejudice, to the Company’s right to renew the motion later after discovery and formal fact finding. Discovery has not yet commenced and no trial date has been set. On October 25, 2005, Mr. Luddy and the Company signed a settlement agreement to resolve the issues raised in Mr. Luddy’s complaint. The settlement agreement will become effective 10 days after it is approved by the Bankruptcy Court. If approved in its current form by the Bankruptcy Court, the settlement agreement will not materially affect the Company’s financial position, results of operations or liquidity.

~~The~~Other 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 within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act. These statements include, among other things, statements concerning our future operations, financial condition and prospects, and business strategies. The words "believe," "expect," "anticipate," "intend," "seek," "will," and other similar expressions generally identify forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition or results of operations to differ materially from our historical results or currently anticipated results. Readers should carefully review the information set forth under the caption "Risk Factors" contained in our Amended Form 10-K 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.Litigation

WeThe ~~have~~Company ~~not~~is ~~filed~~also involved ~~our~~in ~~SEC~~legal ~~periodic~~proceedings, ~~reports~~claims, onand alitigation ~~timely~~arising ~~basis.~~from ~~For~~the ~~this~~ordinary course ~~reason,~~of ~~and~~business. ~~based~~Although on the ~~other~~ultimate ~~risk~~results ~~factors~~of ~~contained~~these inlegal ~~our Amended Form 10-K~~proceedings, claims weand ~~believe~~litigation ~~trading~~are not currently determinable, in ~~our~~the ~~securities~~opinion atof management ~~this~~these ~~time~~matters iswill ~~highly~~not ~~speculative~~materially ~~and~~affect ~~involves~~the aCompany’s ~~high~~financial position, ~~degree~~results of ~~risk~~operations or liquidity.

~~OVERVIEW~~ Lease Commitment

~~Peregrine~~During ~~Systems~~July 2005, ~~Inc.~~ (the "Company" orentered ~~"Peregrine"~~into ~~and~~a ~~references~~lease commitment tofor ~~"we,"~~additional ~~"us,"~~office orspace ~~"our")~~to issupport aoperations ~~global~~at ~~provider~~its headquarters ofin ~~enterprise~~San ~~software~~Diego. ~~Peregrine's~~The ~~core business~~lease isperiod ~~providing~~commences ~~information~~October 1, ~~technology~~2005 ~~asset~~ and ends ~~service~~April 30, ~~management~~2012. ~~software~~The ~~solutions~~total lease commitment is $4.1 million through April 2012.

~~Peregrine's core software product suites are AssetCenter® and ServiceCenter®~~7. ~~AssetCenter and ServiceCenter support two main business processes: asset management and service management. Typically~~ Restructuring, ~~the assets managed with Peregrine's products consist of information technology assets, such as computer and computer-networking hardware and software items, and~~ ~~other~~Impairments ~~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. In addition, we offer products in our Configuration Services suite which provides a consolidated accurate view of all IT assets and allows customers to automatically discover, inventory, and better utilize all hardware, software, and network devices. Other

~~We have~~For ~~also~~the ~~embraced~~six amonths ~~new~~ended ~~vision~~September 30, 2005, ~~called~~restructuring, ~~Optimal~~impairments ~~IT™~~ and ~~announced~~other ~~our~~totaled ~~intent~~$0.2 million, attributable to ~~develop~~ a ~~new DecisionCenter™ product to deliver on this vision~~$0.2 million ~~DecisionCenter and~~escrow ~~the~~payment ~~solutions~~received wefrom ~~develop~~a ~~around~~sale ~~it will be designed to provide analytics and decision modeling capabilities that will enable our customers to optimize the performance~~ of ~~the technology~~one ~~infrastructure using information generated by existing applications, including ServiceCenter and AssetCenter. The Optimal IT solutions are expected to provide the capability~~ of ~~collecting, understanding, analyzing and modeling~~ the ~~complex~~Company’s ~~information~~investments that ~~describes~~had ~~the~~been ~~technology~~previously ~~environment, to enable organizations to make optimal tradeoffs given the constraints of time, resources, costs and assets~~impaired.

148. Other Income

~~RESULTS~~During OFthe ~~OPERATIONS~~ six months ended September 30, 2005, the Company received cash in the amount of $2.1 million related to the settlement of a dispute with a customer arising from a software license agreement entered into in March 2002. In connection with the settlement, the Company also agreed to issue new software licenses to the customer which the customer will evaluate and may decide to install at a later date. Of the cash received, $1.2 million has been accounted for as the resolution of a gain contingency that arose prior to the Company’s application of fresh-start reporting, effective July 18, 2003, upon the emergence from bankruptcy proceedings and is recorded as other income in the accompanying consolidated statements of operations. The settlement included the payment of interest accrued and the recovery of legal expenses incurred by the Company to litigate and ultimately settle this dispute. The Company has recorded the remaining cash received under the settlement of $0.2 million and $0.7 million as interest income and a reduction of general and administrative expenses reflecting the recovery of legal

~~The following tables set forth for the periods indicated the selected condensed consolidated statement of operations data as a percentage of total revenue:~~ 13

~~Three~~costs, ~~Months~~ respectively, in the accompanying consolidated statements of operations, as such amounts were earned or incurred subsequent to the Company’s adoption of fresh-start reporting.

			Three Months Ended June 30, 2005		Three Months Ended June 30, 2004
Revenue:
	Licenses		30.3	%	27.8	%
	Maintenance		58.9	%	62.8	%
	Consulting and training		10.8	%	9.4	%
		Total revenue	100.0	%	100.0	%
Operating costs and expenses:
	Cost of licenses		6.2	%	7.1	%
	Cost of maintenance		10.5	%	11.3	%
	Cost of consulting and training		11.5	%	9.7	%
	Sales and marketing		41.4	%	40.5	%
	Research and development		19.0	%	18.7	%
	General and administrative		25.9	%	31.9	%
	Amortization of intangible assets		7.5	%	8.4	%
	Restructuring, impairments and other		(0.4	)%	—
		Total operating costs and expenses	121.6	%	127.6	%
Operating loss			(21.6	)%	(27.6	)%
	Foreign currency transaction losses, net		(2.4	)%	(2.7	)%
	Reorganization items, net		(0.5	)%	(2.0	)%
	Interest income		1.6	%	0.6	%
	Interest expense		(1.9	)%	(3.0	)%
	Other income		3.7	%	—
Loss before income taxes			(21.1	)%	(34.7	)%
	Income tax expense		(0.8	)%	(3.2	)%
		Net loss	(21.9	)%	(37.9	)%

Also included in other income for the six months ended September 30, 2005 is $0.5 million from the recovery of financing fees paid prior to the Company’s emergence from bankruptcy proceedings to financial institutions with which the Company had accounts receivable financing facilities.

~~COMPARISON~~9. Stockholders’ ~~OF RESULTS OF OPERATIONS~~ Equity

~~REVENUE~~ In May 2004, the Company issued to its Chief Executive Officer, 40,000 shares of common stock, $0.0001 par value, pursuant to the Company’s 2003 Equity Incentive Plan, representing an aggregate value of approximately $0.7 million, which was recognized as compensation expense in the period granted.

~~Revenue~~During isAugust 2005, ~~comprised~~the Company issued to certain key employees a total of ~~license~~468,500 ~~fees~~restricted shares of common stock, ~~maintenance~~$0.0001 ~~service~~par value, ~~fees~~pursuant to the Company’s 2003 Equity Incentive Plan, representing an aggregate value of approximately $9 million, and ~~fees~~is ~~for~~being ~~consulting~~recognized as compensation expense ratably over a three-year vesting period. The shares of restricted stock vest in three equal installments on August 8, 2006, 2007 and ~~training~~2008; ~~services~~subject to full vesting immediately prior to the consummation of a change in control of the Company. WeAdditionally, ~~organize~~during ~~our~~the ~~business~~three ~~operations~~months ~~according~~ended September 30, 2005, the Company issued options to ~~two~~purchase 330,000 shares of its common stock ~~segments:~~with exercise prices at the fair market value of the underlying common stock on the grant date.

15The following table summarizes stock compensation expense included in operating costs and expenses for the three and six months ended September 30, 2005 and 2004, respectively:

The following table summarizes revenue by segment and component for the three months ended June 30, 2005 and 2004 (dollars in thousands):

	Three Months Ended September 30,					Six Months Ended September 30,
	2005		2004			2005		2004
Cost of consulting	$	19		$	—	$	19	$	—
Cost of maintenance	19			—		19		—
Sales and marketing	200			—		200		—
Research and development	51			—		51		—
General and administrative	263			92		263		783
Total stock compensation expense	$	552		$	92	$	552	$	783

				Three Months Ended June 30, 2005		Three Months Ended June 30, 2004		Change
								Amount		Percent
Revenue:
	Licenses
		Americas		$	7,770	$	6,094	$	1,676	28	%
		EMEA/AP			5,727		5,051		676	13	%
			Total license revenue		13,497		11,145		2,352	21	%
Maintenance
		Americas			14,487		14,284		203	1	%
		EMEA/AP			11,783		10,953		830	8	%
			Total maintenance revenue		26,270		25,237		1,033	4	%
Consulting and Training
		Americas			2,624		2,208		416	19	%
		EMEA/AP			2,195		1,584		611	39	%
			Total consulting and training revenue		4,819		3,792		1,027	27	%
Total Revenue				$	44,586	$	40,174	$	4,412	11	%
Total Revenue by Segment:
		Americas		$	24,881	$	22,586	$	2,295	10	%
		EMEA/AP			19,705		17,588		2,117	12	%
Total Revenue				$	44,586	$	40,174	$	4,412	11	%

~~Licenses~~ ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

WeThe ~~generally~~following ~~license~~discussion ~~our~~and ~~products~~analysis toof ~~end-users~~our ~~under~~financial condition, ~~perpetual~~results ~~license~~of ~~agreements~~operations, ~~for~~liquidity anand ~~up-front~~capital ~~fee.~~resources ~~License~~should ~~revenue~~be read ~~for~~in conjunction with the ~~three months~~condensed ~~ended~~consolidated ~~June 30,~~financial ~~2005~~statements ~~increased~~and related bynotes ~~$2.4 million,~~included orin ~~21%,~~this ~~from~~report. Some of the ~~three~~information ~~months~~contained ~~ended~~in this ~~June 30~~discussion and analysis, ~~2004.~~or ~~License~~set ~~revenue~~forth ~~for~~elsewhere ~~the~~in ~~Americas~~this ~~territory~~report, ~~totaled~~includes forward-looking ~~$7.8~~statements within the meaning of Section ~~million~~27a ~~for~~of the Securities Act and Section 21e of the ~~three~~Exchange ~~months~~Act. ~~ended~~These ~~June 30~~statements include, ~~2005~~among other things, anstatements ~~increase~~concerning ofour ~~$1.7 million~~future operations, financial orcondition ~~28%~~and prospects, ~~from~~and ~~the~~business ~~three~~strategies. ~~months~~The ~~ended~~words ~~June 30~~“believe,” “expect,” ~~2004.~~“anticipate,” ~~License~~“intend,” ~~revenue~~“seek,” in“will,” ~~EMEA/AP~~and ~~totaled~~other $5similar expressions generally identify forward-looking statements.~~7 million~~ ~~for~~These forward-looking ~~the~~statements ~~three~~are ~~months~~subject ~~ended~~to ~~June 30,~~substantial ~~2005,~~risks anand ~~increase~~uncertainties ofthat ~~$0.7 million~~could cause our future business, financial condition or ~~13%,~~results of operations to differ materially from ~~the~~our ~~three~~historical ~~months~~results ~~ended~~or ~~June 30,~~currently ~~2004~~anticipated results. Readers ~~The~~should ~~increases~~carefully inreview ~~license~~the ~~revenue~~information ~~for~~set ~~both~~forth under the ~~Americas~~caption ~~and~~“Risk ~~EMEA/AP~~Factors” ~~segments~~contained ~~are~~in ~~primarily~~our ~~attributable~~Amended toForm 10-K for a ~~greater~~discussion ~~number~~ of important ~~relatively~~factors ~~larger~~that ~~transactions~~could ~~recorded~~cause inactual ~~the~~results ~~three~~to ~~months~~differ ~~ended~~materially ~~June 30,~~from ~~2005.~~our historical ~~This~~or ~~revenue~~anticipated ~~was~~results ~~derived~~described ~~largely~~herein, ~~from~~or ~~new~~implied ~~and~~by the forward-looking ~~additional~~statements ~~licenses~~in ~~sold~~this report. We undertake no obligation to ~~our~~revise ~~existing~~or ~~customer~~update ~~base.~~any forward-looking statements for any reason.

~~Maintenance~~ Historically, we have not filed our SEC periodic reports on a timely basis. For this reason, and based on the other risk factors contained in our Amended Form 10-K, we believe trading in our securities at this time is highly speculative and involves a high degree of risk.

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, contain economic index fee escalation provisions and are renewable annually at the customer's option. Maintenance contracts are generally prepaid by customers, and revenue is recognized ratably over the support period. Maintenance revenue may include fees for services rendered in prior periods in instances in which customers did not renew their maintenance contracts until the current period. OVERVIEW

16Peregrine Systems, Inc. (the “Company” or “Peregrine” and references to “we,” “us,” or “our”) is a global provider of enterprise software. Peregrine’s core business is providing information technology asset and service management software solutions.

~~We adopted~~Peregrine’s ~~the~~core ~~fresh-start~~software ~~reporting~~product ~~provisions~~suites ofare AssetCenter® ~~SOP~~and ~~90-7~~ServiceCenter®. asAssetCenter ofand ~~July 18,~~ServiceCenter ~~2003~~support intwo ~~connection~~main business ~~with~~processes: ~~our~~asset ~~emergence~~management ~~from~~and ~~bankruptcy~~service ~~protection under Chapter 11~~management. ~~Fresh-start~~ ~~reporting~~Typically, ~~requires that~~ the assets ~~reorganization~~managed ~~value~~with ~~be allocated to the entity'~~Peregrine’s ~~assets~~products inconsist ~~accordance with Statement~~ of ~~Financial~~information ~~Accounting Standards No. 141, "Business Combinations"~~technology ~~("SFAS 141"). In accordance with these pronouncements~~assets, wesuch ~~determined~~as ~~the~~computer ~~fair~~and ~~market~~computer-networking ~~value~~hardware ~~of our assets~~ and ~~liabilities at July 18, 2003, including our deferred maintenance revenue~~software ~~balances. Accordingly~~items, weand ~~reduced~~other ~~our~~assets ~~deferred~~used ~~maintenance~~to ~~revenue~~provide ~~balances~~infrastructure ~~by $6.3 million~~ to ~~reflect~~a ~~the~~business. ~~fair~~The services ~~value~~managed ofwith ~~maintenance~~Peregrine’s ~~contracts~~products ~~existing~~usually atconsist ~~July 18,~~of ~~2003.~~the ~~This~~service ~~$6.3 million~~delivery ~~adjustment~~and ~~has~~support ~~the~~processes ~~effect~~necessary ofto ~~reducing~~troubleshoot, ~~maintenance~~support ~~revenue~~and ~~over the maintenance contract periods for~~ maintain those ~~contracts~~same ~~that~~information ~~existed~~technology ~~when~~and weinfrastructure ~~adopted fresh-start reporting~~assets. In ~~the~~addition, ~~three~~we ~~months~~offer ~~ended~~products ~~June 30,~~in ~~2005~~our ~~and~~Configuration ~~2004,~~Services ~~maintenance~~suite ~~revenue~~which ~~was~~provides ~~reduced~~a byconsolidated accurate ~~$0.1 million~~view ~~and~~of ~~$0.6 million,~~all ~~respectively.~~IT ~~The~~assets ~~balance~~and ofallows ~~the~~customers ~~adjustment~~to ofautomatically ~~$0.3 million at~~discover, ~~June 30~~inventory, ~~2005,~~and ~~will~~better beutilize ~~amortized~~all ~~through~~hardware, ~~March 31~~software, ~~2007.~~and network devices.

