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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(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, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 000-25661



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TenFold Corporation

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 83-0302610                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



698 West 10000 South

South Jordan, Utah 84095

(Address of principal executive offices, including zip code)



(801) 495-1010

(Registrants telephone number, including area code)



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



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



As of September 30, 2004, there were 46,354,751 shares of the
registrants Common Stock outstanding.



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##### Table of Contents

INDEX



|          |  |         |  |                                                                                                                               |  |     
|--------- |  | ------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ----
|          |  |         |  |                                                                                                                               |  | Page
|          |  |         | 
|          |  |         |  | Forward-Looking Statements                                                                                                    |  | 3   
|          |  |         | 
|PART I.   |  |         |  | FINANCIAL INFORMATION                                                                                                         |  |     
|          |  |         | 
|          |  | Item 1. |  | Condensed Consolidated Financial Statements                                                                                   |  |     
|          |  |         | 
|          |  |         |  | Condensed Consolidated Balance Sheets at September 30, 2004 and December 31, 2003                                             |  | 4   
|          |  |         | 
|          |  |         |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and September 30, 2003 |  | 5   
|          |  |         | 
|          |  |         |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and September 30, 2003           |  | 6   
|          |  |         | 
|          |  |         |  | Notes to Condensed Consolidated Financial Statements                                                                          |  | 7   
|          |  |         | 
|          |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 17  
|          |  |         | 
|          |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |  | 36  
|          |  |         | 
|          |  | Item 4. |  | Controls and Procedures                                                                                                       |  | 36  
|          |  |         | 
|PART II.  |  |         |  | OTHER INFORMATION                                                                                                             |  |     
|          |  |         | 
|          |  | Item 1. |  | Legal Proceedings                                                                                                             |  | 37  
|          |  |         | 
|          |  | Item 5. |  | Other Information                                                                                                             |  | 37  
|          |  |         | 
|          |  | Item 6. |  | Exhibits                                                                                                                      |  | 37  
|          | 
|Signature |  | 38     



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FORWARD-LOOKING STATEMENTS



In
addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking
statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled Managements Discussion and Analysis of Financial Condition and Results of
OperationsFactors That May Affect Future Results and Market Price of Stock. When used in this report, the words expects, intends, anticipates, should, believes,
will, plans, estimates, may, seeks, estimates and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as of the date of this Quarterly Report. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully
review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including our most recent reports on Forms 10-Q and 10-K.



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements



TENFOLD CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



|                                                                                                                  |  |                    |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                  |  | September 30, 2004 |         |   | December 31, 2003 |  
|                                                                                                                  | 
|Assets                                                                                                            |  |                    |         |   |                   |   |         |  
|Current assets:                                                                                                   |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                         |  | $                  | 6,993   |   |                   | $ | 12,236  |  
|Accounts receivable, (net of allowances for doubtful accounts of $50 and $0, respectively)                        |  |                    | 330     |   |                   |   | 942     |  
|Unbilled accounts receivable, (net of allowances for doubtful accounts of $0 and $0, respectively)                |  |                    | 70      |   |                   |   | 58      |  
|Prepaid expenses and other assets                                                                                 |  |                    | 218     |   |                   |   | 243     |  
|Other assets                                                                                                      |  |                    | 9       |   |                   |   | 10      |  
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total current assets                                                                                              |  |                    | 7,620   |   |                   |   | 13,489  |  
|Restricted cash                                                                                                   |  |                    | 73      |   |                   |   | 73      |  
|Property and equipment, net                                                                                       |  |                    | 699     |   |                   |   | 855     |  
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total assets                                                                                                      |  | $                  | 8,392   |   |                   | $ | 14,417  |  
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Liabilities and Stockholders Equity                                                                              |  |                    |         |   |                   |   |         |  
|Current liabilities:                                                                                              |  |                    |         |   |                   |   |         |  
|Accounts payable                                                                                                  |  | $                  | 493     |   |                   | $ | 1,127   |  
|Income taxes payable                                                                                              |  |                    | 1,736   |   |                   |   | 1,728   |  
|Accrued liabilities                                                                                               |  |                    | 1,536   |   |                   |   | 5,416   |  
|Deferred revenue                                                                                                  |  |                    | 1,302   |   |                   |   | 7,586   |  
|Current installments of obligations under capital leases                                                          |  |                    | 24      |   |                   |   |        |  
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total current liabilities                                                                                         |  |                    | 5,091   |   |                   |   | 15,857  |  
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Long-term liabilities:                                                                                            |  |                    |         |   |                   |   |         |  
|Obligations under capital leases, excluding current installments                                                  |  |                    | 42      |   |                   |   |        |  
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total long-term liabilities                                                                                       |  |                    | 42      |   |                   |   |        |  
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Contingencies                                                                                                     |  |                    |         |   |                   |   |         |  
|                                                                                                                  |  |                   
|Stockholders equity:                                                                                             |  |                    |         |   |                   |   |         |  
|Common stock, $0.001 par value:                                                                                   |  |                    |         |   |                   |   |         |  
|Authorized: 120,000,000 shares                                                                                    |  |                    |         |   |                   |   |         |  
|Issued and outstanding shares: 46,354,751 shares at September 30, 2004 and 45,969,524 shares at December 31, 2003 |  |                    | 46      |   |                   |   | 46      |  
|Additional paid-in capital                                                                                        |  |                    | 76,208  |   |                   |   | 75,936  |  
|Deferred compensation                                                                                             |  |                    | (24     | ) |                   |   | (43     | )
|Accumulated deficit                                                                                               |  |                    | (72,971 | ) |                   |   | (77,379 | )
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total stockholders equity (deficit)                                                                              |  |                    | 3,259   |   |                   |   | (1,440  | )
|                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                        |  | $                  | 8,392   |   |                   | $ | 14,417  |  
|                                                                                                                  |  |                    |         |   |                   |   |         |  



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



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TENFOLD CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                  |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                  |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Revenues:                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|License                                                                                           |  | $                               | 33     |   |                                | $ | 11     |      |  | $ | 293    |   |  | $ | 56     |  
|Subscription                                                                                      |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | 10,431 |  
|Services and other                                                                                |  |                                 | 1,723  |   |                                |   | 4,547  |      |  |   | 15,547 |   |  |   | 12,980 |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                                                                    |  |                                 | 1,756  |   |                                |   | 4,558  |      |  |   | 15,840 |   |  |   | 23,467 |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenues                                                                                  |  |                                 | 1,038  |   |                                |   | 2,905  |      |  |   | 5,019  |   |  |   | 7,420  |  
|Sales and marketing                                                                               |  |                                 | 1,045  |   |                                |   | 298    |      |  |   | 1,941  |   |  |   | 788    |  
|Research and development                                                                          |  |                                 | 982    |   |                                |   | 862    |      |  |   | 2,786  |   |  |   | 2,759  |  
|General and administrative                                                                        |  |                                 | 676    |   |                                |   | 697    |      |  |   | 1,898  |   |  |   | 2,711  |  
|Special charges                                                                                   |  |                                 |       |   |                                |   | (673   | )    |  |   |       |   |  |   | (673   | )
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                                                          |  |                                 | 3,741  |   |                                |   | 4,089  |      |  |   | 11,644 |   |  |   | 13,005 |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from operations                                                                     |  |                                 | (1,985 | ) |                                |   | 469    |      |  |   | 4,196  |   |  |   | 10,462 |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Other income (expense):                                                                           |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Interest income                                                                                   |  |                                 | 25     |   |                                |   | 11     |      |  |   | 71     |   |  |   | 40     |  
|Interest expense                                                                                  |  |                                 | (3     | ) |                                |   | (16    | )    |  |   | (7     | ) |  |   | (172   | )
|Other income                                                                                      |  |                                 | 1      |   |                                |   | 8      |      |  |   | 152    |   |  |   | 306    |  
|Gain on retirement of debt                                                                        |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | 2,206  |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total other income, net                                                                           |  |                                 | 23     |   |                                |   | 3      |      |  |   | 216    |   |  |   | 2,380  |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                                                                 |  |                                 | (1,962 | ) |                                |   | 472    |      |  |   | 4,412  |   |  |   | 12,842 |  
|Provision for income taxes                                                                        |  |                                 |       |   |                                |   |       |      |  |   | 4      |   |  |   | 17     |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                                                 |  | $                               | (1,962 | ) |                                | $ | 472    |      |  | $ | 4,408  |   |  | $ | 12,825 |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic earnings (loss) per common share                                                            |  | $                               | (0.04  | ) |                                | $ | 0.01   |      |  | $ | 0.10   |   |  | $ | 0.32   |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Diluted earnings (loss) per common share                                                          |  | $                               | (0.04  | ) |                                | $ | 0.01   |      |  | $ | 0.08   |   |  | $ | 0.28   |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common and common equivalent shares used to calculate earnings (loss) per share: |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic.                                                                                            |  |                                 | 46,312 |   |                                |   | 40,913 |      |  |   | 46,148 |   |  |   | 40,361 |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Diluted.                                                                                          |  |                                 | 46,312 |   |                                |   | 49,337 |      |  |   | 55,688 |   |  |   | 46,607 |  
|                                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



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



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TENFOLD CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                            |  |                                |        |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------- | -
|                                                                                            |  | Nine Months EndedSeptember 30, |       
|                                                                                            |  | 2004                           |        |   | 2003 |  
|Cash flows from operating activities:                                                       |  |                                |        |   |      |   |         |  
|Net income                                                                                  |  | $                              | 4,408  |   |      | $ | 12,825  |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                |        |   |      |   |         |  
|Depreciation and amortization                                                               |  |                                | 270    |   |      |   | 650     |  
|Provision for bad debts                                                                     |  |                                | 52     |   |      |   |        |  
|Amortization of deferred compensation                                                       |  |                                | 13     |   |      |   | 69      |  
|Gain on retirement of debt                                                                  |  |                                |       |   |      |   | (2,206  | )
|Gain on sale of assets                                                                      |  |                                | (62    | ) |      |   | (111    | )
|                                                                                            |  |                               
|Changes in operating assets and liabilities:                                                |  |                                |        |   |      |   |         |  
|Accounts receivable                                                                         |  |                                | 560    |   |      |   | 1,082   |  
|Unbilled accounts receivable                                                                |  |                                | (12    | ) |      |   | (200    | )
|Prepaid expenses and other assets                                                           |  |                                | 26     |   |      |   | (46     | )
|Income taxes receivable                                                                     |  |                                |       |   |      |   | 17      |  
|Accounts payable                                                                            |  |                                | (634   | ) |      |   | 998     |  
|Income taxes payable                                                                        |  |                                | 8      |   |      |   | (15     | )
|Accrued liabilities                                                                         |  |                                | (3,880 | ) |      |   | (77     | )
|Deferred revenues                                                                           |  |                                | (6,284 | ) |      |   | (12,778 | )
|Other liabilities                                                                           |  |                                |       |   |      |   | (53     | )
|                                                                                            |  |                                |        |   |      |   |         |  
|Net cash provided by (used in) operating activities                                         |  |                                | (5,535 | ) |      |   | 155     |  
|                                                                                            |  |                                |        |   |      |   |         |  
|Cash flows from investing activities:                                                       |  |                                |        |   |      |   |         |  
|Proceeds from sale of property and equipment                                                |  |                                | 62     |   |      |   | 135     |  
|Additions to property and equipment                                                         |  |                                | (38    | ) |      |   | (98     | )
|Decreases to restricted cash                                                                |  |                                |       |   |      |   | 65      |  
|                                                                                            |  |                                |        |   |      |   |         |  
|Net cash provided by investing activities                                                   |  |                                | 24     |   |      |   | 102     |  
|                                                                                            |  |                                |        |   |      |   |         |  
|Cash flows from financing activities:                                                       |  |                                |        |   |      |   |         |  
|Proceeds from employee stock purchase plan stock issuance                                   |  |                                | 142    |   |      |   | 6       |  
|Proceeds from issuance of restricted stock                                                  |  |                                |       |   |      |   | 666     |  
|Exercise of common stock options                                                            |  |                                | 136    |   |      |   | 149     |  
|Principal payments on obligations under capital leases                                      |  |                                | (10    | ) |      |   | (650    | )
|                                                                                            |  |                                |        |   |      |   |         |  
|Net cash provided by financing activities                                                   |  |                                | 268    |   |      |   | 171     |  
|                                                                                            |  |                                |        |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                                | (5,243 | ) |      |   | 428     |  
|Cash and cash equivalents at beginning of period                                            |  |                                | 12,236 |   |      |   | 3,838   |  
|                                                                                            |  |                                |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                                  |  | $                              | 6,993  |   |      | $ | 4,266   |  
|                                                                                            |  |                                |        |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                           |  |                                |        |   |      |   |         |  
|Cash paid for income taxes                                                                  |  | $                              | 9      |   |      | $ | 26      |  
|Cash paid for interest                                                                      |  | $                              | 2      |   |      | $ | 6       |  
|Equipment purchased under capital leases                                                    |  | $                              | 76     |   |      | $ |        |  



