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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



(Mark One)



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



For the fiscal year ended January 30, 2004



OR



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



For the transition period from
                     to



Commission file number: 000-25829



PORTAL SOFTWARE, INC.

(Exact name of registrant as specified in its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0369737                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



10200 South De Anza
Boulevard, Cupertino, California 95014

(Address of principal executive offices and Zip Code)



Registrants telephone number, including area code: (408) 572-2000



Securities registered pursuant to Section 12(b) of the
Act:



None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, $0.001 par value



Rights to Purchase Series A Junior Participating Preferred Stock



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



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

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the
common stock on August 1, 2003 as reported on the Nasdaq National Market System, was approximately $88,032,000. Shares of common stock held by each officer, director and holders known to the Registrant of 5% or more of the outstanding common stock
have been excluded from this calculation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 15, 2004, Registrant had outstanding
42,212,676 shares of common stock.

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PORTAL SOFTWARE, INC.



FORM 10-K



FISCAL YEAR 2004



INDEX



|                                                                                                           |  |     
|---------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                           |  | Page
|PART I                                                                                                    
|                                                                                                           | 
|Item 1:        Business                                                                                    |  | 3   
|Item 2:        Properties                                                                                  |  | 11  
|Item 3:        Legal Proceedings                                                                           |  | 12  
|Item 4:        Submission of Matters to a Vote of Security Holders                                         |  | 13  
|                                                                                                          
|PART II                                                                                                   
|                                                                                                           | 
|Item 5:        Market for Registrants Common Stock and Related Stockholder Matters                        |  | 14  
|Item 6:        Selected Consolidated Financial Data                                                        |  | 15  
|Item 7:        Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 16  
|Item 7A:    Quantitative and Qualitative Disclosures About Market Risk                                     |  | 42  
|Item 8:        Financial Statements and Supplementary Data                                                 |  | 43  
|Item 9:        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure        |  | 75  
|Item 9A:    Controls and Procedures                                                                        |  | 75  
|                                                                                                          
|PART III                                                                                                  
|                                                                                                           | 
|Item 10:     Directors and Executive Officers of the Registrant                                            |  | 75  
|Item 11:     Executive Compensation                                                                        |  | 80  
|Item 12:    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 84  
|Item 13:     Certain Relationships and Related Transactions                                                |  | 86  
|Item 14:     Principal Accountant Fees and Services                                                        |  | 87  
|                                                                                                          
|PART IV                                                                                                   
|                                                                                                           | 
|Item 15:     Exhibits, Financial Statement Schedules and Reports on Form 8-K                               |  | 88  
|Signatures                                                                                                 |  | 90  
|Exhibit Index                                                                                              |  | 91  



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PART I



ITEM 1.    BUSINESS



General Information



This report contains
forward-looking statements that are not historical facts but rather are based on current expectations, estimates, projections, beliefs and assumptions about our industry, our company, our business and our prospects. Words such as
anticipates, expects, intends, plans, designs, believes, seeks, estimates and variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future performance and are subject to numerous risks, uncertainties and other factors, some of which are beyond our control, and all of which are difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in Risks Associated With Our Business and Future Operating Results;
Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our
managements view only as of the date of this report. We undertake no obligation to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated events.



On September 3, 2003, the Companys Board of Directors approved a reverse stock split of the Companys common stock at a ratio of one-for-five, causing each outstanding share of common stock to convert
automatically into one-fifth of a share of common stock. The reverse split became effective at the close of business on September 26, 2003. In lieu of fractional shares, stockholders received a cash payment based on an average trading price of the
common stock prior to the effectiveness of the reverse split. All references to share and per share amounts for all periods presented have been restated to reflect this reverse split.



References in this document to Portal, we, our and us refer to Portal
Software, Inc., a Delaware corporation, its predecessors and each of its subsidiaries. Portal, Infranet, and the Portal logo, are trademarks of Portal. Each trademark, trade name or service mark of any other company appearing in this report belongs
to its holder.



Business Overview



Incorporated in 1985, we develop, market, provision, and support billing and
customer management solutions for telecommunications and information service providers. Our solutions are provided in the form of proprietary software (often referred to herein as products) and/or services and are used by service
providers to support voice, data, video and content services across wireless, wireline, cable and satellite networks. Our solutions are characterized by a platform architecture that we believe is highly scalable and sufficiently flexible to allow
service providers to measure, analyze, price and bill their customers usage on a real-time basis. Our solutions facilitate the real-time provisioning and reporting of services, including such functions as account creation, user authentication
and authorization, activity tracking, pricing and rating, billing and customer service, including self-service, all, we believe, on a scale of up to tens of millions of users. Our solutions are designed to be complete and cost effective in order to
enable our customers to differentiate themselves from their competitors. Our standard software platform is built on an open architecture that we believe can be easily integrated with other business system components. While the Portal platform is
designed to meet the needs of next-generation communications markets and services, we believe it can be enhanced with a full suite of prebuilt modules for specific industry segments, including wireless, wireline, cable, ISP and Internet telephony.
We believe that this product-based solution provides customers with significant time to market advantages as well as lower total cost of ongoing operations.



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Industry Background



The communications industry is dramatically changing due to rapid advancements in Internet, broadband and wireless technologies in an increasingly
competitive and uncertain business environment. Wireless devices transmit voice and text messages between users around the globe. Satellite networks broadcast television and Internet access to previously unreachable geographies. Broadband providers
deliver videoconferencing to enterprises wanting to keep key personnel close to home. Today, voice, data, commerce and content are flowing simultaneously over multiple networks, giving users access to the most relevant services and content on the
most appropriate device. As many network-based services become more mature or commoditized, the providers of these services are focusing on developing premium and value added services in order to increase revenue from their customers. To
differentiate themselves and create new revenue opportunities, service providers are experimenting with a multitude of new services, price plans and business models. To do this quickly and efficiently, we believe they will need a fully convergent
system, such as Infranet®, that is designed to be
easy to modify and maintain, technology independent and scale to support millions of customers.



The traditional customer management and billing (CM&B) systems of communications companies were typically designed and built to service
one particular type and size of service providersuch as a large, traditional national or regional carrier, or a small competitive cellular telephone providerand to interface with and process data from the specific equipment and
technologies used in a single network or for a particular service, such as circuit switched wireline telephone, cellular telephones or cable television networks. These traditional highly customized CM&B solutions can generally be characterized
as (1) inflexible, (2) proprietary and (3) difficult to evolve to meet the complex requirements of providers of new telecommunications and information services. As a result, such CM&B solutions may not able to effectively address one of the most
fundamental requirements facing providers of communication and content services: minimizing the time to market for new products and services. Moreover, because such traditional systems have generally been highly customized, their support costs can
be high and changes to increase the functionality or features of the system or to introduce new services can typically require extensive programming using either internal or external professional services, often resulting in additional ongoing
expenses, significant time delays and therefore a very high total cost of ownership.



The Portal Strategy



Our strategy is to
establish ourselves as providing the most flexible, scalable and cost-effective solutions for telecommunications and information service providers. Key elements of this strategy are:



All Portal Solutions are Based on the Same Extensible Software Platform.    We have focused on
the development of an integrated, off-the-shelf software platform that can address the rapidly changing, highly flexible and complex requirements of evolving communications networks and service offerings and can provide a lower total cost of
ownership. Our extensible platform provides a framework for integration with a wide variety of other business systems and a foundation for the development of market-specific solutions. Although there are unique aspects to every service, most share
the same underlying business infrastructure requirements, such as transactional security, financial security and ability to be rapidly deployed. Rather than provide a highly customized solution to every customer, our platform strategy enables us to
provide every customer with the same basic product, which, in contrast to customized one off solutions, creates a future support and upgrade path to all its customers. Moreover, this approach enables us to translate our experience across
a wide variety of markets and leverage our research and development efforts into improvements to the platform that can in turn benefit a broad range of our existing and potential customers. To meet the unique requirements of specific markets and
industries, our platform has been designed to enable Portal and system integrators with whom we work (sometimes referred to as our system integrator partners or partnerships with systems integrators) to develop specific
solutions that integrate with the core platform to address those unique and evolving requirements. We believe that this approach facilitates the rapid development and deployment of unique solutions to address new services without the need for
Portal, our system integration partners or customers to build an entirely new infrastructure to support each service.



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Leverage Partnerships and Alliances With Systems Integrators and with Platform, Software and Network
Equipment Providers.    We have established a series of partnerships and alliances with systems integrators, such as Accenture, Cap Gemini Ernst & Young, BearingPoint and Deloitte Consulting, and platform, software and
services providers, such as Cisco, Hewlett-Packard, IBM, Microsoft, Nokia, Oracle, SAP, Siebel, Siemens, Sun Microsystems, and others. We work with these industry-leading companies to offer customers an extensive set of market-specific solutions.
For example, Portal and Siebel Systems jointly developed TelcoOneTM, a unique end-to-end solution that combines our
billing solution with Siebels customer relationship management solution. TelcoOne delivers an enhanced single interface that is designed to enable service providers to dramatically increase call center efficiency and flexibility, and to
introduce new services at a fraction of the cost of traditional custom-developed billing applications. Another example of our partner-based products is BillingAgilityTM, a joint solution with Microsoft designed to deliver higher flexibility and performance at a reduced total cost of ownership. A combination of our billing and
subscriber management software platform with Microsoft® .NET technologies, BillingAgility is designed to facilitate rapid roll-out of new voice, data and content services, as well as support for legacy and business-to-business (B2B) integrations. We have also established a
strategic relationship and software development agreement with SAP to deliver an integrated solution that combines our solution with SAP® for Telecommunications to help telecommunications providers with the challenge of revenue management, such as controlling revenue leakage they
experience as they roll out new services. In addition, more than 4,000 system integrator professionals have been trained to implement and integrate our solutions with customers existing legacy systems. These partners and alliances also provide
a global extension of our direct sales force and have been a significant source of leads and referrals.



Grow with Customers and the Markets.    While initial sales to customers are often significant, our strategy is to maximize our
available opportunities for long-term revenue growth by targeting service providers we believe have excellent growth potential and building long-term relationships by continuously providing solutions that will require additional software licenses
and professional services. Our subsequent revenue growth can then occur through the addition of subscribers, additional product modules, additional sales for other users to other divisions of an existing customer and performance of a wide variety of
professional services as well as maintenance and support agreements. In turn, we intend to continue to evolve and refine our business to track the growth of evolving telecommunications and information services, so that as these services proliferate,
we can exploit these opportunities.



Portal Software Platform



Our software platform, Infranet is specifically designed
to meet the complex, mission-critical provisioning, accounting, reporting and marketing needs of providers of a wide range of communication and content services. Our integrated extensible platform enables service providers to swiftly define, price,
and bill for a broad range of convergent services. Because the Portal platform can be deployed in a modular fashion, it enables co-existence between legacy billing systems and new next generation services. In this way, enterprises can protect their
existing technology investments while making a well-planned shift to the Portal platform to support new market-critical services.



In fiscal 2004 we introduced several new enhancements to the Portal platform, including a next-generation GSM Manager which enables service providers to
bring unique GSM services to market in days or weeks, accelerating time to revenue and avoiding traditional multi-month development. We also released support for roaming standards, prepaid rating and billing, and a new fully convergent Pricing
Center that is designed to enable service providers to create innovative service offerings and react quickly to market and competitive pricing pressures.



In addition to the basic Portal platform, we offer a number of optional modules that extend the platform for specific customer needs. Such options include
modules for supporting multiple databases, maintaining high availability and fault tolerance, managing multiple brands, and connecting to various standard enterprise applications and payment processing and tax packages.



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We provide localized versions of our solution in a number of languages, including English, traditional
Chinese, simplified Chinese, French, German, Italian, Japanese, Korean, Brazilian Portuguese and Spanish.



Business Benefits



The Portal platform is designed to enable service providers to capture the business benefits of increased revenues, reduced costs of operations and
improved customer service through its ability to enable providers to more effectively and efficiently manage customers and the rating and billing of services.



Increased Revenues.    By helping to accelerate the time to market for new services, we enable service providers to offer a
variety of services quickly and to bundle and price these services in an optimal manner. We enable services to be activated immediately when ordered by a subscriber, so that the service provider can immediately begin to collect revenue. Subscriber
activity can then be monitored in real time, which allows the service provider to promote the consumption of more services through such means as targeted offers or increased credit limits. In addition, we enable a service provider to analyze and
mine subscribers service usage data in real time, which can in turn be used to measure the success of marketing and targeting efforts and to identify new opportunities for subscriber revenue. Using our data analysis features, a
service provider can quickly determine which offerings are not successful and easily make appropriate adjustments. For example, an unsuccessful pricing offer can quickly be terminated or tuned for better subscriber response. Finally,
increased billing accuracy reduces the incidence of uncollected revenue and fraud.



Reduced Ongoing Total Cost of Operations.    Our product-centric solutions are designed to minimize the service providers software implementation and ongoing maintenance and subscriber
servicing costs. We believe that our solutions provide Total Cost of Operations (TCO) advantages over competitive approaches, including custom solutions or product solutions which require significant ongoing customization to meet
evolving customer requirements. The flexibility, functionality and extensibility of the Portal platform are designed to enable service providers to cost-effectively add new functionality, integrate with other legacy applications or scale their
operations without custom programming or extensive systems integration.



Improved Customer Service.    We facilitate service providers to offer improved billing accuracy, enhanced customer service quality and responsiveness to their subscribers. Portals solutions are designed to
permit service providers easily to tailor their offerings on a bundled or unbundled basis, substantially increasing customer choice without incurring significant additional costs. Up-to-the-minute account balances and status information can be made
available to users on a 24x7 basis, either over the Internet or via customer service representatives. Potential customer account issues can be identified and resolved quickly, since there is no need to wait for regular billing cycles to expose these
issues. Our real time capability enhances responsiveness to subscribers needs, which can help reduce subscriber churn, or turnover.



Platform Technology.    Our software architecture is designed to consist of a robust, open platform, upon which market-specific
functionality is layered using documented open application program interfaces. This approach, designed from the start to use object-oriented programming techniques, enables new processes and services to be readily incorporated, thus allowing an
evolving multi-service model to be built without the need to change the underlying software foundations. Similarly, changes can be made in the object-based platform without affecting the market-specific functions. We designed our billing platform to
meet the critical functional requirements sought by service providers. These requirements include scalability and reliability, enterprise integration and interoperability, comprehensive functionality and ease of use, flexibility and improved time to
marketall operating on a real-time basis. As a result of this robust platform, we have been able to begin offering our customers engineered solutions: a development approach that builds unique customer requirements directly into the product
architecture to maintain the ongoing supportability and operations of their Portal billing solution.



Scalability and Reliability.    The Portal solution has been designed to scale from hundreds to millions of users through the
incremental addition of servers. This capability allows a service provider to grow its business



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operating system infrastructure incrementally as its level of business grows without the need for architecture redesign or large-scale system replacements.
For example, new servers can be added without taking the system offline, eliminating costly downtime. By running the Portal solution on multiple servers, a service provider can reduce exposure to various types of failures, including individual
server failure, power failure and loss of physical facilities. Automatic load balancing features smooth out usage spikes and ensure high availability. Our object-to-relational data model is designed for high performance on-line transaction
processing and high reliability.



Enterprise Integration and
Interoperability.    The Portal platform has been designed with documented, open Application Program Interfaces (APIs) that allow Portal, its customers, partners and third-party software developers to integrate
the platform with existing applications and services requiring minimal effort and programming overhead. This capability is designed to enable new services to be deployed quickly and efficiently while maintaining smooth interoperability with
pre-established services. For example, a telecommunications carrier might use the Portal solution to add Internet-related services, which appear on a subscribers monthly telephone bill. Our solution runs on server operating systems from
Hewlett-Packard, IBM, Microsoft and Sun Microsystems and utilizes database software from Microsoft and Oracle. The Portal solution also can be readily integrated with a variety of packaged software applications, such as help desk, accounting,
taxation and payment systems.



Comprehensive Functionality
and Ease of Use.    We have developed a broad suite of pre-defined, ready-to-use customer management and billing functions, including customer registration, business policies, pricing plans and payment methods. We also seek
to provide upgrades and enhancements to our platform on a regular basis, with a strong emphasis on response to customer feedback. The Portal solution employs a simple, intuitive Windows-based user interface for efficient addition and deletion of
services and functions, as well as a set of templates for Web-based capabilities such as subscriber registration, password changes and account balance inquiries. We address the entire customer management and billing life cycle, from account creation
to monitoring and pricing to back-end management and reporting.



Flexibility and Improved Time to Market.    The Portal solution is designed to be a modular, extensible software platform. This flexibility allows each Portal customer to tailor its individual installation to meet
the exact needs of a particular environment, set of services and group of subscribers. The service provider is thereby empowered to respond quickly to the rapidly changing needs of the next-generation telecommunications and information services
marketplace. In addition, the Portal solution can generally be configured to a service providers needs relatively quickly, enabling its customers to improve their time to market with new products and services.



Portal Services



Portal Services offers a broad range of consulting, maintenance and education services designed to help its customers
optimize their investment in Portal technology. From strategic planning, to implementation and knowledge transfer, to application management, support, and enhancements, we help our customers ensure that their investment in billing solutions are
closely aligned with their business objectives.



Portal Consulting



We provide a broad range of
assessment, intelligence, and process improvement recommendations to our customers. Our consultants identify performance gaps in the revenue chain and develop quantifiable action plans to uncover potential revenue opportunities. During the
implementation phase, we leverage our experience, best practices, and engineered solutions to design an effective solution for each customer. Our consultants design customized solutions for our customers and test for quality and performance. We also
offer post-implementation services to help customers grow and adapt their billing support systems to meet their business needs. We can also manage infrastructure, assist with functional execution, and enhance technical capabilities and performance.



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Portal Maintenance



We believe that a high level of customer service and support is critical to the successful sale and usage of our products.
We provide support to our customers through maintenance and support agreements. We generally provide our base level of customer support via an Internet-based customer management system and higher levels of support via telephone and on-site technical
assistance. Support includes assistance with technical problems related to the use of our software and software maintenance and upgrade releases when-and-if made available during the applicable support term. We offer responsive analysis of a
customers problem and practical advice for issue resolution, whether those issues arise in installation, staging, or production. In addition to issue management, we provide a conduit into product development for technical product escalations
and requests and access to a knowledge database where customers can do searches for possible solutions to their issues. For those customers that have purchased maintenance, Portal offers timely access to new product versions and software updates. We
provide customer technical support for our products primarily from our Cupertino, California headquarters and from our facilities in the United Kingdom and Hong Kong, China and increasingly from our operations based in Bangalore, India.



Portal Education



Portal Education consists of a series of courses offered to customers that
address specific requirements across the entire product lifecyclefrom deployment to implementation to operation and enhancement. We offer a broad and practical curriculum for each member of the product implementation and rollout team. We use
role-based methods tailored to an individuals job roleincluding system administration, architecture and design, and pricing implementation.



Pricing



We have structured the pricing of our products to accommodate our target customer segments, including large telecommunications companies, next-generation communications companies and e-services providers. We generally
price our software products on a per subscriber basis for a perpetual term, with customary volume discounts. However, products are also licensed based on other units of usage, such as the number or amount of revenue, call detail reports or
transactions processed using our products. Licenses may have a perpetual term or a fixed duration after which use of the software ceases or is renewed for a new term. Maintenance and support contracts are typically priced as a percentage of the
associated license revenues. Professional services are provided on a time and materials basis or on a fixed price basis. Our initial sales of licenses and associated services, maintenance and support generally range from several hundred thousand
dollars to several million dollars. We have offered some or all of these products and services in a bundled price, such that a separate price was not identified for the individual product and services components.



Sales and Marketing



Sales



Our sales strategy is to pursue targeted accounts primarily through a direct sales force. We target our sales efforts at telecommunications and
information service providers ranging from emerging growth companies to the largest telecommunications companies.



As of March 1, 2004, we maintained direct sales personnel across the United States and internationally in Australia, Canada, China, France, Germany,
India, Italy, Japan, Malaysia, Poland, Singapore, South Korea, Spain, Taiwan and the United Kingdom. This direct sales force is organized into individual account teams, which include both account executives and solutions specialists. These direct
sales teams operate in conjunction with professional services teams assigned to the accounts, as well as with applicable marketing, legal and finance personnel. We generate leads from contacts made through marketing partners, seminars and
conferences, its Web site, trade shows, customers and its ongoing public relations program.



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We complement our direct sales force with a series of partnerships and alliances with systems integrators
such as Accenture, Cap Gemini Ernst & Young, BearingPoint and Deloitte Consulting, and platform, software and services providers, such as Cisco, Hewlett-Packard, IBM, Microsoft, Nokia, Oracle, SAP, Siebel, Sun Microsystems, and others. These
partners provide a global extension of our direct sales force and are an additional source of leads and referrals.



We have derived, and anticipate continuing to derive, a significant portion of our revenues from customers that have significant relationships with our
integrator and platform partners. Many of these partners also work with competing software companies and our success is affected by their willingness and ability to devote sufficient resources and efforts to marketing our products. Our agreements
with these parties typically are in the form of non-exclusive agreements that may be terminated by either party without cause or penalty and with limited notice. In a very limited number of cases, the agreements permit the partner to resell our
products or provide for the payment to the partner of a referral fee.



Marketing



Our marketing programs are focused
on creating awareness of, and generating interest in, our products and services. We engage in a variety of marketing activities, including:



| | · |  | managing and maintaining our Web site;
| | - |  | --------------------------------------



| | · |  | conducting direct mailings and ongoing public relations campaigns;
| | - |  | ------------------------------------------------------------------



| | · |  | conducting seminars;
| | - |  | --------------------



| | · |  | participating in industry tradeshows; and
| | - |  | -----------------------------------------



| | · |  | establishing and maintaining relationships with recognized industry analysts.
| | - |  | -----------------------------------------------------------------------------



We are an active participant in technology-related conferences and demonstrate our products at trade shows targeted at communication and content
service providers. We also focus on a range of joint marketing strategies and programs with our partners in order to leverage our existing strategic relationships and resources.



Customers



Our customers range from emerging small companies offering an innovative service to a small number of subscribers to large telecommunications carriers
with millions of subscribers.



Affiliates majority-owned by
Vodafone Group Plc (Vodafone), as publicly reported by Vodafone, accounted for 31%, 19% and 3% of total revenues during fiscal 2004, 2003, and 2002, respectively. No individual Vodafone affiliate or other customer accounted for more than
10% of revenues during fiscal 2004 or fiscal 2003. One individual customer, America Online, Inc., accounted for 20% of total revenues during fiscal 2002.



Research and Development



We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional applications
incorporating that technology and maintaining the competitiveness of our product and service offerings. We have invested significant time and resources in creating a structured process for undertaking all product development. This process involves
several functional groups at all levels within Portal and is designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully. In addition, we have
recruited key engineers and software developers with experience in the enterprise, database and operating system software markets and have complemented these individuals by hiring senior management with experience in software used by providers of
communication services.



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In fiscal August 2002, we opened a new development center in Bangalore, India. This center is staffed
partially by direct Portal employees as well as personnel provided through Ness Global Services, Inc. (formerly known as APAR Infotech Corporation) pursuant to an agreement with Portal. We significantly increased the number of personnel at the
Bangalore center during fiscal 2004 and are expanding the scope of the operations conducted in India to include technical support and customer solutions services.



Our research and development expenses totaled approximately $30.2 million, $35.7 million, and $58.8 million for fiscal 2004,
2003 and 2002, respectively. As of February 29, 2004, we had approximately 100 employees engaged in research and development activities. This excludes approximately 280 contractors provided by Ness Global Services, Inc.



Competition



We compete in markets that are intensely competitive and rapidly changing. We compete on the basis of performance,
functionality, flexibility, scalability, extensibility, ease of integration and price. We believe we compete favorably with respect to those factors. Additionally, the relative financial strength of Portal or a competitor is an important factor
considered by many potential customers in their vendor selections. We face competition from providers of customer management and billing software, such as Amdocs Ltd., Convergys Corporation, CSG Systems International, Inc. and ADC Telecommunications
Inc. We also compete with systems integrators and with internal information technology departments of larger communications providers. Most of our current principal competitors have significantly more personnel and greater financial, technical,
marketing and other resources than Portal. Many of our competitors also have more diversified businesses, established reputations in particular market segments, larger customer bases and are not as dependent on customers in our target market.
Intense competition has recently resulted in deep price discounting by our competitors that has resulted in a lengthening of our sales cycles, price reductions, decreased margins, and may threaten our ability to realize forecasted business. In spite
of these factors, we have been successful to date in winning business from a number of customers in direct competition with each of these competitors.



Intellectual Property



We rely upon a combination of patent, copyright, trade secret and trademark law to protect our intellectual property. We currently have four issued U.S.
patents relating to our technology that expire in 2017. While we rely on patent, copyright, trade secret and trademark law to protect our technology, we believe that factors such as the technological and creative skills of our personnel, new product
developments, frequent product enhancements and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or
superior to our technology, including our patented technology.



We generally enter into confidentiality or license agreements with our employees, consultants, customers and corporate partners and generally control access to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use its products or technology or to develop its products with the same functionality as our products. Policing
unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect proprietary rights as fully as in
the United States. In addition, certain of our license agreements require us to place the source code for the Portal solution into escrow. Such agreements generally provide that these parties will have a limited, non-exclusive right to use this code
if: (i) there is a bankruptcy proceeding by or against us; (ii) we cease to do business without a successor; or (iii) we discontinue providing maintenance and support.



Substantial litigation regarding intellectual property rights exists in the software industry. We expect that we may be
increasingly subject to third-party infringement claims as the number of competitors in our industry



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segments grows and the functionality of products in different industry segments overlaps. Some of our competitors in the market for CM&B software may
have filed or may intend to file patent applications covering aspects of their technology that they may claim our technology infringes. We cannot be certain that any of these competitors will not make a claim of infringement against us with respect
to our products and technology.



Our success and ability to
compete are substantially dependent upon our internally developed technology. However, portions of Infranet incorporate software are developed and maintained by third-party software vendors, such as operating systems, tools and database vendors. We
may have to rely on third-party software vendors and developers to a larger degree in future products. Although we believe we could find other sources for these products, any significant interruption in the supply of these products could adversely
impact our sales unless and until we can secure another source.



Additional
Information



We file annual reports, quarterly reports,
proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities exchange Act of 1934 (Exchange Act). The public may read and copy any materials that we file with the SEC at the
SECs Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain information on the operation of the public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet site that
contains reports, proxy and information statements, and other information regarding issuers, including Portal, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.



We also make available free of charge through our Internet site
(http://www.portal.com) our most recent annual reports, quarterly reports, current reports, proxy statements and certain other documents filed with the SEC. These documents are available as soon as reasonably practicable after we file them with the
SEC. Copies of these filings will also be provided to the public at no cost upon a written request to the General Counsel of Portal Software, Inc.



Employees



As of February 29, 2004, we had 609 employees, 274 of whom were engaged in professional service, customer service and support, 146 of whom were in sales
and marketing, 100 of whom were in engineering and 89 of whom were in finance, administration and operations. In addition, we had approximately 400 contractors as of February 29, 2004. Our future performance depends in significant part upon the
continued service of our key engineering, sales and senior management personnel, none of whom is bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of our key employees could
harm our business. Our future success also depends on our continuing ability to attract, assimilate and retain highly qualified technical, sales and managerial personnel. None of our employees are represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to be good.



ITEM 2.    PROPERTIES



We lease a four-story building for our headquarters in Cupertino, California consisting of approximately 142,700 square feet. Currently, we are occupying two floors of this building utilizing approximately 67,000 square feet and have listed
the vacant space for sub-lease. We occupy these premises under a lease expiring in December 2010. We have leased approximately 40,000 square feet for our regional headquarters facilities in Slough, United Kingdom, under a lease expiring in 2022 of
which 23,219 square feet are sub-leased to a third party through 2010.In addition to our principal office space in Cupertino, California, and the UK, we also lease facilities and offices domestically in California, North Carolina, Texas and
Virginia and internationally in China, Hong Kong, Germany, and Japan. These leases are for terms expiring at various times through March 2021. We



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also own two buildings in Quickborn, Germany comprising approximately 20,526 square feet of space. We believe that the facilities we currently lease are
sufficient to meet our needs through the next twelve months. We may lease additional space in other locations to support the evolution of our foreign operations.



Reductions in our workforce undertaken in fiscal 2002 and 2003 have substantially reduced our facilities requirements in
several locations. As a result, we have sub-let several facilities and we continue to attempt to sub-let other facilities that we do not currently require, including one vacant 93,200 square foot building in Cupertino that is leased through 2010. In
addition, we also plan to sublease vacant floors in our headquarters building. There is currently a large amount of vacant commercial real estate in the cities in which our buildings are located. Moreover, currently prevailing rental rates in many
locations are substantially lower than those that we are obligated to pay under the leases. We have encountered and may continue to encounter significant difficulties or delays in subleasing such surplus space and may not be able to sublease it for
rents equal to or greater than those which we are obligated to pay. To the extent that we are unable to sublease surplus space at an amount equal to our rent obligations for that space or to the extent sublessees fail to perform their obligations to
pay rent, we could incur greater operating expenses than we have planned or included within previously accrued restructuring charges. Such increases in operating expenses in a period could cause us to exceed our planned expense levels and adversely
affect our financial results for that period. Furthermore, inability to sublease such space may adversely affect our planned uses of cash and our capital resources (see Managements Discussion and Analysis regarding Accrued Restructuring
Expenses under Critical Accounting Policies and Note 4 of Notes to Consolidated Financial Statements.)



ITEM 3.    LEGAL PROCEEDINGS



On July 9, 2001, a purported class action complaint was filed in the Federal United States District Court for the Southern District of New York against Portal, certain of its officers and several underwriters of
Portals initial public offering (IPO). The lawsuit alleges violations of Section 11 of the Securities Act of 1933, as amended, and Section 10(b) of the Securities Exchange Act of 1934, as amended, arising from alleged improprieties
by the underwriters in connection with our 1999 IPO and follow-on public offering, and claims to be on behalf of all persons who purchased Portal Software shares from May 5, 1999 through December 6, 2000. Four additional nearly identical class
actions were also filed in July and August 2001 based on essentially the same facts and allegations. Specifically, the complaints allege the underwriters charged certain of their customers fees in excess of those disclosed in the prospectus and
engaged in certain allegedly improper activities in connection with the distribution of the IPO shares. The complaint was subsequently amended to allege similar claims with respect to our secondary public offering in September 1999.



The cases were consolidated into a single action, and a consolidated amended
complaint was filed on April 19, 2002. These actions are part of the litigation known as the IPO Securities Litigation, which has been brought against over 300 issuers and nearly 50 underwriters alleging claims virtually identical to
those alleged against us. The action seeks damages in an unspecified amount. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions has been denied. This action is being coordinated with
approximately three hundred other nearly identical actions filed against other companies. On February 19, 2003, the Court denied the motion to dismiss the complaint against the Company.



Portal has approved a Memorandum of Understanding (MOU) and related agreements which set forth the terms of a
settlement proposal presented to all between the Company, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. In this settlement, plaintiffs will dismiss and release all claims against Portal and its executive
officers named in the suit, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the public offering cases, and for the assignment or surrender of control of certain claims
Portal may have against its underwriters. Neither Portal nor its executive officers named in the suit will be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement exceeds the amount
of the insurance coverage, a circumstance which Portal does not believe will occur. It is anticipated that any potential financial obligation of



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the Company to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not
expect that the settlement will involve any payment by the Company. The settlements will require MOU and related agreements and are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the
court, which cannot be assured, after class members are given the opportunity to object to the settlement, or opt out of the settlement.



On November 13, 2003 Portal announced that its results for the quarter ended October 31, 2003 would be lower than previously estimated. On November 20,
2003 a purported class action complaint was filed in the United States District Court for the Northern District of California against Portal, and certain of its officers and directors. The lawsuit alleges violations of Section 10(b) and Section
20(a) of the Securities Exchange Act of 1934, as amended, arising from alleged misrepresentations and omissions of material facts, and claims to be on behalf of all persons who purchased Portal shares from May 20, 2003 through November 13, 2003.
Several similar class actions have also been filed in the same court based on essentially the same facts and allegations. The actions seek damages in an unspecified amount. These cases were consolidated on February 4, 2004, and a lead plaintiff and
lead plaintiffs counsel were appointed on March 25, 2004. The lead plaintiff is scheduled to file a consolidated complaint on or before May 17, 2004.



On November 17, 2003, a stockholder derivative action was filed in the Superior Court of California, County of San Mateo against the members of the Board
of Directors and certain officers of Portal alleging breach of fiduciary duty and other violations of state law. A second similar action was filed in the Superior Court of California, County of San Mateo on November 25, 2003. These complaints are
generally based on the same facts and circumstances as the class actions, alleging that the defendants misrepresented Portals financial projections and that certain of the defendants violated state laws relating to insider trading. The actions
seek damages in an unspecified amount, disgorgement of improper profits and attorneys fees, among other forms of relief. In February 2004, both derivative actions were transferred to Santa Clara County Superior Court. Defendants have filed a
motion to stay the second action in favor of the first filed action, as well as motions to dismiss both actions on the grounds that the plaintiffs lack standing to pursue their claims and that the complaints fail to state a claim.



Portal believes that the claims asserted by these lawsuits are without merit,
and intends to defend these actions vigorously. However, due to the inherent uncertainties of litigation, Portal cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome in litigation could materially and adversely
affect Portals business, financial condition and results of operations.



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



Our Annual Meeting of Stockholders was held on January 28, 2004. At the Annual Meeting, the following matters were submitted to a vote of stockholders and
were approved with the votes cast on each matter indicated (there were no broker non-votes):



1.  The election of one Class I Director. Mr. Robert P. Wayman was the only nominee for election and the only director elected
at the meeting. Mr. Waymans election was approved with 34,800,154 shares voting for and 780,000 shares voting against. The terms of office as director of each of the following directors continued after the meeting: John E. Little, George J.
Goldsmith, J. David Martin, Richard A. Moran and Jennifer Taylor.



2.  The ratification of the appointment of Ernst & Young LLP as independent auditors for Portal for the fiscal year ending January 30, 2004 was approved with 35,427,059 shares voting for, 138,310 shares
voting against and 14,785 shares abstaining.