~~Maintenance revenue~~We ~~totaled~~have ~~$26.3 million~~also ~~for~~embraced ~~the~~a new ~~three~~vision ~~months~~called ~~ended~~Optimal ~~June 30,~~IT™ ~~2005,~~and anannounced ~~increase~~our ofintent ~~$1.0 million,~~to ordevelop ~~4%,~~a ~~from~~new DecisionCenter™ ~~the~~product ~~$25.2 million~~to ~~for~~deliver ~~the~~on ~~three months~~this ~~ended June 30, 2004~~vision. ~~This~~DecisionCenter ~~increase~~and ~~is impacted by~~ the solutions ~~reductions~~we ~~resulting~~develop ~~from~~around ~~the~~it ~~adoption~~will ofbe ~~fresh-start~~designed ~~reporting~~to ~~for~~provide ~~the~~analytics ~~three months ended June 30, 2005~~ and ~~2004,~~ ~~respectively,~~decision asmodeling ~~discussed~~capabilities ~~above.~~that ~~Excluding~~will ~~the~~enable ~~reductions~~our incustomers ~~maintenance~~to ~~revenue~~optimize ~~resulting from~~ the performance ~~adoption~~ of ~~fresh-start reporting, maintenance revenue for~~ the ~~three~~technology ~~months~~infrastructure ~~ended~~using ~~June 30, 2005~~information ~~increased~~generated by existing ~~$0.6 million~~applications, orincluding ~~2%,~~ServiceCenter ~~from~~and ~~the three months ended June 30, 2004~~AssetCenter. ~~Maintenance~~The ~~revenue~~Optimal ~~for~~IT solutions ~~the~~are ~~Americas~~expected ~~territory~~to ~~for~~provide the ~~three~~capability ~~months~~of ~~ended June 30~~collecting, ~~2005 increased $0.2 million~~understanding, analyzing orand ~~1%,~~modeling ~~from~~ the ~~three~~complex ~~months~~information ~~ended~~that ~~June 30,~~describes ~~2004. EMEA/AP maintenance revenue in~~ the ~~three months ended June 30, 2005 increased by $0.8 million, or 8%, from~~technology ~~the three months ended June 30~~environment, ~~2004.~~to ~~These~~enable ~~increases~~organizations ~~occurred~~to ~~mainly~~make asoptimal atradeoffs ~~result~~given ~~of increased focus on renewal efforts and because~~ the ~~revenue attributable to additional licenses covered by~~ ~~maintenance~~constraints ~~contracts~~of ~~exceeded the revenue lost from cancellations~~time, ~~in whole or in part~~resources, ofcosts ~~maintenance~~and ~~contracts during the renewal process~~ assets.

~~Consulting~~On September 19, 2005, the Company entered into an Agreement and ~~Training~~ Plan of Merger (the “Merger Agreement”) with Hewlett-Packard Company (“HP”). Pursuant to the terms of the Merger Agreement, at the effective time of the merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive cash in the amount of $26.08. The aggregate purchase price approximates $425 million. Consummation of the merger is subject to customary closing conditions, including (i) approval of the Merger Agreement by the stockholders of the Company, (ii) absence of any law or order prohibiting the consummation of the

~~Consulting and training services include a range of professional and educational services intended to help our customers use our software products more effectively.~~ 15

~~Revenue~~merger, (iii) expiration ~~for~~or ~~consulting~~termination ~~and~~of ~~training~~the ~~services~~applicable ~~totaled~~Hart-Scott-Rodino ~~$4.8 million~~Antitrust ~~for~~Improvements ~~the~~Act of ~~three~~1976 ~~months~~waiting ~~ended~~period ~~June 30,~~and ~~2005,~~receipt ~~an increase~~ of ~~$1.0 million,~~certain orforeign ~~27%~~antitrust approvals, ~~from~~and (iv) the ~~$3.8 million~~accuracy ~~for~~of the ~~three~~representations ~~months ended June 30, 2004. Americas consulting~~ and ~~training~~warranties ~~revenue~~of ~~for~~ the ~~three~~parties ~~months~~to ~~ended~~the ~~June 30, 2005, increased $0~~Merger Agreement.~~4 million,~~ orThe ~~19%, from~~Merger ~~the~~Agreement ~~three~~may ~~months~~be ~~ended~~terminated ~~June 30,~~by ~~2004.~~either ~~EMEA/AP~~the ~~consulting~~Company and ~~training~~HP under ~~revenue~~certain ~~for~~circumstances, ~~the~~and ~~three~~further ~~months~~provides ~~ended June 30~~that, ~~2005,~~upon ~~increased~~certain terminations ~~$0.6 million,~~of ~~or 39%, from~~ the ~~three~~Merger ~~months ended June 30~~Agreement, ~~2004. These increases primarily reflect~~ the Company's ~~investment~~will inbe ~~its~~required ~~consulting~~to ~~operations~~pay ~~that~~HP ~~commenced~~a termination fee in the ~~latter~~amount ~~half~~ of ~~fiscal 2004 through the hiring of additional business development personnel, new managers and other staff to meet increased demand~~$11. 7 million.

17RESULTS OF OPERATIONS

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

Cost of Revenue

	Three Months Ended September 30,				Six Months Ended September 30,
	2005		2004		2005		2004
Revenue:
Licenses	28.4	%	32.6	%	29.3	%	30.4	%
Maintenance	58.9	%	59.1	%	58.9	%	60.8	%
Consulting and training	12.7	%	8.3	%	11.8	%	8.8	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Operating costs and expenses:
Cost of licenses	6.5	%	5.8	%	6.3	%	6.4	%
Cost of maintenance	9.9	%	9.3	%	10.2	%	10.2	%
Cost of consulting and training	12.7	%	9.2	%	12.1	%	9.4	%
Sales and marketing	36.2	%	32.5	%	38.9	%	36.2	%
Research and development	18.1	%	14.2	%	18.6	%	16.3	%
General and administrative	23.9	%	25.4	%	24.8	%	28.4	%
Amortization of intangible assets	7.5	%	7.0	%	7.5	%	7.6	%
Restructuring, impairments and other	—	%	—	%	(0.2	)%	—	%
Total operating costs and expenses	114.8	%	103.4	%	118.2	%	114.5	%
Operating loss	(14.8	)%	(3.4	)%	(18.2	)%	(14.5	)%
Foreign currency transaction gains (losses), net	(1.1	)%	0.2	%	(1.8	)%	(1.1	)%
Reorganization items, net	(0.3	)%	(0.7	)%	(0.4	)%	(1.3	)%
Interest income	1.0	%	0.7	%	1.3	%	0.7	%
Interest expense	(1.6	)%	(2.2	)%	(1.7	)%	(2.6	)%
Other income	0.2	%	—	%	1.9	%	—	%
Loss before income taxes	(16.6	)%	(5.4	)%	(18.9	)%	(18.8	)%
Income tax expense	(2.2	)%	(2.3	)%	(1.4	)%	(2.7	)%
Net loss	(18.8	)%	(7.7	)%	(20.3	)%	(21.5	)%

~~The~~COMPARISON ~~following~~OF ~~table~~RESULTS ~~summarizes~~OF ~~cost of revenue for the three months ended June 30, 2005 and 2004 (in thousands, except for the percentages):~~ OPERATIONS

												Percent of Revenue by Line Item
			Three Months Ended June 30, 2005		Three Months Ended June 30, 2004		Change					Three Months Ended June 30, 2005		Three Months Ended June 30, 2004
							Amount			Percent						Change
Cost of Revenue:
	License		$	2,756	$	2,854	$	(98	)	(3	)%	20	%	26	%	(6	)%
	Maintenance			4,675		4,544		131		3	%	18	%	18	%	—	%
	Consulting and training			5,158		3,885		1,273		33	%	107	%	103	%	4	%
		Total cost of revenue	$	12,589	$	11,283	$	1,306		12	%	28	%	28	%	—	%

REVENUE

~~Cost~~Operating segments are defined as components of ~~Licenses~~ an enterprise about which separate financial information is available and evaluated regularly by our chief operating decision maker, or decision-making group, in allocating resources and assessing performance. Our operating segments are managed separately because each segment represents a strategic business unit that offers different products or services.

~~Cost~~Beginning in the second quarter of ~~licenses~~fiscal ~~primarily~~year ~~consists~~2006, ofwe ~~amortization~~reorganized ~~expense~~our ~~related~~management tostructure. ~~developed~~As ~~technology~~a result, ~~third-party~~we ~~software~~changed ~~royalties,~~our ~~product~~basis ~~packaging,~~of ~~documentation~~segmentation ~~and~~from two reportable segments based ~~production,~~on geography to three reportable segments based on the products and ~~distribution~~services ~~costs~~we offer.

Cost of licenses totaled $2.8 million for the three months ended June 30, 2005, a decrease of $0.1 million, or 3%, from the three months ended June 30, 2004. Cost of licenses represented 20% and 26% of license revenue for the three months ended June 30, 2005 and 2004, respectively. 16

~~Cost~~Our ofthree reportable operating segments are Licenses, Maintenance , and Consulting and Training. The Licenses segment develops and markets licenses to use our software products. The Maintenance segment provides after-sale support for software products. The Consulting and Training segment provides fee-based consulting and training services related to our software products.

~~Cost~~We ofdo ~~maintenance~~not ~~services~~separately ~~primarily~~allocate ~~consists~~operating ofexpenses ~~personnel~~to these segments, ~~facilities~~nor ~~and~~do ~~system~~we ~~costs~~allocate ~~related~~specific assets to ~~technical~~these ~~support~~segments. Therefore, ~~services~~segment toinformation ~~our~~reported ~~customers~~includes ononly ~~maintenance~~revenues, cost of ~~contracts.~~revenues, and gross profit.

~~Cost~~The offollowing ~~maintenance~~table ~~totaled~~summarizes ~~$4.7 million~~revenue ~~for~~by ~~the~~segment ~~three~~and ~~months~~geographic ~~ended~~distribution ~~June 30, 2005, an increase of $0.1 million, or 3%, from~~ for the three ~~months~~and ~~ended~~six ~~June 30, 2004. Cost of maintenance represented 18% of maintenance revenue for each of the three~~ months ended ~~June~~September 30, 2005 and 2004., respectively (dollars in thousands):

Cost of Consulting and Training

	Three Months Ended										Six Months Ended
	September 30,				Change						September 30,				Change
	2005		2004		Amount			Percent			2005		2004		Amount			Percent
Revenue:
Licenses
Americas(4)	$	4,871	$	9,406	$	(4,535	)		(48	)%	$	12,641	$	15,500	$	(2,859	)		(18	)%
EMEA/AP(5)	7,722		6,217		1,505				24	%	13,449		11,268		2,181				19	%
Total license revenue	12,593		15,623		(3,030		)		(19	)%	26,090		26,768		(678		)		(3	)%
Maintenance
Americas(4)	14,351		16,437		(2,086		)		(13	)%	28,838		30,720		(1,882		)		(6	)%
EMEA/AP(5)	11,794		11,878		(84		)		(1	)%	23,577		22,832		745				3	%
Total maintenance revenue	26,145		28,315		(2,170		)		(8	)%	52,415		53,552		(1,137		)		(2	)%
Consulting and Training
Americas(4)	3,750		2,391		1,359				57	%	6,373		4,599		1,774				39	%
EMEA/AP(5)	1,876		1,605		271				17	%	4,072		3,189		883				28	%
Total consulting and training revenue	5,626		3,996		1,630				41	%	10,445		7,788		2,657				34	%
Total Revenue	$	44,364	$	47,934	$	(3,570	)		(7	)%	$	88,950	$	88,108	$	842			1	%

~~Cost~~(4) Americas ofis ~~consulting~~comprised ~~and training services primarily consists~~ of ~~personnel~~United States, ~~facilities~~Canada and ~~system~~Latin ~~costs associated with providing these services~~America. ~~Cost of consulting and training services also includes fees paid to third-party subcontractors providing services on our behalf.~~

~~Cost of consulting and training totaled $~~(5~~.2 million for the three months ended June 30, 2005, an increase of $1.3 million, or 33%, from the three months ended~~) EMEA/AP ~~June 30, 2004. The cost increase~~ is ~~the~~comprised ~~result~~ of ~~expanding the consulting business primarily through the addition of personnel. Specifically~~Europe, ~~there was a $0.7 million increase in costs associated with~~ the ~~use~~Middle ~~of outside consultants. In addition~~East, ~~personnel related costs increased $0.4 million~~Africa, ~~mostly as a result of increased headcount in our consulting operation. The cost of consulting~~ and ~~training represented 107% and 103% of consulting and training revenue for the three months ended June 30, 2005 and 2004, respectively~~Asia-Pacific.

18Licenses

~~Other~~We ~~Operating~~generally ~~Costs~~license ~~and~~our products ~~Expenses~~ to end-users under perpetual license agreements for an up-front fee.