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



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TENFOLD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Basis of Presentation



The accompanying unaudited Condensed Consolidated Financial Statements
included herein have been prepared by TenFold Corporation (TenFold) pursuant to the rules and regulations of the Securities and Exchange Commission. As used herein, TenFold, the Company, we,
our and similar terms refer to TenFold Corporation, unless the context indicates otherwise. In managements opinion, the interim financial data presented includes all adjustments necessary for a fair presentation. All intercompany
accounts and transactions have been eliminated. Certain information required by accounting principles generally accepted in the United States has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission.
Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2004.



This report should be read in conjunction with TenFolds audited
Consolidated Financial Statements for the year ended December 31, 2003 included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions, including for example, estimated project costs and profitability and accounts receivable allowances. These assumptions affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.



2. Revenue Recognition



We derive revenues from license fees, subscription fees, applications development and implementation services, support, and
training services. License revenues consist of fees for licensing EnterpriseTenFold (formerly known as Universal Application) as an applications development tool, and license fees for applications that we previously developed and resold.
Subscription revenue consists of fees for licensing EnterpriseTenFold, licensing new product releases of TenFold ComponentWare, and in certain cases providing related time-and-materials consulting, training, and support services during a
subscription period. Service revenues consist of fees for applications development and implementation, support and training. Other revenues include fees for reimbursement of out of pocket expenses incurred for customer projects.



We follow the provisions of Statement of Position (SOP) 97-2,
Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2 with Respect to Certain Transactions, and Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, in recognizing revenue under each of our contracts.



We generally enter into contracts that involve multiple elements, such as software products, enhancements, post-contract customer support (PCS), training, and time-and-material services. We allocate a
portion of the contract fee to each undelivered element based on the relative fair values of the elements and allocate the fee for delivered software products using the residual method. The fair values of an element must be based on vendor specific
objective evidence (VSOE). We establish VSOE based on the price charged when the same element is sold separately. VSOE for services is based on standard rates for the individuals providing services. These rates are the same rates charged
when the services are sold separately under time-and-materials contracts. We base VSOE for training on standard rates charged for each particular training course. These rates are the rates charged when the training is sold separately for
supplemental training courses. For PCS, VSOE is determined by reference to the renewal rate we charge the customer in future periods.



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For certain contracts, including a subscription to future software products when and if they become
available, we recognize the fees for the software products ratably over the subscription term beginning with delivery of the first software product. For contracts that include a service element for which the fair value is undeterminable, and the
contract includes a subscription to new product releases on a when and if available basis, we recognize the entire contract fee ratably over the subscription period as subscription revenue.



For time-and-materials contracts, we generally estimate a profit range and
recognize the related revenue using the lowest probable level of profit estimated in the range. Billings in excess of revenue recognized under time-and-materials contracts are deferred and recognized upon completion of the time-and-materials
contract or when the results can be estimated more precisely.



We recognize support revenue from contracts for ongoing technical support and product updates ratably over the support period. We recognize training revenue as we perform the services.



For service revenue accounted for under SOP 81-1, we generally estimate a
profit range and recognize revenue as costs are incurred. We adjust the estimates as work progresses under the contract and we gain experience.



We recognize license revenues from applications product sales and EnterpriseTenFold development and deployment licenses that do not include services or
where the related services are not considered essential to the functionality of the software, when the following criteria are met: we have signed a noncancellable license agreement with nonrefundable fees; we have shipped the software product; there
are no uncertainties surrounding product acceptance; the fees are fixed and determinable; and collection is considered probable. This policy applies both when the applications license or EnterpriseTenFold development or deployment licenses are sold
separately or when an EnterpriseTenFold license is sold with an applications development project. Services relating to the licenses typically only include post contract customer support services, or do not add significant functionality, features, or
significantly alter the software. In addition, similar services are available from other vendors; there are no milestones or customer specific acceptance criteria which affect the realizability of the software license fee; and the software license
fee is non-cancelable and non-refundable.



For software
arrangements that include a service element that is considered essential to the functionality of the software, we recognize license fees related to the application, and the applications development service fees, over time as we perform the services,
using the percentage-of-completion method of accounting and following the guidance in Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We make adjustments, if
necessary, to the estimates used in the percentage-of-completion method of accounting as work progresses under the contract and as we gain experience. Fixed-price project revenues are split between license and service based upon the relative fair
value of the components.



For certain projects, we limit
revenue recognition in the period to the amount of project costs incurred in the same period, resulting in zero profit during the period, and postpone recognition of profits until results can be estimated more precisely.



For certain contracts for which reasonably dependable estimates cannot be
made or for which inherent hazards make estimates doubtful, we recognize revenue under the completed-contract method of contract accounting.



We record billings and cash received in excess of revenue earned as deferred revenue. Our deferred revenue balance generally results from contractual
commitments made by customers to pay amounts to us in advance of revenues earned, and from application of the zero profit



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margin methodology described above. Our unbilled accounts receivable represents revenue that we have earned but which we
have not yet billed. We bill customers as payments become due under the terms of the customers contract. We consider current information and events regarding our customers and their contracts and establish allowances for doubtful accounts when
it is probable that we will be unable to collect amounts due under the terms of existing contracts.



3. Earnings Per Share



The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands except per share data):



|                                                                                                   |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|-------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                                   |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                                                                   |  | 2004                            |        |                                | 2003 |   | 2004   |  | 2003
|Numerator:                                                                                         |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Numerator for basic earnings (loss) per share  net income (loss) available to common stockholders |  | $                               | (1,962 | )                              |      | $ | 472    |  | $    | 4,408  |  | $ | 12,825
|                                                                                                   |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Numerator for diluted earnings (loss) per share                                                    |  | $                               | (1,962 | )                              |      | $ | 472    |  | $    | 4,408  |  | $ | 12,825
|                                                                                                   |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Denominator:                                                                                       |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Denominator for basic earnings (loss) per share  weighted average shares                          |  |                                 | 46,312 |                                |      |   | 40,913 |  |      | 46,148 |  |   | 40,361
|                                                                                                   |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Employee stock options                                                                             |  |                                 |       |                                |      |   | 8,424  |  |      | 9,540  |  |   | 6,246 
|                                                                                                   |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Denominator for diluted earnings (loss) per share                                                  |  |                                 | 46,312 |                                |      |   | 49,337 |  |      | 55,688 |  |   | 46,607
|                                                                                                   |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Earnings (loss) per common share:                                                                  |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Basic earnings (loss) per common share                                                             |  | $                               | (0.04  | )                              |      | $ | 0.01   |  | $    | 0.10   |  | $ | 0.32  
|                                                                                                   |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Diluted earnings (loss) per common share                                                           |  | $                               | (0.04  | )                              |      | $ | 0.01   |  | $    | 0.08   |  | $ | 0.28  
|                                                                                                   |  |                                 |        |                                |      |   |        |  |      |        |  |   |       



Employee stock options
that could potentially dilute basic earnings (loss) per share in the future, of which there were 21,338,933 and 4,958,204 outstanding during the three and nine months ended September 30, 2004, respectively, that have a weighted average exercise
price of $2.11 and $6.22 per share, respectively, were not included in the computation of diluted earnings (loss) per share because to do so would have been anti-dilutive for the periods. Similarly, employee stock options of 1,609,485 and 7,234,535
outstanding during the three and nine months ended September 30, 2003, that have a weighted average exercise price of $11.65 and $3.70 per share, respectively, and that could potentially dilute basic earnings (loss) per share in the future, were not
included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods.



4. Restricted Cash



Restricted cash of $73,000 at September 30, 2004 and December 31, 2003 is maintained to support various accounts payable activities.



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5. Comprehensive Income (Loss)



Comprehensive income (loss) for the three and nine months ended September 30, 2004 and 2003 was as follows (in thousands):



|                             |  |                                 |        |                                |      |   |      |  |      |       |  |   |       
|---------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ---- |  | ---- | ----- |  | - | ------
|                             |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                             |  | 2004                            |        |                                | 2003 |   | 2004 |  | 2003
|Net income (loss)            |  | $                               | (1,962 | )                              |      | $ | 472  |  | $    | 4,408 |  | $ | 12,825
|Foreign currency translation |  |                                 |       |                                |      |   |     |  |      |      |  |   |      
|                             |  |                                 |        |                                |      |   |      |  |      |       |  |   |       
|Comprehensive income (loss)  |  | $                               | (1,962 | )                              |      | $ | 472  |  | $    | 4,408 |  | $ | 12,825
|                             |  |                                 |        |                                |      |   |      |  |      |       |  |   |       



6. Stock-Based Compensation



We apply the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employeesand related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensationan Interpretation of APB Opinion No. 25 issued in March 2000, to account for our stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensationestablished accounting and disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS No. 123. We have also
adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No. 123, into these financial statements and related notes.



Had compensation expense for our stock option plan and the employee stock
purchase plan been determined based on the fair value at the grant date for awards or purchase rights under these plans consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock Based Compensation, our net income
(loss) for the three and nine months ended September 30, 2004 and 2003 would have been as follows (in thousands except per share information):



|                                                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                                                            |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Net income (loss) applicable to common stock  as reported                                                                                  |  | $                               | (1,962 | ) |                                | $ | 472    |      |  | $ | 4,408  |   |  | $ | 12,825 |  
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects                           |  |                                 | 4      |   |                                |   | 21     |      |  |   | 13     |   |  |   | 69     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                 | (2,058 | ) |                                |   | (1,584 | )    |  |   | (9,825 | ) |  |   | (3,726 | )
|                                                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) applicable to common stock  pro forma                                                                                    |  | $                               | (4,016 | ) |                                | $ | (1,091 | )    |  | $ | (5,404 | ) |  | $ | 9,168  |  
|                                                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Earnings (loss) per common share  as reported                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                                                                                       |  | $                               | (0.04  | ) |                                | $ | 0.01   |      |  | $ | 0.10   |   |  | $ | 0.32   |  
|                                                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                                                                                                     |  | $                               | (0.04  | ) |                                | $ | 0.01   |      |  | $ | 0.08   |   |  | $ | 0.28   |  
|                                                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Earnings (loss) per common share  pro forma                                                                                                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                                                                                       |  | $                               | (0.09  | ) |                                | $ | (0.03  | )    |  | $ | (0.12  | ) |  | $ | 0.23   |  
|                                                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                                                                                                     |  | $                               | (0.09  | ) |                                | $ | (0.03  | )    |  | $ | (0.12  | ) |  | $ | 0.20   |  
|                                                                                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



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The effect of SFAS No. 123 on pro forma net income (loss) and net income (loss) per share for the three
and nine months ended September 30, 2004 and 2003 may not be representative of the effects on pro forma results in future years.