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PART II



|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
|------- |  | --------------------------------------------------------------------



Portal Software, Inc. common stock, par value $0.001, is traded on the Nasdaq National Market under the symbol
PRSF. Portals common stock began publicly trading on May 6, 1999. The price per share reflected in the table below represents the range of high and low sale prices for Portal common stock as reported in the Nasdaq National Market
for the quarters indicated. All prices have been adjusted for stock splits and combinations effected to date. The closing sale price of Portals common stock as reported in the Nasdaq National Market System on March 31, 2004 was $6.74. The
number of stockholders of record of Portals common stock as of March 31, 2004 was 856. Portal effected a one-for-five reverse split of its common stock on September 26, 2003.



|                               |  |      |       |     |   |     
|------------------------------ |  | ---- | ----- | --- | - | ----
|                               |  | High |       | Low
|Fiscal 2003:                   |  |      |       |     |   |     
|Quarter ended April 30, 2002   |  | $    | 11.85 |     | $ | 6.60
|Quarter ended July 31, 2002    |  | $    | 7.55  |     | $ | 1.90
|Quarter ended October 31, 2002 |  | $    | 2.20  |     | $ | 1.05
|Quarter ended January 31, 2003 |  | $    | 6.70  |     | $ | 2.75
|                               |  |     
|Fiscal 2004:                   |  |      |       |     |   |     
|Quarter ended May 2, 2003      |  | $    | 7.65  |     | $ | 3.30
|Quarter ended August 1, 2003   |  | $    | 16.95 |     | $ | 6.75
|Quarter ended October 31, 2003 |  | $    | 18.40 |     | $ | 11.5
|Quarter ended January 30, 2004 |  | $    | 16.49 |     | $ | 5.29



Dividend Policy



Portal has never paid cash dividends on its capital stock. Portal currently
intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.



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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA



The following table shows selected consolidated financial data for Portal Software, Inc. (Portal) for the past five fiscal years. To better
understand the data in the table, investors should also read the Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of Portal and the Notes to Consolidated
Financial Statements included elsewhere in this report. The basic and diluted net loss per share and the pro forma basic and diluted net loss per share computations exclude outstanding stock options, potential shares of common stock (options and
common stock) subject to repurchase rights held by Portal, preferred stock and warrants, since their effect would be antidilutive. See Note 1 of Notes to Consolidated Financial Statements for a detailed explanation of the determination of the shares
used to compute basic and diluted net loss per share. This table has been restated to reflect the impact of a two-for-one stock split, which became effective on January 20, 2000, and for a one-for-five reverse stock split, which became effective on
September 26, 2003 (see Note 8.) The historical results are not necessarily indicative of results to be expected for any future period.



|                                                              |  |                                          |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                              |  | Years Ended January 31,                  |        
|                                                              |  | 2004                                     |         |   | 2003 |   |         | 2002 |  |   | 2001     |   |  | 2000 |        
|                                                              |  | (in thousands, except per share amounts) |        
|Consolidated Statements of Operations Data:                   |  |                                          |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Revenues:                                                     |  |                                          |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|License fees (3)                                              |  | $                                        | 39,566  |   |      | $ | 44,481  |      |  | $ | 70,598   |   |  | $    | 180,334 |   |  | $ | 67,049  |  
|Services (3)                                                  |  |                                          | 87,187  |   |      |   | 76,609  |      |  |   | 84,192   |   |  |      | 87,973  |   |  |   | 36,000  |  
|                                                              |  |                                          |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Total revenues (3)                                            |  | $                                        | 126,753 |   |      | $ | 121,090 |      |  | $ | 154,790  |   |  | $    | 268,307 |   |  | $ | 103,049 |  
|                                                              |  |                                          |         |   |      |   |         |      |  |   |          |   |  |      |         |   |  |   |         |  
|Loss from operations (1) (3)                                  |  | $                                        | (38,719 | ) |      | $ | (72,460 | )    |  | $ | (394,900 | ) |  | $    | (11,224 | ) |  | $ | (15,700 | )
|Net loss (1) (2) (3)                                          |  | $                                        | (40,191 | ) |      | $ | (72,212 | )    |  | $ | (395,500 | ) |  | $    | (2,307  | ) |  | $ | (7,620  | )
|Basic and diluted net loss per share (3)                      |  | $                                        | (1.05   | ) |      | $ | (2.05   | )    |  | $ | (11.50   | ) |  | $    | (0.07   | ) |  | $ | (0.31   | )
|Shares used in computing basic and diluted net loss per share |  |                                          | 38,163  |   |      |   | 35,278  |      |  |   | 34,398   |   |  |      | 31,973  |   |  |   | 24,963  |  



|                                              |  |                |         |      |   |         |  |      |         |      |   |         |  |   |        
|--------------------------------------------- |  | -------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                              |  | January 31,   
|                                              |  | 2004           |         | 2003 |   | 2002    |  | 2001 |         | 2000
|                                              |  | (in thousands)
|Consolidated Balance Sheet Data:              |  |                |         |      |   |         |  |      |         |      |   |         |  |   |        
|Cash and cash equivalents                     |  | $              | 43,020  |      | $ | 21,502  |  | $    | 36,318  |      | $ | 69,323  |  | $ | 43,887 
|Short-term investments                        |  |                | 39,884  |      |   | 30,641  |  |      | 75,463  |      |   | 141,275 |  |   | 152,090
|Working capital (3)                           |  |                | 53,969  |      |   | 20,920  |  |      | 59,808  |      |   | 181,355 |  |   | 178,717
|Restricted long-term investments              |  |                | 13,164  |      |   | 13,412  |  |      | 15,414  |      |   | 3,466   |  |   | 5,856  
|Total assets                                  |  |                | 158,155 |      |   | 123,734 |  |      | 213,206 |      |   | 630,054 |  |   | 265,529
|Long-term obligations, net of current portion |  |                | 20,355  |      |   | 28,486  |  |      | 27,441  |      |   | 7,652   |  |   | 1,525  
|Stockholders equity (3)                      |  |                | 72,531  |      |   | 35,819  |  |      | 101,935 |      |   | 486,389 |  |   | 208,370

---

|(1) |  | Includes restructuring costs of $36.5 million and $71.0 million, and reductions in intangibles due to impairment of $0.5 million and $199.2 million for fiscal 2003 and 2002,
respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes write-down of impaired investments of $4.0 million in fiscal 2002.
|--- |  | ---------------------------------------------------------------------------

|(3) |  | Our fourth quarter and fiscal 2004 revenues exclude $0.7 million that we originally reported as revenues in our earnings release and conference call dated February 24, 2004. This
revenue was associated with a customer who was, subsequent to the Companys earnings release, unwilling to consent in writing that the Company has fully met all of the customers expectations under the agreement as of January 30,
2004. The Company believes it has met and is in substantial compliance with all contractual requirements. Although the cash associated with this revenue has been received by the Company and the Company believes the customer has no right to a refund,
the Company has decided to defer such revenue to reflect the disagreement with the customer.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



The following Managements Discussion and Analysis of Financial Condition and Results of Operations may contain
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements relating to future revenue and product sales, gross margins, product development, operating
expenses and the sufficiency of financial resources to support our future operations, and are subject to the Safe Harbor provisions created by that statute. Such statements are based on current expectations that involve inherent risks and
uncertainties, including those discussed below and under the heading Risks Associated with Our Business and Future Operating Results that could cause actual results to differ materially from those expressed. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.



OVERVIEW



Business



Portal develops, markets, provisions, and supports customer management and
billing (CM&B) solutions for telecommunications and information service providers. Our convergent platform enables service providers to deliver voice, data, video and content services with multiple networks, payment models, pricing
plans and value chains.



Portal believes that the growth and
rapid change in the telecommunications and information service provider market provide a unique opportunity for Portals solutions which provide real-time, flexible and scalable solutions for these markets. To fully realize this opportunity,
Portal must expand its penetration in this market enabling us to grow our revenues and to achieve profitability and positive cash flow.



While Portal currently provides solutions for some of the leading global telecommunications and information service providers, we face competitors with
substantially more financial resources than Portal. As such, we must demonstrate to our customers our ability to successfully compete with larger solution providers and that we are able to provide an equal or greater ability to support our products
today and in the future and our ability to continue to enhance our products to support this rapidly changing market into the future.



Financial



Beginning with fiscal 1997, substantially all of our revenues have come from the license of one product line, Infranet, and from related services.
Revenues consist of Infranet licenses, professional services and maintenance fees. License revenues are comprised of perpetual or multi-year license fees, which are primarily derived from contracts with telecommunications and information service
providers. Professional services consist of a broad range of implementation services, training, business consulting and operational support services. These services are provided throughout the customer lifecycle. We believe that future revenues will
be generated primarily from the following sources:



| | · |  | services for the deployment of licenses and follow-on solutions related to our customers end-to-end billing needs;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| | · |  | license fees from new customers; for new products or new Infranet modules to existing customers; and growth in the subscriber base of existing customers, which will lead to
increased revenue from subscriber-based licenses; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | annual maintenance fees for the support of existing deployments and rights to access when-and-if available upgrade enhancements to our platform.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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We have established a series of relationships with systems integrators and hardware platform, software
and service providers. We have derived, and anticipate that we will continue to derive, a substantial portion of our revenues from customers that have significant relationships with our integration and platform partners.



As a result of continuing consolidation in the telecommunications and
information delivery industries and the reduction in capital available for emerging companies, we expect to derive an increasing portion of our total revenues from large telecommunications and information service providers. The company continues to
focus on increasing the number of arrangements where license and services fees are combined and payments are scheduled over an extended period as services are provided. To date, the company has not entered into a significant number of these
arrangements. One of the impacts of this change in license structuring could be that license revenue would be recognized ratably as payments from customers become due or as services are completed rather than being recorded as revenue upon delivery.
The portion of our total revenues that is derived from international operations has increased in recent years. As a result, we will face greater exposure to the risks associated with international operations. We believe that in the future a larger
portion of our services revenues will be based on fixed price contracts and that our future contracts will contain a larger component of engineering services. This could result in a higher portion of revenue being recognized under the proportional
performance method or increase the risk of delays in achieving contractual milestones. In addition, our margins and overall profitability on fixed price contracts is more difficult to estimate than on time and materials contracts. For a description
of factors that may affect our future results see Risks Associated with Our Business and Future Operating Results.



We have adopted a 4-4-5 week fiscal accounting year commencing with our 2004 fiscal year. Each quarter will consist of 13 weeks ending on a Friday. Our
2004 fiscal year began on February 1, 2003, the day following the last day of our 2003 fiscal year, and ended on January 30, 2004. Accordingly, all references as of and for the period ended January 31, 2004 reflect amounts as of and for the period
ended January 30, 2004. The year ended January 30, 2004 was comprised of 364 days while the year ended January 31, 2003 was comprised of 365 days.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent liabilities. On a regular basis, we evaluate and may revise our estimates, including those related to the allowance for doubtful accounts, non-marketable investments, long-lived assets and goodwill
and accrued restructuring expenses. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent. Actual results could differ materially from these estimates under different assumptions or conditions.



We believe the following critical accounting policies, among others, affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.



Revenue
Recognition



Portal recognizes revenue in accordance with
current generally accepted accounting principles that have been prescribed for the software industry. Revenue recognition requirements are very complex and are affected by interpretations of the rules and industry practices, both of which are
subject to change. Portal follows specific and detailed guidelines in measuring revenue; however, certain judgments and current interpretations of rules and guidelines affect the application of its revenue recognition policy. Revenue from license
fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. One of the critical judgments we make is our assessment of the probability
of collecting the related accounts receivable balance on a customer-by-customer basis. As a result, the timing or amount of revenue recognition may have been different if different assessments of the probability of



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collection had been made at the time the transactions were recorded in revenue. In cases where collectibility is not deemed probable, revenue is recognized
upon receipt of cash, assuming all other criteria have been met. We are also required to exercise judgment in determining whether the fixed and determinable fee criteria have been met by evaluating the risk of our granting a concession to our
customers, particularly when payments terms are beyond our normal credit period of 30 to 60 days. For multiple element arrangements that include software products, we allocate and defer revenue for the undelivered elements based on their
vendor-specific objective evidence (VSOE) of fair value, which is generally the price charged when that element is sold separately. We are required to exercise judgment in determining whether VSOE exists for each undelivered element and
to determine whether and when each element has been delivered. We believe that we have sufficient consistency of pricing for each undelivered element and we periodically perform analyses to support our assertion that VSOE has been maintained. If we
were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.



For fixed price contracts on consulting services we recognize revenue on a proportional performance basis as determined by
the relationship of contract costs incurred to date and the estimated total contract costs, subject to meeting agreed upon milestones. Estimated total contract costs are regularly reviewed during the life of the contract. The recognition of services
revenue based on a proportional performance basis involves an estimation process and is subject to risks and uncertainties inherent in projecting future events. A number of internal and external factors can affect our estimates, including the nature
of the services being performed, the complexity of the customers information technology environment and the utilization and efficiency of our professional services employees. Recognized revenues and profit are subject to revisions as the
contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.



Allowance for Doubtful Accounts



The allowance for doubtful accounts is established through a charge to general and administrative expenses. This allowance is for estimated losses
resulting from our customers inability to make required payments. It is a significant estimate and is regularly evaluated for adequacy by taking into consideration factors such as past experience, credit quality of the customer, age of the
receivable balance, individually and in the aggregate, and current economic conditions that may affect a customers ability to pay. The use of different estimates or assumptions could produce different allowance balances. Our customer base is
highly concentrated in the telecommunications and information service provider industries. Several of the leading companies in these industries have experienced financial difficulty. If collection is not probable at the time the transaction is
consummated, we do not recognize revenue until cash is collected. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.



Long-Lived Assets



We evaluate the carrying value of long-lived assets and intangible assets, whenever certain events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. When impairment indicators are identified, the estimated future net undiscounted cash flows associated with the asset are compared to the assets carrying
amount to determine if impairment has occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets is recognized. If quoted market prices for the assets are
not available, the fair value is calculated using the present value of estimated net cash flows. The cash flow calculations are based on managements best estimates, using appropriate assumptions and projections at the time.



Accrued Restructuring Expenses



During the fiscal years ended January 31, 2003 and 2002, we implemented
restructuring plans that were a combination of reductions in workforce, consolidations of facilities and the write-off of assets. The restructuring



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charges were based on actual and estimated costs incurred in connection with these restructuring plans. These estimates have been impacted by the rules
governing the termination of employees, especially those in foreign countries. We have accrued restructuring charges for lease commitments, net of estimated projected sublease income, for the various facilities included as part of the restructuring.
The assumptions we have made are based on the current market conditions in the various areas we have vacant space and necessarily entail a high level of management judgment. These market conditions can fluctuate greatly due to such factors as
changes in property occupancy rates, the rental prices charged for comparable properties and the general economic condition of the areas in which our facilities are located. These changes could materially affect our accrual. If, in future periods,
it is determined that we have over accrued restructuring charges for the consolidation of facilities, the reversal of such over accrual would have a favorable impact on our financial statements in the period this was determined and would be recorded
as a credit to restructuring costs. Conversely, if it is determined that our accrual is insufficient, an additional charge would have an unfavorable impact on our financial statements in the period this was determined.



Additionally, we recorded certain asset write-offs relating to our
restructuring efforts during the fiscal years ended January 31, 2003 and 2002, including:



Leasehold improvements:    As a result of the abandonment of various leased facilities, Portal wrote-off the
net book values of the related leasehold improvements. Portal continued to record depreciation expense, included in operating expenses, for the leasehold improvements until it no longer occupied the facilities or portions of the facilities. Upon
vacating these facilities, Portal wrote-off the net book value of these leasehold improvements as they were not deemed recoverable due to unfavorable sub-leasing market conditions.



Furniture and fixtures:    As a result of abandoning facilities, Portal decided
to also abandon furniture and fixtures in the vacated facilities or portion of the facilities. Upon vacating the facilities and abandoning the furniture and fixtures, Portal wrote off the net book value of the abandoned assets.



Internally used software:    As a
result of the reductions in force, Portal assessed its need for the number of licenses for software currently in use. Based on current and projected future needs, Portal determined that the number of licenses purchased exceeds the actual number
needed. Accordingly, Portal abandoned the unused licenses and wrote-off the related portion of the license fees associated with these purchased software packages.



Laptop computers used by exiting employees:    Portal wrote-off the book value of
its laptop computers used by exiting employees that either it did not expect to be returned by the severed employees or it expected to scrap or sell. Portal made a decision to sell the computers returned by exiting employees, as it believed that by
the time it begins to experience personnel growth, the computers would be obsolete. Portal recorded the charge for the computer write-offs net of expected proceeds received from the sale of computers. As this cost is related to employees who were
terminated as part of the restructuring plans, we included the charge as part of the restructuring expense.



Income Taxes



We
allocate our income/losses among our parent and international subsidiaries based on a methodology that we believe is in accordance with Organization for Economic Cooperation and Development (OECD) guidance. The allocation of
income/losses is inherently subjective. If we were to change our allocation methodology, or if the authorities in a specific tax jurisdiction successfully disagreed with our methodology, it could cause a material increase or decrease to our
provision for income taxes in a particular period.



We
currently have $145 million of deferred tax assets, mostly arising from net operating losses, tax credits, accruals and timing differences offset by a full valuation allowance. We believe there is sufficient uncertainty regarding the realization of
deferred tax assets to require a valuation allowance. These factors include consideration of past operating losses, the competitive nature of our market and the unpredictability of future operating results. Therefore, we continue to provide a
valuation allowance on our deferred tax assets as of



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January 31, 2004. We will continue to assess our ability to realize tax benefits available to us based on actual and forecasted operating results.



Results of Operations



The following table sets forth, for the periods indicated, each item from our
consolidated statements of operations, the relative percentage that those amounts represent to consolidated revenues (unless otherwise indicated) and the percentage change in those amounts from period to period. All percentages are calculated using
actual amounts rounded to the nearest thousand.



|                                                              |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|------------------------------------------------------------- |  | ---------------------- | - |  | ---------------------------------------- | - |  | -------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ------------ | -- |  | ------------ | --
|                                                              |  | Year Ended January 31, |   |  | Percent of RevenuesYear EndedJanuary 31, |   |  | Percent Increase(Decrease) |  
|                                                              |  | 2004                   |   |  | 2003                                     |   |  | 2002                       |   |  | 2004 |   |  | 2003 |   |  | 2002 |   |  | 2004 vs.2003 |    |  | 2003 vs.2002 |   
|                                                              |  | (in thousands)         |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |  
|Revenues:                                                     |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|License fees                                                  |  | 39,566                 |   |  | 44,481                                   |   |  | 70,598                     |   |  | 31   | % |  | 37   | % |  | 46   | % |  | (11          | )% |  | (37          | )%
|Services                                                      |  | 87,187                 |   |  | 76,609                                   |   |  | 84,192                     |   |  | 69   |   |  | 63   |   |  | 54   |   |  | 14           |    |  | (9           | ) 
|                                                              |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|Total Revenues                                                |  | 126,753                |   |  | 121,090                                  |   |  | 154,790                    |   |  | 100  |   |  | 100  |   |  | 100  |   |  | 5            |    |  | (22          | ) 
|                                                              |  |                        |   |  |                                          |   |  |                           
|Costs and expenses:                                           |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|Cost of license fees                                          |  | 185                    |   |  | 324                                      |   |  | 1,349                      |   |  |     |   |  |     |   |  | 1    |   |  | (43          | )  |  | (76          | ) 
|Cost of services                                              |  | 56,625                 |   |  | 44,505                                   |   |  | 61,182                     |   |  | 45   |   |  | 38   |   |  | 40   |   |  | 27           |    |  | (27          | ) 
|Amortization and impairment of purchased developed technology |  | 2,660                  |   |  | 4,596                                    |   |  | 5,265                      |   |  | 2    |   |  | 4    |   |  | 3    |   |  | (42          | )  |  | (13          | ) 
|Research and development                                      |  | 30,243                 |   |  | 35,704                                   |   |  | 58,780                     |   |  | 24   |   |  | 29   |   |  | 38   |   |  | (15          | )  |  | (39          | ) 
|Sales and marketing                                           |  | 45,600                 |   |  | 51,900                                   |   |  | 81,309                     |   |  | 36   |   |  | 43   |   |  | 53   |   |  | (12          | )  |  | (36          | ) 
|General and administrative                                    |  | 15,472                 |   |  | 15,747                                   |   |  | 38,508                     |   |  | 12   |   |  | 13   |   |  | 25   |   |  | (2           | )  |  | (59          | ) 
|Stock compensation charges                                    |  | 14,687                 |   |  | 2,272                                    |   |  | 1,992                      |   |  | 12   |   |  | 2    |   |  | 1    |   |  | 546          |    |  | 14           |   
|Amortization of goodwill                                      |  |                       |   |  |                                         |   |  | 31,127                     |   |  |     |   |  |     |   |  | 20   |   |  |             |    |  | (100         | ) 
|Reduction in intangibles due to impairment                    |  |                       |   |  | 486                                      |   |  | 199,158                    |   |  |     |   |  |     |   |  | 128  |   |  | (100         | )  |  | (100         | ) 
|Restructuring costs                                           |  |                       |   |  | 36,546                                   |   |  | 71,020                     |   |  |     |   |  | 30   |   |  | 46   |   |  | (100         | )  |  | (49          | ) 
|Impairment of long-lived assets                               |  |                       |   |  | 1,470                                    |   |  |                           |   |  |     |   |  | 1    |   |  |     |   |  | (100         | )  |  |             |   
|                                                              |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|Total costs and expenses                                      |  | 165,472                |   |  | 193,550                                  |   |  | 549,690                    |   |  | 131  |   |  | 160  |   |  | 355  |   |  | (15          | )  |  | (65          | ) 
|                                                              |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|Loss from operations                                          |  | (38,719                | ) |  | (72,460                                  | ) |  | (394,900                   | ) |  | (31  | ) |  | (60  | ) |  | (255 | ) |  | (47          | )  |  | (82          | ) 
|Interest and other income, net                                |  | 2,024                  |   |  | 3,009                                    |   |  | 8,120                      |   |  | 2    |   |  | 2    |   |  | 5    |   |  | (33          | )  |  | (63          | ) 
|Write-down of impaired investments                            |  |                       |   |  |                                         |   |  | (4,000                     | ) |  |     |   |  |     |   |  | (3   | ) |  |             |    |  | (100         | ) 
|                                                              |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|Loss before income taxes                                      |  | (36,695                | ) |  | (69,451                                  | ) |  | (390,780                   | ) |  | (29  | ) |  | (58  | ) |  | (253 | ) |  | (47          | )  |  | (82          | ) 
|                                                              |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|Provision for income taxes                                    |  | (3,496                 | ) |  | (2,761                                   | ) |  | (4,720                     | ) |  | (3   | ) |  | (2   | ) |  | (3   | ) |  | 27           |    |  | (42          | ) 
|                                                              |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   
|Net loss                                                      |  | (40,191                | ) |  | (72,212                                  | ) |  | (395,500                   | ) |  | (32  | ) |  | (60  | ) |  | (256 | ) |  | (44          | )  |  | (82          | ) 
|                                                              |  |                        |   |  |                                          |   |  |                            |   |  |      |   |  |      |   |  |      |   |  |              |    |  |              |   



The increase in
revenues in fiscal 2004 was a result of an increased demand for our services, primarily consulting services, offset by a decrease in our license revenues. License fees revenues decreased in fiscal 2004 from fiscal 2003 primarily due to a decline in
the volume of orders and average order size. The decline in the average order size in fiscal 2004 has been driven by a change in our customer base, which has shifted from internet based companies to wireless operators and content providers. Sales
arrangements with wireless operators and content providers have resulted in smaller initial sales of licenses and a larger amount of service fees.



Services revenues increased in fiscal 2004 primarily due to increased demand for our consulting services from wireless operators and content providers.
Wireless customers have purchased smaller licenses initially for



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internal purposes and then have entered into consulting engagements spanning multiple quarters prior to making a decision to purchase additional licenses to
be used in a production environment based on a specific number of subscribers. This has led to an increase in the overall volume of consulting services performed and a decrease in license revenues in fiscal 2004.



Our fourth quarter and fiscal 2004 revenues exclude $0.7 million that we
originally reported as revenues in our earnings release and conference call dated February 24, 2004. This revenue was associated with a customer who was, subsequent to the Companys earnings release, unwilling to consent in writing that
the Company has fully met all of the customers expectations under the agreement as of January 30, 2004. The Company believes it has met and is in substantial compliance with all contractual requirements. Although the cash associated with this
revenue has been received by the Company and the Company believes the customer has no right to a refund, the Company has decided to defer such revenue to reflect the disagreement with the customer.



Total revenues decreased in fiscal 2003 from fiscal 2002 primarily due to a
decrease in license fees. License fee revenues decreased in absolute amounts and as a percentage of total revenues in fiscal 2003 and 2002 primarily in the U.S. as a result of the collapse of existing Internet companies and the dramatic drop off in
the formation of new communications and Internet companies that might have used our product. In addition, there was a continued general economic slowdown, and in particular, reduced capital spending by communications service providers, which all
contributed to the decrease in our revenues from fiscal 2003 to fiscal 2002.



Service revenues decreased in fiscal 2003 from fiscal 2002 due to a decline in maintenance renewals as a result of customer terminations and the collapse of our Internet customer base that had not fully been replaced
by new customer contracts, along with a reduction in consulting services revenue as result of fewer new customer implementations.



Affiliates majority-owned by Vodafone Group Plc (Vodafone), as publicly reported by Vodafone, accounted for 31%, 19% and 3% of total revenues
during fiscal 2004, 2003, and 2002, respectively. No individual Vodafone affiliate or other customer accounted for more than 10% of revenues during fiscal 2004 or fiscal 2003. One individual customer, America Online, Inc., accounted for 20% of total
revenues during fiscal 2002.



The following table shows our
revenues by region:



|                             |  |                                   |       |   |                      |     |    |                           |   |       |                      |  |     |                           |  |   |       |  
|---------------------------- |  | --------------------------------- | ----- | - | -------------------- | --- | -- | ------------------------- | - | ----- | -------------------- |  | --- | ------------------------- |  | - | ----- | -
|                             |  | Year EndedJanuary 31,2004         |       |   | % Change2004 to 2003 |     |    | Year EndedJanuary 31,2003 |   |       | % Change2003 to 2002 |  |     | Year EndedJanuary 31,2002 | 
|                             |  | (in millions, except percentages) |      
|Geographical Revenues:       |  |                                   |       |   |                      |     |    |                           |   |       |                      |  |     |                           |  |   |       |  
|North America                |  | $                                 | 28.6  |   |                      | (24 | )% |                           | $ | 37.6  |                      |  | (54 | )%                        |  | $ | 81.7  |  
|Percentage of total revenues |  |                                   | 23    | % |                      |     |    |                           |   | 31    | %                    |  |     |                           |  |   | 53    | %
|International                |  |                                   |       |   |                      |     |    |                           |   |       |                      |  |     |                           |  |   |       |  
|Europe                       |  |                                   | 71.7  |   |                      | 12  | %  |                           |   | 64.1  |                      |  | 33  | %                         |  |   | 48.3  |  
|Percentage of total revenues |  |                                   | 57    | % |                      |     |    |                           |   | 53    | %                    |  |     |                           |  |   | 31    | %
|Intercontinental             |  |                                   | 26.5  |   |                      | 37  | %  |                           |   | 19.4  |                      |  | (22 | )%                        |  |   | 24.8  |  
|Percentage of total revenues |  |                                   | 21    | % |                      |     |    |                           |   | 16    | %                    |  |     |                           |  |   | 16    | %
|                             |  |                                   |       |   |                      |     |    |                           |   |       |                      |  |     |                           |  |   |       |  
|Total international          |  |                                   | 98.2  |   |                      | 18  | %  |                           |   | 83.5  |                      |  | 14  | %                         |  |   | 73.1  |  
|Percentage of total revenues |  |                                   | 77    | % |                      |     |    |                           |   | 69    | %                    |  |     |                           |  |   | 47    | %
|                             |  |                                   |       |   |                      |     |    |                           |   |       |                      |  |     |                           |  |   |       |  
|Total revenues               |  | $                                 | 126.8 |   |                      | 5   | %  |                           | $ | 121.1 |                      |  | (22 | )%                        |  | $ | 154.8 |  
|                             |  |                                   |       |   |                      |     |    |                           |   |       |                      |  |     |                           |  |   |       |  



North American
revenues, which are defined as revenue from the United States and Canada, decreased in fiscal 2004 from fiscal 2003 and decreased in fiscal 2003 from fiscal 2002 primarily due to the shift from Internet based customers to customers in the wireless
industry. North American wireless carriers largely outsource their billing applications to billing providers, and have not allocated significant funds to internal billing projects due to ongoing consolidations within the industry. In addition, we
experienced a decline in both volume of orders and our average order size in North America in fiscal 2004 when compared to fiscal 2003. Revenues for EMEA,



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defined as Europe, Middle East and Africa increased in fiscal 2004 from fiscal 2003 and in fiscal 2003 from fiscal 2002, primarily as a result of our success
in obtaining new business with wireless and content service providers in this region. Intercontinental revenues, which are defined by us as Asia-Pacific, Japan and Latin America (including Mexico) increased in fiscal 2004 from fiscal 2003 primarily
as a result of obtaining new business with a wireless provider in Japan, and with wireless and cable providers in Latin America. Intercontinental revenue decreased in fiscal 2003 from fiscal 2002 due primarily to a continued deferral of capital
expenditures by telecommunications companies as well as a general economic slowdown in that region.



Cost of License Fees



Cost of license fees consists of resellers commission payments to systems integrators and third-party royalty obligations with respect to
third-party technology included in Portal Infranet. In fiscal 2004 compared to fiscal 2003, these costs decreased due to a reduction in reseller commission payments. The decrease in the cost of license fees from fiscal 2003 to 2002 is primarily due
to the decreases in license revenue discussed above.



Cost of Services



Cost of services primarily
consists of consulting, maintenance, and training expenses. Cost of services increased in fiscal 2004 from fiscal 2003 due to increases in headcount and increased subcontractor expense for fiscal 2004. This was largely due to the increase in our
consulting revenue, which required additional headcount. Cost of services decreased in fiscal 2003 from fiscal 2002 primarily due to a reduction in our services workforce resulting from the geographic realignment of consulting and support resources.
Gross margin for services was approximately 35%, 42% and 27% in fiscal 2004, 2003 and 2002, respectively. Service gross margins are generally negatively impacted during periods of growth in service providers, such as in fiscal 2004, due to the costs
of recruiting and initial training of new employees and a temporary proportionately higher level of use of higher cost sub-contractors. The increase in the gross margin for fiscal 2003 from fiscal 2002 was primarily the result of the efficiencies
achieved through reductions in our consulting workforce. We expect margins to improve over the next year as we staff our consulting workforce and decrease the level of use of higher cost subcontractors.



Amortization and Impairment of Purchased Developed Technology



In fiscal year 2000, we purchased third-party software
for which certain functionality was integrated into our product. Due to our restructuring plan in July 2002, we re-assessed our need for this software and we decided against further integration due to the reductions in workforce. As a result we
incurred a charge of $1.4 million for the write-off of the amortized balance of technology originally capitalized in connection with the purchase, in the quarter ended October 31, 2002, that has been included in this category in the Consolidated
Statements of Operations.



In fiscal 2001, we recorded an asset
of $17.9 million for purchased developed technology as a result of acquiring Solution42 and BayGate. Purchased developed technology was being amortized, on a straight-line basis, over the estimated useful lives of the respective assets of three to
four years. (See Note 3 of Notes to Consolidated Financial Statements.) The value was determined by using the income approach which estimates the present value of future cash flows from developed technology based on management and industry
assumptions and market data. During fiscal 2002, we recorded charges of $2.5 million and $2.2 million to reflect the impairment of purchased developed technology related to our investment in BayGate and Solution42, respectively (see Reduction in
Intangibles Due to Impairment below.) As of January 31, 2002, purchased developed technology related to our investment in BayGate was fully expensed due to a combination of impairment charges and amortization during fiscal 2002.



Amortization and impairment of purchased developed technology was $2.7
million and $4.6 million in fiscal 2004 and fiscal 2003, respectively. Future amortization expense of the remaining purchased developed technology related to our investment in Solution42 is estimated to be $2.0 million in fiscal 2005.



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Research and Development Expenses



Research and development expenses consist primarily of personnel and related costs for our development and certain technical
support efforts. Research and development expenses were $30.2 million, $35.7 million and $58.8 million for fiscal 2004, 2003 and 2002, respectively. The decrease in fiscal 2004 from fiscal 2003 is primarily due to a shift of our engineering
workforce from higher cost U.S. locations to our lower costs operations in Bangalore, India. In addition facility costs decreased as a result of our restructuring programs initiated in fiscal 2002 and 2003. The decrease in fiscal 2003 from fiscal
2002 was primarily due to a reduction in our workforce as a result of our restructuring programs. We expect to continue to increase our Bangalore-based personnel. We have not capitalized any development costs to date.



Sales and Marketing Expenses



Sales and marketing expenses consist of personnel and related costs for our
direct sales force, marketing staff and marketing programs, including trade shows, advertising and costs associated with the recruitment of new and maintenance of existing, strategic partnerships. Sales and marketing expenses were $45.6 million,
$51.9 million and $81.3 million in fiscal 2004, 2003 and 2002, respectively. The decrease in sales and marketing expenses in fiscal 2004 from fiscal 2003 and fiscal 2002 is primarily due to a decrease in the number of sales and marketing
personnel and a reduction in facilities costs as a result of our restructuring plans initiated in fiscal 2002 and 2003.



General and Administrative Expenses



General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal
and human resources, as well as information system and facilities expenses not allocated to other departments. General and administrative expenses were $15.5 million, $15.7 million, and $38.5 million in fiscal 2004, 2003 and 2002, respectively.
General and administrative expenses decreased in fiscal 2004 due to decreases in headcount related costs of $1.6 million, decreased expenses of $0.8 million for consultants who assisted in various general and administrative related functions,
decreased travel and other miscellaneous expenses of $1.1 million, offset by increases in legal and audit fees of $2.3 million and a reduction in credits recorded to bad debt expense of $0.9 million. General and administrative expenses decreased in
fiscal 2003 from fiscal 2002 primarily as a result of a reduction in bad debt expense of $12.1 million. This included a reversal of $1.1 million of accruals no longer considered necessary in fiscal 2003. Additionally, general and administrative
expenses declined due to reductions in personnel, facilities costs and depreciation expenses resulting from the restructuring plans initiated in fiscal 2002 and 2003.