~~The~~License ~~following~~revenue ~~table~~for ~~summarizes~~the three ~~operating~~months ~~expenses~~ended September 30, ~~other~~2005 ~~than~~decreased ~~cost~~by of$3.0 million, ~~licenses~~or 19%, ~~maintenance~~from ~~and~~the ~~consulting~~three ~~and~~months ~~training~~ended September 30, 2004. License revenue for the Americas territory totaled $4.9 million for the three months ended September 30, ~~June~~2005, a decrease of $4.5 million, or 48%, from the three months ended September 30, 2004. License revenue in EMEA/AP totaled $7.7 million for the three months ended September 30, 2005, ~~and~~an increase of $1.5 million, or 24%, from the three months ended September 30, 2004. (The decrease in ~~thousands~~license revenue for the Americas territory is primarily attributable to a greater number of relatively larger transactions recorded in the three months ended September 30, 2004. ~~except~~This ~~for~~decrease was partially offset by an increase in license revenue in the ~~percentages):~~EMEA/AP territory which is primarily attributable to a greater number of relatively larger transactions in the three months ended September 30, 2005.

			Three Months Ended June 30, 2005			Three Months Ended June 30, 2004		Change
								Amount			Percent
Other Operating Costs and Expenses:
	Sales and marketing		$	18,476		$	16,274	$	2,202		14	%
	Research and development			8,469			7,508		961		13	%
	General and administrative			11,542			12,819		(1,277	)	(10	)%
	Amortization of intangible assets			3,348			3,376		(28	)	(1	)%
	Restructuring, impairments and other			(198	)		—		(198	)	—
		Total other operating costs and expenses	$	41,637		$	39,977	$	1,660		4	%

License revenue for the six months ended September 30, 2005 decreased by $0.7 million, or 3%, from the six months ended September 30, 2004. License revenue for the Americas territory totaled $12.6 million

~~Sales and Marketing~~ 17

~~Sales~~for ~~and~~the ~~marketing~~six ~~expenses~~months ~~primarily~~ended ~~consist~~September 30, 2005, a decrease of ~~personnel~~$2.9 million, ~~costs~~or 18%, ~~including~~from ~~sales~~the ~~commissions~~six ~~and~~months ~~travel~~ended ~~costs~~September 30, 2004. ~~facilities~~License ~~and~~revenue ~~system~~in ~~costs~~EMEA/AP ~~related~~totaled to$13.4 million ~~our~~for ~~sales,~~the six months ~~including~~ended ~~technical~~September 30, ~~pre-sales~~2005, ~~and~~an ~~marketing~~increase ~~functions~~of $2.2 million, or 19%, from the six months ended September 30, 2004. The ~~costs~~decrease in license revenue for the Americas territory is primarily attributable to a greater number of relatively ~~advertising~~larger ~~and~~transactions ~~marketing~~recorded ~~promotions~~in ~~are~~the ~~also~~six ~~included~~months ended September 30, 2004. This decrease was partially offset by an increase in ~~sales~~license revenue in the EMEA/AP territory primarily attributable to a greater number of relatively larger transactions in the six months ended September 30, 2005 as well as new and ~~marketing~~additional ~~expenses.~~licenses sold to our existing customer base.

Sales and marketing expenses totaled $18.5 million for the three months ended June 30, 2005, an increase of $2.2 million, or 14%, from the three months ended June 30, 2004. The increase was primarily driven by an increase in personnel related costs of $1.3 million resulting primarily from increased headcount in our sales and marketing group. Also contributing to the change over the prior-year period was an increase in advertising, marketing, and promotion costs of $0.8 million. Maintenance

~~Research~~Most customers purchase maintenance services when buying new or additional licenses. Maintenance services consist primarily of providing enhancements and ~~Development~~ upgrades for our products along with customer support services for our products. Generally, maintenance contracts are entered into for one-year periods, contain economic index fee escalation provisions and are renewable annually at the customer’s option. Maintenance contracts are generally prepaid by customers, and revenue is recognized ratably over the support period. Maintenance revenue may include fees for services rendered in prior periods in instances in which customers did not renew their maintenance contracts until the current period.

~~Research~~We ~~and~~adopted ~~development~~the ~~("R&D")~~fresh-start ~~expenses~~reporting ~~primarily~~provisions of ~~consist~~SOP 90-7 as of ~~personnel~~July 18, ~~facilities~~2003 ~~and~~in ~~systems~~connection ~~costs~~with ~~associated~~our emergence from bankruptcy protection under Chapter 11. Fresh-start reporting requires that the reorganization value be allocated to the entity’s assets in accordance with ~~our~~Statement ~~R&D~~of ~~efforts~~Financial Accounting Standards No. 141, ~~which~~“Business Combinations” ~~include~~(“SFAS 141”). ~~software~~In accordance with these pronouncements, we ~~development~~determined the fair market value of our assets and ~~product~~liabilities ~~management~~at ~~efforts~~July 18, 2003, including our deferred maintenance revenue balances. ~~R&D~~Accordingly, ~~expenses~~we reduced ~~also~~our ~~include~~deferred maintenance revenue balances by $6.3 million to reflect the ~~cost~~fair value of ~~services~~maintenance ~~for~~contracts ~~consultants~~existing orat ~~other~~July 18, ~~third~~2003. This ~~parties~~$6.3 million adjustment has the effect of reducing maintenance revenue over the maintenance contract periods for those contracts that existed when we ~~hire~~adopted ~~from~~fresh-start ~~time~~reporting. toIn ~~time~~the tothree ~~augment~~and ~~our~~six ~~own~~months ~~R&D~~ended ~~personnel~~September 30, 2005, maintenance revenue was reduced by $0.1 million and $0.2 million, respectively. In the three and six months ended September 30, 2004, maintenance revenue was reduced by $0.4 million and $1.0 million, respectively. The balance of the adjustment of $0.2 million at September 30, 2005, will be amortized through March 31, 2007.

~~R&D expenses~~Maintenance revenue, net of fresh-start adjustments, totaled $826.51 million for the three months ended ~~June~~September 30, 2005, a andecrease ~~increase~~ of $12.02 million, or 138%, from the $28.3 million for the three months ended ~~June~~September 30, 2004. ~~This~~ ~~increase~~Excluding ~~was~~the ~~primarily~~reductions ~~due~~in maintenance torevenue anresulting ~~increase~~from the adoption of fresh-start reporting, maintenance revenue for the three months ended September 30, 2005 decreased by $02.54 million, inor ~~costs~~9% ~~associated~~from ~~with~~ the ~~use~~three ofmonths ~~outside~~ended ~~consultants~~September 30, 2004. ~~Also~~Maintenance ~~contributing~~revenue tofor the ~~change~~Americas territory for the three months ended September 30, 2005 decreased $2.1 million, or 13%, from the ~~prior-year~~three months ~~period~~ended September 30, 2004. EMEA/AP maintenance revenue in the three ~~was~~months anended ~~increase~~September 30, of2005 decreased by $0.41 million, inor ~~personnel~~1%, from ~~related~~the ~~costs~~three ~~primarily~~months ~~resulting~~ended ~~from~~September 30, ~~increased~~2004. ~~headcount~~The decrease in maintenance ~~our~~revenue ~~development~~for ~~group~~the three months ended September 30, 2005 occurred mainly as a result of a decrease of $1.4 million in carryforward revenue attributable to pre-fiscal 2003 contracts.

~~General~~Maintenance revenue totaled $52.4 million for the six months ended September 30, 2005, a decrease of $1.1 million, or 2%, from the $53.6 million for the six months ended September 30, 2004. Excluding the reductions in maintenance revenue resulting from the adoption of fresh-start reporting, maintenance revenue for the six months ended September 30, 2005 decreased by $1.9 million, or 3%, respectively, from the six months ended September 30, 2004. This decrease is impacted by the reductions resulting from the adoption of fresh-start reporting for the six months ended September 30, 2005 and ~~Administrative~~ 2004, respectively, as discussed above. Maintenance revenue for the Americas territory for the six months ended September 30, 2005 decreased $1.9 million, or 6%, from the six months ended September 30, 2004. EMEA/AP

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. 18

~~G&A~~maintenance ~~expenses~~revenue ~~totaled $11.5 million~~ for the ~~three~~six months ended ~~June~~September 30, 2005, aincreased ~~decrease of~~ by $10.38 million, or 103%, from the ~~three~~six months ended ~~June~~September 30, 2004. ~~The~~ The decrease ~~was~~in ~~primarily~~maintenance ~~attributable~~revenue tofor ~~decreases~~the Americas territory for the six months ended September 30, 2005 occurred mainly as a result of a decrease of $02.6 7 million ~~related~~in carryforward revenue attributable to ~~severance~~pre-fiscal ~~and~~2003 ~~incentive~~contracts. ~~compensation~~This decrease ~~costs~~was ~~and~~partially offset by an increase in maintenance revenue in the EMEA/AP territory mainly as a result of 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.

19Consulting and Training

~~$0.7 million of~~Consulting ~~stock~~and ~~compensation~~training ~~compared~~services toinclude ~~the prior year period. Also contributing to the decrease was~~ a ~~$0.7 million~~range ~~reimbursement~~ of ~~legal fees related to the settlement of a~~ ~~legal~~professional ~~matter~~and aseducational ~~discussed~~services ~~below~~intended ~~under~~to ~~"Other~~help ~~Income."~~our ~~Partially~~customers ~~offsetting the aforementioned expense reductions were an increase of $0.5 million in costs associated with the~~ use ~~of outside~~our ~~consultants,~~software ~~and~~products amore $0effectively.~~4 million increase in personnel related costs.~~

~~Amortization~~Revenue for consulting and training services totaled $5.6 million for the three months ended September 30, 2005, an increase of ~~Intangible~~$1.6 million, ~~Assets~~ or 41%, from the $4.0 million for the three months ended September 30, 2004. Americas consulting and training revenue for the three months ended September 30, 2005, increased $1.3 million, or 57%, from the three months ended September 30, 2004. EMEA/AP consulting and training revenue for the three months ended September 30, 2005, increased $0.3 million, or 17%, from the three months ended September 30, 2004.

~~Identifiable~~Revenue ~~intangible~~for ~~assets~~consulting ~~subject~~and training toservices ~~amortization~~totaled ~~consist~~$10.4 million offor ~~developed~~the ~~technology~~six months ended September 30, 2005, ~~trademarks~~an ~~and~~increase ~~trade~~of ~~names~~$2.7 million, ~~maintenance~~or ~~contracts~~34%, ~~and~~from ~~customer~~the ~~lists~~$7.8 million ~~For~~for the ~~three~~six months ended ~~June~~September 30, ~~2005 and~~ 2004,. ~~the~~Americas ~~Company~~consulting ~~recorded~~and ~~non-cash~~training revenue ~~charges~~ for ~~amortization~~the ofsix ~~intangible~~months ~~assets~~ended ~~of $3.3~~September ~~million~~30, ~~and~~2005, increased $31.48 million, ~~respectively.~~ ~~Amortization~~or ~~expense of $2~~39%,~~452~~ ~~and~~from ~~$2,455~~the ~~related~~six tomonths ~~developed~~ended ~~technology~~September 30, is2004. ~~included~~EMEA/AP consulting inand ~~cost~~training ofrevenue ~~licenses~~ for the ~~three~~six months ended ~~June~~September 30, 2005, ~~and~~increased ~~2004~~$0.9 million, ~~respectively.~~or 28%, from the six months ended September 30, 2004.

~~Restructuring~~These increases primarily reflect the Company’s investment in its consulting operations that commenced in the latter half of fiscal 2004 through the hiring of additional business development personnel, ~~Impairments~~new managers and ~~Other~~ other staff to meet increased demand generated during the period.

~~For~~COST ~~the~~AND three months ended June 30, 2005, restructuring, impairments and other totaled $0.2 million, attributable to a $0.2 million escrow payment received from a sale of one of the Company's investments that had been previously impaired. EXPENSES

~~Foreign~~Cost ~~Currency~~of ~~Transaction Gains (Losses), Net~~ Revenue

~~Foreign currency transaction gains (losses), net consist primarily of exchange rate gains or losses resulting from remeasurement of foreign-denominated~~The ~~short-term~~following ~~intercompany~~tables ~~and~~summarize ~~third-party~~the ~~receivable~~cost ~~and payable balances and cash balances~~ of ~~our~~revenue ~~operating entities into their functional currencies at period-end market rates. Foreign currency transactions resulted in losses of $1.1 million~~ for the three ~~months~~and six months ended ~~June~~September 30, 2005 and 2004, ~~with~~respectively ~~such~~(in ~~losses~~thousands, ~~resulting~~except ~~primarily from~~ for the ~~impact of the strengthening U.S. dollar on our foreign-denominated short-term intercompany receivable and payable balances.~~ percentages):

Reorganization Items, Net

														Percent of Revenue by Line Item
	Three Months Ended September 30,			Three Months Ended September 30,			Change							Three Months Ended September 30,			Three Months Ended September 30,
	2005			2004			Amount				Percent			2005			2004			Change
Cost of Revenue:
License		$	2,870		$	2,774		$	96			3	%		23	%		18	%		5	%
Maintenance		4,413			4,434			(21		)		—	%		17	%		16	%		1	%
Consulting and training		5,618			4,410			1,208				27	%		100	%		110	%		(10	)%
Total cost of revenue		$	12,901		$	11,618		$	1,283			11	%		29	%		24	%		5	%

As a result of our bankruptcy-law filing, we became 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 our Predecessor Company's reorganization of the business through the bankruptcy proceedings are reported separately as reorganization items. The Company has also incurred charges recorded in reorganization items, net, primarily related to bankruptcy-proceeding professional fees. 19

Reorganization items, net totaled $0.2 million and $0.8 million for the three months ended June 30, 2005 and 2004, respectively, and consist primarily of professional fees incurred in connection with the settlement of claims directly related to the bankruptcy filing.

														Percent of Revenue by Line Item
	Six Months Ended September 30,			Six Months Ended September 30,			Change							Six Months Ended September 30,			Six Months Ended September 30,
	2005			2004			Amount				Percent			2005			2004			Change
Cost of Revenue:
License		$	5,626		$	5,628		$	(2	)		—	%		22	%		21	%		1	%
Maintenance		9,088			8,978			110				1	%		17	%		17	%		—	%
Consulting and training		10,776			8,295			2,481				30	%		103	%		107	%		(4	)%
Total cost of revenue		$	25,490		$	22,901		$	2,589			11	%		29	%		26	%		3	%

~~Interest~~Cost ~~Income~~ of Licenses

~~Interest~~Cost ~~income totaled $0.7 million for the three months ended June 30, 2005, an increase~~ of ~~$0.4 million,~~licenses orprimarily ~~179%,~~consists ~~from the three months ended June 30, 2004. This increase resulted partially from increased investment~~ of ~~available cash balances in interest bearing accounts at higher interest rates. Also contributing to the~~amortization ~~increase~~expense ~~was $0.2 million of interest income~~ related to ~~the~~developed ~~settlement~~technology, ofthird-party asoftware ~~legal~~royalties, product ~~matter~~packaging, asdocumentation ~~discussed~~and ~~below~~production, ~~under~~and ~~"Other~~distribution ~~Income~~costs."