7. Income Taxes



There were no provisions for income taxes for the three months ended September 30, 2004 and 2003, as no provisions were necessary based upon results for
the periods. The provisions for income taxes for the nine months ended September 30, 2004 and 2003, relate primarily to foreign taxes and reversing a portion of our valuation allowance attributable to the current operating income in the periods.



The valuation allowance as of September 30, 2004 was recorded
in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of deferred tax assets.



8. Commitments



We have commitments under long-term operating leases for office space. Future minimum lease payments under non-cancelable
operating lease obligations, in excess of one year and excluding obligations accrued as part of restructurings, at September 30, 2004 are as follows (in thousands):



|                                |  |        |      
|------------------------------- |  | ------ | -----
|Year                            |  | Amount
|Q4 2004                         |  | $      | 103  
|2005                            |  |        | 416  
|2006                            |  |        | 427  
|2007                            |  |        | 290  
|Thereafter                      |  |        |     
|                                |  |        |      
|Total minimum lease commitments |  | $      | 1,236
|                                |  |        |      



Operating lease
commitments for properties that have been restructured are included in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheet at September 30, 2004. See Note 10 for more information.



We previously had significant capital lease obligations from equipment leases
we had entered into in prior years. During the three months ended March 31, 2003, we executed agreements with our two major equipment lessors to buy out and fully retire their equipment lease debt at a substantial discount, and return substantially
all the related equipment. We recognized the difference between the amount paid to retire these lease obligations and the carrying amount of the lease obligations as a gain on retirement of debt of approximately $2.2 million in the accompanying
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2003.



9. Legal Proceedings and Contingencies



SkyTel Lawsuit



On May 15, 2001, SkyTel sent
us a letter purporting to terminate the Master Software License and Services Agreement between SkyTel and TenFold based on our alleged material breach of the Agreement. SkyTels letter also demanded a refund of $11 million paid by SkyTel. On
September 24, 2001, SkyTel filed a complaint against TenFold in the First Circuit Court of the First Judicial District of Hinds County, Mississippi. The case was subsequently removed to U.S. District Court for the Southern District of Mississippi.
In its complaint, SkyTel sought monetary damages of at least $17.5 million, plus other damages to be proved at trial, together with pre- and post-judgment interest, attorneys fees and expenses and costs. On November 13, 2001, we filed an
answer denying the material allegations of the complaint. We also filed a counterclaim for unpaid fees and SkyTels disclosure of confidential information. Our counterclaim sought damages of at least $7 million and punitive damages of at least
$10 million.



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The parties stayed discovery and attempted negotiations to settle the dispute. However, resolution was
impeded by the bankruptcy filing of SkyTel and its parent company, WorldCom, Inc. On July 14, 2003, the Court entered an order dismissing the case without prejudice based on incorrect information, which we immediately clarified for the Court. We
received no further notice from the Court.



On October 18,
2004, we received notice from a different court, the United States Bankruptcy Court for the Southern District of New York, that in connection with resolving numerous claims in the bankruptcy proceedings of WorldCom and its subsidiary, SkyTel, SkyTel
has commenced a Claim Objection and Adversary Proceeding against TenFold seeking to deny TenFolds claim against SkyTel of at least $7 million and punitive damages of at least $10 million (our earlier counterclaim described above that became a
claim against SkyTel in its bankruptcy), and to recover at least $17.5 million, plus other damages to be proved at trial, together with pre- and post-judgment interest, attorneys fees and expenses and costs (SkyTels earlier claim
described above). This Court has scheduled a pre-trial conference in this matter for November 30, 2004.



We believe that our insurance will cover the expenses and damages that we may require to resolve this dispute. At this point, we do not believe that this
dispute will have a material adverse impact on our business, results of operations, financial position, or liquidity. Accordingly, no related losses have been provided for in our accompanying financial statements.



Coufal Lawsuit



On December 1, 2003, we were served with a complaint in the matter of Coufal v. Cedars Sinai Medical Center, et. al. The
compliant was filed in the Superior Court of the State of California, County of Los Angeles by the parents of a deceased individual who died on December 15, 2002 while in the care of Cedars Sinai Medical Center. The complaint lists a number of
defendants including, Cedars Sinai Medical Center, Perot Systems Healthcare Services Group, Perot Systems Corporation, PCX Systems, LLC, TenFold Corporation, Steve Chen M.D., Charles Louy M.D., Steven Fowler M.D., Sunshine Aviva Weiss M.D., and Does
1-100, inclusive. The complaint generally alleges that plaintiffs daughter died following surgery as the result of an overdose of prescription medications. The complaint alleges that the medications were prescribed, ordered and/or administered
in excess of the levels acceptable to physicians acting within the standard of care of physicians in the community, and that the computerized physician order entry system (PCX), initially developed by us, failed to detect the overdose.
The complaint acknowledges that in April 2002, and pursuant to separate agreements, which are described in reports that we have filed with the SEC, responsibility for and ownership of PCX was assumed by PCX Systems, LLC (a wholly owned subsidiary of
Cedars Sinai Medical Center), and that in October 2002, Cedars Sinai Medical Center installed PCX for hospital use. Discovery in this case has commenced. There have been a number of depositions. To date, no TenFold depositions have been scheduled.
We believe that our insurance will cover the expenses and damages that we may require to resolve this lawsuit. At this point, we do not believe that this lawsuit will have a material adverse impact on our business, results of operations, financial
position, or liquidity. Accordingly, no related losses have been provided for in our accompanying financial statements.



Stockholder Matters



On November 6, 2001, a class action complaint alleging violations of the federal securities laws was filed in the United States District Court for the
Southern District of New York naming as defendants TenFold, certain of its officers and directors, and certain underwriters of our initial public offering. An amended complaint was filed on April 24, 2002. TenFold and certain of its officers and
directors are named in the suit pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act 1934 on the basis of an alleged failure to disclose the underwriters alleged compensation and manipulative
practices. Similar complaints have



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been filed against over 300 other issuers that have had initial public offerings since 1998. The individual officer and
director defendants entered into tolling agreements and, pursuant to a Court Order dated October 9, 2002, were dismissed from the litigation without prejudice. On February 19, 2003, the Court granted a Motion to Dismiss the Rule 10b-5 claims against
116 defendants, including TenFold. On June 27, 2003, our Board of Directors approved a proposed partial settlement with the plaintiffs in this matter. In June 2004, a settlement agreement was submitted to the Court for preliminary approval. The
settlement would provide, among other things, a release of TenFold and of the individual defendants for the alleged wrongful conduct in the Amended Complaint. We agreed to undertake other responsibilities under the partial settlement, including
agreeing to assign away, not assert, or release certain potential claims we may have against our underwriters. The underwriters filed a memorandum with the Court opposing preliminary approval of the settlement. Any direct financial impact of the
proposed settlement is expected to be borne by our insurers. TenFold agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the
consent of our insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the Court overseeing the litigation. At this point, we do not
believe that this lawsuit will have a material adverse impact on our business, results of operations, financial position, or liquidity. Accordingly, no related losses have been provided for in our accompanying financial statements.



Assessing litigation



We review litigation claims each quarter to determine the likelihood that the claim will result in a loss. Due to the
inherent uncertainties of litigation, predicting the ultimate outcome of litigation is very difficult. Significant management judgment is required to conclude on the likely outcome of outstanding litigation. As part of that review, we consider our
available insurance coverage. Such coverage is subject to the particular policys total limit, and typically subject to the insurers standard reservation of rights regarding conditions or findings that might exclude coverage for a
particular matter.



If a loss is considered probable on a
litigation claim, management estimates the loss and we accrue the estimated loss. If a loss is considered probable but cannot be reasonably estimated, we disclose the contingency in these notes to our financial statements. Losses may however result
on litigation claims that are not considered probable or are not estimable at the current time, potentially having a material adverse impact on our future business, results of operations, financial position, or liquidity.



Indemnifications, Warranties and Insurance



As permitted under Delaware law, and as provided in agreements with our
officers and Directors, we have indemnified officers and Directors for certain claims asserted against them in connection with their service as an officer or Director of TenFold. The maximum potential amount of future payments that we could be
required to make under these indemnification provisions is unlimited. However, we have purchased Directors and Officers insurance policies that reduce our monetary exposure and enable us to recover a portion of any future amounts paid.
As a result of this insurance coverage, we believe the estimated fair value of these indemnification agreements is not material.



Our agreements with customers generally require us to indemnify the customer against claims that our software infringes third party patent, copyright, or
other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including a right to replace an infringing product or cancel the software license and return the fees paid by the customer.
To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements, and no such claims were outstanding at September 30, 2004. As a result, we have not recorded a liability for infringement costs as
of September 30, 2004.



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Our agreements with customers also generally provide a warranty that for so long as the customer is
paying for support services, our software will materially conform to the related documentation, and that our software has been developed in a workmanlike manner. To date, we have not incurred significant warranty costs. As a result, we have not
recorded a liability for warranty costs as of September 30, 2004.



We have an industry-standard, errors and omissions insurance policy. This policy excludes contractual related disputes such as cost and time guarantees, and only covers software errors or omissions that occur after the delivery of software.
We believe this policy provides adequate coverage for potential damages related to errors and omissions in our delivered software.



10. Special Charges



We incurred no special charges during the three and nine months ended September 30, 2004.



Special charges for the three and nine months ended September 30, 2003 include restructuring charge adjustments of
$(578,000) and asset loss impairment adjustments of $(95,000). During the three and nine months ended September 30, 2003, we recorded restructuring charge adjustments of $(578,000) to reduce previously accrued restructuring charges for negotiated
reductions in remaining lease payments due for unoccupied properties, and to reflect higher sublease income received than previously estimated. During the three and nine months ended September 30, 2003, we recorded asset loss provision adjustments
of $(95,000) to eliminate remaining estimated asset loss accruals that were no longer necessary upon our completing the return of previously leased equipment.



Restructuring reserves are included in accounts payable and accrued liabilities at September 30, 2004. Detail of the restructuring charges as of and
for the nine months ended September 30, 2004 are summarized below (in thousands):



|                       |  |                            |     |            |   |             |  |          |   |  |                              |      |   |  |   |    
|---------------------- |  | -------------------------- | --- | ---------- | - | ----------- |  | -------- | - |  | ---------------------------- | ---- | - |  | - | ---
|Restructuring Charges: |  | Balance atDecember 31,2003 |     | NewCharges |   | Adjustments |  | Utilized |   |  | Balance at September 30,2004
|Facilities related     |  | $                          | 531 |            | $ |            |  | $        |  |  | $                            | (309 | ) |  | $ | 222
|                       |  |                            |     |            |   |             |  |          |   |  |                              |      |   |  |   |    
|                       |  | $                          | 531 |            | $ |            |  | $        |  |  | $                            | (309 | ) |  | $ | 222
|                       |  |                            |     |            |   |             |  |          |   |  |                              |      |   |  |   |    



We have estimated
future sublease income which reduces future facility related charges, including lease obligations. We considered current market conditions including current lease rates in the respective geographic regions, vacancy rates, and costs associated with
subleasing when estimating future sublease income. Variances between expected and actual sublease income have previously and may continue to result in restructuring charge adjustments in future periods.



11. Operating Segments



Our CEO reviews financial information on a consolidated basis, similar in format to the accompanying Condensed Consolidated
Statements of Operations. We consolidate revenue and expense information for all business groups for internal and external reporting and for decision-making purposes. We operate in a single operating segment, which is applications products and
services.



Revenues from customers outside of North America
were approximately 22 percent of total revenues for the three months ended September 30, 2004 as compared to 47 percent of total revenues for the same period in 2003. For the nine months ended September 30, 2004, revenues from customers outside of
North America were approximately 20 percent of total revenues as compared to 28 percent of total revenues for the same period in 2003. Our long-lived assets are deployed in the United States.