Our policy has been to maintain accounts receivable allowances based on specifically identified credit concerns and on our
historical experience of delinquencies. During 2002, we determined that a protracted business deterioration in a class of our customers was impacting their ability to make payments when due. Accordingly, we determined that an increase in our
allowance for doubtful accounts was required. In fiscal 2003, as a result of better than anticipated collections and more stringent credit policies, no additions to bad debt expense were required and the allowance for doubtful accounts was decreased
for the write off of uncollectible amounts. During 2004, the allowance was decreased due to the write-off of uncollectible amounts.



Stock Compensation Charges



In fiscal 2003, the Compensation Committee of the Board of Directors approved a plan to reprice stock options for continuing employees (excluding the
Chief Executive Officer and members of the Board of Directors). Under this repricing plan, approximately 4,154,999 outstanding options with an exercise price greater than $3.45 per share (the closing market price on the date of repricing) were
repriced to an exercise price of $3.45 per share. These repriced options became subject to variable accounting resulting in a stock compensation charge of $14.7 million and $2.0 million in fiscal 2004 and fiscal 2003, respectively. (See Note 8 of
Notes to Consolidated Financial Statements.)



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We recorded deferred stock compensation of approximately $16.8 million in fiscal 1999 in connection with
stock options and restricted stock issued in and prior to 1999. We recorded deferred stock compensation of $0.2 million in fiscal 2001 in connection with the acquisition of BayGate. The deferred stock compensation reflects the difference
between the exercise prices of options granted to acquire certain shares of common stock and the deemed fair value for financial reporting purposes of our common stock on their respective grant dates. We amortized deferred compensation expense of
approximately $0.3 million and $2.0 million during fiscal years 2003 and 2002, respectively. This compensation expense relates to options awarded to individuals in all operating expense categories. There was no deferred compensation remaining at
January 31, 2004 and January 31, 2003.



The following
table shows the amounts of stock compensation charges that would have been recorded under the following expense categories if it had not been separately stated on the Consolidated Statements of Operations (in thousands):



|                           |  |                         |        |      |   |       |  |   |      
|-------------------------- |  | ----------------------- | ------ | ---- | - | ----- |  | - | -----
|                           |  | Years Ended January 31,
|                           |  | 2004                    |        | 2003 |   | 2002 
|Cost of services           |  | $                       | 3,192  |      | $ | 475   |  | $ | 312  
|Research and development   |  |                         | 5,408  |      |   | 826   |  |   | 683  
|Sales and marketing        |  |                         | 4,102  |      |   | 636   |  |   | 561  
|General and administrative |  |                         | 1,985  |      |   | 335   |  |   | 436  
|                           |  |                         |        |      |   |       |  |   |      
|                           |  | $                       | 14,687 |      | $ | 2,272 |  | $ | 1,992
|                           |  |                         |        |      |   |       |  |   |      



Amortization of
Goodwill



Goodwill related to the acquisition of
Solution42 accounted for approximately 35% and 45% of total assets and stockholders equity, respectively, as of January 31, 2001. In fiscal 2002, amortization expense of goodwill was $31.1 million. During fiscal 2002, we recorded impairment
charges to goodwill totaling $194.5 million (see Reduction in Intangibles Due to Impairment below) and further reduced goodwill by $3.5 million due to the reversal of excess accrued direct acquisition costs. There was no goodwill balance as of
January 31, 2004 or 2003.



Reduction in Intangibles Due to
Impairment



Long-lived assets and intangible assets are
evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. On at least an annual basis, the estimated future net undiscounted cash flows associated with the asset are
compared to the assets carrying amount to determine if impairment has occurred. If such assets were deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets is recognized. If
quoted market prices for the assets are not available, the fair value is calculated using the present value of estimated expected future net cash flows. The cash flow calculations are based on managements best estimates, using assumptions and
projections it deemed appropriate at the time.



During the
quarter ended October 31, 2002, we recorded a charge of $2.9 million in impairment of assets related to computer equipment and software that we abandoned. Of the total impairment charge, $1.4 million was related to third-party software for which
some of the functionality was previously integrated into our product. Due to the reductions in the workforce, Portal re-assessed its need for this third-party software and abandoned it when the related resources to integrate and maintain the
software were eliminated. The impairment of this software is included in Amortization and Impairment of Purchased Developed Technology in the Consolidated Statements of Operations. The remaining $1.5 million in impairment of assets is included in
Impairment of Long-lived Assets in the Consolidated Statements of Operations.



During the fiscal year ended January 31, 2002, we identified indicators of possible impairment of the intangible assets arising from our acquisitions. These indicators included deterioration in the business climate
and prospects and intentions for these subsidiaries, implying that the downturn may be for a long period of time.



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As related to our acquisition of Solution42, the indicators of impairment included the other than
temporary decline in market values of technology companies in general and Portal specifically. Our stock price experienced a steady decline over the course of several quarters, with a slight rebound at the end of the first quarter of fiscal 2002.
The slight rebound in stock prices appeared to indicate a temporary decline in market values, but the stock continued on a downward trend in the second quarter of fiscal 2002. Had Solution42 been an independent company, we concluded that its
valuation would have declined in a similar manner to ours based on the similarity of products, target markets and declining revenue. Additionally, in the second quarter of fiscal 2002 the forecasted revenue for Solution42 products deteriorated
significantly from the forecasts made at the time of the acquisition. In connection with our restructuring plans (see Restructuring Costs below and Note 4 of Notes to Consolidated Financial Statements), we planned to reduce our headcount overseas
which included many Solution42 employees and cancelled research and development activities related to the Solution42 product, both of which were a result of an other than temporary deterioration in business climate and a drastic reduction in
forecasted revenue opportunities.



We measured the impairment
loss related to intangible assets based on the amount by which the carrying amount of such assets exceeded its fair value. In 2002, our total reduction in intangibles, including goodwill and identified intangible assets, due to impairment was $199.2
million. This consisted of several charges, including charges related to Solution42 and BayGate. For Solution 42, measurement of fair value was based on an analysis of the future discounted cash flows at the Solution42 level. The analysis indicated
that our long-lived assets for Solution42 were impaired by an amount totaling $193.4 million. Accordingly, we recorded an impairment write- down of this amount during the second quarter of fiscal 2002. During the fourth quarter of fiscal 2002, we
identified additional indicators of impairment of our remaining Solution42 intangible assets. As a result, we recorded charges of $1.1 million and $2.2 million to reflect the full impairment of goodwill and purchased developed technology,
respectively, related to our investment. Due to the lack of revenues generated from BayGate products together with the October 2001 reduction of workforce associated with BayGates product, we cancelled the further planned development of
BayGate-related products. Based on these key factors, we recorded a charge of $2.5 million during fiscal 2002, to reflect the impairment of purchased developed technology related to our investment in BayGate.



In the fourth quarter of 2003, we issued 136,362 additional shares valued at
$0.5 million to the former Solution42 stockholders under the terms of the original purchase agreement. The value of these shares was deemed impaired in the same quarter they were issued, resulting in an additional impairment charge during the
quarter of $0.5 million.



Restructuring Costs



In July 2002, our Board of Directors approved and we
began implementation of a plan to change our operations and cost structure to more fully align our structure with market conditions and our increased focus on satisfying the needs of diversified business strategy telecommunications service
providers. The plan included a reduction in workforce of approximately 250 employees, facilities reductions and asset write-offs. We recorded restructuring charges of $6.1 million and $30.4 million for the quarters ended July 31, 2002 and October
31, 2002, respectively. The restructuring charges included approximately $6.2 million of severance-related amounts, $17.1 million of committed excess facility lease payments net of estimated sublease income, $11.7 million in asset write-offs and
$1.5 million for other costs. Additionally, we had integrated certain functionality of third-party software into our product. Due to the reduced labor resources associated with the restructuring, we abandoned and wrote-off the software.



In May 2001 and October 2001, Portals Board of Directors approved
plans to reduce our cost structure as a result of a change in market conditions. The plans were a combination of reductions in our workforce, consolidations of facilities and asset write-offs. The workforce reductions affected all of our functional
areas and all affected employees were notified prior to the end of the respective quarters. As a result of the restructuring plans, we incurred charges of $41.3 million, $19.3 million and $10.4 million, in the quarters ended July 31, 2001, October
31, 2001 and January 31, 2002, respectively.



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The May 2001 plan reduced our workforce by approximately 300 employees. The $41.3 million restructuring
charge incurred during the quarter ended July 31, 2001 included approximately $6.9 million of severance-related amounts, $20.4 million of committed excess facilities, primarily related to lease expenses net of anticipated sublease income, and $13.1
million in asset write-offs.



The October 2001 plan reduced our
workforce by approximately 320 employees. The $19.3 million and $10.4 million charges in the quarters ended October 31, 2001 and January 31, 2002, respectively, included approximately $10.4 million of severance-related amounts, $16.0 million of
committed excess facilities, primarily related to lease expenses net of estimated sublease income, and $2.7 million in asset write-offs.



As of January 31, 2004, the remaining restructuring accruals were $28.0 million of which $26.1 million represents committed excess facilities, net of
anticipated sublease income, $0.1 million for severance-related costs and $1.7 million for other restructuring-related costs. During fiscal 2004, the Company recorded reclassification adjustments to previously recorded restructuring estimates
totaling $0.8 million, primarily due to sublease income and final severance settlement costs in certain European countries exceeding our original estimates. As of January 31, 2003, the remaining restructuring accruals were $40.3 million, of which
$36.6 million represented committed excess facilities, net of anticipated sublease income, $1.9 million for severance-related costs and $1.8 million for other restructuring-related costs. As of January 31, 2002, the remaining restructuring
reserves were $35.0 million, of which $30.0 million represented committed excess facilities, net of estimated sublease income, $2.0 million severance-related costs, $2.4 million for asset write-offs and $0.6 million for other restructuring-related
costs (see Note 4 of Notes to Consolidated Financial Statements.) Severance payments are expected to be paid through the first quarter of fiscal 2005 and payments for the excess facilities are expected to occur through 2013.



While we believe that our business realignment will assist us in streamlining
operations, reducing expenses and achieving profitability, there is no assurance that we will achieve these anticipated results. We may in the future take additional actions, including further changes to the business organization, in order to
realign the business with anticipated requirements. If we are not successful in realigning our business to increase revenues and decrease costs, we may not achieve profitability.



Interest and Other Income



Interest and other income, net includes foreign currency exchange gain, interest and dividend income from cash, cash equivalents and investments offset
by interest expense paid on capital leases and notes payable. Interest and other income, net was $2.0 million, $3.0 million and $8.1 million in fiscal 2004, 2003 and 2002, respectively. Interest income was $0.8 million, $2.7 million and $8.3
million, respectively. The decrease in interest income during fiscal 2004 was due to declining interest rates. The decrease in interest income during fiscal 2003 was due to declining interest rates and a declining investment balance. Net foreign
currency exchange gain was $1.7 million, $0.4 million, and $0.2 million for fiscal 2004, 2003 and 2002, respectively. The gain in foreign currency exchange increased in fiscal 2004 due to a decline in the U.S. dollar during the period.



Write-down of Impaired Investments



In fiscal 2002, we held non-marketable securities of three private
companies, each with a cost basis of $2.0 million. During fiscal 2002, two of the three companies demonstrated cash burn rates significantly in excess of their respective working capital levels and their anticipated access to funding. Further, both
companies were in loss positions and, despite efforts to reduce their respective spending levels, continued to record losses due to slow growing revenues. Considering the downturn in the economy, we believed that it would be difficult for the
companies to obtain additional financing. Consequently, we believed that these were sufficient indicators that these non-marketable investments experienced other than temporary declines in value. As we did not foresee these investments generating
any value or cash in the foreseeable future, and as such did not foresee the investments returning to the valuation levels at the time of Portals initial investment, we deemed the decline in value to be other than temporary and consequently
wrote-off the $4.0 million of cost in fiscal 2002.



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Provision for Income Taxes



The income tax provision was $3.5 million, $2.8 million and $4.7 million for fiscal 2004, 2003 and 2002, respectively. The
income tax provision for each of these fiscal years primarily relates to foreign withholding taxes on revenue. Withholding taxes, when applicable, attach to gross income regardless of overall profitability. We recorded net losses of $39.5 million,
$72.2 million, and $395.5 million for fiscal 2004, 2003 and 2002, respectively. These worldwide losses were allocated among Portal and its subsidiaries in accordance with our transfer pricing policies which we believe are in accordance with
OECD guidance. However, this guidance is inherently subjective and in some jurisdictions income taxes have been paid or accrued.



We believe there is sufficient uncertainty regarding the realization of our deferred tax assets to require a valuation allowance. These factors include
consideration of past operating results, the competitive nature of our market and the unpredictability of future operating results. Therefore, we continue to reserve our deferred tax assets as of January 31, 2004. We will continue to assess our
ability to realize tax benefits available to us based on actual and forecasted operating results.



Liquidity and Capital Resources



We have generated net losses from operations during the past several years. Our operations have largely been funded by our sale of common stock. In 2004, we raised $56.0 million through the sale of common stock in a
registered offering. The proceeds of this stock offering were partially used to fund our operating losses incurred in 2004 and fund our restructuring efforts. We may continue to generate operating losses in the future which may require us to raise
additional capital. We believe we have adequate funds to meet our operating needs for the next twelve months.



Cash, cash equivalents and investments (including restricted investments of $15.7 million and $15.0 million as of January 31, 2004 and January 31, 2003,
respectively) totaled $98.6 million at January 31, 2004, compared to a balance of $67.2 million at January 31, 2003.



We used cash totaling $24.7 million in operations during the year ended January 31, 2004, a decrease of $32.9 million from the $57.6 million used in the
year ended January 31, 2003. Net cash used in operations during fiscal 2004 was primarily comprised of an increase in accounts receivable of $7.3 million, a decrease in other accrued liabilities of $7.9 million, and an increase in deferred revenue
of $4.9 million. In fiscal 2004, adjustments made for non-cash expenses, including depreciation, amortization, stock compensation charges, and amortization of purchased intangibles amounted to $25.1 million. In fiscal 2003, adjustments made for
non-cash expenses, including depreciation, amortization, stock compensation charges, amortization of purchased intangibles and goodwill, reduction in intangibles due to impairment, non-cash restructuring costs, and write-down of impaired investments
amounted to $32.2 million.



The increase in accounts receivable
for fiscal 2004 was primarily due to the growth in revenues for fiscal 2004 compared to fiscal 2003. The decrease in other accrued liabilities was primarily due to lease payments for facilities included in accrued restructuring costs. The increase
in deferred revenue was due to growth in initial maintenance contracts and increases in deferred consulting as more customers have entered into agreements with larger consulting components.



Net cash used in investing activities was $16.0 million for the year ended
January 31, 2004, a decrease of $55.5 million from the $39.5 million provided by investing activities in the year ended January 31, 2003. Net cash used in investing activities for fiscal years 2004 and 2003 primarily reflected net purchase activity
in short and long term investments. During the year ended January 31, 2004, we purchased computer equipment and software, made leasehold improvements and purchased other capital equipment amounting to approximately $5.4 million, primarily to
support our ongoing operations and information systems. Historically, we have also used debt and leases to partially finance our operations and capital purchases. No capital leases were entered into during fiscal 2004.



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The $63.1 million of cash provided by financing activities for fiscal 2004 primarily related to the
issuance of common stock in a registered offering completed in September 2003. The transaction involved the sale of 4,528,302 shares of common stock at $13.25 per share. Portal received proceeds of $56.0 million net of $4.2 million in placement
agent fees and other offering costs. The remainder of the cash provided by financing activities for fiscal 2004 was primarily due to the issuance of common stock related to our stock incentive plans, partially offset by the repayment of notes
payable.



The total future cash outlay for the restructuring
plans enacted in fiscal 2003 and 2002 is currently estimated to be approximately $28.0 million, which includes severance-related costs as well as lease liabilities related to the consolidation of facilities and is expected to be funded by available
cash. Lease payments for impacted facilities, net of expected sublease income, are expected to be $26.1 million and will be paid out through 2013.



In the normal course of business, we enter into leases for facilities in both domestic and international locations. These leases are for terms expiring
from September 2004 through March 2021. In connection with our facility leases, we issued letters of credit in lieu of a security deposit for the facilities (see Note 7 of Notes to Consolidated Financial Statements.) Due to the restructuring
activities that occurred during fiscal 2003 and 2002, several facilities were vacated or are underutilized. Some of these facilities have been subleased. We are also attempting to sublease additional surplus facilities comprising approximately
170,000 square feet.



The following table summarizes our
contractual obligations, including related interest charges, as of January 31, 2004 and the effect such obligations are expected to have on our liquidity and cash flows in future periods. Of the $82.3 million in non-cancelable operating leases, net
of sublease income, $26.1 million has been included in accrued restructuring expenses as of January 31, 2004. (In thousands.)



|                                                        |  |       |        |                 |   |           |  |           |        |              |   |        |  |   |       
|------------------------------------------------------- |  | ----- | ------ | --------------- | - | --------- |  | --------- | ------ | ------------ | - | ------ |  | - | ------
|                                                        |  | Total |        | Less than1 year |   | 1-3 years |  | 4-5 years |        | Over 5 years
|Long-term notes payable                                 |  | $     | 2,243  |                 | $ | 96        |  | $         | 192    |              | $ | 192    |  | $ | 1,763 
|Non-cancelable operating leases, net of sublease income |  |       | 82,301 |                 |   | 11,019    |  |           | 20,533 |              |   | 20,562 |  |   | 30,187
|                                                        |  |       |        |                 |   |           |  |           |        |              |   |        |  |   |       
|                                                        |  | $     | 84,544 |                 | $ | 11,115    |  | $         | 20,725 |              | $ | 20,754 |  | $ | 31,950
|                                                        |  |       |        |                 |   |           |  |           |        |              |   |        |  |   |       



The following table
summarizes our other commitments as of January 31, 2004 and the effect such commitments could have on our liquidity and cash flows in future periods if the letters of credit or the guarantees were drawn upon. Restricted investments represent the
collateral for these commitments. (In thousands.)



|                  |  |       |        |                 |   |          |  |              |     |  |   |       
|----------------- |  | ----- | ------ | --------------- | - | -------- |  | ------------ | --- |  | - | ------
|                  |  | Total |        | Less than1 year |   | 1-5years |  | Over 5 years
|Letters of credit |  | $     | 10,235 |                 | $ | 57       |  | $            |    |  | $ | 10,178
|Guarantees        |  |       | 3,653  |                 |   | 2,124    |  |              | 871 |  |   | 658   
|                  |  |       |        |                 |   |          |  |              |     |  |   |       
|                  |  | $     | 13,888 |                 | $ | 2,181    |  | $            | 871 |  | $ | 10,836
|                  |  |       |        |                 |   |          |  |              |     |  |   |       



Our capital
requirements depend on numerous factors, including the timing of customer orders and engagements, and related obligations and payments, market acceptance of our products, the resources we devote to developing, marketing, selling and supporting our
products, the timing and extent of changes in the size of our operations and other factors. Our planned expense levels for each of the fiscal quarters of fiscal 2005 exceed the revenues we generated in the fourth quarter of fiscal 2004. As a result,
we will need to generate increased revenues from licenses of our products and sale of our services to achieve and maintain operating profitability. We believe that our current cash balances and cash generated from operations will be sufficient to
fund our operations for at least the next 12 months. However, we may seek financing at any time that we determine market conditions are favorable. Additional funding, if needed, may cause dilution to our stockholders or the incurrence of debt and
such funding may not be available on terms acceptable to us, or at all.



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RISKS ASSOCIATED WITH OUR BUSINESS AND FUTURE OPERATING RESULTS



Our future operating results may vary substantially from period to period.
The price of our common stock will fluctuate in the future and an investment in our common stock is subject to a variety of risks, including but not limited to the specific risks identified below. Inevitably, some investors in our securities may
experience gains while others will experience losses depending on the prices at which they purchase and sell securities. Prospective and existing investors are strongly urged to carefully consider the significant price fluctuations of our common
stock and the various cautionary statements and risks set forth in this report. If one or more of these risks materializes, it is likely that the price of our common stock would be significantly affected and an investment in our Company
significantly or wholly impaired.



This report contains
forward-looking statements that are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as anticipates,
expects, intends, plans, believes, seeks, estimates and variations of these words and similar expressions are intended to identify forward-looking statements. These statements
are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, and all of which are difficult to predict and could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in this section entitled Risks Associated With Our Business and Future Operating Results and elsewhere in this report.
Forward-looking statements may ultimately prove to be incorrect. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our managements view only as of the date of this report. We undertake no obligation
to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.



Our revenues may continue to be adversely affected as a result of economic
and political conditions affecting our target markets



We
primarily market our products and services to providers of telecommunications and information services. During the past few years, the telecommunications industry has experienced a difficult economic environment. The substantial number of business
failures and the decline in the market value of dot-com and other technology companies in the past few years has made it more difficult for emerging communication and electronic content companies to obtain financing for their operations.
Moreover, the market value, financial results and prospects of many large and established companies, including many large telecommunications companies, have also declined or degraded significantly. Many communications and content companies have
significantly reduced their expenditures and have reduced or deferred their purchases of software and related products and the introduction of many new communication services has been delayed or cancelled. Cancellations of existing or planned
services also adversely impact our potential professional service, maintenance and support revenues. Reductions in spending by these companies have resulted in intense competition for their available spending and increased price competition and
reductions for products and professional services. Any general decrease by our customers and potential customers in their rate of software and network investments results in a significant decrease in our revenues and operating income. These trends
in technology and software spending dramatically impacted our business in fiscal 2002, 2003 and 2004 and will continue to adversely affect our business until conditions improve. In addition, even after business conditions improve, our customers and
potential customers may continue to demand price discounts and other benefits.



In addition, political instability in various geographic areas has resulted in companies reducing spending for technology projects generally and the delay or reconsideration of potential purchases of our products and
related services. The war on terrorism and in Iraq and the potential for war or other hostilities in various parts of the world continues to contribute to a climate of economic and political uncertainty and low consumer confidence that has adversely
affected and may continue to adversely affect our revenue growth and results of operations.



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We expect to incur additional losses and cannot be certain that we will be profitable or generate positive cash flow



In order to be profitable or generate positive cash flow,
we must significantly increase our revenues or further reduce our expenses. We may not be able to increase or even maintain our revenues and we may not achieve sufficient revenues to attain profitability in any future period. Moreover, we have
already significantly reduced our expenses through a series of restructurings and there may be a limit to our ability to further reduce expenses without significantly damaging our operational capabilities. We incurred net losses of approximately
$40.2 million, $72.2 million, and $395.5 million for fiscal years 2004, 2003 and 2002, respectively.



The decrease in capital expenditures by telecommunications companies as well as the general economic slowdown has adversely affected our revenues and will
make it difficult to increase revenues until spending in our target markets increases. We also expect that we will face increased competition that may make it more difficult to increase our revenues. Even if we are able to increase revenues, we have
experienced and may continue to experience price competition that would lower our gross margins and reduce our ability to become profitable. The company continues to focus on increasing the number of arrangements where license and services fees are
combined and payments are scheduled over an extended period as services are provided. To date, the company has not entered into a significant number of these arrangements. One of the impacts of this change in license structuring would be that
license revenue would be recognized ratably over the term of the license arrangement or as payments from customers become due, or as services or our solutions are accepted rather than being recorded as revenue upon delivery of the license. Such a
change may significantly delay the timing of our revenue recognition and could decrease our revenues in the short term. An increase in the percentage of our revenues that is derived from indirect channels and from services, both of which have lower
margins than our license revenues, could increase gross margin dollars and may decrease our gross margin percentage. In addition, our planned expense levels for each of the fiscal quarters of fiscal 2005 exceed the revenues we generated in the
fourth quarter of fiscal 2004. We cannot be certain that we will achieve operating or net profitability on a quarterly or annual basis. Additionally, failure to achieve a positive cash flow will continue to result in reductions in our existing cash
resources.



Our quarterly revenue is generated from a limited number of
customers and our customer base is concentrated; the loss of one or more of our customers or prospective customers could cause our business to suffer



A substantial portion of our license and services revenues in any given quarter has been, and is expected to continue to be, generated from a limited
number of customers with large financial commitments. For example, affiliates majority-owned by Vodafone Group Plc (Vodafone), as publicly reported by Vodafone, accounted for 31% of revenue recognized during fiscal 2004. As a result, if
a large contract is cancelled or deferred or an anticipated contract does not materialize, our business would be harmed. For example, in the third quarter of 2003, a number of anticipated contracts did not occur within the quarter, which adversely
affected our financial results for that period. Our total revenues could also be adversely affected if revenues from a significant customer in one period are not replaced with revenues from that customer or other customers in subsequent periods. The
telecommunication and information service provider industries we have targeted are consolidating, which could reduce the number of potential customers available to us. Moreover, many of our customers may have purchased sufficient quantities of our
products to satisfy their current or anticipated requirements. A few of our large telecommunications customers own or have an interest in companies in numerous countries and to varying degrees may control or influence the buying decisions of those
affiliated companies. In the event one customer decides not to purchase our products, the decision may adversely affect our ability to market our products and services to that companys affiliates, which may be existing or potential customers
of ours. Because there are a limited number of customers and competition for them is intense, these customers have substantial bargaining power to negotiate terms and conditions favorable to the customer. Any of the foregoing could cause our
business to suffer in the future.



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It is difficult to predict the timing of individual orders and revenues because our solution has complex, long and
variable sales cycles and implementation periods



The
sales cycle for our solution varies greatly, generally ranging between 3 to 18 months. Sales cycles have recently lengthened as the competitive environment has become more intense, the financial position of our potential customers has weakened and
price discounting has further delayed customer decision processes. Our sales cycles are also typically longer with larger customers such as national and international telecommunications companies. Along with systems integrators and our other
distribution partners, we spend significant time educating and providing information to our prospective customers regarding the use and benefits of our solution. Customers increasingly require vendors to perform proof of concept projects and
performance benchmarks as a part of the sales cycles. These tests can further lengthen sales cycles and increase our sales costs. The long sales and implementation cycles for our solution make it more difficult to predict our future financial
results and may cause license revenues and operating results to vary significantly from period to period.



Even after purchase, our customers tend to deploy our solution slowly and deliberately, depending on the specific technical capabilities of the customer,
the size of the deployment, the complexity of the customers network environment and the quantity of hardware and the degree of hardware configuration necessary to deploy our solution. The length of time to implement and deploy systems
involving our solution may have an impact on the timing and amount of revenues ultimately received from customers, particularly if payments are tied to implementation or production milestones. For example, in the third quarter of fiscal year 2004,
failure to obtain acceptance of certain milestones during the quarter reduced the amount of revenue recognizable during the quarter. As a result, the revenues derived from a sale may not be recognized immediately and could be spread over an extended
period. As a result, an increase in the period of time over which revenue is recognized may cause a decline in the amount of revenues in the short term.



Our inability to sublease or reduce surplus office space would increase our use of cash and operating expenses and adversely effect operating results and our financial
condition



We must periodically acquire and dispose of our
office facilities in various locations as the number of existing and projected employees changes for those locations or as existing leases expire. Securing and building out facilities takes significant lead-time. Historically, because of the
need to satisfy projected future expansion, the amount of space we leased was generally more than the amount required at the time. Our significant office leases have terms of between 5 and 20 years. As a result, we frequently attempt to sublease the
portions of leased facilities that we have leased but do not currently need. In addition, our reductions in our workforce undertaken over the past two years have substantially reduced our facilities requirements in several locations. As a result, we
are attempting to sublease the facilities that we have previously leased but do not currently need or to negotiate reductions in our rent obligations relating to those facilities or cancellations of the applicable leases. We have leased
approximately 235,000 square feet for our headquarters facilities in Cupertino, California through 2010. The amounts leased significantly exceed our current requirements and we intend to sublease a majority of the facilities for a substantial
portion, if not the entire balance, of the lease term. There is currently a large amount of vacant commercial real estate in the San Francisco Bay Area and in other locations where we have facilities. Moreover, currently prevailing rental rates in
many locations, including the San Francisco Bay Area, are significantly lower than those that we are obligated to pay under the leases. We may therefore continue to encounter significant difficulties or delays in subleasing our surplus space and
will likely not be able to sublease it for rents equal to those that we are obligated to pay. In connection with our restructuring plan adopted in fiscal 2003, we have vacated additional facilities in the United States and in other locations.



To the extent that we are unable to renegotiate the terms or
cancel the applicable leases or to sublease this and other surplus space at an amount equal to or greater than our rent obligations for that space or to the extent sublessees fail to perform their obligations to pay rent, we could incur greater
operating expenses than we initially anticipated or included within accrued restructuring charges. Such increases in operating expenses in a period could cause us to exceed our planned expense levels and significantly adversely affect our financial
results for that period. Cancellation of leases will likely result in use of significant amounts of cash and additional



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restructuring charges. Furthermore, inability to sublease such space may adversely affect our planned uses of cash and our capital resources. Moreover, we
have reduced the amount of the facilities restructuring charges we accrued by the estimated amount of sublease income. The assumptions we have made were based on the then current market conditions, as of each reporting period, in the various areas
where we have vacant space. These market conditions can fluctuate greatly, thus causing our accrual to be inaccurate. If, in future periods, it is determined that we have over-accrued for restructuring charges related to the consolidation of
facilities, the reversal of such over-accrual would have a favorable impact on our financial statements in the period this was determined. Conversely, if it is determined that our accrual is insufficient, an additional charge would have a
significant unfavorable impact on our financial statements in the period this was determined.



Our quarterly operating results may fluctuate in future periods and we may fail to meet expectations



Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. In future quarters, our operating results
may be below the expectations of one or more public market analysts and investors and the price of our common stock may fall. Failure by technology companies to meet or exceed analyst expectations or any resulting changes in analyst recommendations
or ratings frequently results in substantial decreases in the market value of the stock of such companies. Factors that could cause quarterly fluctuations include:



| | · |  | variations in demand for our products and services, including decreases caused by reductions in technology spending within our target markets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | the timing, execution, and revenue recognition of individual contracts, particularly large contracts that would materially affect our operating results in a given quarter;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | large contracts with extensive consulting services or product commitments may contain contract terms and conditions or require the use of contract accounting for revenue recognition
purposes that have the effect of extending the period of time over which revenue is recognized;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | our ability to develop and attain market acceptance of enhancements to the Portal solution and new products and services;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| | · |  | market acceptance of new communications services that our products are intended to support;
| | - |  | -------------------------------------------------------------------------------------------



| | · |  | delays in introducing new products and services;
| | - |  | ------------------------------------------------



| | · |  | delays in the completion, delivery or acceptance of milestones and deliverables;
| | - |  | --------------------------------------------------------------------------------



| | · |  | new product introductions by our competitors;
| | - |  | ---------------------------------------------



| | · |  | changes in our pricing policies or the pricing policies of our competitors;
| | - |  | ---------------------------------------------------------------------------



| | · |  | announcements of new versions of our products that cause customers to postpone purchases of our current products;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| | · |  | the mix of products and services sold;
| | - |  | --------------------------------------



| | · |  | our ability to sublease our excess real estate or renegotiate our leases;
| | - |  | -------------------------------------------------------------------------



| | · |  | the mix of sales channels through which our products and services are sold;
| | - |  | ---------------------------------------------------------------------------



| | · |  | the mix of domestic and international sales;
| | - |  | --------------------------------------------



| | · |  | costs related to acquisitions of technologies or businesses;
| | - |  | ------------------------------------------------------------



| | · |  | the timing of releases of new versions of third-party software and hardware products that work with our products;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| | · |  | our ability to attract, integrate, train, retain and motivate a substantial number of sales and marketing, research and development, technical support and other management personnel
with the needed competencies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · |  | the variability of future stock-based compensation charges or credits as a result of our stock option repricing during fiscal year 2003;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| | · |  | global economic conditions generally, as well as those specific to providers of communications and content services; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| | · |  | fluctuations in foreign currency exchange rates.
| | - |  | ------------------------------------------------



We have difficulty predicting the volume and timing of orders for new license transactions. In any given quarter, our sales have involved, and we expect
will continue to involve, large financial commitments from a relatively small number of customers. As a result, the cancellation or deferral of even a small number of licenses of the Portal solution would reduce our revenues, which would adversely
affect our quarterly financial performance. Also, we have often booked a large amount of our sales in the last month of the quarter and often in the last week of that month. Accordingly, delays in the closing of sales near the end of a quarter could
cause quarterly revenue to fall substantially short of anticipated levels. Furthermore, delays in the closing of license transactions may result in a consequential delay or loss of services revenues relating to the projects for which the software
would be licensed.



While a portion of our revenues each
quarter is recognized from deferred revenue relating to previously signed contracts, our quarterly performance will depend primarily upon entering into new contracts to generate revenues for that quarter. We may not be successful in entering into
contracts with new or existing customers. New contracts that we enter into may not result in revenue in the quarter in which the contract is signed and we may not be able to predict accurately when revenues from these contracts will be recognized.



We determine our operating expenses largely on the basis of
anticipated revenue trends and a high percentage of our expenses are fixed in the short and medium term. As a result, a failure or delay in generating or recognizing revenue could cause significant variations in our operating results from
quarter-to-quarter and could result in substantial operating losses.



If the
market for our products does not improve, we may be forced to incur additional restructuring charges



During the fiscal year ended January 31, 2002 and the quarters ended July 31, 2002 and October 31, 2002 we incurred charges of $71.0 million, $6.1 million
and $30.7 million, respectively, in connection with restructuring plans implemented to reduce our cost structure. These restructuring plans were implemented in response to the continued global deferral of capital expenditures by telecommunications
companies, as well as the general downturn in the economy. If the poor market environment for telecommunications and content service providers continues and capital expenditures continue to be deferred or our business otherwise continues to suffer,
we may implement additional restructuring plans to further reduce our cost structure and incur additional restructuring charges. These restructuring plans may not achieve or only partially achieve the desired benefits. Any additional restructuring
charges could have a material adverse effect on our financial results.



The
markets in which we sell our product are highly competitive and we may not be able to compete effectively



We compete in markets that are intensely competitive and rapidly changing. We face competition from providers of customer management and billing software,
such as Amdocs Ltd., Convergys Corporation, and CSG Systems International, Inc. and we also compete with systems integrators and with internal information technology departments of larger communications providers. Most of our current principal
competitors have significantly more personnel and greater financial, technical, marketing and other resources than we have. Many of our competitors also have more diversified businesses, established reputations in particular market segments, larger
customer bases and are not as dependent on customers in our target market.