20Cost of licenses totaled $2.9 million for the three months ended September 30, 2005, an increase of $0.1 million, or 3%, from the three months ended September 30, 2004. Cost of licenses represented 23% and 18% of license revenue for the three months ended September 30, 2005 and 2004, respectively.

~~Interest~~Cost ~~Expense~~ of licenses totaled $5.6 million for each of the six months ended September 30, 2005 and 2004. Cost of licenses represented 22% and 21% of license revenue for the six months ended September 30, 2005 and 2004, respectively.

~~Interest~~Cost ~~expense includes interest charges and amortized costs related to our borrowings. Interest expense totaled $0.8 million for the three months ended June 30, 2005, a decrease~~ of ~~$0.4 million, or 33%, from the three months ended June 30, 2004. Interest expense decreased primarily as a result of lower debt balances.~~ Maintenance

~~Income~~Cost ~~Taxes~~ of maintenance services primarily consists of personnel, facilities and system costs related to technical support services to our customers on maintenance contracts.

~~Tax~~Cost ~~expense~~of ismaintenance ~~derived~~totaled ~~primarily~~$4.4 million ~~from~~for ~~interest~~each of ~~accrued~~the onthree ~~the~~months ~~Company's~~ended ~~tax~~September 30, ~~contingencies~~2005 and ~~also~~2004. ~~from~~Cost ~~taxes~~of onmaintenance represented ~~foreign~~17% ~~operations~~and 16% of maintenance revenue for ~~which~~the nothree ~~U.S.~~months ~~federal~~ended September 30, ~~benefit~~2005 ~~can~~and be2004, ~~recorded~~respectively.

~~Income tax~~Cost ~~expense~~of maintenance totaled $09.~~4 million and $~~1.3 million for the ~~three~~six months ended ~~June~~September 30, 2005 ~~and 2004~~, ~~respectively.~~an increase ~~Income tax expense represented 3.7%~~ of ~~the loss before income taxes for the three months ended June~~$0.1 30million, ~~2005,~~or ~~and 9.2~~1%, offrom the ~~loss~~six ~~before income taxes for the three~~ months ended ~~June~~September 30, 2004. InCost ~~order~~of tomaintenance ~~calculate~~represented ~~the interperiod~~17% ~~tax provision for each quarter, the estimated annual effective tax rate is applied to the quarterly pre-tax income (loss)~~ of ~~our~~maintenance ~~legal~~revenue ~~entities~~ for ~~which~~each ~~pre-tax~~of ~~income is anticipated for~~ the ~~year.~~six ~~For~~months ~~the quarter~~ ended ~~June~~September 30, 2005, ~~the majority of our entities reported pre-tax losses, resulting in a tax benefit which reduces the tax provision derived from the foreign operations~~ and ~~interest accrued on the Company's tax contingencies~~2004.

~~Other~~Cost ~~Income~~ of Consulting and Training

~~During~~Cost ~~the three months ended June 30, 2005, the Company received cash in the amount~~ of ~~$2.1 million~~consulting related to the settlement of a dispute with a customer arising from a software license agreement entered into in March 2002. In connection with the settlement, the Company also agreed to issue new software licenses to the customer which the customer will evaluate and ~~may~~training ~~decide~~services ~~to install at a later date. Of the cash received, $1.2 million has been accounted for as the resolution of a gain contingency that arose prior to the~~primarily ~~Company's~~consists ~~application~~ of ~~fresh-start reporting effective July 18~~personnel, ~~2003~~facilities ~~in connection with the emergence from bankruptcy~~ and issystem ~~recorded~~costs asassociated ~~other~~with ~~income in the accompanying~~providing ~~consolidated~~these ~~statements of operations~~services. ~~The~~Cost ~~settlement also included the payment~~ of ~~accrued~~consulting ~~interest~~ and ~~the~~training ~~recovery~~services ofalso ~~legal~~includes ~~expenses~~fees paid ~~incurred by the Company~~ to ~~litigate~~third-party ~~and~~subcontractors ~~ultimately~~providing ~~settle~~services ~~this dispute.~~on ~~The~~our ~~Company has recorded the remaining cash received under the settlement of $0~~behalf.2 million and $0.7 million as interest income and a reduction of general and administrative expenses reflecting the recovery of legal costs, respectively, in the accompanying consolidated statements of operations, as such amounts were earned or incurred subsequent to the Company's adoption of fresh-start reporting.

~~Also included~~Cost inof ~~other~~consulting ~~income~~and training totaled $5.6 million for the three months ended ~~June~~September 30, 2005, an increase of $1.2 million, or 27%, from the three months ended September 30, 2004. The cost increase is the result of expanding the consulting business primarily through the addition of personnel. Specifically, there was a $0.58 million ~~from~~increase in costs associated with the ~~recovery~~use of ~~previously~~outside consultants. ~~paid~~In ~~financing~~addition, ~~fees~~personnel related costs increased $0.4 million, mostly as a result of increased headcount in our consulting operation. The cost of consulting and training represented 100% and 110% of consulting and training revenue for the three months ended September 30, 2005 and 2004, respectively.

~~Effect~~Cost of ~~Foreign~~consulting ~~Currency~~and training ~~Exchange~~totaled ~~Rate~~$10.8 million ~~Fluctuations~~for onthe ~~Results~~six months ended September 30, 2005, an increase of ~~Operations~~ $2.5 million, or 30%, from the six months ended September 30, 2004. The cost increase is the

To provide a framework for assessing how our underlying operations performed, excluding the effect of foreign currency exchange rate fluctuations, we have disclosed below the change in "total revenue" (comprised of licenses, maintenance, and consulting and training), "cost of revenue" (comprised of cost of licenses, maintenance, and consulting and training), and "operating costs and expenses" (comprised of sales and marketing, research and development, general and administrative, amortization of intangible assets, and restructuring, impairments and other) attributable to foreign currency exchange rate fluctuations. To do so, we have calculated the impact of foreign currency exchange rate fluctuations in U.S. Dollars by multiplying the first quarter of fiscal year 2006 activity in local currencies by the difference between the average exchange rates in effect during the first quarter of fiscal year 2006 and the average exchange rates in effect during the first quarter of fiscal year 2005. 20

21result of expanding the consulting business primarily through the addition of personnel. Specifically, there was a $1.5 million increase in costs associated with the use of outside consultants. In addition, personnel related costs increased $0.9 million, mostly as a result of an increased headcount in our consulting operation. The cost of consulting and training represented 103% and 107% of consulting and training revenue for the six months ended September 30, 2005 and 2004, respectively.

~~Revenue~~ Other Operating Costs and Expenses

~~Total~~The following ~~revenue~~table summarizes operating expenses for the three ~~months~~and six months ended ~~June~~September 30, 2005 ~~increased~~and ~~$4.4 million~~2004, ~~from~~respectively ~~the~~(in ~~three months ended June 30~~thousands, ~~2004.~~except ~~Approximately~~for ~~$0.8 million of~~ the ~~increase was the result of foreign currency exchange rate fluctuations.~~ percentages):

Cost of Revenue

	Three Months Ended September 30,			Three Months Ended September 30,			Change						Six Months Ended September 30,				Six Months Ended September 30,			Change
	2005			2004			Amount			Percent			2005				2004			Amount			Percent
Other operating costs and expenses:
Sales and marketing		$	16,045		$	15,583	$	462			3	%		$	34,521			$	31,857	$	2,664			8	%
Research and development		8,045			6,824		1,221				18	%		16,514				14,332		2,182				15	%
General and administrative		10,593			12,192		(1,599		)		(13	)%		22,135				25,011		(2,876		)		(11	)%
Amortization of intangible assets		3,335			3,332		3				—	%		6,683				6,708		(25		)		—	%
Restructuring, impairments and other		—			—		—				—	%		(198		)		—		(198		)		—	%
Total other operating costs and expenses		$	38,018		$	37,931	$	87			—	%		$	79,655			$	77,908	$	1,747			2	%

~~Cost~~Sales ofand revenue for the three months ended June 30, 2005 increased $1.3 million from the three months ended June 30, 2004. Approximately $0.1 million of the increase was the result of foreign currency exchange rate fluctuations. Marketing

~~Other~~Sales ~~Operating~~and ~~Costs~~marketing expenses primarily consist of personnel costs, including sales commissions and travel ~~Expenses~~ 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.

~~Other~~Sales ~~operating costs~~ and marketing expenses totaled $16.0 million for the three months ended ~~June~~September 30, 2005, ~~increased~~an increase of $10.75 million, or 3%, from the three months ended ~~June~~September 30, 2004. The increase was primarily driven by an increase in personnel related ~~Approximately~~costs of $0.4 million ofresulting ~~the~~primarily ~~increase~~from ~~was~~an ~~the~~increased ~~result~~headcount ofin our ~~foreign~~sales ~~currency~~and ~~exchange~~marketing ~~rate fluctuations~~group.

~~LIQUIDITY~~Sales ~~AND~~and ~~CAPITAL~~marketing expenses ~~RESOURCES~~ totaled $34.5 million for the six months ended September 30, 2005, an increase of $2.7 million, or 8%, from the six months ended September 30, 2004. The increase was primarily driven by an increase in personnel related costs of $1.7 million resulting primarily from an increased headcount in our sales and marketing group. Also contributing to the change over the prior-year period was an increase in travel expenses of $0.7 million.

WeResearch ~~primarily generate cash from software licensing, maintenance renewals~~ and ~~the provision of consulting and training services. Our primary uses of cash are for~~ general working capital purposes, taxes, debt service and bankruptcy claims. We also use cash to purchase capital assets to support our business. In fiscal 2006 and fiscal 2005, our principal liquidity requirements have been for operating expenses, working capital and debt and bankruptcy related payments. We have 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 in 2002. Development

~~The~~Research and development (“R&D”) expenses ~~following~~primarily ~~table~~consist ~~summarizes~~of ~~cash~~personnel, facilities and ~~cash~~systems ~~equivalents,~~costs ~~restricted~~associated ~~cash~~with our R&D efforts, which include software development and ~~working~~product ~~capital~~management efforts. ~~(deficit)~~R&D asexpenses also include the cost of ~~June 30,~~services ~~2005~~for ~~and~~consultants ~~March 31,~~or other ~~2005~~third ~~(dollars~~parties inthat ~~thousands):~~we hire from time to time to augment our own R&D personnel.

	June 30, 2005			March 31, 2005
Cash and cash equivalents	$	76,356		$	84,765
Cash—restricted		4,455			4,325
Working capital (deficit)		(20,081	)		(19,641	)

~~Cash equivalents~~R&D ~~primarily~~expenses ~~consist~~totaled $8.0 million offor ~~overnight~~the ~~money~~three ~~market~~months ~~accounts~~ended September 30, ~~time deposits~~2005, ~~commercial~~an increase ~~paper~~of ~~and government agency notes~~$1.2 million, ~~The~~or ~~restricted~~18%, ~~cash~~from ~~relates~~the tothree ~~security~~months ~~for~~ended ~~certain~~September 30, ~~real~~2004. ~~property~~This ~~leases~~increase ~~and~~was ~~certain~~primarily ~~other~~due ~~obligations.~~to ~~Working~~an ~~capital~~increase ~~(deficit)~~of ~~consists~~$0.7 million ~~primarily~~in personnel ofcosts ~~cash~~related ~~and~~to ~~cash~~an ~~equivalents,~~increased ~~marketable~~headcount ~~securities,~~in ~~accounts~~our ~~receivable,~~research and development ~~other~~group ~~current~~as ~~assets~~well ~~net of~~as ~~accounts~~$0.3 million ~~payable,~~in ~~accrued~~costs ~~expenses,~~associated ~~and~~with ~~current~~outside consultants ~~portions~~who ofsupplement ~~deferred~~our ~~revenue~~full-time ~~and~~personnel ~~notes~~working ~~payable.~~on current projects.

~~For~~R&D expenses totaled $16.5 million for the ~~three~~six months ended ~~June~~September 30, 2005, ~~and~~an increase ~~June~~of $2.2 30million, or 15%, from the six months ended September 30, 2004. This increase was primarily due to an increase of $1.2 million in personnel costs related to an increased headcount in our ~~cash~~research ~~flows~~and development ~~were~~group as ~~follows~~well ~~(dollars~~as $0.9 million in ~~thousands):~~costs associated with outside consultants who supplement our full-time personnel working on current projects.

		Three Months Ended June 30, 2005			Three months Ended June 30, 2004
Cash (used in) provided by:
	Operating activities	$	(6,629	)	$	(5,366	)
	Investing activities		(1,181	)		(650	)
	Financing activities		500			(2,360	)
Effect of exchange rate fluctuations on cash			(1,099	)		(518	)
Net decrease in cash and cash equivalents		$	(8,409	)	$	(8,894	)

General and Administrative

22General 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.

~~We believe~~G&A ~~our~~expenses ~~cash on hand and operating cash flows will be sufficient to fund our operations and planned capital expenditures and to satisfy our scheduled non-trade payment~~totaled ~~obligations~~$10.6 million for atthe ~~least~~three 12 months ~~from~~ended ~~the date of this report. However~~September 30, ~~our ability to generate adequate cash depends upon our future performance~~2005, ~~which in turn is subject to general economic~~a ~~conditions~~decrease ~~and~~of ~~financial~~$1.6 million, ~~business~~or ~~and other factors affecting our operations~~13%, ~~including~~from ~~factors beyond our control. Please review~~ the ~~information~~three ~~set~~months ~~forth~~ended ~~under the caption "Risk Factors~~September 30,~~" contained~~ ~~in our Amended Form 10-K~~2004. WeThe ~~currently~~decrease ~~have~~was noprimarily ~~lines~~attributable ofto ~~credit~~costs orassociated ~~similar facilities~~ with ~~any~~the reduced ~~financial~~use ~~institutions.~~of ~~There~~outside ~~can~~consultants beof no$1.1 ~~assurance~~million ~~that~~and ~~additional~~an ~~financing~~insurance ~~will~~recovery beof ~~available~~$0.2 ~~in the future or that~~million, ifwhich ~~available,~~were weoffset ~~will~~in bepart ~~able~~by toan ~~obtain~~increase itin onpersonnel ~~terms~~costs ~~favorable to us~~of $0.4 million.

~~Operating~~G&A ~~Activities~~ expenses totaled $22.1 million for the six months ended September 30, 2005, a decrease of $2.9 million, or 11%, from the six months ended September 30, 2004. The decrease was primarily attributable to the reduced use of outside consultants of $1.1 million, the recovery of legal costs of $0.7 million related to the settlement of a dispute with a customer arising from a software license agreement entered into in March 2002, reduced personnel related costs of $0.5 million, and an insurance recovery of $0.2 million.