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Two customers accounted for 39 percent and 10 percent of our total revenues for the three months ended
September 30, 2004, compared to two customers accounting for 44 percent and 42 percent of our total revenues for the same period in 2003. For the nine months ended September 30, 2004, three customers accounted for 53 percent, 19 percent, and 16
percent of our total revenues as compared to three customers accounting for 47 percent, 22 percent, and 22 percent of our total revenues for the same period in 2003. No other single customer accounted for more than 10 percent of our total revenues
for the three and nine months ended September 30, 2004 or the same periods in 2003.



One customer, Cedars-Sinai Medical Center (Cedars), accounted for 53 percent of our total revenues for the nine months ended September 30, 2004. The revenue from Cedars was primarily from a non-recurring
transaction during the three months ended June 30, 2004. As a result, we do not expect Cedars to account for a significant percentage of our revenues during the remaining quarters of this year, after June 30, 2004. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Transaction with Cedars-Sinai Medical CenterandRevenues for more information.



We expect the two customers accounting for 19 percent and 16 percent of our total revenues for the nine months ended
September 30, 2004 to account for a significant percentage of our revenues for 2004. However, our revenue from these customer projects, which is primarily time-and-materials consulting revenue, is decreasing over time as these customers complete
their current application development projects and become more self-sufficient. The customer accounting for 16 percent of our total revenues for the nine months ended September 30, 2004 completed its use of our time-and-material consulting services
for its current application development project during the quarter ended September 30, 2004. We staffed this project with subcontractor staff that we released upon completion of these services. During Q3, the end-user customer for this project
initiated some short-term time-and-materials consulting services engagements directly with us. The other project, accounting for 19 percent of our total revenues for the nine months ended September 30, 2004, is staffed by our employees and is
currently expected to be completed at the end of the fourth quarter of 2004. During the fourth quarter of 2004, we expect to maintain staffing on this project consistent with the level we experienced during the third quarter of 2004 (but lower than
staffing levels during the earlier quarters of 2004).



12. Recent Accounting
Pronouncements



In December 2003, the FASB issued
Interpretation No. 46 (FIN 46R) (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (ARB 51), which addresses how a business enterprise should
evaluate whether it has a controlling interest in an entity though means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN 46), which was issued in January 2003.
Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (VIE). As of the effective date of FIN 46R,
an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities.
Public companies must apply either FIN 46 or FIN 46R immediately to entities created after January 31, 2003 and no later than the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 had no effect on our results
of operations and financial position.



On December 18, 2003 the
SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104), which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104s primary purpose is to rescind accounting guidance contained in SAB
101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. SAB 104 does not have a material impact on our
financial position or results of operations.



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The FASB has released an exposure draft, Share-Based Payment, which would require us to measure
employee stock-based compensation awards using a fair value method and recognize the related expense in our financial statements. If the exposure draft is adopted as currently proposed, the final statement would be effective for us in our third
quarter of 2005 beginning July 1, 2005. We have not yet assessed the impact of adopting this new proposed standard.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.



Business Overview



TenFold provides EnterpriseTenFold, a software applications platform that reduces enterprise applications design, development, deployment, and maintenance timeframes and costs.
EnterpriseTenFold automates most of what applications programmers typically do, and empowers small teams of business people and IT professionals to design, build, test, deploy, and maintain complex, transaction-intensive applications, with
significantly greater speed, quality and power than other applications development approaches, which generally rely on large teams of IT professionals who expend years of effort to design, program, test, change, and deploy enterprise applications.
We believe that with EnterpriseTenFold, customers get high-quality, complex enterprise applications into production faster and at significantly lower cost than with other applications development technologies.



We believe EnterpriseTenFold has two unique attributes that make building
complex, database-intensive and transaction-intensive applications substantially cheaper, easier, and faster than traditional applications development methodologies. First, because EnterpriseTenFold automates most of what applications programmers
typically do and automatically includes advanced applications functionality, we believe customers get more powerful, higher quality applications faster and at a fraction of the cost of traditional programming approaches. Second, because
EnterpriseTenFold provides a tool and methodology that business people can effectively use, we believe it enables organizations to directly leverage their business experience and insight and to adapt applications easily to meet changing business
requirements.



Our business model focuses on providing
EnterpriseTenFold and our assistance through time-and-materials consulting, training, and support, to customers who use their own business teams and our services partners to build and maintain applications.



Business History



We founded TenFold in 1993. We spent the first several years primarily developing our patented EnterpriseTenFold technology.
In 1996, we began using EnterpriseTenFold to build applications for customers.



In 1999, we completed our initial public offering. In 1999 and early 2000, we tested a new business model which included selling large custom application development projects with a unique-in-the-industry
money-back guarantee, and simultaneously structuring the company to launch and build on an accelerated time frame, eight separate vertical market facing applications product companies. Beginning in 2000, we experienced several difficult
quarters and faced significant financial, legal, and operational issues. Starting in late 2000 and continuing through 2003, we took steps to refocus TenFold to its roots as a software applications platform technology company, resolve the financial
and legal liabilities that arose as a result of the interim business model, and restore the company to sound business health.



We raised capital twice during 2003. In February 2003, Robert W. Felton, a long-time TenFold director, made an investment of $700,000 in TenFold, by
acquiring restricted TenFold common stock. In December 2003, we closed a private placement of 5 million shares of restricted TenFold common stock, with no warrants, which we sold at $2.00 per share (before related fees and expenses). This
strengthened our balance sheet and provided an opportunity for a new group of investors to obtain a meaningful investment in TenFold.



Additionally, during 2003, we continued to put in place the foundation for future growth through three complementary sales and marketing related
initiatives:



| |  | First, continuing to establish alliance relationships with distributors such as VARs.
| | - | -------------------------------------------------------------------------------------



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| |  | Second, using a small direct sales force to prototype a new sales model focusing on selling small, paid VersionOne projects as a low-risk first step for potential customers to test
EnterpriseTenFold. VersionOne is our one- to two-week interactive consulting project during which one or two TenFold application developers work with one or two customer developers to design, build, test, and demonstrate a complete, running,
initial-version of a complex application. We intend the VersionOne to be an initial proof-statement project, including only limited services and small development licenses, which introduces new customers to TenFold, and provides an opportunity for
TenFold to then penetrate and radiate into the account.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Third, initiating internet access to TenFold technology through Tsunami, our first major new product, a single user PC version of EnterpriseTenFold available over the internet
without charge during its Beta program. Tsunami includes a script that lets a person who follows the script both learn Tsunami and build an enterprise application in as little as a few hours. In time, we expect internet distribution of Tsunami to
become an important, low-cost, marketing and sales channel for us.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On September 30, 2003, we announced the release of the next generation of our EnterpriseTenFold product. EnterpriseTenFold is a portable, multi-user applications development and deployment platform that contains Tsunami technologies,
including the user-interface enhancements that enable a customer to use this technology productively with little training, as well as all prior EnterpriseTenFold technologies. EnterpriseTenFold introduces to the industry an innovative capability to
automatically produce complete applications documentation that matches the application, at any time, at the click of a mouse. We added to EnterpriseTenFold multiple forms of XML support, Web services, Citrix MetaFrame support, Sun Java Virtual
Machine support, performance improvements for browser-based applications, and many more features described in detailed, accompanying EnterpriseTenFold ReleaseNotes.



Year-to-Date 2004 Highlights



During the first three quarters of 2004, we focused principally on three initiatives intended to position TenFold as a growth software infrastructure
company.



Tuning our marketing and sales engine



We are steadily tuning our marketing and sales engine to
convince people that our technology does what we claim and help them realize the implications of our value proposition. We are defining and validating leverageable and replicable processes for introducing new customers to TenFold and closing
software license business. We have three standard ways of introducing customers to TenFold. The first is through a VersionOne, which is a one to two week consulting engagement during which one or two TenFold applications developers build a complete
application alongside one or two customer staff. The second is through a QuickHit, which is a two day proof-of-concept engagement during which one or two TenFold applications developers build an application that illustrates key EnterpriseTenFold
transaction or integration capabilities that the customer identifies as critical. The third is through a RequirementsNow! project, which is a one to two week consulting engagement in which we provide an initial project road map that the customer can
then use to accelerate its own application development project.



We have begun to recruit, train, and deploy additional sales and delivery resources. During Q1, we recruited a Vice President of Product Marketing with substantial experience building, testing, deploying and maintaining a complex
TenFold-powered enterprise application and recruited a Vice President of Sales. During Q2, we recruited two direct sales executives and a Director of TeleSales. During Q3, we added additional direct sales executives and developed our first formal
two-day Sales Training program which includes a comprehensive overview of our sales strategy, our specific processes, tools for closing sales, marketing collateral and standard contracts. In October 2004, we delivered this Sales Training program to
all professionals associated with sales including direct sales executives, telemarketing professionals, and pre-sales technology support staff.



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During Q3, we announced 11 new TenFold customers, most of whom were signed in prior quarters, and
successfully completed several small revenue-producing VersionOne, QuickHit, and RequirementsNow! projects. These customers represent diverse industries  medical devices, biotechnology, semiconductor manufacturing, healthcare, software and
communications, among others.



During Q2, a TenFold Value
Added Reseller (VAR), Redi2 Technologies, which provides investment management software products and services to institutional investment, private wealth, custody and general asset management firms around their EnterpriseTenFold-powered
Revenue Manager customer billing, invoicing, and reporting application began to grow its business. During Q3, Redi2 Technologies announced that Mellon Financial Corporations Investment Manager Solutions business had adopted advanced features
of Redi2 Technologies Revenue Manager billing and invoicing capabilities.



Broadening awareness of and interest in TenFold technology



We are broadening awareness of and interest in TenFold technology through increased marketing efforts. We are seeking to reach the Tipping
Point where awareness of TenFold is such that everyone who is interested in complex, database-intensive applications understands that: 1) TenFold exists; 2) TenFold has proven, disruptive applications development technology; 3) TenFold lowers
applications development time and cost by an order of magnitude; 4) others have successfully used TenFold; and, 5) TenFold cannot be ignored.



A cornerstone of our Tipping Point strategy is our Tsunami product. We encourage business people and IT professionals to continue to install Tsunami over
the internet and to follow our SuperCRM script to build a complete enterprise-scale Customer Relationship Management (CRM) application in as little as a few hours with no prior training. Hundreds of individuals have installed Tsunami from the
internet. Tsunami introduces people to TenFold technology, lets them understand our new metaphors for applications development, and demonstrates our Speed, Quality and Power benefits in just a few hours.



Tsunami has broadened interest in TenFold technology more generally. TenFold
was invited to present at the Sixth Annual Needham Growth Conference in January after a senior Needham software analyst tried out Tsunami. TenFold was awarded the Software and Information Industry Association (SIIA) Codie Awards for the Best
Distributed Computing Solution.



We are continuing to test
various other approaches to move TenFold toward the Tipping Point. During Q2, we initiated a multi-faceted integrated marketing plan that includes: an email-based multi-touch marketing campaign testing material and responsiveness of target audiences
primarily in the CIO, CFO, and applications developer communities; enhancing our telemarketing efforts by adding experienced leadership and establishing standard practices and performance tracking; engaging a public relations firm to direct public
relations efforts to ignite awareness of TenFold; engaging Integrated Corporate Relations to assist management in improving investor relations and enhance corporate communications; partnering with Cross Border Enterprises, L.L.C. for executive-level
corporate introductions in the United States and abroad; initiating seminar-marketing activities by announcing and direct marketing a series of three San Francisco Bay Area-based TenFold Seminars to be hosted in Q3; continuing to frequently publish
press releases highlighting our continuing technology innovation and business progress; and, leveraging limited tie-in advertising opportunities including a single full-page advertisement in the Bay Area edition of the Wall Street Journal that
appeared at the time of the Software & Information Industry Associations Codie Award conference in San Francisco and a provocative billboard in Silicon Valley



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placed to coincide with the direct mail marketing of the Bay Area Q3 seminar series. During Q2, we made
substantial upgrades to our website, www.tenfold.com. These include: making Tsunami available directly from our new website; providing direct links to several movies which show EnterpriseTenFold-based application development projects and
highlight interesting features of EnterpriseTenFold; and, upgrading the look and feel of the website. This new website was released into production in early July.