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Our competitors may be able to respond more quickly to new or emerging technologies and changes in
customer requirements than we can. Intense competition has recently been exemplified by deep price discounting by our competitors that has resulted in a lengthening of our sales cycles, and price reductions and may threaten our ability to close
forecasted business. Additionally, our financial strength or that of a competitor is a significant factor considered by many potential customers in their vendor selections. Because many of our competitors have greater financial resources than we do,
this can adversely affect our selection by potential customers. Increased competition can result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would harm our business.



Our failure to develop and market products and services that compete
successfully with those of other suppliers in the market would harm our business. We anticipate that the market for our products and services will remain intensely competitive.



Rapid changes in demand for our services can increase our costs and adversely affect our margins and profitability



Services contracts can require that we rapidly provide qualified consulting
personnel in particular locations. In addition, such personnel may be required to have particular language speaking abilities and technical skills. Recruitment and training of qualified personnel can take significant time and expense. To meet
rapidly changing requirements for personnel, we may need to relocate personnel from one geographic area to another which can result in increased costs. In some cases, we may choose to satisfy resource requirements by retaining subcontractors where
the cost may exceed the cost of using our employees. In addition, we may experience declines in the rates we are able to charge customers in certain locations due to local market conditions and competitive factors. All these factors may increase the
costs of performing services and reduce margins for services. Failure to provide adequate consulting services to our customers could result in loss of revenue, damaged customer relationships or financial penalties. As a result, if we experience
difficulties in managing the size, location and availability of our services workforce, our revenues, profitability and business will suffer.



Fixed price services engagements can impact our profitability if we fail to complete them within the estimated budget



We perform some of our professional services engagements on a fixed price
basis. If the project requires more labor or products than was estimated by us in determining the fixed price agreed to with the customer, our margins and profitability could be adversely affected. In addition, failure to complete services as
required or to obtain written acceptance of completed milestones may result in deferral of revenue until such completion or acceptance occurs and may cause revenues to be recognized in periods other than as initially expected or forecast.



Our operating plans rely on our ability to successfully increase the size
and scope of our operations in India and a failure to manage that process and organization could adversely affect our operations



In fiscal 2003 we opened an engineering center in Bangalore, India. In fiscal 2004 we significantly increased the size of this organization and expanded
its scope. The expansion of this organization is an important component of our strategy to address the business needs of our customers, increase our revenues and achieve profitability. A portion of the personnel in this organization are our
employees but a substantial majority of the personnel is provided through an independent contractor. The success of this operation will depend on our ability and our independent contractors ability to attract, train, assimilate and retain
sufficient highly qualified personnel in the required periods. A disruption of our relationship with the independent contractor would adversely impact the effectiveness of the India organization and could adversely affect our operations and
financial results. Failure to effectively manage and integrate these operations will harm our business and financial results.



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Our quarterly operating results may fluctuate in future periods due to seasonal variations and we may fail to meet
expectations



We may also experience seasonality in our
business. In many software companies, the rate of growth or absolute amount of license fee revenues tends to decline from the fourth quarter of one year to the first quarter of the next year, due in part to the structure of sales compensation plans.
Our revenue in the first quarter of fiscal 2002 and 2003 was significantly lower than the preceding fourth quarter. If we experience such seasonality in the future our rate of growth or absolute revenues could decline in the first quarter of a
fiscal year compared to the preceding fourth quarter. Such seasonality may cause our results of operations to fluctuate or become more difficult to predict and could cause us to fail to meet internal or analyst expected financial results.



Our significant international operations make us much more susceptible to
risks from international operations



For fiscal 2004 and
2003, we derived approximately 77% and 69% of our revenue, respectively, from sales outside North America. In addition, in fiscal 2003 we opened an engineering center in Bangalore, India. As a result, we face risks from doing business
internationally, including, among others:



| | · |  | reduced protection for intellectual property rights in some countries;
| | - |  | ----------------------------------------------------------------------



| | · |  | licenses, tariffs and other trade barriers;
| | - |  | -------------------------------------------



| | · |  | fluctuations in the value of local currencies relative to the U.S. dollar and greater difficulties in collecting accounts receivable;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| | · |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| | · |  | longer sales and payment cycles;
| | - |  | --------------------------------



| | · |  | political and economic instability;
| | - |  | -----------------------------------



| | · |  | seasonal reductions in business activity;
| | - |  | -----------------------------------------



| | · |  | terrorism, war or the potential for hostilities;
| | - |  | ------------------------------------------------



| | · |  | potentially adverse tax consequences;
| | - |  | -------------------------------------



| | · |  | compliance with a wide variety of complex foreign laws and treaties
| | - |  | -------------------------------------------------------------------



| | · |  | other circumstances, such as epidemics (for example, SARS) or natural disasters affecting the applicable area or that have a dampening effect on international business or travel;
and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | variance and unexpected changes in local laws and regulations.
| | - |  | --------------------------------------------------------------



We currently have offices in a number of foreign locations including Australia, Canada, China, France, Germany, India, Italy, Japan, Malaysia, Poland,
Singapore, Spain, South Korea, Taiwan and the United Kingdom and may establish additional facilities in other parts of the world. Expansion of our existing international operations and entry into additional international markets will require
significant management attention and financial resources. We cannot be certain that our investments in establishing facilities in other countries will produce desired levels of revenue.



Historically, we have typically denominated most of our international license revenues in U.S. dollars. Because our foreign
currency denominated revenues have been minimal, we have not engaged in currency hedging activities. Commencing in fiscal 2003, we denominated a larger number of international transactions in euros and certain other currencies (see also Impact
of Foreign Currency Rate Changes in Item 3 Quantitative and Qualitative Disclosures about Market Risk below). As a result, we will face greater exposure to adverse movements in foreign currency exchange rates. These exposures may
change over time as business practices evolve and could have a material adverse impact on our financial position and results of operations. In order to reduce the effect of foreign currency fluctuations, we may hedge our exposure on certain
transactional balances



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that are denominated in foreign currencies through the use of foreign currency forward exchange contracts. Failure to effectively hedge foreign currency
fluctuations would adversely affect our financial results.



To
the extent that we are unable to successfully manage our international business or if any of the foregoing risks should occur, our business could be adversely affected.



Our historical and current revenues and earnings could be adversely affected as a result of future changes in the rules and
interpretations of those rules by the SEC and other accounting authorities as well as political responses to the rules promulgation process



Over the past several years, the American Institute of Certified Public Accountants has issued Statement of Position (SOP) 97-2,
Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. In addition, in December 2003, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition which explains how the SEC staff believes existing revenue recognition rules should be applied to or interpreted for transactions not specifically addressed by
existing rules. These standards address software revenue recognition matters from a conceptual level and include implementation guidance. The issuance of new interpretations could lead to unanticipated reductions in recognized revenue. They could
also drive significant adjustments to our business practices, including the terms of our agreements with our customers, which could result in increased administrative costs, lengthened sales cycles and other changes which could adversely affect our
reported revenues and results of operations. We believe that our revenue has been recognized in compliance with SOP 97-2, SOP 98-9 and SAB 104.



In addition, we currently account for the issuance of stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees.
Certain proposals related to treating the grant of an employee stock option as an expense are currently under consideration by accounting standards organizations and governmental authorities. If such proposals are adopted, our earnings could be
negatively impacted. As a result, we may decide to reduce the number of stock options granted to employees or to grant options to fewer employees. This could affect our ability to retain existing employees and attract qualified candidates, and
increase the cash compensation we would have to pay them.



Our business will
suffer dramatically if we fail to successfully plan and manage changes in the size of our operations



Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning and management process. We have
experienced rapid changes in our number of employees in recent years. On February 29, 2004, we had 609 employees compared to 580 on February 28, 2003 and 808 on March 15, 2002. In calendar 2004, we plan to significantly increase the number of
employees and contractors in our India operations. These changes and reorganizations and realignment of personnel have placed, and our anticipated future operations will continue to place, a significant strain on our management resources and our
ability to train and allocate sufficient personnel resources to achieve our many objectives. Failure to effectively manage the size, location and availability of our services workforce, could adversely affect our services revenues, profitability or
customer relationships. We expect that we will need to continue to evolve our financial, personnel, and managerial controls and reporting systems and procedures and will need to continue to recruit, train and manage our worldwide work force. This is
particularly true as we continue to analyze and improve our internal controls in order to ensure we are in compliance with SEC Rule 404 regarding certification and attestation of our internal controls over financial reporting. We may need to
increase our finance staff and improve our systems in order to ensure we are in compliance with this new requirement. We expect that we will have to change our facilities in certain locations and we may face difficulties and significant expenses
identifying and moving into suitable office space and subleasing or assigning any surplus space.



In addition, reduction in the number of employees can result in significant severance, administrative and legal expenses. Reductions in the number of
personnel or reorganization of responsibilities from personnel in one



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organization or region to another may also adversely affect, or delay, various sales, marketing and product development programs and activities. Reductions
in force may result in a temporary lack of focus and reduced productivity, may cause employees to seek alternative employment, may cause delays in product introductions, and may continue to affect revenues in future quarters. In addition, prospects
and current customers may decide to delay or not purchase our products due to perceived uncertainty caused by the reductions. We cannot assure you that we will not reduce or otherwise adjust our workforce again in the future or that the related
transition issues associated with such a reduction will not occur again. Our business will suffer dramatically if we fail to effectively manage changes in the size and scope of our operations.



Our future success depends on our ability to attract and retain qualified personnel



We will continue to hire sales, support, marketing and
administrative personnel as needed. In addition, we plan to continue to increase the number of research and development personnel we employ or contract with in India. We may not be able to attract, assimilate or retain highly qualified personnel in
the future. In particular, our financial success and our ability to increase revenues in the future depend considerably upon the productivity of our direct sales force that has historically generated a majority of our license revenues. This
productivity will depend to a large degree on our success in recruiting, training and retaining qualified direct salespeople. Our business will be harmed if we fail to hire or retain qualified personnel, or if newly hired employees, particularly
salespeople, fail to develop the necessary sales skills or develop these skills more slowly than we anticipate. Our future success also depends upon the continued service of our executive officers and other key sales, marketing and support personnel
in general.



Disruption of travel due to disease, terrorism or civil unrest
could cause our business to suffer



Because a substantial
portion of our revenues are generated from a limited number of customers each quarter, widespread disruption of travel to a region or country in which we have large customers, prospective customers or services engagements could disrupt our ability
to win or perform contracts. Such disruption could occur as a result of terrorism, such as the decline in travel following the September 11, 2001 attacks, of disease, such as the decline in travel to China and Hong Kong due to the outbreak of SARS,
or as a result of political unrest or war. Inability or unwillingness by our employees to travel to an affected region could adversely affect our efforts to obtain or perform contracts, which could result in the loss of revenue and cause our
business to suffer.



We also use systems integrators and other strategic
relationships to implement and sell the portal solution



We have entered into relationships with third-party systems integrators, as well as with hardware platform and software applications developers and service providers. We have derived, and anticipate that we will continue to derive, some
portion of our market opportunities and revenues from these relationships. Many of these partners also work with competing software companies and our success will depend on their willingness and ability to devote sufficient resources and efforts to
marketing and resale of our products versus the products of others. We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms, or at all. Our agreements with these parties
typically are in the form of nonexclusive referral fee or reseller agreements that are effective for a limited period of time and may be renewed only by mutual agreement of both parties. Therefore, there is no guarantee that any single party will
continue to market our products. We could lose sales opportunities if we fail to work effectively with these parties or fail to grow our base of market and platform partners. We may also be at a serious competitive disadvantage if we fail to
maintain and enhance these indirect sales channels.



Failure to successfully
or timely implement solutions could adversely effect our financial results and prospects



The implementation of customer management and billing systems can be lengthy and expensive. Delays or other problems associated with the successful completion of such projects, could result in the need to provide



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additional services or warranty work, and may have an adverse effect on the timing and amount of revenues and margins associated with such projects, as well
as on customer relationships, the perception and acceptance of our products and services in our target markets generally.



Our business will suffer if our software contains significant errors or our product development implementation is delayed



We face possible claims and higher costs as a result of the complexity of
our products and the potential for undetected errors. Due to the mission critical nature of the Portal solution, undetected errors are of particular concern. Complex software, such as ours, always contains undetected errors. The
implementation of the Portal solution, which we accomplish through our services division and with our partners, typically involves working with sophisticated software, computing and communications systems. If we experience difficulties with an
implementation or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project and to provide these services at reduced or no cost. Moreover, some
contracts subject us to financial penalties if we are unable to correct errors within the required time. If our software contains significant undetected errors or we fail to meet our customers expectations or project milestones in a timely
manner we could experience:



| | · |  | monetary penalties or contract damages;
| | - |  | ---------------------------------------



| | · |  | loss of or delay in revenues and loss of market share;
| | - |  | ------------------------------------------------------



| | · |  | loss of customers;
| | - |  | ------------------



| | · |  | failure to achieve market acceptance;
| | - |  | -------------------------------------



| | · |  | diversion of development and implementation resources;
| | - |  | ------------------------------------------------------



| | · |  | injury to our reputation;
| | - |  | -------------------------



| | · |  | increased service and warranty costs;
| | - |  | -------------------------------------



| | · |  | legal actions by customers against us; and
| | - |  | ------------------------------------------



| | · |  | increased insurance costs.
| | - |  | --------------------------



Our licenses with customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and incidental damages. In addition, our license agreements generally cap the amounts recoverable for damages to the amounts paid by the licensee to us for the product or service
giving rise to the damages or to a multiple of such amounts. However, these contractual limitations on liability may not be enforceable, in certain jurisdictions and under certain circumstances, and we may be subject to claims based on errors in our
software or mistakes in performing our services including claims relating to damages to our customers internal systems. A product liability claim, whether or not successful, could harm our business by increasing our costs, damaging our
reputation and distracting our management.



Our future success will depend
on our ability to manage technological change



The market
for our products and the services they are used to support is characterized by:



| | · |  | rapid technological change;
| | - |  | ---------------------------



| | · |  | frequent new product introductions;
| | - |  | -----------------------------------



| | · |  | changes in customer requirements; and
| | - |  | -------------------------------------



| | · |  | evolving industry standards.
| | - |  | ----------------------------



Future versions of hardware and software platforms embodying new technologies and the emergence of new industry standards could render our products
obsolete. Our future success will depend upon our ability to develop



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and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers.



The Portal solution is designed to work on a variety of hardware and software
platforms used by our customers. However, the Portal solution may not operate correctly on evolving versions of hardware and software platforms, programming languages, database environments, accounting and other systems that our customers use. We
must constantly modify and improve our products to keep pace with changes made to these platforms and to back-office applications and other systems as well as respond to meet the changing requirements of our customers. This may result in uncertainty
relating to the timing and nature of new product announcements, introductions or modifications, which may harm our business. If we fail to modify or improve our products in response to evolving industry standards, our products could become obsolete,
which would harm our business.



If we fail to release products on time or
deliver solutions on time, our business will suffer



In
the past we have failed to release certain new products and upgrades on time and an increasing number of customers are requesting us to provide custom solutions to them to enhance the capability of the Portal products. These delays may result in:



| | · |  | customer dissatisfaction;
| | - |  | -------------------------



| | · |  | cancellation of orders and license agreements;
| | - |  | ----------------------------------------------



| | · |  | monetary penalties for delays in delivery;
| | - |  | ------------------------------------------



| | · |  | negative publicity;
| | - |  | -------------------



| | · |  | loss of revenues;
| | - |  | -----------------



| | · |  | slower market acceptance; or
| | - |  | ----------------------------



| | · |  | legal action by customers against us.
| | - |  | -------------------------------------



In addition, any inability to perform our services in a timely and satisfactory manner would likely have similar effects. Our business may be harmed if we
are unable to develop and release our products and/or solutions or perform our services in a timely manner.



Our proprietary rights may be inadequately protected and there is a risk of infringement



Our success and ability to compete depend substantially upon our internally developed technology, which we protect through a combination of patent,
copyright, trade secret and trademark law. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology or to develop products with the same functionality as
our products. In addition, current or former employees may seek employment with our business partners, customers or competitors. Although our employees are required to sign confidentiality agreements at the time of hire, we cannot assure you that
the confidential nature of certain proprietary information will be maintained in the course of such future employment. Policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Others may develop technologies that are similar or superior to our technology. Moreover,
as the functionality of products in different industry segments overlaps, we expect that our software products may in the future become subject to third-party infringement claims. Some of our competitors in the market for CM&B software may have
filed or may intend to file patent applications covering aspects of their technology upon which they may claim our technology infringes. Any litigation, brought by us or by others, could be time-consuming and costly and could divert the attention of
our technical and management personnel. In addition, litigation could cause product shipment delays or require us to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required,
may not be available on acceptable terms, or at all, and could have a material and adverse impact on our gross margins and profitability. If a successful claim of product infringement were made against us, our business could be significantly harmed.



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We incorporate software licensed from third parties into the portal solution and any significant interruption in the
availability of these third-party software products or defects in these products could harm our business



Portions of the Portal solution incorporate software developed and maintained by third-party software vendors. We may incorporate additional software from
third-party vendors and developers in our future products. Any significant interruption in the availability of these third-party software products or defects in these products or future products could harm our sales unless and until we can secure
another source. We may not be able to replace the functionality provided by the third-party software currently offered with our products if that software becomes obsolete, defective or incompatible with future versions of our products or is not
adequately maintained or updated. The absence of, or any significant delay in the replacement of that functionality, could result in delayed or lost sales and increased costs and could harm our business.



We are currently a party to securities litigation class action lawsuits and stockholder
derivative lawsuits which, if determined adversely, could negatively affect our business and results of operations



We are currently a party to a number of securities litigation class action lawsuits and stockholder derivative lawsuits that are described below in
Part I, Item 3. Legal Proceedings. These legal proceedings will be expensive to conduct, and if determined adversely to us, could result in our payment of significant damages, which would harm our business and financial condition.



From time to time we may become a party to other threatened
legal action including mediation arising from the normal course of business activities. An unfavorable resolution of theses matters could materially affect our future results of operations or cash flows in a particular period. In addition, the
litigation has been, and may continue to be, time consuming and costly and could divert the attention of our management personnel.



The price of our common stock has been and will continue to be volatile



The trading price of our common stock has fluctuated significantly in the past and will continue to fluctuate in the future. For example, the price of
our common stock from our initial public offering in May 1999 through March 31, 2004 has fluctuated between $419.65 and $1.05 per share. Future fluctuation could be a result of a number of factors, many of which are outside our control. Some of
these factors include:



| | · |  | quarter-to-quarter variations in our operating results;
| | - |  | -------------------------------------------------------



| | · |  | failure to meet the expectations of industry analysts;
| | - |  | ------------------------------------------------------



| | · |  | changes in earnings estimates by us or by analysts;
| | - |  | ---------------------------------------------------



| | · |  | general conditions in the communications and content service industries;
| | - |  | ------------------------------------------------------------------------



| | · |  | announcements and technological innovations or new products by us or our competitors;
| | - |  | -------------------------------------------------------------------------------------



| | · |  | increased price competition; and
| | - |  | --------------------------------



| | · |  | developments or disputes concerning intellectual property rights.
| | - |  | -----------------------------------------------------------------



In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many Internet
and computer software companies, including ours, and which have often been unrelated to the operating performance of these companies or our company. Decreases in the trading prices of stocks of technology companies are often precipitous. For
example, the price of our stock dropped rapidly and significantly during the first quarter of fiscal 2001, the fourth quarter of fiscal 2001, the first quarter of fiscal 2002 and, most recently, the fourth quarter of fiscal 2004.



Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware
law could prevent or delay a change in control and, as a result, negatively impact our stockholders



We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have adopted a stockholder rights plan
that would cause substantial dilution to a stockholder, and



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substantially increase the cost paid by a potential acquirer, who attempts to acquire us on terms not approved by our Board of Directors. This could prevent
us from being acquired or reduce the price paid by any potential acquirer. In addition, our certificate of incorporation grants the Board of Directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of
preferred stock without stockholder action. Although we have no present intention to issue shares of preferred stock, such an issuance could have the effect of making it more difficult and less attractive for a third party to acquire a majority of
our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our common stock that could have a material adverse effect on the market value of our common stock. In addition, the following factors
could also delay or prevent a change in control:



| | · |  | our classified Board;
| | - |  | ---------------------



| | · |  | certain provisions of our charter; and
| | - |  | --------------------------------------



| | · |  | certain provisions of our Bylaws.
| | - |  | ---------------------------------



In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. This section provides that except in
certain limited circumstances a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder. This provision could
have the effect of delaying or preventing a change of control of Portal.



Financial difficulties of companies we have invested in could adversely affect our financial results



We have made investments in several companies and may make investments in others in the future. If at any time our investment in a company were deemed
impaired, we may be required to reduce the book value of that investment, which would in turn reduce our earnings in that period. Such investments could be deemed impaired, for example, if the financial condition of those companies deteriorates. We
have reduced the value of some of these investments previously. Because the financial condition of these companies is outside our control, we cannot predict if, or when, we would be required to reduce the value of such investments. As of January 31,
2004, we had approximately $1.5 million (total investment of $2.0 million net of a $0.5 million write down) invested in other companies.



Acquisitions of companies or technologies may result in disruptions to our business and management due to difficulties in assimilating personnel and operations



We may make acquisitions or investments in other
companies, products or technologies. If we make any acquisitions, we will be required to assimilate the operations, products and personnel of the acquired businesses and train, retain and motivate key personnel from the acquired businesses. We may
be unable to maintain uniform standards, controls, procedures and policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert managements attention from day-to-day operations, which could
impair our relationships with our current employees, customers and strategic partners. The issuance of equity securities for any acquisition could be substantially dilutive to our stockholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired goodwill and other intangible assets.



Future regulation of the internet or next generation communication services may slow their growth, resulting in decreased demand for our products and services and increased costs of doing business



It is possible that state and federal regulators could adopt laws and
regulations that may impose additional burdens on those companies providing communications and content services. The growth and development of new services may prompt calls for more stringent consumer protection laws or for imposition of additional
taxes. The adoption of any additional laws or regulations affecting communication services may slow their adoption or impose additional burdens on those companies providing such services. A decline in the growth of next generation communication
services could decrease demand for our products and services and increase our cost of doing business, or otherwise harm our business.



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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The following discussion about Portals risk management activities includes forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those projected in the forward-looking statements for the reasons described under the caption Managements Discussion And Analysis Of Financial Condition And Results Of
OperationsRisks Associated With Portals Business And Future Operating Results.



Short-Term Investment Portfolio



We do not hold derivative financial instruments in our short-term investment portfolio. Our short-term investments consist of instruments rated the equivalent of Standard & Poors and Moodys short-term rating A1/P1 or
long-term rating of at least A/A2. This policy dictates that we diversify our holdings and limit our short-term investments to a maximum of $5 million to any one issuer. Our policy also dictates that all short-term investments mature in 24 months or
less.



The following table presents the amounts of cash
equivalents and investments that are subject to market risk and the weighted average interest rates, by year of expected maturity for Portals investment portfolios. This table does not include cash because cash is not subject to market risk.
(In thousands, except weighted average yields; unaudited).



|                       |  |                       |        |   |                        |   |        |            |  |   |       |   |  |   |        |  
|---------------------- |  | --------------------- | ------ | - | ---------------------- | - | ------ | ---------- |  | - | ----- | - |  | - | ------ | -
|                       |  | Maturingwithin 1 Year |        |   | Maturingwithin 2 Years |   |        | Thereafter |  |   | Total |  
|As of January 31, 2004 |  |                       |        |   |                        |   |        |            |  |   |       |   |  |   |        |  
|Cash Equivalents       |  | $                     | 18,521 |   |                        | $ |       |            |  | $ |      |   |  | $ | 18,521 |  
|Weighted Average Yield |  |                       | 0.98   | % |                        |   |       | %          |  |   |      | % |  |   | 0.98   | %
|Investments            |  |                       | 25,788 |   |                        |   | 14,096 |            |  |   |      |   |  |   | 39,884 |  
|Weighted Average Yield |  |                       | 1.19   | % |                        |   | 1.87   | %          |  |   |      | % |  |   | 1.43   | %
|                       |  |                       |        |   |                        |   |        |            |  |   |       |   |  |   |        |  
|Total Portfolio        |  | $                     | 44,309 |   |                        | $ | 14,096 |            |  | $ |      |   |  | $ | 58,405 |  
|                       |  |                       |        |   |                        |   |        |            |  |   |       |   |  |   |        |  
|Weighted Average Yield |  |                       | 1.10   | % |                        |   | 1.87   | %          |  |   |      | % |  |   | 1.29   | %



Impact of Foreign Currency Rate
Changes



During fiscal 2004, most local currencies of our
international subsidiaries strengthened against the U.S. dollar. Because we translate foreign currencies into U.S. dollars for reporting purposes, currency fluctuations can have an impact on our results. For the fiscal year ended January 31, 2004,
we recorded $1.7 million in foreign exchange gains as a result of remeasuring intercompany transactions from local currencies to U.S dollar. To date, we have not engaged in foreign currency hedging.



As a global concern, we anticipate that our sales outside the United States
will increasingly be denominated in other currencies. In such event, we will face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse
impact on our financial position and results of operations.



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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



1.    Index to Consolidated Financial Statements



The following financial statements are filed as part of this report:



|                                                                                           |  |     
|------------------------------------------------------------------------------------------ |  | ----
|                                                                                           |  | Page
|Report of Ernst & Young LLP, Independent Auditors                                          |  | 44  
|Consolidated Balance Sheets as of January 31, 2004 and 2003                                |  | 45  
|Consolidated Statements of Operations for the three years ended January 31, 2004           |  | 46  
|Consolidated Statements of Stockholders Equity for the three years ended January 31, 2004 |  | 47  
|Consolidated Statements of Cash Flows for the three years ended January 31, 2004           |  | 48  
|Notes to Consolidated Financial Statements                                                 |  | 49  



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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders

Portal Software, Inc.



We have audited the accompanying consolidated balance sheets of Portal Software, Inc. as of January 31, 2004 and 2003, and
the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended January 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item
15(a)(2). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Portal Software, Inc. at January 31, 2004 and 2003 and the consolidated results of its operations
and its cash flows for each of the three years in the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



As discussed in Note 1 to the consolidated financial statements, effective February 1, 2002, the company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.



/s/ ERNST & YOUNG LLP



San Jose, California

February 24, 2004



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PORTAL SOFTWARE, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)



|                                                                                                                                                                                    |  |             |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                    |  | January 31, |         
|                                                                                                                                                                                    |  | 2004        |          |   | 2003 |  
|ASSETS                                                                                                                                                                              |  |             |          |   |      |   |          |  
|Current assets:                                                                                                                                                                     |  |             |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                                           |  | $           | 43,020   |   |      | $ | 21,502   |  
|Short-term investments                                                                                                                                                              |  |             | 39,884   |   |      |   | 30,641   |  
|Accounts receivable, net of allowance for doubtful accounts of $1,857 and $2,458 at January 31, 2004 and 2003, respectively                                                         |  |             | 29,749   |   |      |   | 22,467   |  
|Restricted short-term investments                                                                                                                                                   |  |             | 2,556    |   |      |   | 1,609    |  
|Prepaid expenses and other current assets                                                                                                                                           |  |             | 4,029    |   |      |   | 4,026    |  
|                                                                                                                                                                                    |  |             |          |   |      |   |          |  
|Total current assets                                                                                                                                                                |  |             | 119,238  |   |      |   | 80,245   |  
|Property and equipment, net                                                                                                                                                         |  |             | 20,848   |   |      |   | 22,798   |  
|Purchased developed technology, net                                                                                                                                                 |  |             | 1,995    |   |      |   | 4,655    |  
|Restricted long-term investments                                                                                                                                                    |  |             | 13,164   |   |      |   | 13,412   |  
|Other assets                                                                                                                                                                        |  |             | 2,910    |   |      |   | 2,624    |  
|                                                                                                                                                                                    |  |             |          |   |      |   |          |  
|                                                                                                                                                                                    |  | $           | 158,155  |   |      | $ | 123,734  |  
|                                                                                                                                                                                    |  |             |          |   |      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                |  |             |          |   |      |   |          |  
|Current liabilities:                                                                                                                                                                |  |             |          |   |      |   |          |  
|Accounts payable                                                                                                                                                                    |  | $           | 5,390    |   |      | $ | 4,699    |  
|Accrued employee benefits                                                                                                                                                           |  |             | 8,829    |   |      |   | 8,821    |  
|Current portion accrued restructuring costs                                                                                                                                         |  |             | 9,193    |   |      |   | 13,418   |  
|Other accrued liabilities                                                                                                                                                           |  |             | 9,210    |   |      |   | 6,017    |  
|Taxes payable                                                                                                                                                                       |  |             | 3,660    |   |      |   | 2,412    |  
|Current portion of notes payable and capital lease obligations                                                                                                                      |  |             | 96       |   |      |   | 107      |  
|Deferred revenue                                                                                                                                                                    |  |             | 28,891   |   |      |   | 23,955   |  
|                                                                                                                                                                                    |  |             |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                           |  |             | 65,269   |   |      |   | 59,429   |  
|Long-term notes payable                                                                                                                                                             |  |             | 1,564    |   |      |   | 1,583    |  
|Long-term accrued restructuring costs                                                                                                                                               |  |             | 18,791   |   |      |   | 26,903   |  
|Commitments and contingencies                                                                                                                                                       |  |             |          |   |      |   |          |  
|Stockholders equity:                                                                                                                                                               |  |             |          |   |      |   |          |  
|Convertible preferred stock, $0.001 par value, issuable in series: 5,000 shares authorized, none issued and outstanding                                                             |  |             |         |   |      |   |         |  
|Common stock, $0.001 par value; 200,000 shares authorized at January 31, 2004 42,038 and 35,661 shares issued and outstanding at January 31,
2004 and January 31, 2003 respectively |  |             | 42       |   |      |   | 36       |  
|Additional paid-in capital                                                                                                                                                          |  |             | 618,966  |   |      |   | 541,136  |  
|Accumulated other comprehensive income (loss)                                                                                                                                       |  |             | (647     | ) |      |   | 294      |  
|Notes receivable from stockholders                                                                                                                                                  |  |             | (61      | ) |      |   | (69      | )
|Accumulated deficit                                                                                                                                                                 |  |             | (545,769 | ) |      |   | (505,578 | )
|                                                                                                                                                                                    |  |             |          |   |      |   |          |  
|Stockholders equity                                                                                                                                                                |  |             | 72,531   |   |      |   | 35,819   |  
|                                                                                                                                                                                    |  |             |          |   |      |   |          |  
|                                                                                                                                                                                    |  | $           | 158,155  |   |      | $ | 123,734  |  
|                                                                                                                                                                                    |  |             |          |   |      |   |          |  



See accompanying notes.



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PORTAL SOFTWARE, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                            |  | Years Ended January 31, |        
|                                                                            |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Revenues:                                                                   |  |                         |         |   |      |   |         |      |  |   |          |  
|License fees                                                                |  | $                       | 39,566  |   |      | $ | 44,481  |      |  | $ | 70,598   |  
|Services                                                                    |  |                         | 87,187  |   |      |   | 76,609  |      |  |   | 84,192   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Total revenues                                                              |  |                         | 126,753 |   |      |   | 121,090 |      |  |   | 154,790  |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Costs and expenses:                                                         |  |                         |         |   |      |   |         |      |  |   |          |  
|Cost of license fees                                                        |  |                         | 185     |   |      |   | 324     |      |  |   | 1,349    |  
|Cost of services                                                            |  |                         | 56,625  |   |      |   | 44,505  |      |  |   | 61,182   |  
|Amortization and impairment of purchased developed technology               |  |                         | 2,660   |   |      |   | 4,596   |      |  |   | 5,265    |  
|Research and development                                                    |  |                         | 30,243  |   |      |   | 35,704  |      |  |   | 58,780   |  
|Sales and marketing                                                         |  |                         | 45,600  |   |      |   | 51,900  |      |  |   | 81,309   |  
|General and administrative                                                  |  |                         | 15,472  |   |      |   | 15,747  |      |  |   | 38,508   |  
|Stock compensation charges (1)                                              |  |                         | 14,687  |   |      |   | 2,272   |      |  |   | 1,992    |  
|Amortization of goodwill                                                    |  |                         |        |   |      |   |        |      |  |   | 31,127   |  
|Reduction in intangibles due to impairment                                  |  |                         |        |   |      |   | 486     |      |  |   | 199,158  |  
|Restructuring costs                                                         |  |                         |        |   |      |   | 36,546  |      |  |   | 71,020   |  
|Impairment of long-lived assets                                             |  |                         |        |   |      |   | 1,470   |      |  |   |         |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Total costs and expenses                                                    |  |                         | 165,472 |   |      |   | 193,550 |      |  |   | 549,690  |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Loss from operations                                                        |  |                         | (38,719 | ) |      |   | (72,460 | )    |  |   | (394,900 | )
|Interest and other income, net                                              |  |                         | 2,024   |   |      |   | 3,009   |      |  |   | 8,120    |  
|Write-down of impaired investments                                          |  |                         |        |   |      |   |        |      |  |   | (4,000   | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Loss before income taxes                                                    |  |                         | (36,695 | ) |      |   | (69,451 | )    |  |   | (390,780 | )
|Provision for income taxes                                                  |  |                         | (3,496  | ) |      |   | (2,761  | )    |  |   | (4,720   | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss                                                                    |  | $                       | (40,191 | ) |      | $ | (72,212 | )    |  | $ | (395,500 | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Basic and diluted net loss per share                                        |  | $                       | (1.05   | ) |      | $ | (2.05   | )    |  | $ | (11.50   | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Shares used in computing basic and diluted net loss per share               |  |                         | 38,163  |   |      |   | 35,278  |      |  |   | 34,398   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|(1)  Stock compensation charges relate to the following expense
categories: |  |                         |         |   |      |   |         |      |  |   |          |  
|                                                                            |  |                         |        
|Cost of services                                                            |  | $                       | 3,192   |   |      | $ | 475     |      |  | $ | 312      |  
|Research and development                                                    |  |                         | 5,408   |   |      |   | 826     |      |  |   | 683      |  
|Sales and marketing                                                         |  |                         | 4,102   |   |      |   | 636     |      |  |   | 561      |  
|General and administrative                                                  |  |                         | 1,985   |   |      |   | 335     |      |  |   | 436      |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  
|Total                                                                       |  | $                       | 14,687  |   |      | $ | 2,272   |      |  | $ | 1,992    |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |          |  







See accompanying notes.