~~Our~~Amortization ~~primary source~~ of ~~operating cash flows is cash collections from our customers following the purchase of new software license, maintenance and support, and~~ ~~post-sale~~Intangible consulting and training. Our primary use of cash from operating activities is for compensation and personnel related expenditures. For the three months ended June 30, 2005 the Company used $6.6 million of cash in operating activities. We reported a net loss of $9.8 million and cash outflows from changes in working capital and other of $4.0 million. These were partially offset by non-cash charges of $6.7 million for amortization and depreciation. Of the amortization charge, $5.8 million was related to the amortization of identifiable intangibles. Working capital outflows were primarily impacted by decreases in deferred revenue and accrued expenses of $8.9 million and $1.7 million, respectively. These outflows were offset, in part, by decreases in accounts receivable and other assets of $4.9 million and $1.6 million, respectively, and an increase in accounts payable of $0.2 million. Assets

~~For the~~Identifiable ~~three~~intangible ~~months~~assets ~~ended~~subject ~~June 30,~~to ~~2004, our operations used $5.4 million in net cash. We reported a net loss of $15.2 million, including non-cash~~amortization ~~charges~~consist of ~~$7.0 million~~developed ~~for~~technology, ~~amortization~~trademarks and ~~depreciation.~~trade ~~Of the amortization charge~~names, ~~$5.8 million~~maintenance contracts ~~was~~and ~~related~~customer ~~to the amortization of identifiable intangibles~~lists.

~~Investing~~For ~~Activities~~ each of the three months ended September 30, 2005 and 2004, the Company recorded non-cash charges for amortization of intangible assets of $3.3 million. Amortization expense of $2.5 million related to developed technology is included in cost of licenses for each of the three months ended September 30, 2005 and 2004.

~~Our~~For ~~primary~~each ~~use~~ of ~~cash in investing activities is~~ the ~~purchase~~six ~~of property and equipment. For the three~~ months ended ~~June~~September 30, 2005 and 2004, the Company recorded non-cash charges for amortization of ~~used~~intangible ~~$1.2 million~~assets ~~and~~of $06.7 million,. ~~respectively,~~Amortization expense of ~~net~~$4.9 ~~cash~~million related ~~for~~to ~~investing~~developed ~~activities,~~technology ~~which~~is ~~primarily~~included ~~reflects~~in ~~cash~~cost ~~used~~of licenses for ~~capital~~each ~~expenditures,~~of ~~mostly~~the six ~~for~~months ~~computers~~ended ~~and~~September 30, ~~data processing~~2005 ~~equipment~~ and ~~leasehold improvements~~2004.

~~Financing~~Restructuring, Impairments ~~Activities~~ and Other

~~Our~~For ~~primary source of cash from financing activities has been from~~ the ~~issuance~~six ofmonths ~~common~~ended ~~stock~~September 30, 2005, ~~under~~restructuring, ~~our~~impairments ~~employee~~and ~~stock~~other ~~option plan. Our primary use of cash in financing~~ was ~~for~~a ~~repayment~~gain of ~~outstanding debt~~$0. ~~For the three months ended June~~2 30million, attributable ~~2005,~~to ~~the Company received~~ a $0.52 million ~~refund~~escrow ofpayment ~~fees~~received ~~paid~~from toa ~~factor~~sale ~~banks~~of ~~in connection with~~one ~~factored~~of ~~receivables~~the ~~arrangements~~Company’s investments that ~~are~~had nobeen ~~longer~~previously ~~outstanding~~impaired.

~~For~~Foreign ~~the~~Currency ~~three~~Transaction ~~months~~Gains ~~ended June 30~~(Losses), ~~2004, the Company used $2.4 million in financing activities. These payments primarily reflect repayment of the principal and interest on factor loans.~~ Net

~~Bankruptcy~~Foreign ~~Claims~~ currency transaction gains (losses), net consist primarily of exchange rate gains or losses resulting from remeasurement of foreign-denominated short-term intercompany and third-party receivable and payable balances and cash balances of our operating entities into their functional currencies at

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 June 30, 2005, we have paid, settled or otherwise disposed of Class 8 claims with an original aggregate face amount of approximately $383.6 million. To resolve these claims we have paid or agreed to pay over time approximately $45.0 million in cash. As of June 30, 2005, there were general unsecured claims asserted in the original 22

23period-end market rates. Foreign currency transactions resulted in a loss of $0.5 million and a gain of $0.1 million for the three months ended September 30, 2005 and 2004, respectively. Foreign currency transactions resulted in losses of $1.5 million and $1.0 million for the six months ended September 30, 2005 and 2004, respectively. Losses resulted primarily from the impact of the strengthening U.S. dollar on our foreign-denominated short-term intercompany receivable and payable balances.

~~aggregate face amount of approximately $0.3 million remaining to be resolved. For more information on the status of claims litigation, see "Legal Proceedings—Bankruptcy~~ Reorganization; ~~Claims Litigation; Class 7/9 Reserve Shares~~Items," ~~beginning on page 28 of this report.~~ Net

~~RECENT~~As ~~ACCOUNTING~~a ~~PRONOUNCEMENTS~~ result of our bankruptcy law filing, we became 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 our Predecessor Company’s reorganization of the business through the bankruptcy proceedings are reported separately as reorganization items. The Company has also incurred charges recorded in reorganization items, net, primarily related to bankruptcy-proceeding professional fees.

OnReorganization ~~December 16~~items, ~~2004~~net, totaled ~~FASB issued Statement of Financial Accounting Standards No~~$0. ~~123R,~~1 ~~"Share-Based~~million ~~Payment," ("SFAS 123R") requiring that the compensation cost relating to share-based payment transactions be measured~~ and ~~recognized in financial statements using the fair value of the awards~~$0.3 ~~This~~million ~~statement~~for ~~eliminates~~ the ~~alternative~~three ~~to use~~months ofended ~~APB 25's intrinsic value method of accounting that was provided in SFAS~~September ~~123. Under APB 25~~30, ~~issuing stock options to employees generally resulted in no recognition of compensation cost.~~ ~~SFAS 123R~~2005 ~~requires~~and 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 options2004, ~~restricted share plans~~respectively, ~~performance based awards~~ and ~~employee share purchase plans~~$0. ~~SFAS~~4 ~~123R~~million ~~replaces SFAS 123~~ and ~~supersedes APB 25~~$1. ~~In March~~1 ~~2005,~~million for the ~~SEC~~six ~~issued~~months ~~Staff~~ended ~~Accounting Bulletin No.~~September ~~107~~30, ~~("SAB~~2005 ~~107") regarding the SEC's interpretation of SFAS 123R~~ and ~~the~~2004, ~~valuation of share-based payments for public companies. In April 2005~~respectively, ~~the SEC amended Regulation S-X to delay the date for compliance with~~and ~~SFAS 123R~~consist toprimarily ~~the first interim or annual reporting period~~ of aprofessional ~~registrant's~~fees ~~first~~incurred ~~fiscal~~in ~~year~~connection ~~beginning~~with ~~after June 15, 2005. As a result~~ the ~~Company is required to adopt SFAS 123R~~ onsettlement ~~April 1, 2006. The Company is currently assessing the impact~~ of ~~SFAS 123R~~claims ondirectly ~~its~~related ~~compensation~~to ~~strategies and financial statements and determining which transition alternative it will elect. The Company believes~~ the ~~adoption~~bankruptcy ~~of SFAS 123R will have a material effect on its operating results if current compensation strategies are continued~~filing.

~~RISK~~Interest ~~FACTORS~~ Income

~~There~~Interest ~~are~~income ~~significant~~totaled $0.4 million ~~risk~~for ~~factors~~the ~~that~~three ~~currently~~months ~~affect~~ended orSeptember 30, ~~may~~2005, ~~affect~~an increase ~~our~~of ~~business~~$0.1 million, ~~financial condition~~ or ~~operating~~35%, ~~results.~~from ~~As of~~ the ~~date~~three ofmonths ~~this~~ended ~~report~~September 30, we ~~have~~2004. ~~not~~Interest ~~filed~~income ~~our~~totaled ~~periodic~~$1.1 million ~~reports~~for ~~with~~ the ~~SEC~~six onmonths aended ~~timely~~September 30, 2005, ~~basis.~~an ~~Readers~~increase ~~should~~of ~~carefully~~$0.6 million, ~~consider~~or ~~these~~97%, ~~factors~~from ~~before~~the ~~making~~six anmonths ~~investment~~ended ~~decision~~September 30, 2004. ~~with~~This ~~respect~~increase toresulted ~~our~~partially ~~common~~from ~~stock.~~investment ~~These~~of ~~risk~~increased available ~~factors~~cash ~~are~~balances ~~detailed~~in ~~beginning~~interest onbearing ~~page 34~~accounts ofat ~~our~~higher ~~Amendment~~interest Norates. 1 Also contributing to the ~~Annual~~increase ~~Report~~during ~~on Form 10-K for~~ the ~~fiscal~~six ~~year~~months ended ~~March~~September 3130, 2005, ~~filed~~was ~~with~~$0.2 million of interest income related to the ~~SEC~~settlement onof a ~~October 18,~~legal ~~2005.~~matter as discussed below under “Other Income.”

Interest ~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~ Expense

AsInterest ofexpense ~~June~~includes interest charges and amortized costs related to our borrowings. Interest expense totaled $0.7 million for the three months ended September 30, 2005, ~~there~~a ~~were~~decrease noof ~~material~~$0.3 million, ~~changes~~or to31%, from the ~~information~~three ~~previously~~months ~~reported~~ended ~~under~~September 30, 2004. ~~Item~~Interest 7Aexpense intotaled ~~our~~$1.5 million ~~Form~~for the six months ended September ~~10-K~~30, 2005, a decrease of $0.7 million, or 32%, from the six months ended September 30, 2004. Interest expense decreased primarily as a result of lower debt balances.

Income ~~ITEM 4. CONTROLS AND PROCEDURES~~ Taxes

~~EVALUATION~~Income OFtax ~~DISCLOSURE~~expense ~~CONTROLS~~is ~~AND~~derived ~~PROCEDURES~~ primarily from interest accrued on the Company’s tax contingencies and also from taxes on foreign operations for which no U.S. federal benefit can be recorded.

WeIncome ~~maintain~~tax ~~disclosure~~expense ~~controls~~totaled $1.0 million and ~~procedures~~$1.1 million asfor ~~such~~the ~~term~~three ismonths ~~defined~~ended September 30, in2005 ~~Rules 13a-15(e)~~and 2004, respectively. Income tax expense represented 13% and ~~15d-15(e)~~ 42% of the ~~Exchange~~loss ~~Act~~before income taxes for the three months ended September 30, 2005 and 2004, respectively. Income tax expense totaled ~~that~~$1.3 million ~~are~~and ~~designed~~$2.4 million tofor ~~ensure~~the ~~that~~six ~~information~~months ~~required~~ended toSeptember 30, 2005 beand ~~disclosed~~2004, byrespectively. usIncome intax ~~reports~~expense ~~that~~represented we8% ~~file~~and or14% ~~submit~~of ~~under~~the loss before income taxes for the ~~Exchange~~six ~~Act~~months isended ~~recorded~~September 30, ~~processed~~2005 and 2004, ~~summarized~~respectively. In order to calculate the interperiod tax provision for each quarter, ~~and~~the ~~reported~~estimated ~~within~~annual effective tax rate is applied to the ~~time~~quarterly ~~periods~~pre-tax ~~specified~~income in(loss) ~~SEC~~of ~~rules and~~our ~~forms,~~legal ~~and~~entities ~~that~~for ~~such~~which ~~information~~pre-tax income is anticipated ~~accumulated~~for ~~and~~the ~~communicated~~year. toFor ~~our~~the ~~management~~quarter ended September 30, ~~including~~2005, ~~our~~the majority ~~chief~~of ~~executive~~our ~~officer~~foreign ~~and~~entities ~~chief~~reported ~~financial~~pre-tax ~~officer~~income, asresulting in foreign ~~appropriate~~tax expense which, when added to ~~allow~~the ~~timely~~tax ~~decisions~~expense ~~regarding~~from ~~required~~interest ~~public~~accrued ~~disclosure.~~on the Company’s tax contingencies, increased the tax provision for the quarter.

As of June 30, 2005, management carried out an assessment, under the supervision of and with the participation of our chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). As of the date of this assessment, the chief executive officer and the 23

24Other Income

~~chief~~During the six months ~~financial~~ended ~~officer~~September 30, ~~concluded~~2005, ~~that~~the ~~our~~Company ~~disclosure~~received ~~controls~~cash in the amount of $2.1 million related to the settlement of a dispute with a customer arising from a software license agreement entered into in March 2002. In connection with the settlement, the Company also agreed to issue new software licenses to the customer which the customer will evaluate and ~~procedures~~may ~~were~~decide ~~not~~to install ~~effective~~at ~~because~~a later date. Of the cash received, $1.2 million has been accounted for as the resolution of a gain contingency that arose prior to the Company’s ~~material~~application ~~weaknesses~~of ~~described~~fresh-start reporting, effective July 18, 2003, upon the emergence from bankruptcy proceedings and is recorded as other income in ~~our~~the ~~Amended~~accompanying ~~Form~~consolidated statements of operations. The settlement included the payment of interest accrued and the recovery of legal expenses incurred by the Company to litigate and ultimately settle this dispute. The Company has recorded the remaining cash received under the settlement of $0.2 ~~10-K~~million and $0.7 million as interest income and a reduction of general and administrative expenses reflecting the recovery of legal costs, respectively, in the accompanying consolidated statements of operations, as such amounts were earned or incurred subsequent to the Company’s adoption of fresh-start reporting.

~~In view~~Also ofincluded ~~the fact that the financial information presented~~ in ~~this~~other income ~~report~~for ~~was prepared in~~ the ~~absence~~six ofmonths ~~effective~~ended ~~internal control over financial reporting~~September 30, we2005 ~~have~~is ~~devoted a~~$0.5 million ~~significant~~from ~~amount of time and resources to~~ the ~~analysis~~recovery of ~~the~~financing ~~financial~~fees ~~statements~~paid ~~contained~~prior into ~~this~~the ~~report.~~Company’s Inemergence ~~particular, we have reviewed all significant account balances and transactions~~from ~~reflected~~bankruptcy inproceedings ~~the~~to financial ~~statements~~institutions ~~contained~~with inwhich ~~this report and otherwise analyzed~~ the ~~transactions~~Company ~~underlying our financial statements to verify the accuracy of the financial statements contained~~had inaccounts ~~this~~receivable ~~report.~~financing ~~Accordingly, management believes that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations, and cash flows~~facilities.