During Q3, we continued our multi-faceted integrated marketing initiatives. We conducted TenFold Seminars in three US
markets (San Francisco Bay Area, New York City, and Chicago) and one in the UK (London). We have tested various complementary ways of promoting these TenFold Seminars, including multi-touch email, direct mail, telemarketing, an attention-getting
billboard and print advertising. During Q3, in conjunction with PeopleSofts annual customer meeting in San Francisco, we announced the availability, at no charge, of SuperHR, a TenFold-powered application similar to core components of
PeopleSoftHR, as an inducement to interested parties to investigate EnterpriseTenFold. During Q3, we also obtained coverage of TenFold technology in two widely read online industry publications  eWeek and ADTmag.com. We transitioned our public
relations efforts to a dedicated team from the global, integrated communications firm, Coltrin & Associates, Inc.



We expect that achieving the Tipping Point will launch TenFold as a high-growth software infrastructure company because we believe broad recognition of
our value proposition will generate demand for our products and services. While we have multiple initiatives underway designed to achieve the Tipping Point, the timing for reaching that achievement is uncertain.



Identifying and establishing business practices and resources for handling
future growth



We are identifying and establishing
business practices and resources to let TenFold manage the high future growth we seek to achieve. We believe that most TenFold operational areas can achieve better-than-industry-standard productivity, lower cost per deliverable, and consequently
higher margin contribution, if we use TenFold-powered applications to automate them.



During Q1, our TenFold Support organization designed, built, and took into stable production a custom CRM application, CustomerManager, tailored to our business, able to use customer-related information from other
TenFold systems, and incorporating advanced application features such as compliance management and proactive tracking of assignments. During Q2, TenFold Support prototyped SpeedPro services, which provide support customers with access to expert
consultants for very short duration (that is, as short as an hour or two) for special project needs on a time-and-materials basis. Customer purchases of SpeedPro services, while still modest, doubled from Q2 to Q3.



During Q1, we began updating the educational programs provided by TenFold
University, our education division, to incorporate the important lessons we have learned during our VersionOne projects, including how best to introduce first time users to our technology, and how best to manage a project that uses our technology.
TenFold University developed new training materials, designed new curriculum and piloted a brand new TenFold Paradigm class  the introductory class that we recommend for all our users. During Q2, we increased TenFold University staffing to
provide experienced resources to develop the curriculum and supporting materials for both advanced technology classes offered to customers and internal training classes provided to our employees. During Q2, TenFold University offered for the first
time a host of new, fully-redesigned advanced technology classes, which included Managing Product Areas, Managing Production, Performance Tuning an Application, and Maximizing Data. Customer purchases of TenFold University training, while still
modest, increased 70% from Q2 to Q3. TenFold University also offered TenFold employees three classes on management practices that we call the TenFold Way. In the future, we expect to leverage the effort spent creating these classes when we offer
TenFold Way training to audiences outside TenFold.



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During 2004, we have continued to make significant strides in product development. During Q3, we
announced eight major new product features important to our existing and target EnterpriseTenFold customers. Additionally, we moved close to completion of testing of our 2004 general availability release of EnterpriseTenFold and our newest product,
MyTenFold. While neither has been formally announced, the latest EnterpriseTenFold version has been released to and is in the process of being adopted by several existing TenFold customers.



Customers using TenFold-powered applications in production today include,
among others, Abbey National Bank, Allstate Insurance, Barclays Global Investors, Cedars-Sinai Medical Center, Deutsche Bank, Dresdner Bank, Franklin Templeton, iplan networks, JP Morgan Chase, MedCath, Rand Technology, Trinity, and Vertex (a
subsidiary of United Utilities). Customer progress during the first nine months of 2004 toward full deployment of new or continuing applications development projects includes:



| |  | JPMorgan Chase continued the rollout of its TenFold-powered global securities lending application, SecuritiesLendingExpress (SLX), expanding production from the international
traders to domestic trading. During Q1, as part of their merger underway with BankOne, JPMorgan Chase determined to focus its SLX application development efforts on customer facing enhancements to SLX and integration of existing legacy backend
systems to SLX. During Q1, we reached agreement on the key terms for the transfer of the ownership of SLX to JPMorgan Chase and the provision of continuing time-and-materials consulting services. As we help them become more self-reliant maintaining
SLX in production, we expect them to gradually reduce their use of time-and-materials consulting services and largely complete the SLX development and implementation project during the fourth quarter of 2004.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vertex, a UK-based utility sector customer management and billing company, took its TenFold-powered replacement customer management and billing application, Generic Billing System
(GBS), into production for its initial water company customer and began the process of converting customer billing to this new system. During Q2 this conversion continued smoothly. Today, Vertex has approximately 1,300,000 customers converted over
to GBS. During Q3, we completed the provision of time-and-materials consulting services to Vertexs project through our UK reseller, youDevise Limited, which augmented the team supplied by global systems integrator Sapient. Later in Q3, Vertex
requested TenFolds direct assistance on several short-term time-and-materials consulting projects. We are currently completing these projects and making recommendations to Vertex to improve their leverage of TenFold technology.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During Q1, VERITAS Software took its TenFold-powered ProductCompatibility application into production. During Q3, we provided time-and-materials consulting assistance to VERITAS in
its enhancement of this application.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Early in Q4, Cedars-Sinai Medical Center (Cedars) deployed important additional components of its PatientCareExpert (PCX) application into quiet production
without encountering any significant issues. Since Q3 2002, Cedars has had parts of Patient Accounting in steady use. In October 2004, Cedars deployed Patient Management (which manages all admission, insurance verification, bed management and
discharge and is also known by the acronym, ADT, for Admission, Discharge and Transfer) and Orders Communication (which enables nurses to enter clinical orders electronically) into production use. Cedars expects to continue to deploy additional
important applications components into production in 2005 and 2006.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Transaction with Cedars-Sinai Medical Center



At the close of Q2, we executed an important set of agreements with Cedars. The financial aspects of this non-recurring transaction are discussed under Results of Operations  Revenues



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below. As part of this set of agreements, Cedars acknowledged completion of TenFolds prior
application development work and TenFold granted Cedars expanded EnterpriseTenFold license rights to allow greater development and deployment within Cedars and we granted Cedars PCX Systems, LLC subsidiary the right to expand its Patient Care
Expert System with additional health care related modules, and to resell those applications in the health care market. Long term, TenFold stands to benefit financially if Cedars and its partner Perot Health Systems successfully commercialize these
healthcare applications. We continue to provide Cedars with EnterpriseTenFold support. We expect to continue to provide consulting services to Cedars and Perot Health Systems on a time-and-materials basis as we have done in recent prior quarters,
including Q1, Q2 and Q3 of 2004.



Results of Operations



We had third quarter 2004 revenues of $1.8 million, an operating loss of
$2.0 million, and a net loss of $2.0 million. This compares to revenues of $4.6 million, operating income of $469,000, and net income of $472,000 for the same period of 2003.



For the nine months ended September 30, 2004, we had revenues of $15.8 million, operating income of $4.2 million, and net
income of $4.4 million. This compares to revenues of $23.5 million, operating income of $10.5 million, and net income of $12.8 million for the same period of 2003.



The following table sets forth, for the periods indicated, the percentage relationship of selected items from TenFolds
statements of operations to total revenues.



|                                  |  |                                  |    |  |                                 |    |  |      |   |  |      |   
|--------------------------------- |  | -------------------------------- | -- |  | ------------------------------- | -- |  | ---- | - |  | ---- | --
|                                  |  | Three Months Ended September 30, |    |  | Nine Months Ended September 30, |   
|                                  |  | 2004                             |    |  | 2003                            |    |  | 2004 |   |  | 2003 |   
|Revenues:                         |  |                                  |    |  |                                 |    |  |      |   |  |      |   
|License                           |  | 2                                | %  |  |                                |    |  | 2    | % |  |     |   
|Subscription                      |  |                                 |    |  |                                |    |  |     |   |  | 45   | % 
|Services and other                |  | 98                               | %  |  | 100                             | %  |  | 98   | % |  | 55   | % 
|                                  |  |                                  |    |  |                                 |    |  |      |   |  |      |   
|Total revenues                    |  | 100                              | %  |  | 100                             | %  |  | 100  | % |  | 100  | % 
|                                  |  |                                  |    | 
|Operating expenses:               |  |                                  |    |  |                                 |    |  |      |   |  |      |   
|Cost of revenues                  |  | 59                               | %  |  | 64                              | %  |  | 32   | % |  | 32   | % 
|Sales and marketing               |  | 60                               | %  |  | 7                               | %  |  | 12   | % |  | 3    | % 
|Research and development          |  | 56                               | %  |  | 19                              | %  |  | 17   | % |  | 12   | % 
|General and administrative        |  | 38                               | %  |  | 15                              | %  |  | 12   | % |  | 11   | % 
|Special charges                   |  |                                 |    |  | (15                             | )% |  |     |   |  | (3   | )%
|                                  |  |                                  |    |  |                                 |    |  |      |   |  |      |   
|Total operating expenses          |  | 213                              | %  |  | 90                              | %  |  | 73   | % |  | 55   | % 
|                                  |  |                                  |    |  |                                 |    |  |      |   |  |      |   
|Income (loss) from operations     |  | (113                             | )% |  | 10                              | %  |  | 27   | % |  | 45   | % 
|Total other income (expense), net |  | 1                                | %  |  |                                |    |  | 1    | % |  | 10   | % 
|                                  |  |                                  |    |  |                                 |    |  |      |   |  |      |   
|Income (loss) before income taxes |  | (112                             | )% |  | 10                              | %  |  | 28   | % |  | 55   | % 
|Provision for income taxes        |  |                                 |    |  |                                |    |  |     |   |  |     |   
|                                  |  |                                  |    |  |                                 |    |  |      |   |  |      |   
|Net income (loss)                 |  | (112                             | )% |  | 10                              | %  |  | 28   | % |  | 55   | % 
|                                  |  |                                  |    |  |                                 |    |  |      |   |  |      |   



Revenues



Total revenues decreased $2.8 million or 61 percent, to
$1.8 million for the three months ended September 30, 2004, as compared to $4.6 million for the same period in 2003. For the nine months ended September 30, 2004, total revenues decreased $7.7 million, or 33 percent, to $15.8 million as compared to
$23.5 million for the same period in 2003.



Services and other
revenues decreased $2.8 million, or 62 percent, to $1.7 million for the three months ended September 30, 2004 as compared to $4.5 million for the same period in 2003. This decrease in services and other revenues is primarily due to decreases in
revenues from certain customers who are purchasing less time-and-materials consulting from us over time as they complete their current application development projects and become more self-sufficient.



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For the nine months ended September 30, 2004, services and other revenues increased $2.5 million, or 20
percent, to $15.5 million as compared to $13.0 million for the same period in 2003. Services and other revenues for the nine months ended September 30, 2004 include $8.1 million in revenues, and $150,000 in operating costs, recognized during the
quarter ended June 30, 2004, related to the completion of an earlier fixed-price applications development project with Cedars-Sinai Medical Center (Cedars). This completes the recognition of these revenues and related costs that were
deferred in prior years pending confirmation of the completion of the applications development project and resolution of potential disputes between the parties. The new contractual terms between Cedars and TenFold confirm TenFolds completion
of the earlier project and provide for mutual releases from prior related claims. Since this completed our recognition of this project-related revenue, we do not expect to recognize similar amounts, and we do not expect Cedars to account for a
significant portion of our revenues, in future periods.