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PORTAL SOFTWARE, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share amounts)



|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | -- |  | ------------------------------------------ | ------- | - | ------------------------------- | - | ----- | ------------------------- |  | - | ------------------ | - |  | ------------------------ | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                            |  | Common Stock |  | AdditionalPaid-InCapital |    |  | AccumulatedOtherComprehensiveIncome (Loss) |         |   | NotesReceivablefromStockholders |   |       | DeferredStockCompensation |  |   | AccumulatedDeficit |   |  | TotalStockholdersEquity |       
|                                                                            |  | Shares       |  | Amount                   |    |  |                                            |         |   |                                
|Balances at January 31, 2001                                                |  | 34,268,889   |  | $                        | 34 |  | $                                          | 526,869 |   |                                 | $ | 132   |                           |  | $ | (127               | ) |  | $                        | (2,653 | ) |  | $ | (37,866  | ) |  | $ | 486,389  |  
|Components of comprehensive loss:                                           |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Net unrealized loss on investments (net of tax)                             |  |             |  |                          |   |  |                                            |        |   |                                 |   | (183  | )                         |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | (183     | )
|Translation adjustment and other (net of tax)                               |  |             |  |                          |   |  |                                            |        |   |                                 |   | (658  | )                         |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | (658     | )
|Net loss                                                                    |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   | (395,500 | ) |  |   | (395,500 | )
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                          |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   | (396,341 | )
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Issuance of common stock upon exercise of stock options, net of repurchases |  | 242,521      |  |                          |   |  |                                            | 2,281   |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 2,281    |  
|Issuance of common stock pursuant to Employee Stock Purchase Plan           |  | 478,149      |  |                          | 1  |  |                                            | 7,352   |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 7,353    |  
|Amortization of deferred stock compensation                                 |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   |                   |   |  |                          | 1,992  |   |  |   |         |   |  |   | 1,992    |  
|Payments on shareholder notes receivable                                    |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   | 48                 |   |  |                          |       |   |  |   |         |   |  |   | 48       |  
|Stock options assumed upon acquisition of BayGate                           |  |             |  |                          |   |  |                                            | 289     |   |                                 |   |      |                           |  |   |                   |   |  |                          | (134   | ) |  |   |         |   |  |   | 155      |  
|Reduction of deferred stock compensation related to terminations            |  |             |  |                          |   |  |                                            | (402    | ) |                                 |   |      |                           |  |   |                   |   |  |                          | 460    |   |  |   |         |   |  |   | 58       |  
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Balances at January 31, 2002                                                |  | 34,989,559   |  |                          | 35 |  |                                            | 536,389 |   |                                 |   | (709  | )                         |  |   | (79                | ) |  |                          | (335   | ) |  |   | (433,366 | ) |  |   | 101,935  |  
|Components of comprehensive loss:                                           |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Net unrealized loss on investments (net of tax)                             |  |             |  |                          |   |  |                                            |        |   |                                 |   | (574  | )                         |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | (574     | )
|Translation adjustment and other (net of tax)                               |  |             |  |                          |   |  |                                            |        |   |                                 |   | 1,577 |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 1,577    |  
|Net loss                                                                    |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   | (72,212  | ) |  |   | (72,212  | )
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                          |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   | (71,209  | )
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Issuance of common stock upon exercise of stock options, net of repurchases |  | 144,056      |  |                          |   |  |                                            | 381     |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 381      |  
|Issuance of common stock pursuant to Employee Stock Purchase Plan           |  | 390,548      |  |                          | 1  |  |                                            | 1,903   |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 1,904    |  
|Compensation charge related to employee stock options                       |  |             |  |                          |   |  |                                            | 1,977   |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 1,977    |  
|Amortization of deferred stock compensation                                 |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   |                   |   |  |                          | 295    |   |  |   |         |   |  |   | 295      |  
|Payments on shareholder notes receivable                                    |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   | 10                 |   |  |                          |       |   |  |   |         |   |  |   | 10       |  
|Issuance of common stock related to acquisition of Solution42               |  | 136,362      |  |                          |   |  |                                            | 486     |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 486      |  
|Reduction of deferred stock compensation related to terminations            |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   |                   |   |  |                          | 40     |   |  |   |         |   |  |   | 40       |  
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Balances at January 31, 2003                                                |  | 35,660,525   |  |                          | 36 |  |                                            | 541,136 |   |                                 |   | 294   |                           |  |   | (69                | ) |  |                          |       |   |  |   | (505,578 | ) |  |   | 35,819   |  
|Components of comprehensive loss:                                           |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Net unrealized loss on investments (net of tax)                             |  |             |  |                          |   |  |                                            |        |   |                                 |   | (37   | )                         |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | (37      | )
|Translation adjustment and other (net of tax)                               |  |             |  |                          |   |  |                                            |        |   |                                 |   | (904  | )                         |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | (904     | )
|Net loss                                                                    |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   | (39,452  | ) |  |   | (40,191  | )
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                          |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   | (41,132  | )
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Issuance of common stock upon exercise of stock options, net of repurchases |  | 1,535,690    |  |                          | 1  |  |                                            | 5,693   |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 5,694    |  
|Issuance of common stock pursuant to Employee Stock Purchase Plan           |  | 313,199      |  |                          |   |  |                                            | 1,468   |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 1,468    |  
|Compensation charge related to employee stock options                       |  |             |  |                          |   |  |                                            | 14,687  |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 14,687   |  
|Write off of stockholders notes receivable                                  |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   | 2                  |   |  |                          |       |   |  |   |         |   |  |   | 2        |  
|Payments on stockholder notes receivable                                    |  |             |  |                          |   |  |                                            |        |   |                                 |   |      |                           |  |   | 6                  |   |  |                          |       |   |  |   |         |   |  |   | 6        |  
|Issuance of common stock related to registered offering                     |  | 4,528,302    |  |                          | 5  |  |                                            | 55,982  |   |                                 |   |      |                           |  |   |                   |   |  |                          |       |   |  |   |         |   |  |   | 55,987   |  
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  
|Balances at January 31, 2004                                                |  | 42,037,716   |  | $                        | 42 |  | $                                          | 618,966 |   |                                 | $ | (647  | )                         |  | $ | (61                | ) |  | $                        |       |   |  | $ | (545,769 | ) |  | $ | 72,531   |  
|                                                                            |  |              |  |                          |    |  |                                            |         |   |                                 |   |       |                           |  |   |                    |   |  |                          |        |   |  |   |          |   |  |   |          |  



See accompanying notes.



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PORTAL SOFTWARE, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                          |  | Years Ended January 31, |         
|                                                                                          |  | 2004                    |          |   | 2003 |   |          | 2002 | 
|OPERATING ACTIVITIES:                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                                  |  | $                       | (40,191  | ) |      | $ | (72,212  | )    |  | $ | (395,500 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                         |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                             |  |                         | 7,765    |   |      |   | 9,295    |      |  |   | 17,966   |  
|Stock compensation charges                                                                |  |                         | 14,687   |   |      |   | 2,272    |      |  |   | 1,992    |  
|Amortization of purchased intangibles and goodwill                                        |  |                         | 2,660    |   |      |   | 3,202    |      |  |   | 35,377   |  
|Reduction in intangibles due to impairment                                                |  |                         |         |   |      |   | 1,880    |      |  |   | 199,158  |  
|Restructuring costs                                                                       |  |                         |         |   |      |   | 14,071   |      |  |   | 13,421   |  
|Impairment of long-lived assets                                                           |  |                         |         |   |      |   | 1,470    |      |  |   |         |  
|Write-down of impaired investments                                                        |  |                         |         |   |      |   |         |      |  |   | 4,000    |  
|Changes in operating assets and liabilities:                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Accounts receivable, net                                                                  |  |                         | (7,282   | ) |      |   | (144     | )    |  |   | 60,902   |  
|Prepaid expenses and other current assets                                                 |  |                         | 242      |   |      |   | 514      |      |  |   | 3,463    |  
|Other assets                                                                              |  |                         | (286     | ) |      |   | 1,400    |      |  |   | 785      |  
|Accounts payable                                                                          |  |                         | 691      |   |      |   | 620      |      |  |   | (5,917   | )
|Accrued employee benefits                                                                 |  |                         | 8        |   |      |   | (3,315   | )    |  |   | (12,271  | )
|Other accrued liabilities and taxes payable                                               |  |                         | (7,896   | ) |      |   | (3,131   | )    |  |   | 22,579   |  
|Deferred revenue                                                                          |  |                         | 4,936    |   |      |   | (13,511  | )    |  |   | (29,470  | )
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) operating activities                                                   |  |                         | (24,666  | ) |      |   | (57,589  | )    |  |   | (83,515  | )
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|INVESTING ACTIVITIES:                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Purchases of short-term investments                                                       |  |                         | (136,071 | ) |      |   | (181,997 | )    |  |   | (184,089 | )
|Sales of short-term investments                                                           |  |                         | 73,448   |   |      |   | 168,627  |      |  |   | 97,699   |  
|Maturity of short-term investments                                                        |  |                         | 49,790   |   |      |   | 56,972   |      |  |   | 149,978  |  
|Purchases of restricted long-term investments                                             |  |                         |         |   |      |   | (1,289   | )    |  |   | (6,992   | )
|Sales and maturity of restricted long-term investments                                    |  |                         | 2,233    |   |      |   | 3,784    |      |  |   | 3,000    |  
|Purchases of property and equipment                                                       |  |                         | (5,439   | ) |      |   | (6,591   | )    |  |   | (12,634  | )
|Proceeds from sale of private equity investments                                          |  |                         |         |   |      |   |         |      |  |   | 1,112    |  
|Business acquisitions                                                                     |  |                         |         |   |      |   |         |      |  |   | (2,103   | )
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                       |  |                         | (16,039  | ) |      |   | 39,506   |      |  |   | 45,971   |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|FINANCING ACTIVITIES:                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Payments received and write offs of stockholder notes receivable                          |  |                         | 8        |   |      |   | 10       |      |  |   | 48       |  
|Repayment of notes payable                                                                |  |                         | (19      | ) |      |   | (18      | )    |  |   | (2,391   | )
|Principal payments under capital lease obligations                                        |  |                         | (11      | ) |      |   | (587     | )    |  |   | (2,093   | )
|Proceeds from issuance of common stock, net of repurchases                                |  |                         | 63,149   |   |      |   | 2,285    |      |  |   | 9,634    |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash from financing activities                                                        |  |                         | 63,127   |   |      |   | 1,690    |      |  |   | 5,198    |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Effect of exchange rate on cash and cash equivalents                                      |  |                         | (904     | ) |      |   | 1,577    |      |  |   | (659     | )
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                         | 21,518   |   |      |   | (14,816  | )    |  |   | (33,005  | )
|Cash and cash equivalents at beginning of year                                            |  |                         | 21,502   |   |      |   | 36,318   |      |  |   | 69,323   |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                  |  | $                       | 43,020   |   |      | $ | 21,502   |      |  | $ | 36,318   |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosures of cash flow information:                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|Interest paid                                                                             |  | $                       | 34       |   |      | $ | 149      |      |  | $ | 172      |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Income taxes paid                                                                         |  | $                       | 2,299    |   |      | $ | 2,356    |      |  | $ | 1,865    |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosures of non-cash financing activity:                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Issuance of common stock for acquisition of Solution42                                    |  | $                       |         |   |      | $ | 486      |      |  | $ |         |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Stock options assumed upon acquisition of BayGate                                         |  | $                       |         |   |      | $ |         |      |  | $ | 289      |  
|                                                                                          |  |                         |          |   |      |   |          |      |  |   |          |  







See accompanying notes.



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##### Table of Contents

PORTAL SOFTWARE, INC.



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



Note
1.    Significant Accounting Policies:



Nature of Business and Basis of Presentation



Portal Software, Inc., or Portal, develops, markets, and supports customer management and billing software products and services for telecommunications and information service providers. Portals convergent platform enables service
providers to deliver voice, data, video and content services with multiple networks, payment models, pricing plans and value chains. Portal markets its products worldwide through a combination of a direct sales force and distribution partners.
Substantially all of Portals license revenues are derived from sales of its Infranet product line.



Fiscal year



We have adopted a 52/53 week fiscal accounting year commencing with our 2004 fiscal year. Each quarter will consist of 13 weeks ending on a Friday. Our
2004 fiscal year began on February 1, 2003, the day following the last day of our 2003 fiscal year, and ended on January 30, 2004. Accordingly, all references as of and for the period ended January 31, 2004 reflect amounts as of and for the period
ended January 30, 2004. The year ended January 30, 2004 was comprised of 364 days while the year ended January 31, 2003 was comprised of 365 days.



Principles of Consolidation



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



Foreign
Currency



Portal considers the functional currency of its
foreign subsidiaries to be the local currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date and revenue, costs and expenses are translated at average rates of exchange in effect
during the year. Translation gains and losses are reported within accumulated other comprehensive loss. For the fiscal year ended January 31, 2004, we recorded $1.7 million in net foreign exchange gains as a result of remeasuring intercompany
transactions from local currencies to the U.S dollar. Net foreign exchange gains resulting from foreign exchange transactions were immaterial in fiscal 2002 and 2003.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the 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. Estimates are used
for, but are not limited to, revenue recognition, allowances for doubtful accounts, long-lived assets, restructuring accruals, and income taxes. These estimates are based upon information available as of the date of the financial statements. Actual
results could differ materially from those estimates.



Revenue Recognition



Portal recognizes revenue
in accordance with current generally accepted accounting principles that have been prescribed for the software industry. Revenue recognition requirements are very complex and are affected by interpretations of the rules and industry practices, both
of which are subject to change.



Revenue from license fees is
recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. Pursuant to the requirements



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of Statement of Position (SOP) 97-2 Software Revenue Recognition and SOP 98-9 Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions, Portal uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence of the fair
value (VSOE) of all undelivered elements exists. VSOE for undelivered elements is based on normal pricing for those elements when sold separately and, for maintenance services, is additionally measured by the renewal rate. The software
is considered to have been delivered when Portal has provided the customer with the access codes that allow for immediate possession of the software. The Companys assessment of a customers creditworthiness is a factor in the
determination of whether or not collectibility is probable. The determination of creditworthiness requires the exercise of judgment, which affects Portals revenue recognition. If a customer is deemed to not be creditworthy, all revenue under
arrangements with that customer is recognized upon receipt of cash. Additionally, when Portal enters into contracts with industry-standard payment terms, it is Portals policy to recognize such revenue when the customer is deemed to be
creditworthy and collection of the receivable is probable. Revenue from arrangements with resellers who are not the ultimate users and who have a right of return is not recognized until evidence of an arrangement with an end user has been received.
Should Portal enter into a transaction with a customer to purchase the customers products contemporaneously with the customers purchase of software from Portal, Portals policy is to recognize the amount of license fees paid to
Portal net of the fees paid for the customers products.



Services revenues are primarily comprised of revenue from product deployment, follow-on enhancements and other consulting fees, maintenance agreements and training. When license arrangements include services, the license fees are recognized
upon delivery, provided that (1) the criteria set forth in the above paragraph have been met, (2) payment of the license fees is not dependent upon the performance of the services, (3) the services are not essential to the functionality of the
software, and (4) VSOE exists on the undelivered services. When software services are not considered essential, which has been the case in the majority of the Companys license arrangements, the Company recognizes time and materials service
contracts as the services are performed. Fixed price services contracts are recognized on a proportional performance basis as determined by the relationship of contract costs incurred to date and the estimated total contract costs, which are
regularly reviewed during the life of the contract, subject to meeting agreed upon milestones. In the event that a milestone has not been reached, the associated cost is deferred and revenue is not recognized until the milestone has been accepted by
the customer.



To date, Portal has been able to estimate
efforts required under its services contracts, including its fixed price contracts, and accordingly, has not incurred any significant losses on its fixed priced contracts. In the event that cost estimates exceed total expected revenues,
Portals policy is to accrue for the estimated losses if and when the losses become evident.



For arrangements that do not meet the above criteria, both the license revenues and services revenues are recognized under a contract accounting method in
accordance with the provisions of SOP 81-1, Accounting for Performance of Construction Type and Certain Production Type Contracts. Portal follows the percentage-of-completion method where reasonably dependable estimates of progress
toward completion of a contract can be made. The Company estimates the percentage-of-completion on contracts utilizing costs incurred to date as a percentage of the total costs at project completion, subject to meeting agreed milestones. In the
event that a milestone has not been reached, the associated cost is deferred and revenue is not recognized until the milestone has been accepted by the customer. Recognized revenues and profit are subject to revisions as the contract progresses to
completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. To date, Portal has had no contracts accounted for under SOP 81-1.



Maintenance agreements provide technical support and include the right to
unspecified upgrades on an if-and-when-available basis. For those customers that have purchased maintenance, Portal offers timely access to new product versions and software updates. Maintenance revenue is deferred and recognized on a straight-line



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



basis as services revenue over the life of the related agreement, which is typically one year. Customer advances and billed amounts due from customers in
excess of revenue recognized are generally recorded as deferred revenue.



Deferred revenue was comprised of the following:



|                        |  |                 |        |                 |   |       
|----------------------- |  | --------------- | ------ | --------------- | - | ------
|                        |  | January 31,2004 |        | January 31,2003
|Deferred license        |  | $               | 5,834  |                 | $ | 5,264 
|Deferred services       |  |                 | 23,057 |                 |   | 18,691
|                        |  |                 |        |                 |   |       
|Total deferred revenues |  | $               | 28,891 |                 | $ | 23,955
|                        |  |                 |        |                 |   |       



Research and
Development



Research and development expenditures are
generally charged to operations as incurred. Statement of Financial Accounting Standards Number 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed, requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility. Based on Portals product development process, technological feasibility is established upon the completion of a working model. Costs incurred by Portal between the
completion of the working model and the point at which the product is ready for general release have been insignificant. Therefore, through January 31, 2004, Portal has charged all such costs to research and development expense in the period
incurred.



Concentration of Credit Risk



Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash equivalents, short-term investments and trade accounts receivable. Our investment policy limits the amount of credit risk exposure to any one issuer. We are exposed to credit risks in the event of default by
the issuers to the extent of the amount recorded on the balance sheet.



Substantially all of Portals software and services have been sold to North American, European and Asia-Pacific telecommunication and content service providers, including mobile wireless companies, broadband, electronic content and
Internet access companies, as well as other Internet and e-commerce companies. Accordingly, adverse economic trends affecting the communications industry may increase our credit risk in our trade accounts receivable. We have adopted credit policies
and standards intended to accommodate industry growth and inherent risk. We perform ongoing credit evaluations of our customers financial condition. We do not require collateral.



Affiliates majority-owned by Vodafone Group Plc (Vodafone), as publicly reported by Vodafone, accounted for 31%,
19% and 3% of total revenues during fiscal 2004, 2003, and 2002, respectively. No individual Vodafone affiliate or other customer accounted for more than 10% of revenues during fiscal 2004 or fiscal 2003. One individual customer, America Online,
Inc., accounted for 20% of total revenues during fiscal 2002.



Guarantees



Our license agreements include
indemnification for infringements of third-party intellectual property rights and also include certain warranties. No amounts have been accrued relating to those indemnities and warranties,



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



as we do not believe any losses are probable. We have also issued letters of credit totaling $10.2 million related to our leased facilities, $2.3 million
related to bank guarantees securing bank loans to the former shareholders of Solution42 and $1.4 million of bank guarantees issued in support of Portals compliance with performance obligations to three customers. In the event Portal or the
former Solution42 shareholders default on the terms of the underlying agreements, the beneficiaries may draw on these letters of credit. The requirements to maintain the letters of credit correspond to the terms of the underlying agreements which
expire at various dates through 2021.



Our software license
agreements also generally include a warranty that our software products will substantially operate as described in the applicable program documentation for a period of 90 days after delivery. We also warrant that services we perform will be provided
in a manner consistent with industry standards. To date, we have not incurred any material costs associated with these warranties.



As permitted under our Restated Certificate of Incorporation, Bylaws and the Delaware General Corporation Law, we have entered into agreements whereby we
indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity.



Allowance for Doubtful Accounts



The allowance for doubtful accounts is established through a charge to general and administrative expenses. This allowance is for estimated losses
resulting from our customers inability to make required payments. It is a significant estimate and is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer, age of
the receivable balance, individually and in the aggregate, and current economic conditions that may affect a customers ability to pay. Our customer base is highly concentrated in the telecommunications and information service provider
industries. Companies in these industries have experienced financial difficulty. If collection is not probable at the time the transaction is consummated, we do not recognize revenue until cash is collected. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon
a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical
collection experience and current economic trends. During fiscal 2004 and fiscal 2003, Portal reversed approximately $0.2 million and $1.1 million, respectively, from its allowance for doubtful accounts as such amounts were no longer considered
necessary. During fiscal 2002 Portal added approximately $11.0 million to its allowance for doubtful accounts. Write-offs of uncollectible accounts totaled $0.4 million, $4.3 million, and $6.0 million for fiscal 2004, 2003 and 2002, respectively.



Segment Information



Portal operates solely in one business segment, the development and
marketing of business infrastructure software. Portals foreign operations consist of sales, marketing and support activities through its foreign subsidiaries and an overseas reseller network as well as an engineering and development center in
India. Portals CEO has responsibility as the Chief Operating Decision Maker (CODM) as defined by SFAS 131. The CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and
certain direct expenses by geographic region for purposes of making operating decisions and assessing financial performance. Portals assets are primarily located in its corporate office in the United States and are not allocated to any
specific region, therefore Portal does not produce reports for, or measure the performance of its geographic regions based on any asset-based metrics. Therefore, geographic information is presented only for revenues.



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Portals revenue to external customers outside of North America represented 77%, 69% and 47% of
total revenues in fiscal 2004, 2003 and 2002, respectively, and were derived from sales to Europe (which is defined by Portal as Europe, Middle East and Africa) and Intercontinental (which is defined by Portal as Asia-Pacific, Japan and Latin
America.) European revenues for these years were $71.7 million, $64.1 million and $48.3 million, respectively and Intercontinental revenues were $26.5 million, $19.4 million and $24.8 million, respectively. In fiscal 2004, revenues from the United
Kingdom and Italy were $19.2 and $14.5 million, respectively. Revenues from the United Kingdom were $20.1 million in fiscal 2003. No one country was greater than 10% of revenues in fiscal 2002.



Fair Value of Financial Instruments



The fair value of short-term and long-term notes payable and short-term and
long-term capital lease obligations is estimated based on current interest rates available to Portal for debt instruments with similar terms, degrees of risk and remaining maturities. At January 31, 2004 and 2003, the carrying values of these
obligations approximate their respective fair values. The fair value of debt securities were based on quoted market prices and pricing models, and should generally approximate the actual values that could have been realized as of year-end but may
not be representative of the values to be realized in the future.



Advertising



Portal expenses advertising costs
as incurred. There were no advertising expenses recorded for fiscal 2003 and approximately $0.1 million and $0.2 million for fiscal 2004 and 2002, respectively.



Cash, Cash Equivalents, Short-Term and Long-Term Investments



Portal considers all highly liquid, low-risk debt instruments with an original maturity, at the date of purchase, of three
months or less to be cash equivalents. At January 31, 2004 and 2003, cash equivalents and short-term investments consist primarily of commercial paper, corporate notes, money market funds and government securities.



Portal classifies, at the date of acquisition, its cash equivalents and
short-term investments as available-for-sale in accordance with the provisions of the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards Number 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115). Securities are reported at fair market value, with the related unrealized gains and losses included within stockholders equity. Debt and discount securities are adjusted for
straight-line amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Realized gains and losses are recorded using the specific identification method and are immaterial for all periods
presented.



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following summarizes Portals cash, cash equivalents and investments (in thousands):



|                                             |  |                  |        |                  |   |       
|-------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                             |  | January 31, 2004 |        | January 31, 2003
|                                             |  |                 
|Cash and cash equivalents:                   |  |                  |        |                  |   |       
|Cash                                         |  | $                | 24,499 |                  | $ | 13,108
|Money market funds                           |  |                  | 11,927 |                  |   | 8,394 
|Commercial paper                             |  |                  | 6,594  |                  |   |      
|                                             |  |                  |        |                  |   |       
|Total cash and cash equivalents              |  |                  | 43,020 |                  |   | 21,502
|                                             |  |                 
|Short-term investments                       |  |                  | 39,884 |                  |   | 30,641
|                                             |  |                 
|Restricted short-term investments:           |  |                  |        |                  |   |       
|Cash                                         |  |                  | 57     |                  |   |      
|U.S. Government securities                   |  |                  | 2,499  |                  |   | 1,609 
|                                             |  |                  |        |                  |   |       
|Total restricted short-term investments      |  |                  | 2,556  |                  |   | 1,609 
|                                             |  |                 
|Restricted long-term investments:            |  |                  |        |                  |   |       
|Cash                                         |  |                  |       |                  |   | 57    
|Money market funds                           |  |                  | 5,171  |                  |   | 1,814 
|Corporate notes                              |  |                  | 7,993  |                  |   |      
|U.S. Government securities                   |  |                  |       |                  |   | 11,541
|                                             |  |                  |        |                  |   |       
|Total restricted long-term investments       |  |                  | 13,164 |                  |   | 13,412
|                                             |  |                  |        |                  |   |       
|Total cash, cash equivalents and investments |  | $                | 98,624 |                  | $ | 67,164
|                                             |  |                  |        |                  |   |       



Available-For-Sale
Securities

|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|----------------------------------------------------- |  | -------------- | ------ | --------------- | ---- | ---- | ---------- | - | --- | - |  | - | ------
|                                                      |  | Amortized Cost |        | GrossUnrealized |      |      | Fair Value
|                                                      |  |                | Gain   |                 | Loss |      |           
|January 31, 2003                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|Corporate notes                                       |  | $              | 7,398  |                 | $    | 30   |            |   |    |   |  | $ | 7,428 
|U.S. Government securities                            |  |                | 29,981 |                 |      | 17   |            | $ | (5  | ) |  |   | 29,993
|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|Total available for sale debt securities              |  | $              | 37,379 |                 | $    | 47   |            | $ | (5  | ) |  | $ | 37,421
|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|Amounts included in short-term investments            |  | $              | 30,599 |                 | $    | 47   |            | $ | (5  | ) |  | $ | 30,641
|Amounts included in restricted short-term investments |  |                | 1,609  |                 |      |     |            |   |    |   |  |   | 1,609 
|Amounts included in restricted long-term investments  |  |                | 5,171  |                 |      |     |            |   |    |   |  |   | 5,171 
|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|Total available for sale debt securities              |  | $              | 37,379 |                 | $    | 47   |            | $ | (5  | ) |  | $ | 37,421
|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|                                                      |  |                |       
|                                                      |  | Amortized Cost |        | GrossUnrealized |      |      | Fair Value
|                                                      |  |                | Gain   |                 |      | Loss |            |  
|January 31, 2004                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|Commercial paper                                      |  | $              | 6,594  |                 |      |     |            |   |    |   |  | $ | 6,594 
|Corporate notes                                       |  |                | 16,366 |                 | $    | 18   |            | $ | (8  | ) |  |   | 16,376
|U.S. Government securities                            |  |                | 34,005 |                 |      | 8    |            | $ | (13 | ) |  |   | 34,000
|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|Total available for sale debt securities              |  | $              | 56,965 |                 | $    | 26   |            | $ | (21 | ) |  | $ | 56,970
|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|Amounts included in cash and cash equivalents         |  | $              | 6,594  |                 |      |     |            |   |    |   |  | $ | 6,594 
|Amounts included in short-term investments            |  |                | 39,879 |                 | $    | 26   |            | $ | (21 | ) |  |   | 39,884
|Amounts included in restricted short-term investments |  |                | 2,499  |                 |      |     |            |   |    |   |  |   | 2,499 
|Amounts included in restricted long-term investments  |  |                | 7,993  |                 |      |     |            |   |    |   |  |   | 7,993 
|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       
|Total available for sale debt securities              |  | $              | 56,965 |                 | $    | 26   |            | $ | (21 | ) |  | $ | 56,970
|                                                      |  |                |        |                 |      |      |            |   |     |   |  |   |       



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The estimated fair value of short-term investments classified by date of maturity is as follows (in
thousands):



|                                  |  |                 |        |   |                 |   |        |  
|--------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | -
|                                  |  | January 31,2004 |        |   | January 31,2003 |  
|Due within one year               |  | $               | 28,287 |   |                 | $ | 11,726 |  
|Due within two years              |  |                 | 14,096 |   |                 |   | 20,524 |  
|Restricted short-term investments |  |                 | (2,499 | ) |                 |   | (1,609 | )
|                                  |  |                 |        |   |                 |   |        |  
|                                  |  | $               | 39,884 |   |                 | $ | 30,641 |  
|                                  |  |                 |        |   |                 |   |        |  



Restricted investments
represent collateral for outstanding letters of credit and bank guarantees. The collateral amounts are typically in excess of the face value of the letters of credit and bank guarantees in order to account for potential fluctuations in the value of
the investments and exchange rates. As of January 31, 2004, restricted short-term investments of $2.5 million combined with restricted long-term investments of $13.2 million represent collateral for four letters of credit and five bank guarantees.
As of January 31, 2004 the four letters of credit totaling $11.4 million were issued in lieu of a cash security deposit and are renewable annually and expire on various dates from October 31, 2004 through March 5, 2021. One bank guarantee for $1.8
million was issued to secure outstanding bank loans made to former shareholders of Solution42 and expires on April 30, 2004. Another bank guarantee for $0.8 million relates to outstanding loans secured by buildings owned by Portal and expires on
December 31, 2017. The remaining three bank guarantees total $1.7 million were issued in support of Portals compliance with performance obligations to three customers and expire on various dates from March 15, 2004 through April 15, 2005.
Restricted investments consist of corporate notes and U.S. Government securities maturing over a period of one to two years.



As of January 31, 2004, restricted long-term investments of $13.2 million consisted of $5.2 million of cash and cash equivalents and $8.0 million of
investments classified as available-for-sale with no unrealized gains and losses. As of January 31, 2003, restricted long-term investments of $13.4 million consisted of $1.9 million of cash and cash equivalents and $6.3 million of investments
classified as held-to maturity and $5.2 million classified as available-for-sale with no unrealized gains and losses.



Portal also invests in equity instruments of privately held companies for business and strategic purposes. These investments are included in other assets,
in the amount of $1.5 million (total investment of $2.0 million net of a valuation allowance of $0.5 million) as of January 31, 2004 and January 31, 2003. The investments are accounted for using the cost method as Portal does not have the ability to
exercise significant influence over the operations of these companies and Portals investment is less than 20% of the outstanding voting shares in each entity. Portal monitors its investments for other than temporary impairment, basing its
assessment on a review of the investees operations and other indicators. Other indicators include, but are not limited to, capital resources, prospects of receiving additional financing, down rounds, and prospects for liquidity of the related
securities.



Depreciation and Amortization



Depreciation on office and computer equipment and furniture is computed
using the straight-line method over estimated useful lives of two to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or their estimated useful lives, typically five years.



Goodwill



Goodwill was carried at cost less accumulated amortization. Amortization,
through the year ended January 31, 2002, was computed using the straight-line method over the estimated economic life of four years. During



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



fiscal 2002, Portal recorded a charge of $194.5 million to reflect the impairment of goodwill. Goodwill was further reduced in fiscal 2002 by $3.5 million
due to the reversal of excess accrued direct acquisition costs. As of January 31, 2002 there was no remaining balance in goodwill.



Upon adoption of Statement of Financial Accounting Standards Number 142, Goodwill and Other Intangible Assets, (SFAS 142), in its
fiscal year beginning February 1, 2002, Portal is required to present specific disclosures under the transitional provisions of SFAS 142. The following table presents the loss for all periods presented, as adjusted, to exclude the amortization of
goodwill (in thousands, except per share data; unaudited):



|                                        |  |                         |         |   |      |   |         |      |  |   |          |  
|--------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                        |  | Years ended January 31, |        
|                                        |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Net loss as reported                    |  | $                       | (40,191 | ) |      | $ | (72,212 | )    |  | $ | (395,500 | )
|Add: Amortization of goodwill           |  |                         |        |   |      |   |        |      |  |   | 31,127   |  
|                                        |  |                         |         |   |      |   |         |      |  |   |          |  
|Adjusted net loss                       |  | $                       | (40,191 | ) |      | $ | (72,212 | )    |  | $ | (364,373 | )
|                                        |  |                         |         |   |      |   |         |      |  |   |          |  
|Basic and diluted net loss per share:   |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss per share as reported          |  | $                       | (1.05   | ) |      | $ | (2.05   | )    |  | $ | (11.50   | )
|Add: Amortization of goodwill per share |  |                         |        |   |      |   |        |      |  |   | 0.90     |  
|                                        |  |                         |         |   |      |   |         |      |  |   |          |  
|Adjusted net loss per share             |  | $                       | (1.05   | ) |      | $ | (2.05   | )    |  | $ | (10.60   | )
|                                        |  |                         |         |   |      |   |         |      |  |   |          |  



Purchased Developed
Technology



Purchased developed technology is carried at
cost less accumulated depreciation. The following table summarizes the Companys purchased developed technology and accumulated amortization as of January 31, 2004 and 2003.



|                         |  |                 |        |   |                 |   |        |  
|------------------------ |  | --------------- | ------ | - | --------------- | - | ------ | -
|                         |  | January 31,2004 |        |   | January 31,2003 |  
|Gross costs              |  | $               | 11,628 |   |                 | $ | 11,628 |  
|Accumulated amortization |  |                 | (9,633 | ) |                 |   | (6,973 | )
|                         |  |                 |        |   |                 |   |        |  
|Net                      |  | $               | 1,995  |   |                 | $ | 4,655  |  
|                         |  |                 |        |   |                 |   |        |  



Future amortization
expense of the remaining purchased developed technology is estimated to be $2.0 million in fiscal 2005 and will be fully amortized in that year.



Impairment of Long-Lived Assets



Portal evaluates the carrying value of long-lived assets and intangible assets whenever certain events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When indicators of impairment exist, the estimated future net undiscounted cash flows associated with the asset are compared to the assets carrying amount to determine if impairment has
occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets is recognized. If quoted market prices for the assets are not available, the fair value is
calculated using the present value of estimated net cash flows.



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During the quarter ended October 31, 2002, Portal recorded charges of $2.9 million in impairment of
assets related to computer equipment and software that we abandoned. Of the total impairment charge, $1.4 million was related to third-party software for which some of the functionality was previously integrated into Portals product. The
entire software was abandoned after Portal re-assessed its need for the software and decided against further integration due to the reductions in workforce. The impairment of this software is included in Amortization and Impairment of Purchased
Developed Technology in the Consolidated Statements of Operations. The remaining $1.5 million in impairment of computer equipment is included in Impairment of Long-lived Assets in the Consolidated Statements of Operations.