~~Our Amended~~Effect Form 10-K includes (i) Management's Report on Internal Control over Financial Reporting, which concludes that the Company's internal control over financial reporting is not effective, (ii) an unqualified report of ~~the~~Foreign ~~Company's~~Currency ~~independent~~Exchange ~~registered~~Rate ~~public accounting firm on~~Fluctuations ~~management's assessment and (iii) an adverse opinion of the Company's independent registered public accounting firm~~ on ~~the~~Results ~~effectiveness~~ of ~~the Company's internal control over financial reporting, each as of March 31, 2005.~~ Operations

~~CHANGES~~To INprovide ~~INTERNAL~~a ~~CONTROL~~framework ~~OVER~~for assessing ~~FINANCIAL~~how ~~REPORTING~~ our underlying operations performed, excluding the effect of foreign currency exchange rate fluctuations, we have disclosed below the change in “total revenue” (comprising licenses, maintenance, and consulting and training), “cost of revenue” (comprising cost of licenses, maintenance, and consulting and training), and “operating costs and expenses” (comprising sales and marketing, research and development, general and administrative, amortization of intangible assets, and restructuring, impairments and other) attributable to foreign currency exchange rate fluctuations. To do so, we have calculated the impact of foreign currency exchange rate fluctuations in U.S. dollars by multiplying the three and six month periods ended September 30, 2005 activity in local currencies by the difference between the average exchange rates in effect during the three and six month periods ended September 30, 2005 and the average exchange rates in effect during the three and six month periods ended September 30, 2004.

There have not been any additional changes to our internal control over financial reporting during the quarter ended June 30, 2005 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting that were not described in our Amended Form 10-K. During the three months ended June 30, 2005, we continued efforts to complete management's assessment of the Company's internal control over financial reporting as of March 31, 2005, as well as to support the efforts of our independent registered public accounting firm to complete its assessment. In addition, we continued efforts to remedy the deficiencies in our internal control over financial reporting. Revenue

25Total revenue for the three months ended September 30, 2005 was not impacted significantly from foreign currency exchange fluctuations. Total revenue for the six months ended September 30, 2005 increased $0.8 million from the six months ended September 30, 2004, all of which was due to foreign currency exchange rate fluctuations.

Cost of ~~PART II—OTHER INFORMATION~~ Revenue

Cost of revenue for the ~~ITEM~~three 1months ended September 30, 2005 was not impacted significantly from foreign currency exchange fluctuations. ~~LEGAL~~Cost ~~PROCEEDINGS~~ of revenue for the six months ended September 30, 2005 increased $2.6 million from the six months ended September 30, 2004. Approximately $0.1 million of the increase for the six month comparison was due to foreign currency exchange rate fluctuations.

~~Federal~~Other ~~Government~~Operating ~~Investigations~~Costs and ~~Proceedings Pertaining to Historical Accounting Irregularities~~ Expenses

~~Government~~Other ~~Investigations. In~~operating ~~early~~costs ~~2002, the DOJ~~ and ~~SEC opened investigations into Peregrine and certain former Peregrine~~ ~~employees~~expenses ~~pertaining~~for to the ~~accounting~~three ~~improprieties~~months ~~that~~ended ~~took place prior to 2002. As a result of the DOJ's investigation~~September 30, a2005 ~~number~~was ofnot ~~our former employees, including our former chief financial~~affected ~~officer,~~significantly ~~treasurer,~~by ~~assistant~~foreign ~~treasurer~~currency ~~and~~exchange ~~two sales executives have pleaded guilty to various felony charges and are awaiting sentencing~~fluctuations. AOther ~~former~~operating ~~managing director of KPMG Consulting has also~~costs ~~pleaded guilty to felony counts in connection with these events. A number of other former employees, including our former chief executive officer~~ and ~~chairman,~~expenses ~~chief~~for ~~operating~~the ~~officer,~~six ~~two~~months ~~executive vice~~ended ~~presidents of worldwide sales~~September 30, ~~vice~~2005 ~~president~~increased ~~of finance and chief accounting officer, and other sales and finance personnel have been charged with various felonies in connection with these accounting irregularities and are awaiting trial~~$1. ~~An Arthur Andersen partner who formerly was our lead auditor also was indicted in connection with these events. The criminal charges generally relate~~7 million tofrom the ~~manipulation~~six ofmonths ~~our~~ended ~~apparent financial condition~~September 30, ~~misleading~~2004. ~~investors,~~Approximately ~~hindering the government's investigation or conspiracy~~$0.3 ~~In most~~ million of ~~these cases,~~ the ~~SEC~~increase ~~filed~~for ~~a civil action against~~ the ~~individuals~~ ~~alleging~~six ~~violations~~month ofcomparison ~~the~~was ~~Securities~~due ~~Act,~~to ~~the~~foreign ~~Exchange~~currency exchange ~~Act~~rate ~~and the rules promulgated thereunder~~fluctuations.

Our Settlement with the Securities and Exchange Commission. In June 2003, the SEC filed a partially-settled civil action against Peregrine in the United States District Court for the Southern District of California alleging violations of the Securities Act, the Exchange Act and the rules promulgated thereunder. In the same month, our settlement with the SEC was approved by the United States District Court for the Southern District of California, resolving all the matters raised in the civil action, except the request for a civil penalty and disgorgement. The SEC separately withdrew the request for monetary damages and disgorgement in July 2003. Under the terms of the settlement, we agreed, among other things, to: 24

~~Continuing~~LIQUIDITY ~~Investigations. The SEC and the DOJ are continuing their investigations and we are fully cooperating with them in~~AND ~~these~~CAPITAL investigations and as they prepare for the trials involving former employees and others. Since we have not filed our SEC periodic reports on a timely basis, we have not been in compliance with the requirement of our settlement with the SEC pertaining to refraining from violating federal securities laws. To our knowledge, the SEC is not considering a further enforcement action against us and neither Peregrine nor any current employee is a target of an ongoing investigation, but we can not be sure that a further enforcement action or criminal proceeding will not be brought against us. Responding to any such actions could be expensive and time-consuming for management and could have an adverse effect on our reputation and ability to generate sales. Readers RESOURCES

26We primarily generate cash from software licensing, maintenance renewals and the provision of consulting and training services. Our primary uses of cash are for general working capital purposes, taxes, debt service and bankruptcy claims. We also use cash to purchase capital assets to support our business. In fiscal 2006 and fiscal 2005, our principal liquidity requirements have been for operating expenses, working capital and debt and bankruptcy related payments. We have 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 in 2002.

~~should~~The ~~carefully~~following ~~review~~table ~~the~~summarizes ~~information~~cash ~~set~~and ~~forth~~cash ~~under~~equivalents, ~~the~~restricted ~~caption "Risk Factors~~cash," ~~beginning~~and working oncapital ~~page 34~~(deficit) as of ~~our Amendment No.~~September 130, to2005 ~~the~~and ~~Annual Report on Form~~March ~~10-K/A~~31, ~~filed~~2005, ~~with~~respectively ~~the~~(dollars ~~SEC~~in ~~on October 18, 2005.~~ thousands):

Stockholder Litigation Pertaining to Historical Accounting Irregularities as to Which Peregrine is No Longer a Party

	September 30, 2005				March 31, 2005
Cash and cash equivalents		$	54,914			$	84,765
Cash—restricted		$	4,912			$	4,325
Working capital (deficit)		$	(35,127	)		$	(19,641	)

~~During~~Cash ~~May and~~equivalents ~~June 2002,~~primarily aconsist ~~number~~ of ~~purported~~overnight ~~class~~money market ~~action~~accounts, ~~complaints~~time ~~were~~deposits, ~~filed~~commercial ~~against~~paper ~~Peregrine~~and ongovernment ~~behalf~~agency ~~of purchasers of its securities~~notes. ~~during~~The ~~various~~restricted ~~periods~~cash ~~from~~relates ~~1999~~ to ~~2002.~~security ~~The~~for ~~complaints~~certain ~~alleged~~real ~~false~~property ~~and~~leases ~~misleading statements in SEC filings, financial statements~~ and certain other ~~public statements and asserted claims for violations of federal securities laws~~obligations. ~~The~~Working ~~complaints~~capital ~~were ultimately consolidated into an action before the United States District Court for the Southern District of California~~ (~~the "Federal Securities Action"~~deficit)~~. In~~ ~~January 2003,~~consists ~~the~~primarily ~~District Court entered an order designating a group~~ of ~~individuals identified as the Loran Group as lead plaintiff with respect to claims arising from violations of~~cash ~~Sections 10(b)~~ and ~~20(a) of~~cash ~~the Securities Act and Heywood Waga as lead plaintiff with respect to claims arising from violations of Section 11 of the Exchange Act. In November 2003~~equivalents, ~~the~~marketable ~~Bankruptcy Court certified a class consisting of persons who acquired Peregrine~~ securities ~~from July 22~~, ~~1999~~accounts ~~through May 3~~receivable, ~~2002, led by the Loran Group~~ and ~~Heywood~~ ~~Waga (the "Securities Class"), and a class, consisting of persons holding the Predecessor Company's common stock as of the effective date of the Reorganization Plan (the "Equity Class"). The~~other ~~Securities~~current ~~Class and~~assets ~~the~~net ~~Equity Class were certified by the Bankruptcy Court solely for purposes~~ of ~~allowing~~accounts ~~them to enter into a settlement agreement with Peregrine to resolve the allocation of new common stock among the various interests in Class 9 under our Reorganization Plan~~payable, ~~consisting~~accrued ~~of the Securities Class~~expenses, ~~the Equity Class~~ and ~~certain~~current portions of ~~our~~deferred ~~former directors~~revenue and ~~officers~~notes ~~asserting indemnity claims relating to lawsuits filed against them (the "Indemnification Class")~~payable. ~~The Bankruptcy Court's order approving the settlement agreement resolved the stockholder claims against us and we are not a party to the Federal Securities Action.~~

~~Peregrine~~The following ~~Litigation~~table ~~Trustee~~summarizes ~~Action~~cash toflows ~~Which~~for ~~Peregrine~~the issix ~~Not~~months aended ~~Party~~ September 30, 2005 and 2004, respectively (dollars in thousands):

Under our Reorganization Plan, an independent litigation trust was established and initially funded with $3.2 million in cash and 708,750 shares of new common stock. With limited exceptions, potential claims and causes of action we had against our former officers and directors for negligence, breach of fiduciary duty, insider trading or any other breaches of duty imposed by law, all potential claims we had against our former auditor Arthur Andersen relating to accounting services provided to us, claims brought by third parties against some of our former directors and officers purportedly on our behalf as derivative claims, and certain other claims, were transferred to the litigation trust. The assigned trustee (the "Litigation Trustee") has the authority to prosecute, abandon, release, settle or otherwise dispose of these claims at the trustee's sole discretion, without the consent, authority or approval of any third parties, including the Bankruptcy Court, except that the lead plaintiffs in the Federal Securities Action must consent in advance to any release, settlement, compromise or liquidation of claims. We are required under a Bankruptcy Court stipulation and the litigation trust agreement to provide the Litigation Trustee with access to our books and records, to make our employees available as witnesses and to be available for depositions, interviews and other proceedings. In February 2004, the Litigation Trustee filed suit in California Superior Court in San Diego County against a number of our former directors and officers under theories of insider trading, breach of fiduciary duty, waste of corporate assets, conspiracy and unjust enrichment (the "Litigation Trustee Action"). The trustee also is pursuing claims against Arthur Andersen for violations of the federal securities laws in connection with accounting services Arthur Andersen provided to us. The Litigation Trustee Action is ongoing, but we are not a party to it. All of the proceeds resulting from the Litigation Trustee Action, if any, are for the benefit of the Securities Class and we are not entitled to receive any such proceeds.

	Six Months Ended September 30, 2005				Six months Ended September 30, 2004
Cash used in:
Operating activities		$	(15,907	)		$	(9,658	)
Investing activities		(3,270		)		(9,552		)
Financing activities		(9,555		)		(13,124		)
Effect of exchange rate fluctuations on cash		(1,119		)		(92		)
Net decrease in cash and cash equivalents		$	(29,851	)		$	(32,426	)

27We believe our cash on hand and operating cash flows will be sufficient to fund our operations and planned capital expenditures and to satisfy our scheduled non-trade payment obligations for at least 12 months from the date of this report. However, our ability to generate adequate cash depends upon our future performance, which in turn is subject to general economic conditions and financial, business and other factors affecting our operations, including factors beyond our control. Please review the information set forth under the caption “Risk Factors,” contained in our Amended Form 10-K. We currently have no lines of credit or similar facilities with any financial institutions. There can be no assurance that additional financing will be available in the future or that, if available, we will be able to obtain it on terms favorable to us.