Excluding the effect of this Cedars transaction, we would have had total revenues of $7.7 million, and a net loss of $3.5 million for the nine months ended September 30, 2004. The increase in services and other revenues during the nine
months ended September 30, 2004 from this transaction, were partially offset by decreases in revenues from certain other customers who are purchasing less time-and-materials consulting from us over time as they complete their current application
development projects and become more self-sufficient. Services and other revenues for the nine months ended September 30, 2003 include $900,000 from the reduction over time of a guarantee on one prior fixed-price contract, and $600,000 recognized
upon completion of training obligations associated with a contract signed in 2002.



License revenues increased $22,000, or 200 percent to $33,000 for the three months ended September 30, 2004, as compared to $11,000 for the same period in 2003. For the nine months ended September 30, 2004, license
revenues increased $237,000, or 423 percent, to $293,000 as compared to $56,000 for the same period in 2003. The increases in license revenues are primarily due to an increase in the volume of new license sales during 2004 as compared to 2003, and
the amortization of the revenue from a project related license sold in late 2003 into revenues during early 2004.



We had no subscription revenues for the three months ended September 30, 2004, or for the same period in 2003. We had no subscription revenues for the
nine months ended September 30, 2004, as compared to $10.4 million for the same period in 2003. Subscription revenues represent revenue from contracts that include a subscription to new product releases on a when and if available basis.
For certain contracts, including a subscription to future software products when and if they become available, we recognize the fees for the software products ratably over the subscription term beginning with delivery of the first software product.
For contracts that include a service element for which the fair value is undeterminable, and the contract includes a subscription to new product releases on a when and if available basis, we recognize the entire contract fee ratably over
the subscription period as subscription revenue. During the quarter ended June 30, 2003, our existing subscription contracts reached the end of their subscription periods, and we recognized the final remaining subscription revenue for these
contracts.



Revenues from customers outside of North America
were approximately 22 percent of total revenues for the three months ended September 30, 2004 as compared to 47 percent of total revenues for the same period in 2003. For the nine months ended September 30, 2004, revenues from customers outside of
North America were approximately 20 percent of total revenues as compared to 28 percent of total revenues for the same period in 2003. Our long-lived assets are deployed in the United States.



Two customers accounted for 39 percent and 10 percent of our total revenues
for the three months ended September 30, 2004, compared to two customers accounting for 44 percent and 42 percent of our total revenues for the same period in 2003. For the nine months ended September 30, 2004, three customers accounted for 53
percent (Cedars), 19 percent, and 16 percent of our



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total revenues as compared to three customers accounting for 47 percent, 22 percent, and 22 percent of our total revenues
for the same period in 2003. No other single customer accounted for more than 10 percent of our total revenues for the three and nine months ended September 30, 2004 or the same periods in 2003.



We expect the two customers accounting for 19 percent and 16 percent of our
total revenues for the nine months ended September 30, 2004 to account for a significant percentage of our revenues for 2004. However, our revenue from these customer projects, which is primarily time-and-materials consulting revenue, is decreasing
over time as these customers complete their current application development projects and become more self-sufficient. The customer accounting for 16 percent of our total revenues for the nine months ended September 30, 2004 completed its use of our
time-and-material consulting services for its current application development project during the quarter ended September 30, 2004. We staffed this project with subcontractor staff that we released upon completion of these services. During Q3, the
end-user customer for this project initiated some short-term time-and-materials consulting services engagements directly with us. The other project, accounting for 19 percent of our total revenues for the nine months ended September 30, 2004, is
staffed by our employees and is currently expected to be completed at the end of the fourth quarter of 2004. During the fourth quarter of 2004, we expect to maintain staffing on this project consistent with the level we experienced during the third
quarter of 2004 (but lower than staffing levels during the earlier quarters of 2004).



We continue to actively sell to new customers. In 2004, we have completed a number of new, small tactical sales transactions. However, these new sales are not material to our overall financial results, and we continue
to face a challenging sales environment. As a result, it is unclear when we can expect to achieve significant sales to new or existing customers, and until we do so we are likely to continue to experience losses.



Operating Expenses



Cost of Revenues.Cost of revenues consists primarily of
compensation and other related costs of personnel to provide applications development and implementation, support, and training services. Cost of revenues decreased $1.9 million, or 64 percent, to $1.0 million for the three months ended September
30, 2004 compared to $2.9 million for the same period in 2003. For the nine months ended September 30, 2004, cost of revenues decreased $2.4 million, or 32 percent, to $5.0 million as compared to $7.4 million for the same period in 2003. The
decreases in cost of revenues are primarily due to having fewer staff (particularly subcontractors) working on customer projects as these customers complete their current application development projects and become more self-sufficient.



Sales and Marketing.Sales and marketing expenses consist
primarily of compensation, travel, and other related expenses for sales and marketing personnel, as well as advertising and other marketing expenses. Sales and marketing expenses increased $747,000, or 251 percent, to $1.0 million for the three
months ended September 30, 2004 as compared to $298,000 for the same period in 2003. For the nine months ended September 30, 2004, sales and marketing expenses increased $1,153,000, or 146 percent, to $1.9 million as compared to $788,000 for the
same period in 2003. These increases in sales and marketing expenses are primarily due to expanding sales staffing and increasing marketing activities. See Tuning our marketing and sales engineandBroadening awareness of and interest in
TenFold technologyabove for more information.



Research and Development.Research and development expenses consist primarily of compensation and other related costs of personnel dedicated to research and development activities. Research and development expenses increased
$120,000, or 14%, to $982,000 for the three months ended September 30, 2004, as compared to $862,000 for the same period in 2003. For the nine months ended September 30, 2004, and 2003, research and development expenses were $2.8 million in each
period.



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General and Administrative.General and administrative expenses consist primarily of the
costs of executive management, finance and administrative staff, business insurance, and professional fees. General and administrative expenses decreased $21,000, or 3 percent, to $676,000 for the three months ended September 30, 2004 as compared to
$697,000 for the same period in 2003. For the nine months ended September 30, 2004, general and administrative expenses decreased $813,000, or 30 percent, to $1.9 million as compared to $2.7 million for the same period in 2003. The decreases in
general and administrative expenses are primarily due to lower variable compensation accruals, and lower legal expenses.



During the quarter ended March 31, 2004, we reduced some variable compensation accrued during 2003, to lower levels that we believe better reflect our
estimates. This reduced operating expenses for the first quarter of 2004 by $219,000.



Special Charges. We incurred no special charges during the three and nine months ended September 30, 2004.



Special charges for the three and nine months ended September 30, 2003 include restructuring charge adjustments of $(578,000) and asset loss impairment
adjustments of $(95,000). During the three and nine months ended September 30, 2003, we recorded restructuring charge adjustments of $(578,000) to reduce previously accrued restructuring charges for negotiated reductions in remaining lease payments
due for unoccupied properties, and to reflect higher sublease income received than previously estimated. During the three and nine months ended September 30, 2003, we recorded asset loss provision adjustments of $(95,000) to eliminate remaining
estimated asset loss accruals that were no longer necessary upon our completing the return of previously leased equipment.



Total Other Income, net



Net total other income was $23,000 for the three months ended September 30, 2004, as compared to $3,000 for the same period in 2003. Net total other
income was $216,000 for the nine months ended September 30, 2004, as compared to $2.4 million for the same period in 2003. Net total other income for the nine months ended September 30, 2003 included a gain of approximately $2.2 million that we
recognized on the retirement of capital lease obligations at a significant discount to their carrying value.



Provision for Income Taxes



There were no provisions for income taxes for the three months ended September 30, 2004 and 2003, as no provisions were necessary based upon results for
the periods. The provisions for income taxes for the nine months ended September 30, 2004 and 2003, relate primarily to foreign taxes and reversing a portion of our valuation allowance attributable to the current operating income in the periods.



The valuation allowance as of September 30, 2004 was recorded
in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires that a valuation allowance be established when there is significant uncertainty as to the
realizability of deferred tax assets.



Critical Accounting Policies



The fundamental objective of financial reporting is to
provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, management has identified the critical accounting policies below. These policies have the potential to have a more
significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific
point in time, events which are continuous in nature.



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Revenue Recognition and Project Profitability



We believe risks relating to revenue recognition primarily include the
judgment required to determine project profit or loss projections on time-and-material contracts. We recognize time-and-materials revenue at the lowest point in the range of estimated profit margin, which represents our best estimate of the profit
to be achieved. Variances may occur if we are unable to collect time-and-material billings or if we grant concessions to time-and-material customers in order to sell additional business or collect cash under the contract. These variances between
managements estimate of the lowest point in the range of estimated profit margin and actual results may result in a significant adjustment to our results of operations and financial position.



Litigation Reserves



We review asserted litigation claims each quarter to determine the
likelihood that the claim will result in a loss. Significant management judgment is required to conclude on the likely outcome of outstanding litigation. If a loss is probable on a litigation claim, management estimates the loss and we accrue the
estimated loss. If a loss is considered probable but cannot be reasonably estimated, we disclose the contingency in the notes to our financial statements. Losses may result on litigation claims that are not considered probable or are not estimable
at the current time, potentially having a significant impact on future financial results.



Restructuring Charges



We recognize restructuring charges consistent with EITF 94-3, prior to January 1, 2003 and consistent with SFAS 146 beginning on January 1, 2003. For amounts accrued at December 31, 2002, we reduce current charges for abandoned facilities
with sublease income. Management analyzes current market conditions including current lease rates in the respective geographic regions, vacancy rates, and costs associated with subleasing when evaluating the reasonableness of future sublease income.
Significant management judgments and estimates must be made and used in calculating future sublease income. Variances between expected and actual sublease income have previously and may continue to result in restructuring charge adjustments in
future periods.



Liquidity and Capital Resources



As of September 30, 2004, our principal source of
liquidity was our cash and cash equivalents of $7.0 million. During the nine months ended September 30, 2004, we funded purchases of computer equipment of $76,000 with capital leases.



Net cash used in operating activities was $5.5 million for the nine months ended September 30, 2004 as compared to $155,000
provided by operating activities for the same period in 2003. The increase in cash flow used in operating activities results primarily from decreases in cash inflows from time-and-material consulting projects as these customers complete their
current application development projects and become more self-sufficient, increased investments we have made in sales and marketing related activities, and payments we made to reduce some older accounts payable and accrued liability items accrued in
earlier quarters, including amounts due to our United Kingdom subcontractor for its work on a large project.



Net cash provided by investing activities was $24,000 for the nine months ended September 30, 2004 as compared to $102,000 for the same period in 2003.



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Net cash provided by financing activities was $268,000 for the nine months ended September 30, 2004 as
compared to $171,000 for the same period in 2003. Net cash provided by financing activities for the nine months ended September 30, 2004 included $142,000 of proceeds from employee stock purchase plan stock issuances, and $136,000 from employee
stock option exercises. Net cash provided by financing activities for the nine months ended September 30, 2003 included net cash proceeds of $666,000 from the sale of 3,888,889 shares of common stock to a member of our Board of Directors. During the
three months ended March 31, 2003 we made payments of approximately $588,000 to retire capital lease obligations at a significant discount.



Our deferred revenue balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned. We had
deferred revenues balances of $1.3 million at December 30, 2004 and $7.6 million at December 31, 2003. When over time we recognize these deferred revenue balances as revenues in the statement of operations, we will not have corresponding increases
in cash, as the related cash amounts have previously been received by us. Our unbilled accounts receivable represents revenue that we have earned but which we have not yet billed.