During the fiscal year ended January 31, 2002, Portal identified indicators
of possible impairment of the intangible assets arising from its acquisition of Solution42. The indicators of impairment included the other than temporary decline in market values of technology companies in general and Portal specifically.
Portals stock price experienced a steady decline over the course of several quarters, with a slight rebound at the end of the first quarter of fiscal 2002. The slight rebound in stock prices appeared to indicate that the decline in market
values may be temporary, but the stock continued on a downward trend in the second quarter of fiscal 2002. Had Solution42 been an independent company, Portal concluded that its valuation would have declined in a similar manner to Portals based
on the similarity of products, target markets and declining revenue. Additionally, in the second quarter of fiscal 2002 the forecasted revenue for Solution42 products deteriorated significantly from the forecasts made at the time of the acquisition.
In connection with Portals restructuring plans (see Restructuring Costs below), it planned to reduce its headcount overseas which included many Solution42 employees and cancelled research and development activities related to the Solution42
product, both of which were a result of an other than temporary deterioration in the business climate and a drastic reduction in forecasted revenue opportunities.



Portal performed asset impairment tests at the Solution42 subsidiary level, the lowest level for which there were
identifiable cash flows related to these acquired intangible assets and goodwill. The tests were performed by comparing the expected undiscounted cash flows to the carrying amount of the intangible assets resulting from the Solution42 acquisition.
Based on the results of these tests, Portal determined that intangible assets initially recorded in connection with this acquisition were significantly impaired.



Portal measured the impairment loss related to intangible assets based on the amount by which the carrying amount of such
assets exceeded its fair value. Measurement of fair value was based on an analysis of the future discounted cash flows at the Solution42 level. In performing this analysis, Portal used the best information available in the circumstances including
reasonable and supportable assumptions and projections. The discounted cash flow analysis considered the likelihood of possible outcomes and was based on Portals best estimate of projected future cash flows. The discount rate was based on
historical risk premiums required by investors for companies of Portals size, industry and capital structure and included risk factors specific to Portal. The analysis indicated that Portals intangible assets for Solution42 were impaired
by an amount totaling $193.4 million. Accordingly, Portal recorded an impairment write-down of this amount during the second quarter of fiscal 2002.



During the third quarter of fiscal 2002, Portal further reduced goodwill by $3.5 million due to the reduction of accrued direct acquisition costs. During
the final quarter of fiscal 2002, Portal identified additional indicators of impairment of its remaining Solution42 intangible assets. As a result, Portal recorded charges of $1.1 million and $2.2 million to reflect the impairment of the remaining
balance of goodwill and a portion of the purchased developed technology, respectively. In the fourth quarter of fiscal 2003, we issued 136,362 shares valued at $0.5 million to the former Solution42 shareholders under the terms of the original
purchase agreement, resulting in an additional goodwill impairment charge during the quarter.



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Due to the lack of revenues generated from BayGate products together with the October 2001 reduction
of workforce associated with BayGates product, Portal cancelled the further planned development of BayGate-related products. Based on these key factors, Portal recorded a charge of $2.5 million during the third quarter of fiscal 2002, to
reflect the impairment of the remaining balance of the purchased developed technology related to its investment in BayGate.



Net Loss Per Share



In accordance with Financial Accounting Standards Number 128, Earnings Per Share, basic and diluted net loss per share have been computed
using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase.



The following table presents the calculation of basic and diluted net loss per share for each of the three years in the period ended January 31, 2004 (in
thousands, except per share data):



|                                                                   |  |                         |         |   |      |   |         |      |  |   |          |  
|------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                   |  | Years ended January 31, |        
|                                                                   |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Basic and diluted:                                                 |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss                                                           |  | $                       | (40,191 | ) |      | $ | (72,212 | )    |  | $ | (395,500 | )
|                                                                   |  |                         |         |   |      |   |         |      |  |   |          |  
|Weighted-average shares of common stock outstanding                |  |                         | 38,170  |   |      |   | 35,292  |      |  |   | 34,580   |  
|Less: Weighted-average shares subject to repurchase                |  |                         | (7      | ) |      |   | (14     | )    |  |   | (182     | )
|                                                                   |  |                         |         |   |      |   |         |      |  |   |          |  
|Weighted-average shares used in computing basic net loss per share |  |                         | 38,163  |   |      |   | 35,278  |      |  |   | 34,398   |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |          |  
|Net loss per share                                                 |  | $                       | (1.05   | ) |      | $ | (2.05   | )    |  | $ | (11.50   | )
|                                                                   |  |                         |         |   |      |   |         |      |  |   |          |  



Portal has excluded
outstanding stock options from the calculation of diluted loss per share because all such securities are antidilutive for all periods presented. The total number of shares under options excluded from the calculations of diluted net loss per share
was 2,617,216 for fiscal 2004, 693,145 for fiscal 2003, and 904,903 for fiscal 2002 . Such options, had they been dilutive, would have been included in the computations of diluted net loss per share using the treasury stock method. See Note 8 for
further information on these securities.



Stock-Based
Compensation



Portal has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion Number 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its employee and director
stock-based awards. An alternative method prescribed by Statement of Financial Accounting Standards Number 123, Accounting for Stock-Based Compensation, (SFAS 123), as amended by Statement of Financial Accounting Standards
Number 148 Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148), encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value.
The alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock-based awards. Under APB Opinion Number 25, Portal does not recognize compensation
expense with respect to such awards if the exercise price equals or exceeds the fair value of the underlying security on the date of grant and other terms are fixed.



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Portal estimates fair value based on the Black-Scholes option pricing model. This model was developed
for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, this option valuation model requires the input of highly subjective assumptions, including the expected stock price
volatility. Because Portals stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards.



The fair value of options granted was estimated using the following weighted-average assumptions:



|                        |  |                         |   |  |                             |   |  |      |   |  |      |   |  |      |   |  |      |  
|----------------------- |  | ----------------------- | - |  | --------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                        |  | Options                 |   |  | Employee Stock PurchasePlan |  
|                        |  | Years Ended January 31, |   |  | Years Ended January 31,     |  
|                        |  | 2004                    |   |  | 2003                        |   |  | 2002 |   |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Risk-free interest rate |  | 3.5                     | % |  | 4.0                         | % |  | 5.0  | % |  | 1.1  | % |  | 2.3  | % |  | 4.9  | %
|Expected life (years)   |  | 4.5                     |   |  | 4.5                         |   |  | 5.0  |   |  | 0.8  |   |  | 1.0  |   |  | 0.5  |  
|Volatility              |  | 110                     | % |  | 90                          | % |  | 90   | % |  | 110  | % |  | 90   | % |  | 90   | %
|Dividend yield          |  | 0                       | % |  | 0                           | % |  | 0    | % |  | 0    | % |  | 0    | % |  | 0    | %



The weighted average
fair value, per share, of options granted for the years ended January 31, 2004, 2003 and 2002 was $8.08, $4.79 and $8.48, respectively. The weighted average fair value, per share, of stock granted for the employee stock purchase plan for the years
ended January 31, 2004, 2003 and 2002 was $4.44, $2.77 and $9.22, respectively.



Summarized below are the pro forma effects on net loss and net loss per share as if Portal had elected to use the fair value approach prescribed by SFAS 123 (in thousands, except per share amounts):



|                                                                                                                                |  |                         |         |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                                                |  | Years Ended January 31, |        
|                                                                                                                                |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|Net loss, as reported                                                                                                           |  | $                       | (40,191 | ) |      | $ | (72,212  | )    |  | $ | (395,500 | )
|Add: Stock-based employee compensation included in reported net loss                                                            |  |                         | 14,687  |   |      |   | 2,272    |      |  |   | 1,992    |  
|Deduct: Stock-based employee compensation expense determined under the fair value method for all stock option grants (SFAS
123) |  |                         | (35,399 | ) |      |   | (52,277  | )    |  |   | (81,683  | )
|                                                                                                                                |  |                         |         |   |      |   |          |      |  |   |          |  
|Pro forma net loss                                                                                                              |  | $                       | (60,903 | ) |      | $ | (122,217 | )    |  | $ | (475,191 | )
|                                                                                                                                |  |                         |         |   |      |   |          |      |  |   |          |  
|Basic and diluted net loss per share:                                                                                           |  |                         |         |   |      |   |          |      |  |   |          |  
|As reported                                                                                                                     |  | $                       | (1.05   | ) |      | $ | (2.05    | )    |  | $ | (11.50   | )
|                                                                                                                                |  |                         |         |   |      |   |          |      |  |   |          |  
|Pro forma                                                                                                                       |  | $                       | (1.60   | ) |      | $ | (3.46    | )    |  | $ | (13.81   | )
|                                                                                                                                |  |                         |         |   |      |   |          |      |  |   |          |  



Recently Issued
Accounting Standards



In January 2003, the FASB issued
Interpretation No. 46 (the Interpretation), Consolidation of Variable Interest Entities. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entitys expected losses, receives a
majority of the entitys expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has controlling financial
interest through ownership of a majority voting



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



interest in the entity. We will implement the Interpretation in the quarter ending April 30, 2004. We have performed a preliminary analysis of the
Interpretation and do not believe that the adoption will result in a material impact on our results of operations or financial position. During the quarter ending April 30, 2004, we will complete the evaluation of the implications of the
Interpretation with respect to all variable interest entities with which we have involvement.



Note 2.    Property and Equipment



Property and equipment is recorded at cost and consists of the following (in thousands):



|                                          |  |             |         |   |      |   |         |  
|----------------------------------------- |  | ----------- | ------- | - | ---- | - | ------- | -
|                                          |  | January 31, |        
|                                          |  | 2004        |         |   | 2003 |  
|Land and buildings                        |  | $           | 2,458   |   |      | $ | 2,142   |  
|Office and computer equipment             |  |             | 35,365  |   |      |   | 30,770  |  
|Furniture and fixtures                    |  |             | 2,258   |   |      |   | 2,172   |  
|Leasehold improvements                    |  |             | 8,663   |   |      |   | 8,246   |  
|                                          |  |             |         |   |      |   |         |  
|                                          |  |             | 48,744  |   |      |   | 43,330  |  
|Accumulated depreciation and amortization |  |             | (27,896 | ) |      |   | (20,532 | )
|                                          |  |             |         |   |      |   |         |  
|Property and equipment, net               |  | $           | 20,848  |   |      | $ | 22,798  |  
|                                          |  |             |         |   |      |   |         |  



In fiscal 2003,
property and equipment with an original cost of approximately $35.2 million was written down to its net realizable value as part of the restructuring program and impairment of assets.



During fiscal 2004, 2003 and 2002 depreciation expense amounted to $7.3 million, $9.0 million and $17.7 million,
respectively.



Note 3.    Acquisitions



On May 10, 2001, Portal purchased all of the outstanding stock of
privately held BayGate, Inc (BayGate) for $2.2 million in cash and up to an additional $2.5 million in cash based on achievement of certain revenue and engineering objectives. BayGate was a provider of database management software. The
acquisition was completed in July 2001 and was accounted for as a purchase. Using the income approach, which estimates the net present value of future earnings and cash flow potential, Portal estimated a total potential value of $6.6 million for
purchased developed technology. Based on consideration given at the time of acquisition, the amount allocated to purchased developed technology was $4.1 million. Upon achievement of specified revenue and engineering objectives, the additional
consideration would have been allocated to purchased developed technology. The consolidated financial statements include the operating results of BayGate from the date of acquisition. Amounts allocated to developed technology were being amortized
over its estimated useful life of three years.



Due to the lack
of revenues generated from BayGate products together with the October 2001 reduction of workforce (see Note 4) associated with BayGates product, Portal cancelled the further planned development of BayGate-related products. Based on these key
factors, Portal recorded a charge of $2.5 million during the quarter ended October 31, 2001, to reflect the impairment of purchased developed technology related to Portals investment in BayGate . As of January 31, 2002, Portal no longer had
purchased developed technology related to our investment in BayGate due to a combination of impairment charges and amortization during fiscal 2002. Under a subsequent agreement, a final payment of $0.3 million was made in January 2002 to the BayGate
stockholders in satisfaction of all our contingent purchase price obligations under the purchase agreement.



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On November 2, 2000, Portal acquired SOLUTION42 AG (Solution42) and its subsidiaries.
Solution42 is a Germany-based provider of wireless voice mediation, provisioning and rating technologies. The acquisition was treated as a purchase for accounting purposes, and accordingly, the purchase price was allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The consolidated financial statements include the operating results of Solution42 from the date of acquisition.



At the date of acquisition, the purchase price was $268.6 million, which
consisted of the fair value of the stock issued as consideration, direct acquisition costs of $14.8 million, and a deferred tax liability of $5.0 million recorded by Portal.



The following is the allocation of the non-contingent purchase price and deferred tax liability (in thousands):



|                                    |  |   |        
|----------------------------------- |  | - | -------
|Net assets acquired                 |  | $ | 1,475  
|Purchased developed technology      |  |   | 13,800 
|In-process research and development |  |   | 9,200  
|Goodwill                            |  |   | 244,165
|                                    |  |   |        
|                                    |  | $ | 268,640
|                                    |  |   |        



Purchased developed
technology is being amortized, on a straight-line basis, over its estimated useful life of four years. Accumulated amortization, including the impairment charge of $2.2 million, was $11.8 million and $9.1 million as of January 31, 2004 and 2003,
respectively. During fiscal 2002, Portal recorded a charge of $2.2 million to reflect the impairment of purchased developed technology as related to Portals investment in Solution42 (see Note 1.)



Goodwill, as related to the acquisition of Solution42, was recorded in the
amount of $244.2 million and was being amortized, on a straight-line basis, over its estimated useful life of four years. Amortization expense was $31.1 million and $14.9 million for the years ended January 31, 2002 and 2001, respectively. During
the year ended January 31, 2002, Portal recorded a charge of $194.5 million to reflect the impairment of goodwill (see Note 1). Goodwill was further reduced in the third quarter of fiscal 2002 by $3.5 million, to zero, due to the reversal of excess
accrued direct acquisition costs. In the fourth quarter of fiscal 2003, the 136,362 shares subject to the economic earn-out were issued. The value of these shares of $0.5 million was also written-off to the Reduction in Intangibles due to Impairment
in the Consolidated Statements of Operations.



Note
4.    Restructuring



Fiscal 2003
Restructuring Activities:



In July 2002, our Board of
Directors approved and we began implementation of a plan to effect a change in our operations and cost structure to more fully align with our revised business strategy requiring a greater focus on the needs of diversified telecommunications service
providers. The plan included a reduction in workforce of approximately 250 employees, facilities reductions and asset write-offs. We recorded restructuring charges of $6.1 million and $30.4 million for the quarters ended July 31, 2002 and October
31, 2002, respectively. The restructuring charges included approximately $6.2 million of severance related amounts, $17.1 million of committed excess facilities, primarily related to lease expenses net of anticipated sublease income, $11.7 million
in asset write-offs and $1.5 million for other costs. Additionally, Portal had previously integrated certain functionality of third-party software into its product. Due to the reductions in the workforce, Portal re-assessed its



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need for this third-party software and abandoned it when the related resources to integrate and maintain the software were eliminated. As a result, a $1.4
million charge was recorded in the quarter ended October 31, 2002 to reflect the value of the abandoned software which has been included in the Amortization and Impairment of Purchased Developed Technology in the Consolidated Statements of
Operations.



The fiscal 2003 restructuring plan specifically
identified facilities to be vacated, throughout North America and internationally in Germany, Japan and the United Kingdom. Portal vacated the facilities on various dates, as planned, through September 2002. A portion of Portals headquarters
was also vacated by December 2002. The planned exit dates for each facility were considered when calculating the restructuring charges. For the portion of the facilities that we continued to occupy subsequent to the plans approval, we have
included rental costs relating to the period following the planned exit date in the restructuring charges. Prior to vacating these facilities, or portions thereof, rental expense continued to be included in operating expenses. Portal has been
successful in negotiating the termination of some of its leases. The restructuring accrual reflects the terms of these agreements.



The $11.7 million in asset write-offs consisted of the following significant assets:



Leasehold improvements:    As a result of the abandonment of various operating
lease facilities as defined in the restructuring plans, Portal also abandoned the related leasehold improvements. Upon vacating the facilities, Portal wrote-off the net book values of the related leasehold improvements. This charge impacted its
North American and European regions.



Furniture and fixtures:    As a result of abandoning facilities, Portal decided to also abandon furniture and fixtures in the vacated facilities or portion of the facilities. Upon vacating the facilities and
abandoning the furniture and fixtures, Portal wrote off the net book value of the abandoned assets. This charge impacted the North American and European regions.



Internally used software:    As a result of the reductions in force, Portal
assessed its need for the number of licenses for software currently in use. Based on current and projected future needs, Portal determined that the number of licenses purchased exceeded the actual number needed. Accordingly, Portal abandoned the
unused licenses and wrote-off the related portion of the license fees associated with these purchased software packages. Additionally, Portal was working on a project that utilized third-party software. Due to the reductions in force, Portal
re-assessed its need for the software, and abandoned it, due to the elimination of related resources. These charges impacted the North American and European regions.



The long-term portion of the accrued restructuring costs is made up of lease payments for vacated facilities, net of
expected sublease income, and is currently expected to be paid through 2009. Actual future cash requirements may differ materially from the accrual, particularly if actual sublease income is significantly different from current estimates, if we are
successful or unsuccessful in our efforts to renegotiate facility leases, or if we are unsuccessful in our attempts to sublet the facilities.



Fiscal 2002 Restructuring Activities:



In May 2001, Portals Board of Directors approved a plan to reduce its cost structure. The plan was a combination of a reduction in workforce of
approximately 300 employees or 20% of the workforce, consolidations of facilities and asset write-offs. These workforce reductions affected all functional areas of Portal and were largely completed in the second quarter of fiscal 2002. As a result
of the restructuring plan, Portal incurred a charge of $41.3 million in the second quarter of fiscal 2002. The restructuring charge included approximately $6.9 million of severance related amounts, $20.4 million of committed excess facilities,
primarily related to lease expenses net of anticipated sublease income, and $13.1 million in asset write-offs. The estimated



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costs of abandoning these leased facilities, including estimated costs to sublease, were determined through assessment of market information trend analyses.



In October 2001, Portals Board of Directors approved a
second restructuring plan to further reduce its cost structure in response to the continued global deferral of capital expenditures by telecommunications companies as well as the general downturn in the economy. The restructuring plan included a
reduction in workforce of approximately 320 employees, or 28% of the workforce, which affected all functional areas of Portal and was largely completed in the fourth quarter of fiscal 2002. The plan also included further consolidations of facilities
and asset write-offs. Portal incurred a charge of $19.3 million and $10.4 million in the third and fourth quarters of fiscal 2002, respectively, as a result of this restructuring plan. The restructuring charge included approximately $10.4 million of
severance related amounts, $16.0 million of committed excess facilities, primarily related to lease expenses net of anticipated sublease income, and $2.7 million in asset write-offs. The additional charges in the fourth quarter of fiscal 2002 were
necessitated by revised estimates of sublease commencement dates and rental rate projections to reflect continuing declines in market conditions as well as additional severance for foreign employees.



For the fiscal 2002 restructuring plans, Portal identified assets that were
to be written off. The following is a list of Portals significant asset write-offs:

Prepaid Services (Accenture
LLP related):    On April 12, 1999, Portal agreed to enter into a strategic alliance with Accenture LLP (Accenture) under which Accenture agreed to provide services to Portal and the parties agreed to primarily
jointly develop Portals Wireline product. Portal agreed to compensate Accenture for its services with a minimum services fee in cash of $2.8 million and a cash-settled put (fair value $3.8 million) for 400,000 of the shares to be
purchased by Accenture. Both the cash and the fair value of the put, $6.6 million in aggregate, was recorded as a prepaid service asset. This asset was being amortized over the estimated period of benefit of four and one half years on a
straight-line basis. The asset was written off as the parties mutually agreed to terminate the agreement on April 17, 2003. (see Note 6.)



Leasehold improvements:    As a result of the abandonment of various operating lease facilities, Portal
wrote-off the net book values of the related leasehold improvements. Portal continued to record depreciation expense, included in operating expenses, for the leasehold improvements until it no longer occupied the facilities or portions of the
facilities. Upon vacating these facilities, Portal wrote-off the net book value of these leasehold improvements. This charge impacted its North American and European regions.



Laptop computers used by exiting employees:    Portal wrote-off the book value of
its laptop computers used by exiting employees that either it did not expect to be returned by the severed employees or it expected to scrap or sell. Portal made a decision to sell the computers returned by exiting employees as it believed that by
the time it begins to experience growth, the computers would be obsolete. Portal recorded the charge for the computer write-offs net of expected proceeds received from the sale of computers. As this cost is related to employees who were terminated
as part of the restructuring plans, we included the charge as part of the restructuring expense. This charge impacted all regions.



The fiscal 2002 restructuring plans specifically identified facilities to be vacated, domestically in California and Virginia, and internationally in
Germany, Japan and the United Kingdom. Portal vacated the facilities on various dates, as planned, starting May 2001 through March 2002. The planned exit dates for each facility were considered when calculating the restructuring charges. For the
portion of the facilities that we continued to occupy subsequent to the plans approval, we included rental costs relating to the period following the planned exit date in the restructuring charges. Prior to vacating these facilities, or
portions thereof, rental expense continued to be included in operating expenses.



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The remaining severance was paid out through the second quarter of fiscal 2003. Facilities costs are
expected to be paid out through 2013. Actual future cash requirements may differ materially from the accrual, particularly if actual sublease income is significantly different from current estimates, if we are successful or unsuccessful in our
efforts to renegotiate facility leases, or if we are unsuccessful in our attempts to sublet the facilities. During fiscal 2004, Portal recorded reclassification adjustments to previously recorded restructuring estimates totaling $0.8 million,
primarily due to sublease income and final severance settlement costs in certain European countries exceeding our original estimates.



A summary of restructuring activities along with the respective remaining reserves follows (in thousands):



|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       
|------------------------------------------- |  | ------------------------ | ------ | -------------------- | ---- | ------ | ---- | -------- | - | -------- | ---------------------- |  | ---------------------- | ------- | - |  | - | ------
|                                            |  | Restructuring Charges    |        |                      | Cash |        |      | Non-cash |   |          | BalanceJanuary 31,2002
|                                            |  | Plan I                   |        | Plan II              |      |        |      |         
|Severance                                   |  | $                        | 6,893  |                      | $    | 10,413 |      |          | $ | (15,356  | )                      |  | $                      |        |   |  | $ | 1,950 
|Facilities                                  |  |                          | 20,352 |                      |      | 15,989 |      |          |   | (6,365   | )                      |  |                        |        |   |  |   | 29,976
|Asset write-offs                            |  |                          | 13,084 |                      |      | 2,718  |      |          |   |         |                        |  |                        | (13,421 | ) |  |   | 2,381 
|Other                                       |  |                          | 963    |                      |      | 608    |      |          |   | (897     | )                      |  |                        |        |   |  |   | 674   
|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       
|                                            |  | $                        | 41,292 |                      | $    | 29,728 |      |          | $ | (22,618  | )                      |  | $                      | (13,421 | ) |  | $ | 34,981
|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       
|                                            |  |                          |        |                      |     
|                                            |  | Balance January 31, 2002 |        | RestructuringCharges |      |        | Cash |          |   | Non-cash |                        |  | BalanceJanuary 31,2003
|Severance                                   |  | $                        | 1,950  |                      | $    | 6,175  |      |          | $ | (6,228   | )                      |  | $                      |        |   |  | $ | 1,897 
|Facilities                                  |  |                          | 29,976 |                      |      | 17,120 |      |          |   | (10,466  | )                      |  |                        |        |   |  |   | 36,630
|Asset write-offs                            |  |                          | 2,381  |                      |      | 11,690 |      |          |   |         |                        |  |                        | (14,071 | ) |  |   |      
|Other                                       |  |                          | 674    |                      |      | 1,561  |      |          |   | (441     | )                      |  |                        |        |   |  |   | 1,794 
|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       
|                                            |  | $                        | 34,981 |                      | $    | 36,546 |      |          | $ | (17,135  | )                      |  | $                      | (14,071 | ) |  | $ | 40,321
|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       
|                                            |  |                          |        |                      |     
|                                            |  | BalanceJanuary 31,2003   |        | Adjustments          |      |        | Cash |          |   | Non-cash |                        |  | BalanceJanuary 31,2004
|Severance                                   |  | $                        | 1,897  |                      | $    | 783    |      |          | $ | (2,545   | )                      |  | $                      |        |   |  | $ | 135   
|Facilities                                  |  |                          | 36,630 |                      |      | (783   | )    |          |   | (9,711   | )                      |  |                        |        |   |  |   | 26,136
|Other                                       |  |                          | 1,794  |                      |      |        |      |          |   | (81      | )                      |  |                        |        |   |  |   | 1,713 
|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       
|                                            |  | $                        | 40,321 |                      | $    |       |      |          | $ | (12,337  | )                      |  | $                      |        |   |  | $ | 27,984
|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       
|Current portion accrued restructuring costs |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  | $ | 9,193 
|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       
|Long-term accrued restructuring costs       |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  | $ | 18,791
|                                            |  |                          |        |                      |      |        |      |          |   |          |                        |  |                        |         |   |  |   |       



The restructuring
accrual for facilities as of January 31, 2004 of $26.1 million included approximately $19.1 million for future minimum lease payments and $7.0 million for variable facility related operating costs. If we are unable to find suitable sublessors for
our unused facilities, our maximum exposure for future lease payments and variable facility related operating costs not included in the accrued restructuring amounts related to facilities is $43.3 million.



Note 5.    Short-term and Long-term Notes Payable



In November 2000, Portal acquired Solution42 (see Note 3.) The liabilities
assumed as part of the acquisition included two short-term notes payable and four long-term notes payable.



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The first short-term note payable was unsecured and accrued interest at 6% per annum. The interest
was due and payable one month after managements approval of the annual financial statements. Under the original terms of the loan, principal payments were not due until June 2002 and were to continue through June 2005. However, after the
acquisition, Portal management made arrangements to repay the entire balance in fiscal 2002. Due to this decision, the entire loan balance of $0.8 million was classified as short-term as of January 31, 2001. This note was repaid in fiscal 2002. The
second short-term note payable was unsecured and accrued interest at 6% per annum. The interest was due and payable on a quarterly basis. The terms of the loan required repayment of the principal in June 2001 and was repaid accordingly.



The four long-term notes payable are mortgages for two facilities
purchased by Solution42. Two of the loans accrue interest at 4.45% per annum. These two loans are guaranteed by a German government organization and have restrictions on the transfer of property. Principal and interest are due in December 2010 and
June 2011. As of January 31, 2004, the balances due on these loans were $0.7 million and $0.6 million, respectively. The other two loans accrue interest at 5.10% and 4.88% per annum. The interest rates on these loans are fixed until 2008 and 2009,
respectively, at which time the rates can be renegotiated. Principal and interest are due monthly through October 2015 and November 2024, respectively. As of January 31, 2004 the balances due on these loans were $0.2 million each.



Future minimum payments under long-term notes payable are as follows (in
thousands):



|                                  |  |   |       |  
|--------------------------------- |  | - | ----- | -
|Year ending January 31,           |  |   |       |  
|2005                              |  | $ | 96    |  
|2006                              |  |   | 96    |  
|2007                              |  |   | 96    |  
|2008                              |  |   | 96    |  
|2009                              |  |   | 96    |  
|Thereafter                        |  |   | 1,763 |  
|                                  |  |   |       |  
|Total minimum payments            |  |   | 2,243 |  
|Less amount representing interest |  |   | (583  | )
|                                  |  |   |       |  
|Present value of future payments  |  |   | 1,660 |  
|Less current portion              |  |   | (96   | )
|                                  |  |   |       |  
|Long-term portion                 |  | $ | 1,564 |  
|                                  |  |   |       |  



Note
6.Agreement with Accenture LLP (formerly Andersen Consulting LLP)



On April 12, 1999, Portal entered into a strategic alliance with Accenture under which Accenture agreed to provide services to Portal and the parties
agreed to expand their existing marketing alliance and work closely together to expand their customer service and marketing relationship.



Under this agreement, Portal agreed to compensate Accenture for its services with a minimum services fee. As a result of this relationship, a prepaid
service asset of $6.6 million was recorded related to the development of a specific product and was being amortized on a straight-line basis over the term of the agreement of approximately four and one half years. However, due to the Companys
May 2001 restructuring (see Note 4), the further development and sale of this product was cancelled because of a lack of required internal resources. Consequently, the remaining balance of $5.0 million was written-off in the second quarter of fiscal
2002 and was included in the restructuring charges. Further, the parties mutually agreed to terminate the agreement on April 17, 2003.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 7.    Commitments and Contingencies



Operating Leases



Portal leases its office facilities and some property under various
operating lease agreements with terms through March 2021. Rental expense, net of sublease income, for all operating leases was approximately $6.4 million, $10.0 million and $15.1 million for fiscal 2004, 2003 and 2002, respectively. Sublease income
was $1.0 million, $1.2 million and $1.1 million for fiscal 2004, 2003 and 2002, respectively.



Future minimum lease payments and committed future sublease income as of January 31, 2004 for all operating leases are as follows (in thousands):



|                             |  |               |        |                |   |       
|---------------------------- |  | ------------- | ------ | -------------- | - | ------
|Year ending January 31,      |  | LeasePayments |        | SubleaseIncome
|2005                         |  |               | 12,329 |                |   | 1,310 
|2006                         |  |               | 12,035 |                |   | 1,551 
|2007                         |  |               | 11,222 |                |   | 1,173 
|2008                         |  |               | 11,197 |                |   | 1,012 
|2009                         |  |               | 11,466 |                |   | 1,089 
|Thereafter                   |  |               | 35,258 |                |   | 5,071 
|                             |  |               |        |                |   |       
|Total minimum lease payments |  | $             | 93,507 |                | $ | 11,206
|                             |  |               |        |                |   |       



Of the $82.3 million
net non-cancelable operating leases, $19.1 million has been included in accrued restructuring expenses as of January 31, 2004.



In connection with the leases for several facilities, Portal has issued four letters of credit as deposits (see Note 1.) The four letters of credit were
issued in lieu of a cash security deposit, are renewable annually and expire on various dates from October 31, 2004 through March 5, 2021.



Legal Matters



On July 9, 2001, a purported class action complaint was filed in the Federal United States District Court for the Southern District of New York against
Portal, certain of its officers and several underwriters of Portals initial public offering (IPO). The lawsuit alleges violations of Section 11 of the Securities Act of 1933, as amended, and Section 10(b) of the Securities Exchange
Act of 1934, as amended, arising from alleged improprieties by the underwriters in connection with our 1999 IPO and follow-on public offering, and claims to be on behalf of all persons who purchased Portal Software shares from May 5, 1999 through
December 6, 2000. Four additional nearly identical class actions were also filed in July and August 2001 based on essentially the same facts and allegations. Specifically, the complaints allege the underwriters charged certain of their customers
fees in excess of those disclosed in the prospectus and engaged in certain allegedly improper activities in connection with the distribution of the IPO shares. The complaint was subsequently amended to allege similar claims with respect to our
secondary public offering in September 1999.



The cases were
consolidated into a single action, and a consolidated amended complaint was filed on April 19, 2002. These actions are part of the litigation known as the IPO Securities Litigation, which has been brought against over 300 issuers and
nearly 50 underwriters alleging claims virtually identical to those alleged against us. The action seeks damages in an unspecified amount. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these
actions has been denied. This action is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On February 19, 2003, the Court denied the motion to dismiss the complaint against the Company.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Portal has approved a Memorandum of Understanding (MOU) and related agreements which set
forth the terms of a settlement proposal presented to all between the Company, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. In this settlement, plaintiffs will dismiss and release all claims against
Portal and its executive officers named in the suit, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the public offering cases, and for the assignment or surrender of
control of certain claims Portal may have against its underwriters. Neither Portal nor its executive officers named in the suit will be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the
settlement exceeds the amount of the insurance coverage, a circumstance which Portal does not believe will occur. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the MOU and related
agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the Company. The settlements will require MOU and related agreements and are subject to a number of
contingencies, including the negotiation of a settlement agreement and its approval by the court, which cannot be assured, after class members are given the opportunity to object to the settlement, or opt out of the settlement.



On November 13, 2003 Portal announced that its results for the quarter ended
October 31, 2003 would be lower than previously estimated. On November 20, 2003 a purported class action complaint was filed in the United States District Court for the Northern District of California against Portal, and certain of its officers and
directors. The lawsuit alleges violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, arising from alleged misrepresentations and omissions of material facts, and claims to be on behalf of all persons who
purchased Portal shares from May 20, 2003 through November 13, 2003. Several similar class actions have also been filed in the same court based on essentially the same facts and allegations. The actions seek damages in an unspecified amount. These
cases were consolidated on February 4, 2004, and a lead plaintiff and lead plaintiffs counsel were appointed on March 25, 2004. The lead plaintiff is scheduled to file a consolidated complaint on or before May 17, 2004.



On November 17, 2003, a stockholder derivative action was filed in the
Superior Court of California, County of San Mateo against the members of the Board of Directors and certain officers of Portal alleging breach of fiduciary duty and other violations of state law. A second similar action was filed in the Superior
Court of California, County of San Mateo on November 25, 2003. These complaints are generally based on the same facts and circumstances as the class actions, alleging that the defendants misrepresented Portals financial projections and that
certain of the defendants violated state laws relating to insider trading. The actions seek damages in an unspecified amount, disgorgement of improper profits and attorneys fees, among other forms of relief. In February 2004, both derivative
actions were transferred to Santa Clara County Superior Court. Defendants have filed a motion to stay the second action in favor of the first filed action, as well as motions to dismiss both actions on the grounds that the plaintiffs lack standing
to pursue their claims and that the complaints fail to state a claim.



Portal believes that the claims asserted by these lawsuits are without merit, and intends to defend these actions vigorously. However, due to the inherent uncertainties of litigation, Portal cannot accurately predict the ultimate outcome of
the litigation. An unfavorable outcome in litigation could materially and adversely affect Portals business, financial condition and results of operations.