~~Bankruptcy Reorganization; Claims Litigation; Class 7/9 Reserve Shares~~ Operating Activities

OnOur ~~September 27,~~primary ~~2002,~~source ~~the~~of ~~Company~~operating ~~and~~cash ~~its~~flows ~~wholly-owned~~is ~~subsidiary,~~revenue from ~~Peregrine Remedy, Inc., filed voluntary petitions under Chapter 11 of~~ the ~~U.S. Bankruptcy~~sale ~~Code. The plan~~ of ~~reorganization~~software oflicenses ~~the~~and ~~Company (~~the ~~"Reorganization~~provision ~~Plan") was confirmed by the U.S. Bankruptcy Court in the District~~ of, ~~Delaware~~maintenance ~~(the "Bankruptcy Court") on~~and ~~July 18,~~support ~~2003~~services, and itpost-sale ~~became~~consulting ~~effective~~and ~~on August 7, 2003~~training. ~~Unless~~Our ~~otherwise~~primary ~~indicated,~~use ~~all~~of cash ~~references~~from tooperating ~~"old~~activities ~~common~~is ~~stock"~~for ~~pertain~~compensation toand ~~the~~personnel ~~Company's common stock, par value $0~~related expenditures.~~001~~ ~~per share,~~For ~~that~~the ~~was~~six ~~cancelled~~months onended ~~August~~September 730, ~~2003~~2005 ~~in connection with~~ the Company's ~~emergence from Chapter 11 bankruptcy proceedings, and all references to "new common stock" pertain to the~~used ~~Company's common stock, par value~~ $015.~~0001~~9 million ~~per share, from and after the effective date~~ of ~~the~~cash ~~Reorganization~~in ~~Plan~~operating activities. ~~References~~We toreported ~~the~~a ~~"Predecessor Company" herein pertain to the fiscal periods prior to and including July 18, 2003.~~

Class 8 General Unsecured Claims. Approximately 1,200 general unsecured claims were filed against the Predecessor Company based on events that took place prior to the bankruptcy filing. The Company began paying claims on the effective date of the Reorganization Plan and continues to pay based on settlement terms or as claims are settled. Through June 30, 2005, in order to resolve these claims, the Company has paid or agreed to pay over time approximately $45.0 million in cash. As of June 30, 2005, there were general unsecured claims asserted in the original aggregate face amount of approximately $0.3 million remaining to be resolved. The Company believes amounts accrued at June 30, 2005 are sufficient to resolve the claims. 25

~~Class 7/9~~net ~~Reserve~~loss ~~Shares. Under our Reorganization Plan, 600,000 shares~~ of ~~new common stock (the "Class~~$18.1 ~~7/9~~million ~~Reserve~~and ~~Shares"),~~cash ~~representing~~outflows 4%from ofchanges ~~the~~in ~~15,000,000~~working ~~shares~~capital ofand ~~new~~other ~~common stock issued on the effective date~~ of ~~the~~$11.8 million. These ~~Reorganization Plan,~~ were ~~held~~partially inoffset ~~reserve~~ by ~~Peregrine,~~non-cash incharges ~~its~~of ~~capacity~~$13.3 million ~~as stock~~for ~~disbursing~~amortization ~~agent under the Reorganization Plan, to be allocated between Class 7~~ and ~~Class 9~~depreciation. ~~The~~Of ~~allocation is based on whether~~ the ~~amount~~amortization ~~finally paid to resolve Class 8 claims falls below~~charge, ~~within, or above the range of~~ $4911.06 million was ~~and~~related ~~$65.0 million,~~to ~~which were~~ the ~~estimates~~amortization of ~~Class 8~~identifiable ~~payments~~intangibles. ~~determined~~Working ~~by the various constituencies in the bankruptcy~~capital ~~proceedings.~~outflows Aswere ~~the~~primarily ~~Company~~impacted ~~has~~by ~~determined~~decreases ~~that~~in ~~the~~deferred ~~final~~revenue ~~amount~~and ~~needed~~accrued expenses toof ~~resolve Class~~$18.3 8million ~~claims~~and ~~will be below~~ $491.06 million, ~~all~~respectively. ofThese outflows ~~these 600,000 shares~~ were ~~allocated to Class 9. As a result of the Class 9 settlement~~offset, ~~the~~in ~~Equity Class within Class 9 (i.e.~~part, ~~holders,~~by asdecreases ofin ~~the~~accounts ~~effective~~receivable ~~date~~and ~~of the Reorganization Plan, of the Predecessor~~other ~~Company's~~assets ~~common stock) were entitled to receive 85%, or 510,000,~~ of ~~such~~$6.5 million ~~shares~~ and ~~the Securities Class within Class~~$1.2 9million, ~~(i.e.~~respectively, ~~purchasers~~and ~~of old common stock involved in a class action brought~~an ~~against~~increase ~~the Predecessor Company that was resolved~~ in ~~the~~accounts ~~Reorganization~~payable ~~Plan) were entitled to receive 15%, or 90,000,~~ of ~~such shares~~$0. ~~The Class~~3 ~~7/9 Reserve Shares were distributed in a process that began on August 30, 2005~~million.

~~Administrative~~For ~~Claims and Luddy v. Peregrine. Administrative claims are claims related to obligations we purportedly incurred after we filed for bankruptcy law protection during~~ the ~~administrative~~six ~~period~~months ofended ~~the bankruptcy case. In order to be paid~~September 30, ~~administrative claims must meet certain requirements under the Reorganization~~ ~~Plan and bankruptcy laws. The only material remaining administrative claim is a claim asserted by our former chief technology officer, Frederic Luddy. In May~~ 2004, ~~Mr. Luddy~~our ~~filed~~operations ~~a complaint~~used ~~against us in the Court of Chancery for the State of Delaware seeking advancement of certain legal fees and expenses~~$9. ~~Mr.~~7 ~~Luddy's~~million ~~complaint alleged that Peregrine is required to advance or reimburse him for his defense expenses~~ in ~~connection~~net ~~with the Federal Securities Action and the Litigation Trustee Action~~cash. ~~His~~We ~~complaint~~reported ~~also alleged that, pursuant to~~ a ~~paragraph~~net loss of ~~the Bankruptcy Court's order confirming our Reorganization Plan, his indemnity claim can be pursued in state court~~$18. ~~In June~~9 ~~2004~~million, weincluding ~~removed~~non-cash ~~Mr. Luddy's~~charges ~~complaint~~of ~~from Delaware state court to the Bankruptcy Court~~$14. ~~In November~~0 ~~2004,~~million ~~the~~for amortization ~~Bankruptcy~~and ~~Court found that it had jurisdiction to consider the complaint~~depreciation. AtOf the ~~same~~amortization ~~time~~charge, ~~the Bankruptcy Court granted in part and denied in~~$11.6 million ~~part~~was ~~our~~related ~~motion~~ to ~~dismiss, without prejudice to our right to renew~~ the ~~motion~~amortization ~~later~~of ~~after~~identifiable ~~discovery and~~ intangibles.

28Investing Activities

~~formal fact~~Our ~~finding.~~primary Onuse ~~February 23,~~of ~~2005,~~cash ~~Mr. Luddy~~in ~~filed~~investing anactivities ~~amended~~is ~~complaint,~~the purchase ~~which~~of weproperty ~~answered~~and ~~on March 15, 2005~~equipment. ~~Discovery~~For ~~has~~the ~~not~~six ~~yet~~months ~~commenced~~ended ~~and~~September 30, 2005, nothe ~~trial~~Company ~~date~~used ~~has been set~~$3. ~~We believe Mr.~~3 ~~Luddy's~~million ~~claims~~of ~~are~~net ~~without~~cash ~~merit~~for ~~and~~investing weactivities primarily ~~intend~~related to ~~vigorously defend against them~~$2.8 ~~While~~million ~~the outcome is not currently determinable,~~ in ~~the~~capital ~~opinion~~expenditures of(e.g. ~~management~~computers ~~the matter~~and ~~will~~data ~~not~~processing ~~materially affect our financial position~~equipment, ~~results~~leasehold ~~of operations or liquidity~~improvements).

~~Litigation~~For ~~Regarding~~the six months ended September 30, 2004, the ~~Latham~~Company ~~Report~~ used $9.6 million of net cash for investing activities primarily related to the purchase of $8.0 million of marketable securities, net of sales proceeds, and $1.8 million in capital expenditures (e.g. computers and data processing equipment, leasehold improvements).

~~To assist the SEC in its investigation, in August 2002 we provided to the SEC, pursuant to a confidentiality agreement, an extensive report and supporting~~Financing 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 law filing in September 2002, the Official Committee of Unsecured Creditors of the Company and Peregrine Remedy, Inc. ("Remedy") appointed in the cases commenced under Chapter 11 of the U.S. Bankruptcy Code by the Company and Remedy filed a motion to appoint a trustee and, as an exhibit to their motion, filed a copy of the Latham Report under seal. Thereafter, Copley Press, Inc. ("Copley"), 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 opposed the unsealing of the Latham Report. 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 to engage in an access analysis to determine what portions of the Latham Report, if any, should be unsealed. We appealed the District Court's decision to the United States Court of Appeals for the Third Circuit. On April 22, 2005, as required by the District Court's order, and by agreement between Copley and Peregrine, we filed a partially redacted version of the Latham Report and a proposed court order with the Bankruptcy Court. The filing made the unredacted portions of the report a part of the public record. Under the proposed order, the redacted portions of the report would be deemed sealed and would not be a part of the public record. The sealing of the redacted text was based on a compromise between Copley and Peregrine, without prejudice to our respective positions, and is not based on any judicial predetermination of cause or justification, or lack thereof, for such sealing. Copley or other parties could move to unseal additional portions of the report, subject to a process that is defined in the proposed order. On September 13, 2005, we dismissed our appeal to the Third Circuit. Activities

~~The Latham~~Our ~~Report~~primary ~~also~~source ~~has~~of ~~been~~cash ~~filed~~from infinancing ~~court,~~activities has ~~under~~been ~~provisional~~from ~~seal,~~the byissuance ~~John J.~~of ~~Moores,~~common astock ~~former~~under ~~director,~~our inemployee ~~connection~~stock ~~with the Federal Securities Action and the Litigation~~option ~~Trustee Action~~plan. ~~Mr. Moores~~Our ~~filed~~primary ~~the~~use ~~Latham~~of ~~Report,~~cash ~~under temporary seal,~~ in ~~both~~financing ~~actions~~has inbeen ~~connection~~for ~~with~~repayment ~~motions~~of outstanding ~~to dismiss the complaints against him~~debt. WeFor ~~have filed motions in both cases to have~~ the ~~Latham~~six ~~Report~~months ~~stricken~~ended ~~from the record or, as an alternative, to have the Latham Report, or portions of it, permanently sealed. On February~~September 230, 2005, the ~~District Court in the~~Company ~~Federal~~repaid ~~Securities~~$10.3 ~~Action~~million ~~ruled,~~in ~~among~~long-term ~~other things~~debt, ~~that~~which ~~the~~was ~~Latham~~offset ~~Report would not be stricken from the record, but that it would remain under seal pending any further applications to unseal it. Similarly,~~ in ~~the~~part ~~Litigation~~by ~~Trustee Action, we have entered into an agreed stipulation and order with Mr~~a $0.5 ~~Moores~~million ~~providing~~refund ~~that~~of ~~the~~fees ~~unredacted~~paid ~~Latham~~to ~~Report~~factor ~~filed~~banks ~~by him~~ in ~~that~~connection ~~action under~~with ~~temporary~~factored ~~seal~~receivables ~~would~~arrangements ~~remain~~that ~~under~~are ~~seal~~no ~~pending~~longer ~~any~~outstanding ~~further motions to unseal to be brought by Mr. Moores~~ and ~~other parties in interest~~$0. ~~No such motion has been brought to date. In the criminal~~3 ~~actions~~million ~~against~~received ~~former Peregrine employees and others pending~~ in ~~the~~connection ~~U.S.~~with ~~District Court for~~ the ~~Southern~~issuance ~~District~~ of ~~California,~~shares aof ~~protective~~common ~~order~~stock ~~was entered on February 28, 2005 to provide~~upon ~~limited~~exercise ~~protection for the confidential information~~ of ~~nonparties,~~employee ~~such~~stock ~~as the Latham Report and other Peregrine confidential information~~options.

29For the six months ended September 30, 2004, the Company used $13.1 million in financing activities. These payments primarily reflect repayment of the principal and interest on factor loans.

~~Other~~Bankruptcy ~~Litigation~~ Claims

We ~~are~~began ~~also~~paying ~~involved~~claims inon ~~legal~~the ~~proceedings,~~effective date of the Reorganization Plan and continue to pay as claims are settled, ~~and~~liquidated, ~~litigation~~or otherwise ~~arising~~resolved. ~~from~~Through ~~the~~September 30, ~~ordinary~~2005, ~~course~~we have paid, settled or otherwise disposed of ~~business.~~Class 8 ~~Although~~claims ~~the~~with ~~ultimate~~an ~~results~~original aggregate face amount of approximately $383.6 million. To resolve these ~~legal~~claims we have ~~proceedings,~~paid ~~claims~~or ~~and~~agreed ~~litigation~~to ~~are~~pay ~~not~~over ~~currently~~time ~~determinable~~approximately $45.0 million in cash. As of September 30, 2005, there were general unsecured claims asserted in the original ~~opinion~~aggregate face amount of ~~management~~approximately ~~these~~$0.3 million ~~matters~~remaining ~~will~~to be ~~not~~resolved. ~~materially~~Bankruptcy ~~affect~~claims ~~our~~to ~~financial~~be ~~position~~paid in cash over time at September 30, 2005 ~~results~~total $36.1 million. For more information on the status of ~~operation~~claims litigation, orsee ~~liquidity.~~“Legal Proceedings—Bankruptcy Reorganization; Claims Litigation; Class 7/9 Reserve Shares,” beginning on page 30 of this report.

RISK ~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~ FACTORS

OnThere ~~April 18,~~are ~~April 22,~~significant ~~June 7~~risk factors ~~and~~that ~~June 24,~~currently ~~2005~~affect weor ~~issued~~may toaffect ~~former~~our ~~employees 105 shares~~business, ~~105~~financial ~~shares, 58 shares, and 351 shares,~~condition ~~respectively,~~or ofoperating ~~our~~results. ~~new~~Prior ~~common~~to ~~stock for aggregate purchase prices of $1,640, $1,640, $906, and $5,482, respectively, upon~~ the ~~exercise~~filing of ~~vested~~this ~~options~~Quarterly byReport ~~these four former employees. The exercise price was $15.62 per share. These shares were issued without registration in reliance~~ on ~~the exemption provided by Section~~Form ~~3(A)(7) of the Securities Act~~10-Q, ~~and comparable provisions of~~ ~~state~~we ~~securities~~have ~~laws,~~not ~~for~~filed ~~securities~~our ~~issued~~periodic inreports ~~connection~~ with the ~~approval~~SEC ~~and~~on ana ~~order~~timely ~~of the U~~basis.S. ~~Bankruptcy~~Readers should ~~Court~~carefully ~~pursuant~~consider tothese ~~our~~factors ~~prior~~before ~~bankruptcy~~making ~~proceedings.~~an

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~ 26

~~None~~investment decision with respect to our common stock. These risk factors are detailed beginning on page 34 in our Amendment No. 1 to the Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005, filed with the SEC on October 18, 2005.

ITEM 4 3. ~~SUBMISSION~~ OFQUANTITATIVE ~~MATTERS~~AND TOQUALITATIVE ADISCLOSURES ~~VOTE~~ABOUT OFMARKET ~~SECURITY HOLDERS~~ RISK

~~None.~~As of September 30, 2005, there were no material changes to the information previously reported under Item 7A in our Amended Form 10-K.

ITEM 5 4. ~~OTHER~~ ~~INFORMATION~~ CONTROLS AND PROCEDURES

~~None.~~EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) of ~~ITEM~~the Exchange Act. These controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules 6and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required public disclosure. ~~EXHIBITS~~

~~The~~As ~~following~~of ~~are~~September 30, ~~filed~~2005, asmanagement ~~exhibits~~carried out an assessment, under the supervision of and with the participation of our chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). As of the date of this ~~Quarterly~~assessment, ~~Report~~the onchief executive officer and the chief financial officer concluded that our disclosure controls and procedures were not effective because of the material weaknesses described in our Amended Form 10-Q: K.

31.1		Certification of the Chief Executive Officer pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

In view of the fact that the financial information presented in this report was prepared in the absence of effective internal control over financial reporting, we have devoted a significant amount of time and resources to the analysis of the financial statements contained in this report. In particular, we have 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. Accordingly, management believes that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations, and cash flows.