We raised capital during 2003 to strengthen our balance sheet. We believe that our existing cash and expected continuing
cash flows from existing customers will provide us with sufficient resources for the remainder of this year. However, some challenges and risks exist:



| |  | We have derived, and over the near term we expect to continue to derive, a significant portion of our cash inflows from time-and-material consulting services for a limited number of
large customers. We expect these large customers to continue to reduce their purchases of our time-and-materials consulting services over time as they complete projects and become more self-sufficient. The loss of a large customer could materially
and adversely affect our business, results of operations, financial position and liquidity.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We continue to invest in specific marketing initiatives intended to drive TenFold toward the Tipping Point by creating awareness and generating leads, as well as the
cost of new direct sales staff to convert those leads to sales.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We continue to face a challenging sales environment, and it is unclear when we can expect to achieve significant sales to new or existing customers, and achieve and sustain positive
cash flow from operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may need to seek additional capital to support our operations until our cash flow from sales to new customers provides sufficient cash flow, and that capital may or may not be
available on acceptable terms.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe that
we are continuing to appropriately manage these risks. However, there can be no assurance that we will be successful, and that these risks will not have a materially adverse affect on our future cash flow and operations.



See Factors that May Affect Future Results and Market Price of
Stock for more information about risks facing TenFold.



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Disclosure about Contractual Obligations



The following table sets forth certain contractual obligations recorded in the condensed consolidated financial statements
as of September 30, 2004 and summary information is presented in the following table (in thousands):



|                                                                                   |  |       |       |                  |   |          |  |          |     |                   |   |  |  
|---------------------------------------------------------------------------------- |  | ----- | ----- | ---------------- | - | -------- |  | -------- | --- | ----------------- | - |  | -
|Contractual Obligations                                                            |  | Total |       | Less than 1 year |   | 1-3years |  | 4-5years |     | More than 5 years
|Long-Term Debt                                                                     |  |       |      |                  |   |         |  |          |    |                   |  |  | 
|Capital Lease Obligations (including interest)                                     |  | $     | 71    |                  |   | 28       |  |          | 43  |                   |  |  | 
|Operating Leases                                                                   |  |       | 1,656 |                  |   | 833      |  |          | 823 |                   |  |  | 
|Purchase Obligations                                                               |  |       |      |                  |   |         |  |          |    |                   |  |  | 
|Other Long Term Liabilities Reflected on the Registrants Balance Sheet under GAAP |  |       |      |                  |   |         |  |          |    |                   |  |  | 
|                                                                                   |  |       |       |                  |   |          |  |          |     |                   |   |  |  
|Total                                                                              |  | $     | 1,727 |                  | $ | 861      |  | $        | 866 |                   |  |  | 
|                                                                                   |  |       |       |                  |   |          |  |          |     |                   |   |  |  



The real estate
operating leases above include $420,000 of restructured real estate lease obligations which have not been reduced by sublease income of $159,000 due from sublease tenants. In the Condensed Consolidated Balance Sheet at September 30, 2004, these
obligations are included in accounts payable and accrued liabilities, net of the related sublease income. See Note 10 of Notes to Condensed Consolidated Financial Statements for more information.



We previously had legacy fixed-price contracts containing guarantees. With
the conclusion of the transaction with Cedars-Sinai Medical Center described above, we no longer have any contracts subject to a guarantee.



Recent Accounting Pronouncements



In December 2003, the FASB issued Interpretation No. 46 (FIN 46R) (revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (ARB 51), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity though means other than voting rights and accordingly should
consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN 46), which was issued in January 2003. Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must
first determine that the entity is not a variable interest entity (VIE). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine
whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after January 31, 2003 and no later than the
end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 had no effect on our results of operations and financial position.



On December 18, 2003 the SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104), which supercedes SAB 101, Revenue
Recognition in Financial Statements. SAB 104s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of EITF 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. SAB 104 does not have a material impact on our financial position or results of operations.



The FASB has released an exposure draft, Share-Based Payment, which would require us to measure employee stock-based
compensation awards using a fair value method and recognize the related expense in our financial statements. If the exposure draft is adopted as currently proposed, the final statement would be effective for us in our third quarter of 2005 beginning
July 1, 2005. We have not yet assessed the impact of adopting this new proposed standard.



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Factors that May Affect Future Results and Market Price of Stock



We operate in a rapidly changing environment that involves numerous risks,
some of which are beyond our control. The following discussion highlights some of these risks.



If we are unable to generate sufficient cash flow from operations, or secure additional sources of financing, we would be unable to continue operations as a going concern



Our business model relies upon generating new sales to existing and new
customers. We have improved our operating cash flow over the last several years and in December 2003 closed a private placement in which we sold 5 million shares of restricted common stock, with no warrants, at $2.00 per share, to strengthen our
financial position. We believe that our existing cash and expected continuing cash flows from existing customers will provide us with sufficient resources for the remainder of this year. However, for the nine months ended September 30, 2004 net cash
used in operations was $5.5 million and if we do not generate significant new sales to existing and new customers in the coming quarters, we will be required to pursue one or a combination of the following remedies: seek additional sources of
financing, further reduce operating expenses, sell part or all of our assets, or terminate operations. There can be no assurance that we will be successful achieving sufficient cash flow.



We continue to experience difficulty in securing future customer revenue



Although in 2004 we have completed a number of new, small tactical sales
transactions, these new sales are not material to our overall financial results, and we continue to face a challenging sales environment. As a result, there is no assurance that we will be able to convince future prospective customers to purchase
products or services from us or that any customer revenue that is achieved can be sustained. If we are unable to obtain future customer revenue, our operations, financial condition, liquidity, and prospects will be materially and adversely affected,
and we will be required to pursue one or a combination of the following remedies: seek additional sources of financing, further reduce operating expenses, sell part or all of our assets, or terminate operations. There can be no assurance that
additional financing sources will be available to us when needed or that we will be able to execute the other potential remedies sufficiently to continue operations.



Our sales cycle can be lengthy and subject to delays and these delays could cause our operating results to suffer



We believe that a customers decision to purchase significant products
or services from us can involve a significant commitment of resources and be influenced by customer budget cycles. To successfully sell our products and services, we generally must educate our potential customers regarding the use and benefit of our
products and services. Recently, we have been able to demonstrate new account penetration through small, introductory proof-of-concept projects including small development and deployment licenses and limited consulting services. However,
historically, getting new customers to purchase significant licenses or services has required significant time and resources. Consequently, the period between initial contact and the purchase of our products or services can be long and subject to
delays associated with the lengthy budgeting, approval, and competitive evaluation processes that typically accompany significant capital expenditures. Historically, our sales cycles have been lengthy and variable, typically ranging between three to
twelve months from initial contact with a potential customer to the signing of a contract. In addition, the national economic downturn and concern regarding other regulatory implications has caused current and potential customers to delay or change
their purchasing decisions. Sales delays could cause our operating results to vary widely. There can be no assurance that we will not experience sales delays in the future. In addition, we face a challenging sales environment and there can be no
assurance that we will have sales in the future.



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Our future prospects are difficult to evaluate



In light of our operating results for recent periods and the continued difficult sales environment in the technology sector,
it is difficult to evaluate our future prospects. There can be no assurance that we will be able to successfully complete current or new projects. In the past we received customer complaints concerning some of our projects. Although we have
substantially changed the business model under which we sold and delivered business that generated customer complaints, we cannot be certain that we will not receive more customer complaints in the future. Additionally, our failure to successfully
complete any current or new projects may have a material adverse impact on our financial position and results of operations. We cannot be certain that our business strategy will succeed.



We are substantially dependent on a small number of large customers and the loss of one or more of these customers may cause revenues and
cash flow to decline



We have derived, and over the near
term we expect to continue to derive, a significant portion of our revenues and cash flow from a limited number of large customers. For example, for the nine months ended September 30, 2004, three customers accounted for 53 percent, 19 percent, and
16 percent of our total revenues. Significant reductions in the amount of business large customers conduct with us has previously and may in the future, materially and adversely affect our business, results of operations, financial position and
liquidity. Replacing the loss of a large customer is unpredictable. Revenues and cash flows from a single customer or a few large customers may constitute a significant portion of our total revenues and cash inflows in a particular period, then
decline as the volume of work performed for specific customers is likely to vary from period to period, and a major customer in one period may not continue to purchase licenses or services from us in a subsequent period.



The revenue from the customer accounting for 53 percent of our total revenues
for the nine months ended September 30, 2004 was primarily from a non-recurring transaction during the three months ended June 30, 2004. As a result, we do not expect this customer to account for a significant percentage of our revenues during the
remainder of the year, after June 30, 2004. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Transaction with Cedars-Sinai Medical CenterandRevenues for more information.



We expect the two customers accounting for 19 percent and 16
percent of our total revenues for the nine months ended September 30, 2004 to account for a significant percentage of our revenues for 2004. However, our revenue from these customer projects, which is primarily time-and-materials consulting revenue,
is decreasing over time as these customers complete their current application development projects and become more self-sufficient. The customer accounting for 16 percent of our total revenues for the nine months ended September 30, 2004 completed
its use of our time-and-material consulting services for its current application development project during the quarter ended September 30, 2004. We staffed this project with subcontractor staff that we released upon completion of these services.
During Q3, the end-user customer for this project, initiated some short-term time-and-materials consulting services engagements directly with us. The other project, staffed by our employees, is currently expected to be completed at the end of the
fourth quarter of 2004. During the fourth quarter of 2004, we expect to maintain staffing on this project consistent with the level we experienced during the third quarter of 2004 (but lower than staffing levels during the earlier quarters of 2004).



We have previously recognized significant deferred revenues which will not
be available in future periods



Our deferred revenue
balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned. We had deferred revenue balances of $7.6 million at December 31, 2003 and $20.3 million at December 31, 2002. The decrease
in deferred revenues from December 31, 2002 to December 31, 2003 was primarily a result of our recognizing as revenues the remaining previously deferred subscription revenues from our existing subscription contracts as these contracts reached the
end of their subscription



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periods during the quarter ended June 30, 2003. During the three months ended June 30, 2004 we recognized revenues of
$8.1 million from revenues deferred in prior years related to an earlier applications development project. As a result, at June 30, 2004, we had a remaining deferred revenue balance of $1.6 million that we expect to recognize as revenues in future
periods. Therefore, we do not expect to recognize future revenues or profits from deferred revenues at the same levels that we experienced during 2003 and the first half of 2004, and will likely experience losses until this decrease is offset by
revenue from other sources.



Our growth and success depends on our ability
to license EnterpriseTenFold and other software products; however, we have limited experience licensing EnterpriseTenFold or other products to date



As we change our business strategy to licensing EnterpriseTenFold and other software products, the success of our business is dependent, in part, upon our
ability to license those products. If our strategy for marketing EnterpriseTenFold and our other products is unsuccessful, or if we are unable to license EnterpriseTenFold and/or other products successfully, or within the time frames anticipated,
our revenues and operating results will suffer.



Our historical quarterly
operating results have varied significantly and our future operating results could vary



Historically, our quarterly operating results have varied significantly. For example, during some years, including this year, we have had quarterly profits followed by losses in subsequent quarters. Our future
operating results may continue to vary significantly. Furthermore, there can be no assurance that we will not continue to suffer losses in the future.



If our software contains defects or other limitations, we could face product liability exposure



Because of our limited operating history and our small number of customers, we have completed a limited number of projects
that are now in production. As a result, there may be undiscovered material defects in our products or technology. Furthermore, complex software products often contain errors or defects, particularly when first introduced or when new versions or
enhancements are released. Despite internal testing and testing by current and potential customers, our current and future products may contain serious defects. Serious defects or errors could result in lost revenues or a delay in market acceptance,
which would damage our reputation and business.