Note 8.    Stockholders Equity



Stock Split



On September 3, 2003, the Companys Board of Directors approved a reverse stock split of the Companys common stock at a ratio of one-for-five,
causing each outstanding share of common stock to convert automatically into one-fifth of a share of common stock. The reverse split became effective at the close of



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



business on September 26, 2003. In lieu of fractional shares, stockholders received a cash payment based on an average trading price of the common stock
prior to the effectiveness of the reverse split. Stockholders equity has been restated to give retroactive recognition to the reverse split for all periods presented by reclassifying the excess par value resulting from the reduced number of
shares from common stock to paid-in capital. All references to common share and per common share amounts for all periods presented have been restated to reflect this reverse split.



Registered Direct Offering



In September 2003, Portal completed a registered direct offering of 4,528,302 shares of its common stock to certain institutional investors The shares
of common stock were sold to the purchasers at $13.25 per share. The net proceeds to the company, after payment of placement agency fees and other offering costs, were $56.0 million.



Series A Junior Participating Preferred Stock



In connection with the adoption of a stockholder rights plan, the Board of Directors designated in August 2002 a series of
one million shares of Series A Junior Participating Preferred Stock, par value $.001 per share.



Common Stock



Portal has issued shares of common stock to employees, which are subject to Portals right to repurchase at the original issuance price upon the
occurrence of certain events, as defined in the agreement relating to the sale of such stock. The repurchase rights lapse ratably over a period of one to four years from the date of issuance. At January 31, 2004, 2003 and 2002, approximately 6,000,
7,375, and 39,026 shares were subject to repurchase. These shares were issued upon the exercise of options under the 1995 Stock Option/Issuance Plan.



At January 31, 2004, common stock was reserved for issuance as follows:



|                                                                                         |  |           
|---------------------------------------------------------------------------------------- |  | ----------
|Exercise of outstanding stock options                                                    |  | 5,975,154 
|Shares of common stock available for grant under the 1999 Stock Incentive Plan           |  | 2,173,647 
|Shares of common stock available for grant under the 2000 Supplemental Stock Option Plan |  | 753,451   
|Shares of common stock available for grant under Employee Stock Purchase Plans           |  | 1,950,626 
|                                                                                         |  |           
|Total common stock reserved for issuance                                                 |  | 10,852,878
|                                                                                         |  |           



Stockholder Rights
Plan



On August 16, 2002, Portal adopted a stockholder
rights plan (the Rights Agreement). Under the Rights Agreement, rights were distributed as a dividend at the rate of one right for each share of common stock of Portal held by stockholders of record as of the close of business on August
26, 2002. The rights will expire on August 16, 2012 unless redeemed or exchanged. Under the Rights Agreement, each right will initially entitle the registered holder to buy a unit of one one-thousandth of a share of Series A Junior Participating
Preferred Stock at a price of $14.00 per unit. The rights will become exercisable only if, subject to certain exceptions, a person or group acquires beneficial ownership of 15 percent of more of Portals common stock or commences a tender offer
or exchange offer upon consummation of which such person or group would beneficially own 15 percent or more of Portals common stock.



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Stock Options



Upon the reincorporation of Portal on April 29, 1999, all options issued under the 1995 Stock Option/Stock Issuance Plan
were assumed by the 1999 Stock Incentive Plan (the Plan). Under the Plan, the Board of Directors is authorized to grant incentive stock options or nonqualified stock options to employees, officers and directors of Portal. The Plan allows
for the grant of incentive stock options to employees and grant of nonstatutory stock options to eligible participants. The number of shares of common stock available for issuance under the Plan automatically increases on the first trading day of
each fiscal year during the term of the Plan, beginning with fiscal 2001, by an amount equal to four percent of the shares of common stock outstanding on the last trading day of the immediately preceding fiscal year, but in no event shall any such
annual increase exceed 2,100,000 shares. Pursuant to the automatic increase an additional 1.4 million shares were added each year in fiscal 2004, fiscal 2003 and fiscal 2002 to the Plan.



The option price of options granted under the Plan is not less than 100% or 85% of the fair value on the date of the grant
as determined by the Board of Directors for incentive stock options and nonqualified stock options, respectively, except for incentive stock options granted to a person owning greater than 10% of the total voting power of Portal, for which the
exercise price of the options must not be less than 110% of the fair value at the time of grant. Options granted prior to January 27, 1999 generally become exercisable upon grant subject to repurchase rights in favor of Portal until vested. Options
granted after January 27, 1999 generally become exercisable only when vested. Options generally vest over a period of no more than four years. Options may be granted with different vesting terms at the discretion of the Board of Directors. Options
are exercisable for a term of ten years after the date of grant except those incentive stock options granted to a person owning greater than 10% of the total voting power of stock of Portal, which are exercisable for a term of five years after the
date of grant. If the optionees employment by or service with Portal is terminated, the options cease to be exercisable after a specified period, generally three months (one year in the case of death or disability.) In the event of a change in
control in which options granted under the Plan are not assumed, the options will accelerate and vest in full and existing repurchase rights will lapse.



In December 2000 the Board of Directors approved the 2000 Supplemental Stock Option Plan (the Supplemental Plan). Under the Supplemental Plan,
the Board of Directors is authorized to grant nonqualified stock options to non-officer employees and consultants of Portal. Under the Supplemental Plan, 1,200,000 shares of common stock were authorized for issuance. The option price of options
granted under the Supplemental Plan is not less than 100% of the fair value on the date of the grant as determined by the Board of Directors. Options granted become exercisable only when vested. Options generally vest over a period of no more than
four years, however, options may be granted with different vesting terms at the discretion of the Board of Directors. Options are exercisable for a term of ten years after the date of grant. If the optionees employment by or service with
Portal is terminated, the options cease to be exercisable after a specified period, generally three months (one year in the case of death or disability). In the event of a change in control in which options granted under the Supplemental Plan are
not assumed, the options will accelerate and vest in full and existing repurchase rights will lapse.



In July 2001, a stock option exchange program was initiated. Under this program, all employees (including executive officers) were given the opportunity
to cancel one or more outstanding stock options previously granted to them, at an exercise price of $25.00 or more, in exchange for one or more new stock options to be granted at least six months and one day from the date the old options were
cancelled, provided the individual was still employed on such date. In addition, each employee who chose to exchange any options was also required to exchange all options granted on or after February 4, 2001. The cancellation date for the program
was August 4, 2001. Each new option was exercisable for 75% of the number of shares subject to the old options and the exercise price of the new options was the fair market value of Portal common stock on the date of grant. The new options preserved
the vesting schedule and the vesting commencement date of the old options except that the



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



number of shares vested and total number of shares exercisable under the new options was 75% of the old options. On August 5, 2001, Portal accepted for
cancellation and exchange options to purchase a total of 1.0 million shares of common stock. On February 7, 2002, stock options to purchase 0.6 million shares, at $9.45 per share, were issued pursuant to the terms of the option exchange program. The
exercise price of these stock options was the same as the fair value on the date of grant; accordingly no compensation charges were recorded.



In November 2002, the Compensation Committee of Portals Board of Directors approved a plan to reprice stock options for continuing employees only.
The plan excluded the Chief Executive Officer and members of the Board of Directors. The new exercise price for the repriced options, effective as of November 7, 2002, was $3.45 per share with no changes to the vesting schedules. Approximately
4,154,999 options with a weighted average exercise price per share of $14.80 were repriced. These options became subject to variable accounting prospectively whereby stock-based compensation for the options are being re-measured quarterly and
recorded in the Consolidated Statements of Operations for each reporting period. For fiscal 2004 and 2003, Portal recorded $14.7 million and $2.0 million, respectively, in stock compensation expense in connection with these repriced options. Of
these options, approximately 1,528,049 options were vested as of the repricing date.



A summary of Portals stock option activity under all Plans and related information follows:



|                                 |  |                  |   |                  |                               |                  |        |            |   |                               |   |        |  |            |                               |  |   |      
|-------------------------------- |  | ---------------- | - | ---------------- | ----------------------------- | ---------------- | ------ | ---------- | - | ----------------------------- | - | ------ |  | ---------- | ----------------------------- |  | - | -----
|                                 |  | January 31, 2004 |   | January 31, 2003 |                               | January 31, 2002
|                                 |  | Shares           |   |                  | Weighted-AverageExercisePrice |                  | Shares |            |   | Weighted-AverageExercisePrice |   | Shares |  |            | Weighted-AverageExercisePrice
|Outstanding at beginning of year |  | 6,780,770        |   |                  | $                             | 5.46             |        | 3,676,222  |   |                               | $ | 23.30  |  | 5,359,672  |                               |  | $ | 61.15
|Options granted                  |  | 2,015,065        |   |                  | $                             | 10.49            |        | 5,468,983  |   |                               | $ | 6.45   |  | 1,319,175  |                               |  | $ | 12.20
|Options exercised                |  | (1,535,690       | ) |                  | $                             | 3.67             |        | (144,056   | ) |                               | $ | 2.40   |  | (242,521   | )                             |  | $ | 8.50 
|Options cancelled                |  | (1,284,991       | ) |                  | $                             | 10.35            |        | (2,220,379 | ) |                               | $ | 15.90  |  | (2,760,104 | )                             |  | $ | 94.30
|                                 |  |                  |   |                  |                               |                  |        |            |   |                               |   |        |  |            |                               |  |   |      
|Outstanding at end of year       |  | 5,975,154        |   |                  | $                             | 6.54             |        | 6,780,770  |   |                               | $ | 5.40   |  | 3,676,222  |                               |  | $ | 23.30
|                                 |  |                  |   |                  |                               |                  |        |            |   |                               |   |        |  |            |                               |  |   |      
|Exercisable at end of year       |  | 2,197,086        |   |                  | $                             | 6.27             |        | 2,608,006  |   |                               | $ | 8.80   |  | 1,571,327  |                               |  | $ | 27.60
|                                 |  |                  |   |                  |                               |                  |        |            |   |                               |   |        |  |            |                               |  |   |      
|Additional authorized shares     |  | 1,426,424        |   |                  |                               |                  |        | 1,405,043  |   |                               |   |        |  | 1,370,755  |                               |  |   |      
|                                 |  |                  |   |                  |                               |                  |        |            |   |                               |   |        |  |            |                               |  |   |      



Exercise prices for
options outstanding as of January 31, 2004 and the weighted-average remaining contractual life are as follows:



|                         |  |                     |  |                                                     |  |                               |        |                   |           |                               |   |       
|------------------------ |  | ------------------- |  | --------------------------------------------------- |  | ----------------------------- | ------ | ----------------- | --------- | ----------------------------- | - | ------
|                         |  | Options Outstanding |  | Options Exercisable                                
|Range of Exercise Prices |  | NumberOutstanding   |  | Weighted-AverageRemainingContractual Life(in years) |  | Weighted-AverageExercisePrice |        | NumberOutstanding |           | Weighted-AverageExercisePrice
|$    0.83$1.67          |  | 63,095              |  | 5.44                                                |  | $                             | 1.60   |                   | 45,900    |                               | $ | 1.57  
|1.95                     |  | 801,452             |  | 8.55                                                |  | $                             | 1.95   |                   | 218,328   |                               | $ | 1.95  
|2.103.33                |  | 373,065             |  | 8.20                                                |  | $                             | 2.52   |                   | 130,446   |                               | $ | 2.65  
|3.45                     |  | 2,448,277           |  | 7.68                                                |  | $                             | 3.45   |                   | 1,397,373 |                               | $ | 3.45  
|3.658.85                |  | 658,424             |  | 9.46                                                |  | $                             | 6.38   |                   | 69,190    |                               | $ | 5.68  
|9.059.65                |  | 721,112             |  | 8.89                                                |  | $                             | 9.26   |                   | 219,878   |                               | $ | 9.40  
|11.8014.25              |  | 106,320             |  | 9.58                                                |  | $                             | 12.85  |                   | 3,731     |                               | $ | 13.32 
|14.63                    |  | 732,833             |  | 9.69                                                |  | $                             | 14.63  |                   | 44,168    |                               | $ | 14.63 
|15.30218.75             |  | 65,776              |  | 5.92                                                |  | $                             | 54.67  |                   | 63,272    |                               | $ | 55.26 
|303.75                   |  | 4,800               |  | 6.48                                                |  | $                             | 303.75 |                   | 4,800     |                               | $ | 303.75
|                         |  |                     |  |                                                     |  |                               |        |                   |           |                               |   |       
|                         |  | 5,975,154           |  | 8.41                                                |  | $                             | 6.54   |                   | 2,197,086 |                               | $ | 6.27  
|                         |  |                     |  |                                                     |  |                               |        |                   |           |                               |   |       



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The deferred stock compensation in our consolidated Statement of Stockholders Equity reflects
the difference between the exercise prices of options granted to acquire certain shares of common stock and the deemed fair value for financial reporting purposes of Portals common stock on their respective grant dates. Such amounts are
included as a reduction of stockholders equity and were being amortized by charges to operations on a graded vesting method. In fiscal 2003 and 2002, Portal recorded amortization of deferred stock compensation expense of approximately $0.3
million, and $2.0 million, respectively. At January 31, 2003, Portal had fully amortized deferred compensation expense.



Employee Stock Purchase Plans



In February 1999, the Board of Directors approved the adoption of Portals 1999 Employee Stock Purchase Plan (1999 Purchase Plan). The
stockholders approved this plan in April 1999. A total of 720,000 shares of common stock were initially reserved for issuance under the 1999 Purchase Plan. The number of shares of common stock available for issuance under the 1999 Purchase Plan
automatically increases on the first trading day of each fiscal year during the term of the 1999 Purchase Plan, beginning with fiscal 2001, by an amount equal to two percent of the shares of common stock outstanding on the last trading day of the
immediately preceding fiscal year, but in no event shall any such annual increase exceed 800,000 shares. Accordingly, an additional 635,706 shares were added to the 1999 Purchase Plan on February 1, 2000. On June 16, 2000 the Board of Directors
approved the adoption of Portals 2000 International Employee Stock Purchase Plan (International Plan). The 1999 Purchase Plan and International Plan are collectively referred to as the Purchase Plans. The number of
shares initially reserved for issuance over the term of the International Plan was limited to 1,355,706 shares, less any shares issued under the 1999 Purchase Plan in the future and on the November 30, 1999 and May 31, 2000 purchase dates, subject
to the annual automatic increase discussed above. Pursuant to the annual automatic increase, an aggregate additional 713,212 shares, 702,522 shares and 685,378 shares were added in fiscal 2004, fiscal 2003 and fiscal 2002, respectively, to the
Purchase Plans. The Purchase Plans permit eligible employees to acquire shares of Portals common stock through periodic payroll deductions of up to 15% of total compensation. No more than 700 shares may be purchased on any purchase date per
employee. Each offering period will have a maximum duration of 24 months. The price at which the common stock may be purchased is 85% of the lesser of (i) the closing selling price per share of common stock on the employees entry date into the
two-year offering period in which that semi-annual purchase occurs, or (ii) the closing selling price per share on the semi-annual purchase date. A total of 148,270 shares and 164,929 shares were sold under the Purchase Plans during the year ended
January 31, 2004 at a price of $4.59 and $4.77 per share, respectively.



Note 9.    Interest and Other Income, Net



Interest and other income, net primarily represents net interest income, and net gains and losses resulting from foreign currency exchange rate changes and other income (loss).



The following table sets forth information regarding the Companys
interest and other income, net (in thousands):



|                                               |  |                         |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                               |  | Years ended January 31, |      
|                                               |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|Interest income                                |  | $                       | 774   |   |      | $ | 2,675 |      |  | $ | 8,251 |  
|Net foreign currency transaction exchange gain |  |                         | 1,722 |   |      |   | 372   |      |  |   | 229   |  
|Other loss, net                                |  |                         | (472  | ) |      |   | (38   | )    |  |   | (360  | )
|                                               |  |                         |       |   |      |   |       |      |  |   |       |  
|Total interest and other income, net           |  | $                       | 2,024 |   |      | $ | 3,009 |      |  | $ | 8,120 |  
|                                               |  |                         |       |   |      |   |       |      |  |   |       |  



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 10.    Income Taxes



The loss before taxes consists of the following (in thousands):



|                        |  |                         |         |   |      |   |         |      |  |   |          |  
|----------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                        |  | Years Ended January 31, |        
|                        |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Loss before taxes       |  |                         |         |   |      |   |         |      |  |   |          |  
|United States           |  | $                       | (38,603 | ) |      | $ | (48,982 | )    |  | $ | (392,479 | )
|Foreign                 |  |                         | 1,908   |   |      |   | (20,469 | )    |  |   | 1,699    |  
|                        |  |                         |         |   |      |   |         |      |  |   |          |  
|Total loss before taxes |  | $                       | (36,695 | ) |      | $ | (69,451 | )    |  | $ | (390,780 | )
|                        |  |                         |         |   |      |   |         |      |  |   |          |  



The provision for
income taxes is comprised of the following (in thousands):



|                          |  |                         |       |      |   |       |      |  |   |       |  
|------------------------- |  | ----------------------- | ----- | ---- | - | ----- | ---- |  | - | ----- | -
|                          |  | Years Ended January 31, |      
|                          |  | 2004                    |       | 2003 |   |       | 2002 | 
|Current:                  |  |                         |       |      |   |       |      |  |   |       |  
|Federal                   |  | $                       |      |      | $ | (512  | )    |  | $ |      |  
|State                     |  |                         | 186   |      |   | 253   |      |  |   | 219   |  
|Foreign                   |  |                         | 3,310 |      |   | 3,020 |      |  |   | 4,685 |  
|                          |  |                         |       |      |   |       |      |  |   |       |  
|Total current             |  |                         | 3,496 |      |   | 2,761 |      |  |   | 4,904 |  
|                          |  |                         |       |      |   |       |      |  |   |       |  
|Deferred:                 |  |                         |       |      |   |       |      |  |   |       |  
|Federal                   |  |                         |       |      |   |      |      |  |   | (184  | )
|State                     |  |                         |       |      |   |      |      |  |   |      |  
|                          |  |                         |       |      |   |       |      |  |   |       |  
|Total deferred            |  |                         |       |      |   |      |      |  |   | (184  | )
|                          |  |                         |       |      |   |       |      |  |   |       |  
|Total provision for taxes |  | $                       | 3,496 |      | $ | 2,761 |      |  | $ | 4,720 |  
|                          |  |                         |       |      |   |       |      |  |   |       |  



The reconciliation of
income tax expense (benefit) attributable to continuing operations, computed at the U.S. federal statutory rates, to income tax expense for the fiscal years ended January 31, 2004, 2003 and 2002 is as follows (in thousands):



|                                                                                                    |  |                         |         |   |      |   |         |      |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                    |  | Years Ended January 31, |        
|                                                                                                    |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Tax benefit at U.S. statutory rate                                                                  |  | $                       | (12,225 | ) |      | $ | (24,308 | )    |  | $ | (136,773 | )
|Loss for which no tax benefit is currently recognizable                                             |  |                         | 12,032  |   |      |   | 23,715  |      |  |   | 53,178   |  
|State tax, net of federal benefit                                                                   |  |                         | 123     |   |      |   | 164     |      |  |   | 142      |  
|Foreign income and withholding taxes                                                                |  |                         | 2,662   |   |      |   | 3,020   |      |  |   | 4,685    |  
|Purchased in-process research and development, goodwill, developed technology and asset impairments |  |                         | 904     |   |      |   | 170     |      |  |   | 83,488   |  
|                                                                                                    |  |                         |         |   |      |   |         |      |  |   |          |  
|Total                                                                                               |  | $                       | 3,496   |   |      | $ | 2,761   |      |  | $ | 4,720    |  
|                                                                                                    |  |                         |         |   |      |   |         |      |  |   |          |  



Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Significant components of Portals deferred taxes are as follows (in thousands):



|                                               |  |             |          |   |      |   |          |  
|---------------------------------------------- |  | ----------- | -------- | - | ---- | - | -------- | -
|                                               |  | January 31, |         
|                                               |  | 2004        |          |   | 2003 |  
|Deferred tax assets:                           |  |             |          |   |      |   |          |  
|Net operating loss carry-forwards              |  | $           | 123,180  |   |      | $ | 104,489  |  
|Tax credit carry-forwards                      |  |             | 14,020   |   |      |   | 15,364   |  
|Deferred revenue                               |  |             | 1,940    |   |      |   | 2,123    |  
|Accruals and reserves not currently deductible |  |             | 1,270    |   |      |   | 10,572   |  
|Other, net                                     |  |             | 4,610    |   |      |   | 6,447    |  
|                                               |  |             |          |   |      |   |          |  
|Gross deferred tax assets                      |  |             | 145,020  |   |      |   | 138,995  |  
|Valuation allowance                            |  |             | (144,302 | ) |      |   | (137,273 | )
|                                               |  |             |          |   |      |   |          |  
|Total deferred tax assets                      |  | $           | 718      |   |      | $ | 1,722    |  
|                                               |  |             |          |   |      |   |          |  
|Deferred tax liabilities:                      |  |             |          |   |      |   |          |  
|Acquired intangibles                           |  | $           | (718     | ) |      | $ | (1,722   | )
|                                               |  |             |          |   |      |   |          |  
|Total deferred tax liabilities                 |  |             | (718     | ) |      |   | (1,722   | )
|                                               |  |             |          |   |      |   |          |  
|Net deferred tax assets                        |  | $           |         |   |      | $ |         |  
|                                               |  |             |          |   |      |   |          |  



The change in the
valuation allowance was an increase of approximately $7.0 million, $19.6 million, and $68.0 million for fiscal years ended January 31, 2004, 2003 and 2002, respectively. Approximately $56.3 million of the valuation allowance for deferred tax assets
is attributable to unbenefited stock option deductions, the benefit of which will be credited to stockholders equity when realized.



As of January 30, 2004, Portals federal and state net operating loss carry-forwards for income tax purposes were approximately $351.3 million and
$64.1 million, respectively. If not utilized, the federal net operating loss carry-forwards will begin to expire in 2017. The state net operating loss carry-forwards have begun to expire in 2002. Portal had federal research and development tax
credit carry-forwards of approximately $7.6 million, which will begin to expire in 2016 if not utilized. The Company also had state research and development credit carry-forwards of approximately $9.5 million with no expiration dates.



Utilization of net operating losses and tax credit carry-forwards may be
subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in expiration of net operating loss and tax
credit carry-forwards before full utilization.



The company
believes that its tax filings, on a jurisdictional basis, are in compliance with local tax requirements. In the event of an audit, it is possible that a taxing jurisdiction could interpret their requirements differently, and attempt to assess an
additional tax due. In the event of an unfavorable resolution, there exists the possibility of a material adverse impact on the results of operations of the period in which the audit is ultimately resolved or an unfavorable outcome becomes probable
and reasonably estimable.



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PORTAL SOFTWARE, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 11.    Quarterly Results of Operations (Unaudited)



The following table presents Portals operating results for each of the
eight quarters in the period ended January 31, 2004. The information for each of these quarters is unaudited but has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all necessary
adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements of Portal and the financial statement
footnotes appearing elsewhere in this Form 10-K. (In thousands, except per share amounts and percentages.)



|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | ------------ |  | - | ------------- | -- |  | ------------ | ------ | -- | ------------ | - | ------ | ------------ |  | - | ------------- | -- |  | - | ------- | -- |  | - | ------- | --
|                                                              |  | Quarter Ended |        
|                                                              |  | Jan. 31,2004  |         |   | Oct. 31,2003 |   |         | July 31,2003 |  |   | April 30,2003 |    |  | Jan. 31,2003 |        |    | Oct. 31,2002 |   |        | July 31,2002 |  |   | April 30,2002 |   
|Consolidated Statements of Operations Data:                   |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Revenues:                                                     |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|License fees                                                  |  | $             | 8,988   |   |              | $ | 5,687   |              |  | $ | 11,321        |    |  | $            | 13,570 |    |              | $ | 11,694 |              |  | $ | 10,701        |    |  | $ | 9,378   |    |  | $ | 12,708  |   
|Services                                                      |  |               | 27,112  |   |              |   | 19,672  |              |  |   | 21,880        |    |  |              | 18,523 |    |              |   | 19,362 |              |  |   | 19,459        |    |  |   | 19,384  |    |  |   | 18,404  |   
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Total revenues                                                |  |               | 36,100  |   |              |   | 25,359  |              |  |   | 33,201        |    |  |              | 32,093 |    |              |   | 31,056 |              |  |   | 30,160        |    |  |   | 28,762  |    |  |   | 31,112  |   
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Costs and expenses:                                           |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Cost of license fees                                          |  |               | 56      |   |              |   | 19      |              |  |   | 22            |    |  |              | 88     |    |              |   | 84     |              |  |   | 71            |    |  |   | 54      |    |  |   | 115     |   
|Cost of services                                              |  |               | 17,739  |   |              |   | 14,078  |              |  |   | 13,195        |    |  |              | 11,613 |    |              |   | 11,473 |              |  |   | 10,295        |    |  |   | 11,788  |    |  |   | 10,949  |   
|Amortization and impairment of purchased developed technology |  |               | 665     |   |              |   | 665     |              |  |   | 665           |    |  |              | 665    |    |              |   | 666    |              |  |   | 2,232         |    |  |   | 849     |    |  |   | 849     |   
|Research and development                                      |  |               | 7,822   |   |              |   | 8,273   |              |  |   | 6,981         |    |  |              | 7,167  |    |              |   | 6,680  |              |  |   | 7,928         |    |  |   | 9,662   |    |  |   | 11,434  |   
|Sales and marketing                                           |  |               | 11,902  |   |              |   | 10,677  |              |  |   | 11,633        |    |  |              | 11,388 |    |              |   | 10,637 |              |  |   | 12,412        |    |  |   | 13,951  |    |  |   | 14,900  |   
|General and administrative                                    |  |               | 5,118   |   |              |   | 3,926   |              |  |   | 3,095         |    |  |              | 3,333  |    |              |   | 2,772  |              |  |   | 4,372         |    |  |   | 4,209   |    |  |   | 4,394   |   
|Stock compensation charges                                    |  |               | (19,152 | ) |              |   | 3,000   |              |  |   | 23,749        |    |  |              | 7,090  |    |              |   | 2,001  |              |  |   | 62            |    |  |   | 99      |    |  |   | 110     |   
|Amortization of goodwill                                      |  |               |        |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   |       |              |  |   |              |    |  |   |        |    |  |   |        |   
|Reduction in intangibles due to impairment                    |  |               |         |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   | 486    |              |  |   |              |    |  |   |        |    |  |   |        |   
|Restructuring costs                                           |  |               |        |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   |       |              |  |   | 30,493        |    |  |   | 6,053   |    |  |   |        |   
|Impairment of assets                                          |  |               |        |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   |       |              |  |   | 1,470         |    |  |   |        |    |  |   |        |   
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Total costs and expenses                                      |  |               | 24,150  |   |              |   | 40,638  |              |  |   | 59,340        |    |  |              | 41,344 |    |              |   | 34,799 |              |  |   | 69,335        |    |  |   | 46,665  |    |  |   | 42,751  |   
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Income (loss) from operations                                 |  | $             | 11,950  |   |              | $ | (15,279 | )            |  | $ | (26,139       | )  |  | $            | (9,251 | )  |              | $ | (3,743 | )            |  | $ | (39,175       | )  |  | $ | (17,903 | )  |  | $ | (11,639 | ) 
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Net Income (loss)                                             |  | $             | 11,648  |   |              | $ | (15,184 | )            |  | $ | (26,891       | )  |  | $            | (9,764 | )  |              | $ | (2,593 | )            |  | $ | (39,564       | )  |  | $ | (18,046 | )  |  | $ | (12,009 | ) 
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Basic earnings (loss) per share                               |  | $             | 0.28    |   |              | $ | (0.39   | )            |  | $ | (0.74         | )  |  | $            | (0.27  | )  |              | $ | (0.07  | )            |  | $ | (1.12         | )  |  | $ | (0.51   | )  |  | $ | (0.34   | ) 
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Diluted earnings (loss) per share                             |  | $             | 0.26    |   |              | $ | (0.39   | )            |  | $ | (0.74         | )  |  | $            | (0.27  | )  |              | $ | (0.07  | )            |  | $ | (1.12         | )  |  | $ | (0.51   | )  |  | $ | (0.34   | ) 
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|As a Percentage of Total Revenues:                            |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Revenues:                                                     |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|License fees                                                  |  |               | 25      | % |              |   | 22      | %            |  |   | 34            | %  |  |              | 42     | %  |              |   | 38     | %            |  |   | 35            | %  |  |   | 33      | %  |  |   | 41      | % 
|Services                                                      |  |               | 75      |   |              |   | 78      |              |  |   | 66            |    |  |              | 58     |    |              |   | 62     |              |  |   | 65            |    |  |   | 67      |    |  |   | 59      |   
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Total revenues                                                |  |               | 100     |   |              |   | 100     |              |  |   | 100           |    |  |              | 100    |    |              |   | 100    |              |  |   | 100           |    |  |   | 100     |    |  |   | 100     |   
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Costs and expenses:                                           |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Cost of license fees                                          |  |               |        |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   |       |              |  |   |              |    |  |   |        |    |  |   |        |   
|Cost of services                                              |  |               | 49      |   |              |   | 55      |              |  |   | 40            |    |  |              | 37     |    |              |   | 37     |              |  |   | 34            |    |  |   | 41      |    |  |   | 35      |   
|Amortization and impairment of purchased developed technology |  |               | 2       |   |              |   | 3       |              |  |   | 2             |    |  |              | 2      |    |              |   | 2      |              |  |   | 8             |    |  |   | 3       |    |  |   | 3       |   
|Research and development                                      |  |               | 22      |   |              |   | 33      |              |  |   | 21            |    |  |              | 22     |    |              |   | 22     |              |  |   | 26            |    |  |   | 34      |    |  |   | 37      |   
|Sales and marketing                                           |  |               | 33      |   |              |   | 42      |              |  |   | 35            |    |  |              | 36     |    |              |   | 34     |              |  |   | 41            |    |  |   | 48      |    |  |   | 48      |   
|General and administrative                                    |  |               | 14      |   |              |   | 15      |              |  |   | 9             |    |  |              | 10     |    |              |   | 9      |              |  |   | 15            |    |  |   | 15      |    |  |   | 14      |   
|Stock compensation charges                                    |  |               | (53     | ) |              |   | 12      |              |  |   | 72            |    |  |              | 22     |    |              |   | 6      |              |  |   |              |    |  |   |        |    |  |   |        |   
|Amortization of goodwill                                      |  |               |        |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   |       |              |  |   |              |    |  |   |        |    |  |   |        |   
|Reduction in intangibles due to impairment                    |  |               |        |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   | 2      |              |  |   |              |    |  |   |        |    |  |   |        |   
|Restructuring costs                                           |  |               |        |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   |       |              |  |   | 101           |    |  |   | 21      |    |  |   |        |   
|Impairment of assets                                          |  |               |        |   |              |   |        |              |  |   |              |    |  |              |       |    |              |   |       |              |  |   | 5             |    |  |   |        |    |  |   |        |   
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Total costs and expenses                                      |  |               | 67      |   |              |   | 160     |              |  |   | 179           |    |  |              | 129    |    |              |   | 112    |              |  |   | 230           |    |  |   | 162     |    |  |   | 137     |   
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   
|Income (loss) from operations                                 |  |               | 33      | % |              |   | (60     | )%           |  |   | (79           | )% |  |              | (29    | )% |              |   | (12    | )%           |  |   | (130          | )% |  |   | (62     | )% |  |   | (37     | )%
|                                                              |  |               |         |   |              |   |         |              |  |   |               |    |  |              |        |    |              |   |        |              |  |   |               |    |  |   |         |    |  |   |         |   



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|ITEM 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------



Not applicable.



ITEM 9A.    CONTROLS AND PROCEDURES



Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report (the
Evaluation Date). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is
accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



PART III



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT



Executive Officers of the Registrant



The following table sets forth certain information regarding our executive officers as of April 9, 2004:



|                   |  |     |  |                                                  
|------------------ |  | --- |  | -------------------------------------------------
|Name               |  | Age |  | Position                                         
|John E. Little     |  | 46  |  | Chief Executive Officer and Director             
|Marc Aronson       |  | 47  |  | Senior Vice President, Engineering               
|Howard A. Bain III |  | 58  |  | Senior Vice President and Chief Financial Officer
|Larry S. Bercovich |  | 45  |  | Vice President, General Counsel and Secretary    
|Bhaskar M. Gorti   |  | 37  |  | Senior Vice President, Marketing and Alliances   
|Ronald W. Kisling  |  | 43  |  | Vice President, Finance                          
|David S. Labuda    |  | 40  |  | Chief Technology Officer                         
|Scott P. Sullivan  |  | 40  |  | Senior Vice President, Human Resources           



John E.
Little.    Mr. Little founded Portal in March 1985 based on his vision of an integrated business infrastructure for emerging global networks. He has been Chief Executive Officer and a Director since its inception and Chairman
of the Board from inception to February 2004. In addition, Mr. Little served as President from inception to March 1996 and has served as President from November 1996 to February 2002. Prior to founding Portal, Mr. Little was an independent
consultant for a number of companies including Knight-Ridder Inc., AT&T Corp., Raytheon Company, Dow Jones News Retrieval, a subsidiary of Dow Jones & Company, Inc., Victor Company of Japan (JVC) and Sun Microsystems, Inc.



Marc Aronson.    Mr. Aronson has
served as Senior Vice President, Engineering of Portal since November 2001, as Vice President, Engineering from March 2000 to November 2001 and as Senior Director of the SETI engineering group from August 1998 to March 2000. From July 1997 to August
1998, Mr. Aronson was a Senior Engineering Director for Adobe Systems Inc., a software company, and from September 1990 to July 1997, he served as Engineering Director and in other engineering positions with Adobe.



Howard A. Bain III.    Mr. Bain has served as
Senior Vice President and Chief Financial Officer of Portal since November 2001 and as Vice President and Chief Financial Officer from August 2001 to November 2001.



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From January 2000 to November 2000, Mr. Bain served as Executive Vice President and Chief Financial Officer of Vicinity Corporation, a provider of
Internet-based marketing infrastructure services. From January 1999 to March 2000, he served as Executive Vice President and Chief Financial Officer of Informix Software Corporation, an enterprise database software company, and from November 1996 to
January 1999, he served as Vice President Worldwide Operations and Chief Financial Officer of Symantec Corporation, a security software company. Mr. Bain serves on the board of directors for Learning Tree International (NASDAQ:LTRE), a leading
worldwide provider of vendor independent education and training to information technology professionals in business and government organizations.