30Our Amended Form 10-K includes (i) Management’s Report on Internal Control over Financial Reporting, which concludes that the Company’s internal control over financial reporting is not effective, (ii) an unqualified report of the Company’s independent registered public accounting firm on management’s assessment and (iii) an adverse opinion of the Company’s independent registered public accounting firm on the effectiveness of the Company’s internal control over financial reporting, each as of March 31, 2005.

CHANGES IN INTERNAL ~~SIGNATURES~~ CONTROL OVER FINANCIAL REPORTING

~~Pursuant~~There were not any material changes to ~~the~~our ~~requirements~~internal control ofover ~~the~~financial ~~Securities~~reporting ~~Exchange~~during ~~Act~~the ofquarter ~~1934~~ended September 30, 2005 ~~the~~that ~~registrant~~management ~~has~~believes ~~duly~~have ~~caused~~materially ~~this~~affected, ~~report~~or are reasonably likely to bematerially ~~signed~~affect, onour ~~its~~internal ~~behalf~~control byover ~~the~~financial ~~undersigned~~reporting that ~~thereunto~~were ~~duly~~not ~~authorized~~described in our Amended Form 10-K. During the three and six months ended September 30, 2005, we continued efforts to remedy the deficiencies in our internal control over financial reporting.

Date: October 18, 2005		PEREGRINE SYSTEMS, INC. (Registrant)
		By:		/s/ KENNETH J. SAUNDERS Executive Vice President & Chief Financial Officer (Principal Financial Officer and Authorized Signatory)

31PART II—OTHER INFORMATION

~~QuickLinks~~ITEM 1. LEGAL PROCEEDINGS

Federal Government Investigations and Proceedings Pertaining to Historical Accounting Irregularities

Government Investigations. In early 2002, the DOJ and SEC opened investigations into Peregrine and certain former Peregrine employees pertaining to the accounting improprieties that took place prior to 2002. As a result of the DOJ’s investigation, a number of our former employees, including our former chief financial officer, treasurer, assistant treasurer and two sales executives have pleaded guilty to various felony charges and are awaiting sentencing. A former managing director of KPMG Consulting has also pleaded guilty to felony counts in connection with these events. A number of other former employees, including our former chief executive officer and chairman, chief operating officer, two executive vice presidents of worldwide sales, vice president of finance and chief accounting officer, and other sales and finance personnel have been charged with various felonies in connection with these accounting irregularities and are awaiting trial. An Arthur Andersen partner who formerly was our lead auditor also was indicted in connection with these events. The criminal charges generally relate to the manipulation of our 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, the Exchange Act and the rules promulgated thereunder.

Our Settlement with the Securities and Exchange Commission. In June 2003, the SEC filed a partially-settled civil action against Peregrine in the United States District Court for the Southern District of California alleging violations of the Securities Act, the Exchange Act and the rules promulgated thereunder. In the same month, our settlement with the SEC was approved by the United States District Court for the Southern District of California, resolving all the matters raised in the civil action, except the request for a civil penalty and disgorgement. The SEC separately withdrew the request for monetary damages and disgorgement in July 2003. Under the terms of the settlement, we agreed, among other things, to:

· Be enjoined from violating federal securities laws;

· Comply on an accelerated basis with the rules regarding management’s reporting on internal control over financial reporting in accordance with the Sarbanes-Oxley Act of 2002;

· Retain an internal auditor to assist with the accurate reporting of our financial results;

· Establish a corporate compliance program and retain a compliance officer to perform a continuous review of the effectiveness of our governance systems;

· Commence a training program for our officers and employees to prevent violations of federal securities laws; and

· Make a public statement that fully and accurately disclosed the condition of our internal control structure and our procedures for financial reporting on the effective date of our Reorganization Plan.

Continuing Investigations. The SEC and the DOJ are continuing their investigations and we are fully cooperating with them in these investigations and as they prepare for the trials involving former employees and others. Since we have not filed our SEC periodic reports on a timely basis, we have not been in compliance with the requirement of our settlement with the SEC pertaining to refraining from violating federal securities laws. To our knowledge, the SEC is not considering a further enforcement action against us and neither Peregrine nor any current employee is a target of an ongoing investigation, but we can not be sure that a further enforcement action or criminal proceeding will not be brought against us. Responding to any such actions could be expensive and time-consuming for management and could have

an adverse effect on our reputation and ability to generate sales. Readers should carefully review the information set forth under the caption “Risk Factors,” beginning on page 34 of our Amendment No. 1 to our fiscal 2005 Annual Report on Form 10-K/A filed with the SEC on October 18, 2005.

Stockholder Litigation Pertaining to Historical Accounting Irregularities as to Which Peregrine is No Longer a Party

During May and June 2002, a number of purported class action complaints were filed against Peregrine on behalf of purchasers of its securities during various periods from 1999 to 2002. The complaints alleged false and misleading statements in SEC filings, financial statements and other public statements and asserted claims for violations of federal securities laws. The complaints were ultimately consolidated into an action before the United States District Court for the Southern District of California (the “Federal Securities Action”). In January 2003, the District Court entered an order designating a group of individuals identified as the Loran Group as lead plaintiff with respect to claims arising from violations of Sections 10(b) and 20(a) of the Securities Act and Heywood Waga as lead plaintiff with respect to claims arising from violations of Section 11 of the Exchange Act. In November 2003, the Bankruptcy Court certified a class consisting of persons who acquired Peregrine securities from July 22, 1999 through May 3, 2002, led by the Loran Group and Heywood Waga (the “Securities Class”), and a class, consisting of persons holding the Predecessor Company’s common stock as of the effective date of the Reorganization Plan (the “Equity Class”). The Securities Class and the Equity Class were certified by the Bankruptcy Court solely for purposes of allowing them to enter into a settlement agreement with Peregrine to resolve the allocation of new common stock among the various interests in Class 9 under our Reorganization Plan, consisting of the Securities Class, the Equity Class and certain of our former directors and officers asserting indemnity claims relating to lawsuits filed against them (the “Indemnification Class”). The Bankruptcy Court’s order approving the settlement agreement resolved the stockholder claims against us and we are not a party to the Federal Securities Action.

Peregrine Litigation Trustee Action to Which Peregrine is Not a Party

Under our Reorganization Plan, an independent litigation trust was established and initially funded with $3.2 million in cash and 708,750 shares of new common stock. With limited exceptions, potential claims and causes of action we had against our former officers and directors for negligence, breach of fiduciary duty, insider trading or any other breaches of duty imposed by law, all potential claims we had against our former auditor Arthur Andersen relating to accounting services provided to us, claims brought by third parties against some of our former directors and officers purportedly on our behalf as derivative claims, and certain other claims, were transferred to the litigation trust. The assigned trustee (the “Litigation Trustee”) has the authority to prosecute, abandon, release, settle or otherwise dispose of these claims at the trustee’s sole discretion, without the consent, authority or approval of any third parties, including the Bankruptcy Court, except that the lead plaintiffs in the Federal Securities Action must consent in advance to any release, settlement, compromise or liquidation of claims. We are required under a Bankruptcy Court stipulation and the litigation trust agreement to provide the Litigation Trustee with access to our books and records, to make our employees available as witnesses and to be available for depositions, interviews and other proceedings. In February 2004, the Litigation Trustee filed suit in California Superior Court in San Diego County against a number of our former directors and officers under theories of insider trading, breach of fiduciary duty, waste of corporate assets, conspiracy and unjust enrichment (the “Litigation Trustee Action”). The trustee also is pursuing claims against Arthur Andersen for violations of the federal securities laws in connection with accounting services Arthur Andersen provided to us. The Litigation Trustee Action is ongoing, but we are not a party to it. All of the proceeds resulting from the Litigation Trustee Action, if any, are for the benefit of the Securities Class and we are not entitled to receive any such proceeds.

Bankruptcy Reorganization; Claims Litigation; Class 7/9 Reserve Shares

On September 22, 2002, the Company and its wholly-owned subsidiary, Peregrine Remedy, Inc., 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 in the District of Delaware (the “Bankruptcy Court”) on July 18, 2003, and it became effective on August 7, 2003. Unless otherwise indicated, all references to “old common stock” pertain to the Company’s common stock, par value $0.001 per share, that was cancelled on August 7, 2003 in connection with the Company’s emergence from Chapter 11 bankruptcy proceedings, and all references to “new common stock” pertain to the Company’s common stock, par value $0.0001 per share, from and after the effective date of the Reorganization Plan. References to the “Predecessor Company” herein pertain to the fiscal periods prior to and including July 18, 2003.

Class 8 General Unsecured Claims. Approximately 1,200 general unsecured claims were filed against the Predecessor Company based on events that took place prior to the bankruptcy filing. The Company began paying claims on the effective date of the Reorganization Plan and continues to pay based on settlement terms or as claims are settled. Through September 30, 2005, in order to resolve these claims, the Company has paid or agreed to pay over time approximately $45.0 million in cash. As of September 30, 2005, there were general unsecured claims asserted in the original aggregate face amount of approximately $0.3 million remaining to be resolved. Bankruptcy related claims to be paid in cash over time at September 30, 2005 total $36.1 million. The Company believes amounts accrued at September 30, 2005 are sufficient to resolve the claims.

Class 7/9 Reserve Shares. Under our Reorganization Plan, 600,000 shares of new common stock (the “Class 7/9 Reserve Shares”), representing 4% of the 15,000,000 shares of new common stock issued on the effective date of the Reorganization Plan, were held in reserve by Peregrine, in its capacity as stock disbursing agent under the Reorganization Plan, to be allocated between Class 7 and Class 9. The allocation is based on whether the amount finally paid to resolve Class 8 claims falls below, within, or above the range of $49.0 million and $65.0 million, which were the estimates of Class 8 payments determined by the various constituencies in the bankruptcy proceedings. As the Company has determined that the final amount needed to resolve Class 8 claims will be below $49.0 million, all of these 600,000 shares were allocated to Class 9. As a result of the Class 9 settlement, the Equity Class within Class 9 (i.e. holders, as of the effective date of the Reorganization Plan, of the Predecessor Company’s common stock) were entitled to receive 85%, or 510,000, of such shares and the Securities Class within Class 9 (i.e. purchasers of old common stock involved in a class action brought against the Predecessor Company that was resolved in the Reorganization Plan) were entitled to receive 15%, or 90,000, of such shares. The Class 7/9 Reserve Shares were distributed in a process that began on August 30, 2005.

Administrative Claims and Luddy v. Peregrine. Administrative claims are claims related to obligations we purportedly incurred after we filed for bankruptcy law protection during the administrative period of the bankruptcy case. In order to be paid, administrative claims must meet certain requirements under the Reorganization Plan and bankruptcy laws. The only material remaining administrative claim is a claim asserted by our former chief technology officer, Frederic Luddy. In May 2004, Mr. Luddy 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’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 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. In November 2004, the Bankruptcy Court found that it had jurisdiction to consider the complaint. At the same time, the Bankruptcy Court granted in part and denied in part our motion to dismiss, without prejudice to our right to renew the motion later after discovery and formal fact finding. On February 23, 2005, Mr. Luddy filed

an amended complaint, which we answered on March 15, 2005. Discovery has not yet commenced and no trial date has been set. On October 25, 2005, Mr. Luddy and the Company signed a settlement agreement to resolve the issues raised in Mr. Luddy’s complaint. The settlement agreement will become effective 10 days after it is approved by the Bankruptcy Court. If approved in its current form by the Bankruptcy Court, the settlement agreement will not materially affect the Company’s financial position, results of operations or liquidity.

Litigation Regarding the Latham Report

To assist the 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 law filing in September 2002, the Official Committee of Unsecured Creditors of the Company and Peregrine Remedy, Inc. (“Remedy”) appointed in the cases commenced under Chapter 11 of the U.S. Bankruptcy Code by the Company and Remedy filed a motion to appoint a trustee and, as an exhibit to their motion, filed a copy of the Latham Report under seal. Thereafter, Copley Press, Inc. (“Copley”), 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 opposed the unsealing of the Latham Report. 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 to engage in an access analysis to determine what portions of the Latham Report, if any, should be unsealed. We appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit. On April 22, 2005, as required by the District Court’s order, and by agreement between Copley and Peregrine, we filed a partially redacted version of the Latham Report and a proposed court order with the Bankruptcy Court. The filing made the unredacted portions of the report a part of the public record. Under the proposed order, the redacted portions of the report would be deemed sealed and would not be a part of the public record. The sealing of the redacted text was based on a compromise between Copley and Peregrine, without prejudice to our respective positions, and is not based on any judicial predetermination of cause or justification, or lack thereof, for such sealing. Copley or other parties could move to unseal additional portions of the report, subject to a process that is defined in the proposed order. On September 13, 2005, we dismissed our appeal to the Third Circuit.

The Latham Report also has been filed in court, under provisional seal, by John J. Moores, a former director, in connection with the Federal Securities Action and the Litigation Trustee Action. Mr. Moores 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. On February 2, 2005, the District Court in the Federal Securities Action ruled, among other things, that the Latham Report would not be stricken from the record, but that it would remain under seal pending any further applications to unseal it. Similarly, in the Litigation Trustee Action, we have entered into an agreed stipulation and order with Mr. Moores providing that the unredacted Latham Report filed by him in that action under temporary seal would remain under seal pending any further motions to unseal to be brought by Mr. Moores and other parties in interest. No such motion has been brought to date. In the criminal actions against former Peregrine employees and others pending in the U.S. District Court for the Southern District of California, a protective order was entered on February 28, 2005 to provide limited protection for the confidential information of nonparties, such as the Latham Report and other Peregrine confidential information.

Other Litigation

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 operation or liquidity.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 20, September 14, September 15, September 22, and September 29, 2005 we issued to former employees 154 shares, 105 shares, 47 shares, 25,352 shares and 1,584 shares, respectively, of our new common stock for exercise prices of $15.62 for all the transactions but the September 22, 2005 sales, for which the exercise price was $9.94, and for aggregate purchase prices of $3,080, $1,995, $900, $641,279 and $40,075, respectively, upon the exercise of vested options by these former employees. These shares were issued without registration in reliance on the exemption provided by Section 3(A)(7) of the Securities Act, and comparable provisions of state securities laws, for securities issued in connection with the approval and an order of the U.S. Bankruptcy Court pursuant to our prior bankruptcy proceedings.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following are filed as exhibits to this Quarterly Report on Form 10-Q:

31.1	Certification of the Chief Executive Officer pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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.

Date: November 9, 2005	PEREGRINE SYSTEMS, INC.
	(Registrant)
	By:	/s/ KENNETH J. SAUNDERS
		Executive Vice President & Chief Financial Officer (Principal Financial Officer and Authorized Signatory)

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