Because our
customers may use our products for mission-critical applications, errors, defects, or other performance problems could result in financial or other damages to customers. Our customers could seek damages for these losses. Any successful claims for
these losses, to the extent not covered by insurance, could result in our being obligated to pay substantial damages, which would cause operating results to suffer. Although our license agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these limitations of liability provisions. A product liability claim brought against us, even if not successful, would likely be time
consuming and costly.



Our errors and omissions coverage may not cover
contractual disputes



While we maintain errors and
omissions insurance coverage for claims related to customer contract disputes within the coverage scope and term, given the nature and complexity of the factors affecting the estimated liabilities, actual liabilities may exceed or be outside the
scope of our current errors and omissions coverage. We can give no assurance that our insurance carrier will extend coverage to current or future claims. In addition, no assurance can be given that we will not be subject to material additional
liabilities and significant additional litigation relating to errors and omissions for existing claims and future claims.



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Our errors and omissions insurance policy, which we renewed on March 1, 2004, is in the form of an
industry standard software errors and omissions policy. As such, it only covers software errors and omissions that occur after the delivery of software and excludes contractual disputes such as cost and time related guarantees. We have previously
had contractual disputes related to our guarantees. While we have substantially changed our business model and no longer offer a money-back guarantee, no assurance can be given that we will not be subject to these types of claims in the future. In
the event that liabilities from claims are not covered by or exceed our errors and omissions coverage, our business, results of operations, financial position, or liquidity could be materially and adversely affected.



We are involved in litigation and disputes and may in the future be involved in further
litigation or disputes that may be costly and time-consuming, and if we suffer adverse judgments, our operating results could suffer



We are involved in a dispute with a former customer as part of its resolution of its bankruptcy proceeding and in a class action suit against more than
300 issuers involving the underwriters of those issuers initial public offerings. We have also been named as one of many defendants in a lawsuit related to the death of a patient at Cedars-Sinai Medical Center, one of our customers. We may in
the future face other litigation or disputes with customers, employees, business partners, stockholders, or other third parties. Such litigation or disputes could result in substantial costs and diversion of resources that would harm our business.
An unfavorable outcome of these matters may have a material adverse impact on our business, results of operations, financial position, or liquidity. See Legal Proceedings generally for more information concerning our litigation and
disputes.



Our settlements with Perot Systems and Cedars-Sinai require that
if we do not meet certain obligations their claims may be re-instated or re-asserted, and if this were to happen and we suffer adverse judgments, our operating results could suffer



Although we have settled our disputes with Perot Systems and Cedars-Sinai, and recently entered into revised agreements with
Cedars-Sinai that confirm our completion of the earlier project and provide for mutual releases from prior related claims, our agreements still require that we perform and meet certain obligations. If we are unable to or do not perform or meet these
obligations, Perot Systems and Cedars-Sinai may re-instate or re-assert their respective prior claims against us. If either Perot Systems or Cedars-Sinai were to re-instate or re-assert their respective claims, an unfavorable outcome of the matter
may have a material adverse impact on our business, results of operations, financial position, or liquidity.



If we fail to adequately anticipate employee and resource utilization rates, our operating results could suffer



A high percentage of our operating expenses, particularly personnel and rent, are relatively fixed in advance of any particular quarter. As a result,
unanticipated variations in the number, or progress toward completion, of our projects or in employee utilization rates did and may continue to cause significant variations in operating results in any particular quarter and could result in quarterly
losses. Time-and-materials consulting arrangements can typically be terminated by a customer on short notice. An unanticipated termination of a major project, the delay of a project, or the completion during a quarter of several projects has in the
past and may continue to result in under-utilized employees and could, therefore, cause us to suffer quarterly losses or adverse results of operations.



A loss of Nancy M. Harvey, Jeffrey L. Walker, or any other key employee could impair our business



Our industry is competitive and we are substantially dependent upon the continued service of our existing executive
personnel, especially Nancy M. Harvey, President, Chief Executive Officer and Chief Financial Officer. Furthermore, our products and technologies are complex and we are substantially dependent upon the continued service of our senior technical
staff, including Jeffrey L. Walker, Chairman of the Board of Directors, Executive Vice President, and Chief



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Technology Officer. If a key employee resigns to join a competitor or to form a competing company, the loss of the
employee and any resulting loss of existing or potential customers to the competing company would harm our business. We do not carry key-man life insurance on any of our key employees. We have entered into an employment agreement with our President,
Chief Executive Officer, and Chief Financial Officer, Nancy M. Harvey. However, the agreement does not ensure continued service to TenFold. In the event of the loss of key personnel, there can be no assurance that we would be able to prevent their
unauthorized disclosure or use of our technical knowledge, practices, or procedures.



Our failure to attract and retain highly skilled employees, particularly project managers and other senior technical personnel, could impair our ability to complete projects and expand our business



Our services business is labor intensive. Our success will depend in large
part upon our ability to attract, retain, train, and motivate highly skilled employees, particularly project managers and other senior technical personnel. Any failure on our part to do so would impair our ability to adequately manage and complete
existing projects, bid for and obtain new projects, and expand business. There exists significant competition for employees with the skills required to perform the services we offer. Qualified project managers and senior technical staff are in great
demand and are likely to remain a limited resource for the foreseeable future. Our restructurings and related headcount reductions, may make it more difficult for us to retain and compete for such employees. There can be no assurance that we will be
successful in retaining, training, and motivating our employees or in attracting new, highly skilled employees. If we are unsuccessful in this effort or if our employees are unable to achieve expected performance levels, our business will be harmed.



If we cannot protect or enforce our intellectual property rights, our
competitive position would be impaired and we may become involved in costly and time-consuming litigation



Our success is dependent, in part, upon our proprietary EnterpriseTenFold technology and other intellectual property rights. If we are unable to protect
and enforce these intellectual property rights, our competitors will have the ability to introduce competing products that are similar to ours, and our revenues, market share, and operating results will suffer. To date, we have relied primarily on a
combination of patent, copyright, trade secret, and trademark laws, and nondisclosure and other contractual restrictions on copying and distribution to protect our proprietary technology. We have been issued three patents in the U.S. and intend to
continue to seek patents on our technology when appropriate. There can be no assurance that the steps we have taken in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property rights. The laws of some countries may not protect our intellectual property rights to the same extent as do the laws of the United States. Furthermore, litigation may
be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. This litigation could result
in substantial costs and diversion of resources that would harm our business.



To date, we have not been notified that our products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by us with respect to current or
future products. We expect software developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any
of these claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert managements attention and resources, cause product shipment delays, or require us to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all. A successful claim against us of product infringement and our failure or inability to license the infringed or similar technology on
favorable terms would harm our business.



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If we fail to successfully compete, our revenues and market share will be adversely affected



The market for our products and services is highly competitive, and if we
are not successful in competing in this market, our revenues and market share will suffer. Many of our competitors have significantly greater financial, technical and marketing resources, generate greater revenues, and have greater name recognition
than we do. In addition, there are relatively low barriers to entry into our markets and we have faced, and expect to continue to face, additional competition from new entrants into our markets.



International political and economic uncertainty could have an adverse impact on our
business and on our operating results



Revenues from
customers outside of North America were 20 percent of total revenues for the nine months ended September 30, 2004. The international political and economic uncertainty caused by the ongoing war on terrorism may adversely impact our ability to
continue existing relationships with our foreign customers and to develop new business abroad.



Our stock price may continue to be volatile



Our stock price has fluctuated widely in the past and could continue to do so in the future. Your investment in our stock could lose value. Some of the factors that could significantly affect the market price of our
stock include: variations in our quarterly financial results; changes in our revenue; changes in our customer base including the loss of a major customer; changes in management; reports or earnings estimates published by financial analysts; changes
in political, economic and market conditions either generally or specifically to particular industries; and fluctuations in stock prices generally, particularly with respect to the stock prices for other technology companies. A significant drop in
our stock price could expose us to the risk of securities class action lawsuits. Defending against such lawsuits could result in substantial costs and divert managements attention and resources. An unfavorable outcome of such a matter may have
a material adverse impact on our business, results of operations, financial position, or liquidity.



If we elected to or were required to account for employee stock option and employee stock purchase plans using the fair value method, it could significantly reduce our net income



There has been ongoing public debate whether employee stock option and
employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. Although we are not currently required to record compensation expense using a fair value method in connection with
option grants that have an exercise price at or above fair market value at the grant date and for shares issued under our employee stock purchase plan, future accounting pronouncements, including a proposed accounting pronouncement released earlier
this year, may require us to treat all stock-based compensation as an expense using a fair value method. If we elected to or were required to record expenses for option awards under our option or employee stock purchase plans using a fair value
method, we could have significant charges. For the nine months ended September 30, 2004, had we accounted for stock-based compensation plans using the fair-value method prescribed in FASB Statement No. 123 as amended by Statement 148, net income
would have been reduced by $9.8 million, resulting in a net loss of $5.4 million. See Note 6 of Notes to Condensed Consolidated Financial Statements for more information.



No corporate actions requiring stockholder approval can take place without the approval of our controlling stockholders



The executive officers, directors, and entities affiliated with them, in
the aggregate, beneficially own approximately 52 percent of our outstanding common stock. Jeffrey L. Walker, Chairman, Executive Vice President and Chief Technology Officer, and the Walker Childrens Trust, in the aggregate, currently
beneficially own approximately 39 percent of our outstanding common stock. Mr. Walker, acting with others, would be able to decide or significantly influence



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all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or
other business combination transactions. This concentration of ownership may have the effect of delaying or preventing a merger or other business combination transaction, even if the transaction would be beneficial to our other stockholders.



The anti-takeover provisions in our charter documents and/or under Delaware
law could discourage a takeover that stockholders may consider favorable



Provisions of our certificate of incorporation, bylaws, stock incentive plans and Delaware law may discourage, delay, or prevent a merger or acquisition that a stockholder may consider favorable.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk.



Reference is made to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, appearing on page 45 of TenFolds 2003 Annual
Report on Form 10-K for information relating to TenFolds interest rate and currency rate risks. There have been no material changes in such risks through September 30, 2004.



Item 4. Controls and Procedures



An evaluation was performed under the supervision and with the participation of the Companys management, including Nancy Harvey (Chief Executive Officer and Chief Financial Officer), of the effectiveness of the design and operation of
the Companys disclosure controls and procedures as of September 30, 2004. Based on that evaluation, Ms. Harvey concluded that the Companys disclosure controls and procedures are effective in ensuring that information required to be
disclosed by the Company in reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as specified in the rules and forms of the Securities and Exchange Commission. There have
been no material changes in the Companys internal controls over financial reporting or in other factors reasonably likely to affect the internal controls over financial reporting during the quarter ended September 30, 2004.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



See
Part I, Item 1, Note 9 of Notes to Condensed Consolidated Financial Statements for a description of legal proceedings.



Item 5. Other Information



On
October 6, 2004 we filed a report on Form 8-K to report that the Board of Directors of TenFold Corporation held a regularly scheduled meeting on September 23, 2004, at which Mr. Robert E. Parsons Jr. was elected to our Board of Directors. At the
time of filing that report, Mr. Parsons participation in our Board committees was not known. On October 23, 2004, the Board of Directors of TenFold Corporation approved Mr. Parsons appointment to the Audit Committee of the Board of Directors.



Item 6. Exhibits



|       |  |                                                                                                                                    
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                        
|11*    |  | Computation of Shares used in Computing Basic and Diluted Net Income (Loss) Per Share.                                             
|       | 
|31     |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|       | 
|32     |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* | Incorporated by reference to Notes to Condensed Consolidated Financial Statements herein
|- | ------------------------------------------------------------------------------------------



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##### Table of Contents

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.



|                                                               
|---------------------------------------------------------------
|TenFold Corporation                                            
|                                                               
|/s/ Nancy M. Harvey                                            
|Nancy M. Harvey                                                
|President, Chief Executive Officer, and Chief Financial Officer
|October 27, 2004                                               



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