Larry S. Bercovich.    Mr. Bercovich has served as Vice President, General Counsel and Secretary of Portal since March 2004.
From June 2002 to March 2004, he served as General Counsel for Yipes Enterprise Services, Inc., a provider of business-to business and business-to-Internet optical IP networking services, and from March 2000 to June 2002, he served as Assistant
General Counsel for Yipes Communications, Inc. From March 1997 to March 2000, Mr. Bercovich served as General Attorney for SBC Communications, Inc., a leading provider of telecommunications services.



Bhaskar M. Gorti.    Mr. Gorti has served as
Senior Vice President, Marketing, Alliances and Business Development of Portal since April 2003, as Senior Vice President, Strategic Alliances and Business Development of Portal since November 2002, and as Vice President, Global Alliances from June
2002 to November 2002. From March 2000 to June 2002, he served as Vice President, Global Sales and Alliances for OnDemand, Inc., a provider of relationship management software that was acquired by Chordiant Software, Inc. From November 1998 to March
2000, Mr. Gorti served as Director, Worldwide Business Development, Telecom and ISPs for Hewlett-Packard Company, a leading provider of enterprise systems, imaging and printing solutions and personal computing solutions and devices, and from June
1996 to October 1998, he served as General Manager, E-Services (SMB) Business Unit for Hewlett-Packard Company.



Ronald W. Kisling.    Mr. Kisling has served as Vice President, Finance of Portal since March 2004. From May 2002 to March
2004, he served as Chief Financial Officer of Saba Software, Inc., a leading provider of human capital development and management (HCDM) solutions, and from June 2001 to May 2002, he served as Vice President of Finance and IT for Saba Software, Inc.
From August 1998 to June 2001, Mr. Kisling served in various positions at SPL WorldGroup, Inc., a provider of information technology consulting and enterprise solutions, most recently as Vice President and Chief Financial Officer. Prior to joining
SPL WorldGroup, Mr. Kisling spent nine years at Symantec Corporation, most recently as Vice President, Controller. Mr. Kisling began his finance career at Coopers & Lybrand, LLP in San Jose. Mr. Kisling is a graduate of Stanford University and
holds a B.A. in Economics. He is also a Certified Public Accountant in the state of California.



David S. Labuda.    Mr. Labuda is co-founder of Portal and has served as Chief Technology Officer of Portal since March 1994.
Mr. Labuda is responsible for defining the architectural vision of Portal and managing the design and integration of new techniques into Portals platform-based solution. From March 1994 to March 2000, Mr. Labuda also served as Vice President
of Engineering for Portal. Prior to joining Portal, Mr. Labuda worked for 8 years at Sun Microsystems in the UNIX Operating System group and was one of the first recipients of the Sun Presidential Award. Mr. Labuda holds Bachelor of Science and
Master of Science degrees in Computer Engineering from Case Western Reserve University. Mr. Labuda also holds seven patents in software technologies ranging from optimized caching algorithms to object query technology.



Scott P. Sullivan.    Mr. Sullivan has served as
Senior Vice President, Human Resources of Portal since September 2003. From September 2000 to March 2003, he served as Vice President, Human Resources of Vicinity Corporation and from April 2000 to September 2000, he served as Senior Principal for
Diamond Technology Partners, a provider of internet business strategies for major corporations. From July 1994 to March 2000, Mr. Sullivan served as a Managing Consultant for Towers Perrin, the worlds largest human resources consulting firm.



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Directors of the Registrant



We currently have six directors divided among three classes as follows: Class IRobert P. Wayman; Class IIGeorge
J. Goldsmith and Richard A. Moran; and Class IIIJohn E. Little, Jennifer Taylor and J. David Martin.



Certain information regarding the members of the Board of Directors as of April 9, 2004 is set forth below:



|                            |  |     |  |                   
|--------------------------- |  | --- |  | ------------------
|Name of Director or Nominee |  | Age |  | CurrentTermExpires
|John E. Little              |  | 46  |  | 2005              
|George J. Goldsmith         |  | 48  |  | 2004              
|J. David Martin             |  | 48  |  | 2005              
|Richard A. Moran            |  | 53  |  | 2004              
|Jennifer Taylor             |  | 55  |  | 2005              
|Robert P. Wayman            |  | 58  |  | 2006              



John E.
Little.    Mr. Little founded Portal in March 1985 based on his vision of an integrated business infrastructure for the emerging global networks. He has been Chief Executive Officer and a Director since its inception and
Chairman of the Board from inception to February 2004. In addition, Mr. Little served as President from inception to March 1996 and has served as President from November 1996 to February 2002. Prior to founding Portal, Mr. Little was an independent
consultant for a number of companies including Knight-Ridder Inc., AT&T Corp., Raytheon Company, Dow Jones News Retrieval, a subsidiary of Dow Jones & Company, Inc., Victor Company of Japan (JVC) and Sun Microsystems, Inc.



George J. Goldsmith.    Mr.
Goldsmith has served as a Director of Portal since March 2003. Since July 2002, he has served as the Chief Executive Officer of Tapestry Networks, a company that creates and manages leader-to-leader programs, transforming traditional conferences,
councils and advisory boards into dynamic engines for the creation of shared value. From March 2000 to April 2001, Mr. Goldsmith served as the Chief Executive Officer of TomorrowLab, a provider of multi-client professional services, which was a
division of McKinsey & Company, a management consulting firm. He served as a Senior Advisor to McKinsey & Company, from October 1998 to March 2000. Mr. Goldsmith is also the founder of, and from January 1996 to February 2000, served as Chief
Executive Officer for, TomorrowLab, Inc., a web strategy firm that worked with global organizations to create customer communities and knowledge portals. Prior to that, he was an executive at Lotus Development Corporation. Mr. Goldsmith also
currently serves as a director for the Young Presidents Organization, or YPO, International Board, a non-profit organization of over 8,500 young business executives in 75 countries that provides networking and education opportunities to its
members, since July 2001.



J. David
Martin.    Mr. Martin has served as a Director of Portal since November 2002. Since September 2001, he has served as the Chief Executive Officer of the YPO. Mr. Martin has served as a Director of YPOs International
Board since July of 1998 including serving as Chairman of the International Board from July of 2001 to June of 2002. From October 1995 through September 2000, he served as the Chief Executive Officer and Director of Burnham Pacific Properties, a
real estate investment trust listed on the New York Stock Exchange. Mr. Martin founded TMG Partners, a real estate development company, in February 1984 and served as its Chairman and Chief Executive Officer until October 1995. Since that time he
has continued to serve as its Chairman of the Board.



Richard A. Moran.    Mr. Moran has been a Director of Portal since March 2003 and Chairman of the Board of Portal since February 2004. Since June 2002, he has served as a private consultant to various companies.
Mr. Moran served as a Partner at Accenture LLP, a leading provider of professional consulting services, from April 1996 to June 2002, where he worked with clients in the media and entertainment, communications and technology industries. Prior
to this position, Mr. Moran held management positions in several consulting firms.



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Jennifer Taylor.Ms. Taylor has served as a Director of Portal since
September 2002. Since May 2002, she has served as an executive coach and business advisor to high technology companies. Ms. Taylor served as a Partner for Heidrick & Struggles, an executive search firm from January 2001 to May 2002. From April
2000 to January 2001 she served as a consultant and business advisor to high technology companies. From July 1989 through February 2000, Ms. Taylor served as the head partner for the communications industry consulting practice in the United States
for PricewaterhouseCoopers LLC, a leading provider of professional services.



Robert P. Wayman.    Mr. Wayman has served as a Director of Portal since September 2000. He has served as Executive Vice President, Finance and Administration and Chief Financial Officer of
Hewlett-Packard Company since 1992. From 1987 to 1992, Mr. Wayman served as Senior Vice President, Finance and Administration and Chief Financial Officer of Hewlett-Packard Company. He also serves on the Board of Directors of CNF, Inc., a logistics
and transportation company, and Sybase, Inc., an enterprise client/server software company. Mr. Wayman is also a director of the Private Sector Council and a director of the Cultural Initiative Silicon Valley.



Audit Committee



Our Audit Committee currently consists of the following directors: Robert Wayman and Jennifer Taylor. Each member of the
Audit Committee is an independent director as defined in Rule 4200 of the Marketplace Rules of the Nasdaq National Market and also meet the additional criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1)
under the Securities Exchange Act of 1934, as amended. The Board of Directors has determined that Mr. Wayman is an audit committee financial expert as defined in Item 401(h) of Regulation S-K.



Board Nomination Procedures



Our Governance and Nominating Committee screens and evaluates all proposed
nominees to the Board of Directors with direct input from the Chief Executive Officer. Each member of the Governance and Nominating Committee is an independent director as defined in Rule 4200 of the Marketplace Rules of the Nasdaq
National Market. The process and criteria used to evaluate proposed nominees is the same whether the proposed nominee is recommended for nomination by a stockholder, by an existing director or otherwise. The Governance and Nominating Committee
reviews qualifications of potential candidates and recommends director nominees to the full Board. Once a prospective member has been identified, he or she will be proposed to the Governance and Nominating Committee for formal evaluation, along with
a packet of information that includes:



| | · |  | Resume or CV of the candidate.
| | - |  | ------------------------------



| | · |  | Evaluation of the candidate based on the current director criteria.
| | - |  | -------------------------------------------------------------------



| | · |  | Preliminary recommendation by the proposing Board member, describing why he believes the candidate is appropriate.
| | - |  | ------------------------------------------------------------------------------------------------------------------



The CEO and the Governance and Nominating Committee are responsible for
interviewing and otherwise evaluating prospective members. Prospective members who pass their initial evaluation are presented to the complete board for final evaluation and approval. Candidates recommended by the Governance and Nominating Committee
should be interviewed by all directors, and directors are expected to conduct their interviews expeditiously to ensure that decisions regarding prospective candidates can be made without undue delay. The Board will select the slate of prospective
members only from candidates identified, screened and approved by the Governance and Nominating Committee.



The Governance and Nominating Committee will consider suggestions of prospective members of the Board from stockholders. Stockholders may recommend
individuals for consideration by submitting the materials set forth below to the Company addressed to the Chairman of the Governance and Nominating Committee at the



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Companys address. To be timely, the written materials must be submitted within the time permitted under applicable law and the Companys bylaws
for submission of a stockholder proposal for inclusion in the Companys proxy statement for the subject annual meeting.



| | · |  | The written materials must include: (1) all information relating to the individual recommended that is required to be disclosed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (including such persons written consent to being named in the proxy statement as a prospective member and to serving as a director if elected); (2) the name(s) and address(es) of the stockholders making the nomination and
the amount of the Companys securities which are owned beneficially and of record by such stockholder(s); (3) appropriate biographical information (including a business address and a telephone number) and a statement as to the individuals
qualifications, with a focus on the criteria described above; (4) a representation that the stockholder of record is a holder of record of stock of the Company entitled to vote on the date of submission of such written materials; and (5) any
material interest of the stockholder in the nomination.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The Governance and Nominating Committee will evaluate a prospective member suggested by any stockholder in the same manner and against the same criteria as any other prospective
member identified by the Governance and Nominating Committee from any other source.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The general criteria used to assess candidates and existing directors for services on the Board is as set forth below. Specific additional criteria may be
added with respect to specific searches. An acceptable candidate/director may not fully satisfy all of the criteria, but is expected to satisfy nearly all of the them.



| | (a) |  | Leadership and professional excellence;
| | --- |  | ---------------------------------------



| | (b) |  | Intelligence, judgment and ethics;
| | --- |  | ----------------------------------



| | (c) |  | General experience, which means at least 5 years experience as a CEO, COO or head of a major operating division of a successful business or as a successful entrepreneur or
alternatively, the individual has at least 10 years of significant experience in the private, government or academic sector in a general area of expertise desired by the Board;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | Specific experience, which may be topical, geographical or market related experience;
| | --- |  | -------------------------------------------------------------------------------------



| | (e) |  | Diversity of perspective;
| | --- |  | -------------------------



| | (f) |  | Ability to influence customers or win business;
| | --- |  | -----------------------------------------------



| | (g) |  | Ability to work actively in a collegial environment;
| | --- |  | ----------------------------------------------------



| | (h) |  | Availability;
| | --- |  | -------------



| | (i) |  | Understanding of financials;
| | --- |  | ----------------------------



| | (j) |  | Willingness to represent and act in the interests of all stockholders of the Company rather than the interests of a particular group; and
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| | (k) |  | Independence.
| | --- |  | -------------



The re-nomination of existing directors should not be viewed as automatic, but should be based on continuing qualification under the criteria set forth
above.



| | · |  | For incumbent directors standing for re-election, the Governance and Nominating Committee will assess the incumbent directors performance during his or her term, including the
number of meetings attended, level of participation, and overall contribution to the Company; the number of other company boards on which the individual serves, composition of the Board at that time, and any changed circumstances affecting the
individual director which may bear on his or her ability to continue to serve on the Board.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than 10% of a registered class of our equity securities, to file an initial report of securities ownership on Form 3 and reports of changes in securities ownership on Form 4 or 5 with the Securities and Exchange Commission (the
SEC). Such officers, directors and 10% stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms that they file. Based solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 4 or 5 were required for such persons, we believe that, for the reporting period from February 1, 2003 to January 30, 2004, all required Section 16(a) filings were made on a timely basis,
except for two Forms 3 for Mssrs. Goldsmith and Moran reporting that they were now Section 16 directors for the Company which were filed after the deadline for the applicable filing.



Code of Ethics



Portal has a Code of Ethics in place for its principal executive officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions. One may obtain a copy of the Code of Ethics, without charge, from the investor relations section of our website at www.portal.com or by writing to the Investor Relations director at 10200 S. De Anza Boulevard,
Cupertino, California 95014.



ITEM 11.    EXECUTIVE COMPENSATION



Summary Compensation



The following table
provides certain summary information concerning the compensation earned for services rendered in all capacities to us and our subsidiaries for the fiscal years ended January 30, 2004 and January 31, 2003 and 2002 by our Chief Executive Officer and
each of our four other most highly compensated executive officers whose salary and bonus for the 2004 fiscal year was in excess of $100,000. Such individuals are referred to as the named executive officers. No other executive officer who would have
otherwise been included in such table on the basis of salary and bonus earned for the 2004 fiscal year has resigned or terminated employment during that fiscal year.



|                                                |  |            |               |                     |               |  |                             |                                     |     |                   |         |      |  |   |         |    
|----------------------------------------------- |  | ---------- | ------------- | ------------------- | ------------- |  | --------------------------- | ----------------------------------- | --- | ----------------- | ------- | ---- |  | - | ------- | ---
|                                                |  | FiscalYear |               | Annual Compensation |               |  | Long-TermCompensationAwards |                                     |     | OtherCompensation |        
|Name and Principal Position in Fiscal Year
2004 |  |            | Salary ($)(1) |                     | Bonus ($) (2) |  |                             | Number ofSharesUnderlyingOptions(3) |     |                  
|John E. Little                                  |  | 2004       |               | $                   | 260,000       |  | $                           | 0                                   |     |                   | 150,000 |      |  |   |        |    
|Chairman of the Board                           |  | 2003       |               | $                   | 260,000       |  | $                           | 0                                   |     |                   | 272,000 | (4)  |  |   |        |    
|and Chief Executive Officer                     |  | 2002       |               | $                   | 260,000       |  | $                           | 0                                   |     |                   | 0       |      |  |   |        |    
|                                                |  |            |               |                     |              
|Glenn R. Wienkoop (5)                           |  | 2004       |               | $                   | 350,000       |  | $                           | 0                                   |     |                   | 100,000 |      |  | $ | 630,000 | (6)
|President and Chief                             |  | 2003       |               | $                   | 299,520       |  | $                           | 0                                   |     |                   | 487,000 | (7)  |  |   |        |    
|Operating Officer                               |  | 2002       |               |                     |              |  |                             |                                    |     |                   |        |      |  |   |        |    
|                                                |  |            |               |                     |              
|Howard A. Bain III                              |  | 2004       |               | $                   | 300,000       |  | $                           | 0                                   |     |                   | 85,000  |      |  |   |        |    
|Senior Vice President,                          |  | 2003       |               | $                   | 250,385       |  | $                           | 0                                   |     |                   | 260,000 | (8)  |  |   |        |    
|Chief Financial Officer                         |  | 2002       |               | $                   | 114,615       |  | $                           | 37,500                              | (9) |                   | 80,000  |      |  |   |        |    
|                                                |  |            |               |                     |              
|David S. Labuda                                 |  | 2004       |               | $                   | 276,480       |  | $                           | 0                                   |     |                   | 65,000  |      |  |   |        |    
|Chief Technology Officer                        |  | 2003       |               | $                   | 229,762       |  | $                           | 0                                   |     |                   | 532,600 | (10) |  |   |        |    
|                                                |  | 2002       |               | $                   | 217,462       |  | $                           | 0                                   |     |                   | 0       |      |  |   |        |    
|                                                |  |            |               |                     |              
|Bhaskar M. Gorti                                |  | 2004       |               | $                   | 247,500       |  | $                           | 0                                   |     |                   | 50,000  |      |  |   |        |    
|Senior Vice President,                          |  | 2003       |               | $                   | 135,985       |  | $                           | 0                                   |     |                   | 92,000  | (11) |  |   |        |    
|Marketing and Alliances                         |  | 2002       |               |                     |              |  |                             |                                    |     |                   |        |      |  |   |        |    



80



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---

|(1) |  | Salary includes amounts earned in the year indicated but deferred pursuant to Portals 401(k) savings plan.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(2) |  | Bonuses for each year include amounts earned for such year, even if paid in a subsequent year, and exclude bonuses paid during such year that were earned in a prior year.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Applicable rules of the SEC require that options which are granted and repriced in the same fiscal year must be treated as two separate option grants: the first grant covering the
number of shares subject to the option at the time of grant and the second grant covering the number of shares subject to the option at the time of the repricing. In addition, options granted in the 2003 fiscal year in replacement for options for a
greater number of shares cancelled in the 2002 fiscal year as part of the July 2001 option exchange program must be also be reported as a 2003 fiscal year option grant. Further all share numbers have been adjusted to reflect a one-for-five reverse
stock split that was effected on September 26, 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes options for 72,000 shares that were granted on February 7, 2002 pursuant to the July 2001 option exchange program in replacement for cancelled options covering 96,000
shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Mr. Wienkoops employment with the Company ended in February 2004.
|--- |  | ------------------------------------------------------------------

|(6) |  | Represents severance benefits to be paid to Mr. Wienkoop in connection with his termination of employment in February 2004. This payment will be made in twenty-four semi-monthly
installments of $26,250 each over the twelve month period measured from March 2, 2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | 400,000 of the shares are attributable to an option for 200,000 shares granted in the 2003 fiscal year and subsequently repriced to $3.45 per share on November 7, 2002 in connection
with the November 2002 repricing program.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | 120,000 of the shares are attributable to an option for 60,000 shares granted in the 2003 fiscal year and subsequently repriced to $3.45 per share on November 7, 2002 in connection
with the November 2002 repricing program. An additional 80,000 of the shares are attributable to an option granted in an earlier fiscal year but subsequently repriced to $3.45 per share on November 7, 2002 in connection with the November 2002
repricing program.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Represents a sign-on bonus.
|--- |  | ---------------------------

|(10) |  | 72,600 of the shares are attributable to (i) an option for 36,300 shares granted on February 7, 2002 pursuant to the July 2001 option exchange program in replacement for cancelled
options covering 48,400 shares and (ii) the repricing of that 36,300-share option to $3.45 per share on November 7, 2002 in connection with the November 2002 repricing program. An additional 400,000 of the shares are attributable to an option for
200,000 shares granted in the 2003 fiscal year but subsequently repriced to $3.45 per share on November 7, 2002 in connection with the November 2002 repricing program.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | 54,000 of the shares are attributable to an option for 27,000 shares granted in the 2003 fiscal year and subsequently repriced to $3.45 per share on November 7, 2002 in connection
with the November 2002 repricing program.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Stock Option Grants in Last Fiscal Year



The following table contains information concerning the grant of stock options in fiscal year 2004 to the named executive
officers and the potential realizable value of such stock options at assumed annual rates of stock appreciation over the terms of such stock options. No stock appreciation rights were granted to the named executive officers during fiscal year 2004.



|                   |  |                                             |  |                                                                                                 |   |  |                         |       |                |            |    |   |           |  |   |          
|------------------ |  | ------------------------------------------- |  | ----------------------------------------------------------------------------------------------- | - |  | ----------------------- | ----- | -------------- | ---------- | -- | - | --------- |  | - | ---------
|                   |  | Individual Grants                           |  | Potential Realizable Value atAssumed Annual Rates ofStock Price Appreciation forOption Term (2)
|Name               |  | Number ofSharesUnderlyingOptionsGranted (1) |  | % of TotalOptionsGranted toEmployeesin FY 2004                                                  |   |  | ExercisePricePerShare 3 |       | ExpirationDate |            | 5% |   | 10%      
|                   |  |                                             |  |                                                                                                 |   | 
|John E. Little     |  | 150,000                                     |  | 7.6                                                                                             | % |  | $                       | 14.63 |                | 10/09/2013 |    | $ | 1,379,631 |  | $ | 3,495,982
|                   |  |                                             |  |                                                                                                 |   | 
|Glenn R. Wienkoop  |  | 100,000                                     |  | 5.1                                                                                             | % |  | $                       | 14.63 |                | 10/09/2013 |    | $ | 919,754   |  | $ | 2,330,654
|                   |  |                                             |  |                                                                                                 |   | 
|Howard A. Bain III |  | 85,000                                      |  | 4.3                                                                                             | % |  | $                       | 14.63 |                | 10/09/2013 |    | $ | 781,791   |  | $ | 1,981,056
|                   |  |                                             |  |                                                                                                 |   | 
|David S. Labuda    |  | 65,000                                      |  | 3.3                                                                                             | % |  | $                       | 14.63 |                | 10/09/2013 |    | $ | 597,840   |  | $ | 1,514,925
|                   |  |                                             |  |                                                                                                 |   | 
|Bhaskar M. Gorti   |  | 20,000                                      |  | 1.0                                                                                             | % |  | $                       | 8.85  |                | 06/12/2013 |    | $ | 111,276   |  | $ | 281,973  
|                   |  | 30,000                                      |  | 1.5                                                                                             | % |  | $                       | 14.63 |                | 10/09/2013 |    | $ | 275,926   |  | $ | 699,196  

---

|(1) |  | The grant dates for the options were June 13, 2003 and October 10, 2003. Each option has an exercise price equal to the fair market value on the grant date and will become
exercisable in 48 successive equal monthly installments upon the optionees completion of each month of service over the 48-month period measured from the grant date. The options have a 10-year term measured from such grant date, subject to
earlier termination following the optionees cessation of employment. In the event of an acquisition of Portal by merger or sale of all or substantially all of the assets of Portal, the options, to the extent outstanding at that time but not
fully exercisable will accelerate and become exercisable for all the option shares as fully-vested shares unless the successor corporation agrees to assume the options or substitute equivalent options therefore. In addition, the options shall become
immediately exercisable in the event that the optionees employment is involuntarily terminated without cause within 12 months following a change in control of Portal in which those options are assumed or otherwise continued in effect.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The 5% and 10% rates of appreciation are specified by the rules of the Securities and Exchange Commission and do not represent our estimates or projections of future common stock
prices.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The exercise price may be paid in cash, in shares of our common stock valued at fair market value on the exercise date or, to the extent allowable under applicable law or
Portals company policy, through a cashless exercise procedure involving the same-day sale of the purchased shares.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values



The following table provides information with respect to the named executive officers concerning the exercise of options
during the last fiscal year and the number and value of unexercised options held as of the end of the last fiscal year. No stock appreciation rights were exercised by the named executive officers during the last fiscal year, and no stock
appreciation rights were held by them at the end of that year.



|                   |  |                           |  |                            |         |                                                                  |         |                                                                 |         |               |   |         |  |   |        
|------------------ |  | ------------------------- |  | -------------------------- | ------- | ---------------------------------------------------------------- | ------- | --------------------------------------------------------------- | ------- | ------------- | - | ------- |  | - | -------
|                   |  | SharesAcquired onExercise |  | AggregateValueRealized (1) |         | Number of SharesUnderlying UnexercisedOptions at Fiscal Year-End |         | Value of Unexercised In-the-Money Options at FiscalYear-End (2)
|Name               |  |                           |  | Exercisable                |         | Unexercisable                                                    |         | Exercisable                                                     |         | Unexercisable
|John E. Little     |  |                          |  | $                          | 0.00    |                                                                  | 172,497 |                                                                 | 249,503 |               |   |        |  |   |       
|Glenn R. Wienkoop  |  | 58,748                    |  | $                          | 587,964 |                                                                  | 84,564  |                                                                 | 243,687 |               | $ | 294,842 |  | $ | 702,834
|Howard A. Bain III |  | 7,500                     |  | $                          | 51,000  |                                                                  | 114,585 |                                                                 | 162,915 |               | $ | 412,884 |  | $ | 410,666
|David S. Labuda    |  |                          |  | $                          | 0.00    |                                                                  | 156,738 |                                                                 | 204,562 |               | $ | 600,864 |  | $ | 638,669
|Bhaskar M. Gorti   |  |                          |  | $                          | 0.00    |                                                                  | 28,438  |                                                                 | 76,562  |               | $ | 82,761  |  | $ | 148,788



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##### Table of Contents

---

|(1) |  | Market value of underlying securities on the date of exercise, minus the exercise price.
|--- |  | ----------------------------------------------------------------------------------------

|(2) |  | Market value of underlying securities on January 30, 2004 ($7.36 per share), minus the exercise price of in-the-money options.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------



Director Compensation



In fiscal year 2004 non-employee directors received no cash fees in connection with their service on the Board of Directors
and its committees, except that non-employee directors were reimbursed by Portal for actual travel and hotel expenses incurred in attending Board meetings.



Newly elected or appointed non-employee directors are eligible to receive discretionary stock option grants under our 1999 Stock Incentive Plan (the
1999 Plan) in connection with their initial election or appointment to the Board. Accordingly in connection with their appointment to the Board in March 2003, Mr. Goldsmith and Mr. Moran each received a stock option for 16,000 shares
with an exercise price of $3.65 per share. Each such option has a maximum term of 10 years, subject to earlier termination upon the optionees cessation of Board service, and will vest in 48 successive equal monthly installments upon the
optionees completion of each of his or her first 48 months of Board service. Each option will, however, immediately vest and become exercisable for all the option shares upon certain changes in control or ownership of Portal.



On the date of each Annual Stockholders Meeting, each of the continuing
non-employee Board members who has served in such capacity for at least 6 months will receive an option grant, pursuant to the Automatic Option Grant Program in effect under the 1999 Plan, for 2,400 shares with an exercise price per share equal to
the fair market value per share of the common stock on the grant date. Each option will have a maximum term of ten (10) years measured from the grant date, subject to the earlier termination upon the optionees cessation of Board service. The
option will be immediately exercisable for all the option shares as fully-vested shares. Pursuant to such Automatic Option Grant Program, Messrs. Goldsmith, Martin, Moran, Taylor and Wayman were each granted an option to purchase 2,400 shares of
common stock with an exercise price of $7.55 per share on January 28, 2004, the date of the 2003 Annual Meeting.



The 1999 Stock Incentive Plan also contains a director fee option grant program. Should this program be activated in the future, each non-employee Board
member will have the opportunity to apply all or a portion of any annual retainer fee otherwise payable in cash to the acquisition of a below-market option grant. Effective February 1, 2004 (the beginning of our 2005 fiscal year), the Board approved
a cash compensation plan for our non-employee Board members. Under this plan, each Board member receives an annual retainer of $20,000. Additional retainers are paid as follows: $50,000 for serving as the Outside Lead Director, $8,000 for serving as
the Audit Committee Chairperson, $6,000 for serving as the Committee Chairperson for the Compensation or Governance and Nominating Committee, and $4,000 for serving as a member on a Committee. The Chairperson and member retainers are not cumulative.
In addition, the Company pays each non-employee Board Member a $1,000 fee for each meeting (an additional meeting fee is paid for meetings that exceed six hours). The Company pays $500 for each telephonic meeting.



Compensation Committee Interlocks and Insider Participation



The Compensation Committee is currently composed of Mr. Moran and Mr.
Goldsmith. No interlocking relationship exists between our Board of Directors or compensation committee and the Board of Directors or compensation committee of any other company.



83



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##### Table of Contents

|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- |  | ----------------------------------------------------------------------------------------------



The following table sets forth the beneficial ownership of common stock of Portal based upon 43,652,604 shares of our common
stock outstanding as of January 30, 2004 as to (a) each current director and nominee for director; (b) each named executive officer; (c) all current directors and executive officers as a group; and (d) each person known to us to beneficially own at
that time more than 5% of the outstanding shares of Portals common stock. Unless otherwise specified, the address of each beneficial owner is 10200 South De Anza Boulevard, Cupertino, California 95014.



|                                                                          |  |                             |  |                                  |  
|------------------------------------------------------------------------- |  | --------------------------- |  | -------------------------------- | -
|Name of Beneficial Owner                                                  |  | SharesBeneficiallyOwned (1) |  | ApproximatePercent ofClass Owned |  
|John E. Little (2)                                                        |  | 7,097,902                   |  | 15.8                             | %
|David S. Labuda (3)                                                       |  | 2,197,819                   |  | 4.7                              | %
|Howard A. Bain III (4)                                                    |  | 118,994                     |  | *                                |  
|George J. Goldsmith (5)                                                   |  | 6,400                       |  | *                                |  
|Bhaskar M. Gorti (6)                                                      |  | 26,822                      |  | *                                |  
|J. David Martin (7)                                                       |  | 27,400                      |  | *                                |  
|Richard A. Moran (8)                                                      |  | 6,400                       |  | *                                |  
|Jennifer Taylor (9)                                                       |  | 8,067                       |  | *                                |  
|Robert P. Wayman (10)                                                     |  | 24,599                      |  | *                                |  
|Glenn R. Wienkoop (11)                                                    |  | 81,955                      |  | *                                |  
|All current executive officers and directors as a group (11 persons) (12) |  | 9,598,791                   |  | 20.4                             | %

---

|* |  | Less than one percent.
|- |  | ----------------------

|(1) |  | The table is based upon information supplied by executive officers, directors and principal stockholders. Unless otherwise indicated, each of the stockholders named in the table has
sole voting and investment power with respect to all securities shown as beneficially owned, subject to community property laws where applicable and to the information contained in the footnotes to the table.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 6,610,305 shares held in trust by Mr. Little, 328,767 shares held by his wife and 158,830 shares subject to options that are currently exercisable or will become
exercisable within 60 days after January 30, 2004. Mr. Little disclaims beneficial ownership of the 328,767 shares held by his wife.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes 157,000 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004. Includes 1,576,548 shares held in trust
by Mr. Labuda as trustee of the David S. Labuda Separate Property Trust U/D/T dated December 30, 1998. Also includes 231,348 shares held in trust by Mr. Labuda and Cindy A. Labuda, Mr. Labudas wife, as trustees of the Labuda Community Trust
U/D/T dated December 30, 1998. Also includes 75,154 shares of common stock held by Cindy A. Labuda, trustee of the Cindy A. Labuda Separate Property Trust U/D/T dated December 30, 1998 and 56,000 shares held in the name of the Kira Anne Labuda Trust
dated 12/31/97. Also includes 25,442 shares held in the name of the Paige Elyse Labuda Trust U/T/A dated 12/28/00. Also includes 25,442 shares held in the name of the Chad Austin Labuda Trust U/T/A dated 12/28/00. Also includes
25,442 shares held in the name of the Evan Pierce Labuda Trust U/T/A dated 12/28/00. Also includes 25,443 shares held in the name of the Trevor Lee Labuda Trust U/T/A dated 12/28/00. Mr. Labuda disclaims beneficial ownership of all of
these latter 232,926 shares.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 108,752 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Includes 6,400 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Includes 26,563 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Includes 7,400 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(8) |  | Includes 6,400 subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Includes 8,067 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Includes 24,599 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Includes 79,855 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Includes 587,597 shares subject to options that are currently exercisable or will become exercisable within 60 days after January 30, 2004.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------



Equity Compensation Plans



The following table sets forth information with respect to our equity
compensation plans as of January 30, 2004. There are no outstanding options to acquire shares of our common stock under equity compensation plans or arrangements assumed by us in connection with our acquisitions of other companies, and there are no
assumed plans under which any options to acquire such shares may be currently granted.



|                                                                                  |  |                                                                                             |     |  |                                                                              |      |                                                                                                                                           |           |       
|--------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | --- |  | ---------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------------- | --------- | ------
|Plan Category                                                                     |  | Number of Securitiesto be issued uponexercise ofoutstanding options,warrants and
rights (a) |     |  | Weighted-averageexercise price ofoutstanding options,warrants and
rights (b) |      | Number of securitiesremaining availablefor future issuanceunder equitycompensation
plans(excluding securitiesreflected in column (a)) (c) |          
|Equity Compensation Plans Approved by Stockholders:                               |  |                                                                                             |     |  |                                                                              |      |                                                                                                                                           |           |       
|1999 Stock Incentive Plan                                                         |  | 5,668,813                                                                                   |     |  | $                                                                            | 6.63 |                                                                                                                                           | 2,173,647 | (2)(3)
|1999 Employee Stock Purchase Plan/2000 International Employee Stock Purchase Plan |  | 0                                                                                           | (1) |  |                                                                              |     |                                                                                                                                           | 1,950,626 | (2)(4)
|Equity Compensation Plans Not Approved by Stockholders:                           |  |                                                                                             |     |  |                                                                              |      |                                                                                                                                           |           |       
|2000 Supplemental Stock Option Plan                                               |  | 306,341                                                                                     |     |  | $                                                                            | 4.80 |                                                                                                                                           | 753,451   |       

---

|(1) |  | Excludes purchase rights accruing under our 1999 Employee Stock Purchase Plan and 2000 International Employee Stock Purchase Plan (the Purchase Plans). Pursuant to those
rights, each eligible employee may purchase up to 700 shares of common stock at semi-annual intervals on the last business day of May and November each year at a purchase price per share equal to 85% of the lower of (i) the closing selling price per
share of common stock on the employees entry date into the two-year offering period in which that semi-annual purchase date occurs or (ii) the closing selling price per share on the semi-annual purchase date.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The number of shares of common stock available for issuance under the 1999 Stock Incentive Plan automatically increases on the first trading day of each fiscal year by an amount
equal to 4% of the total number of shares of our common stock outstanding on the last trading day of the immediately preceding fiscal year, but in no event will any such annual increase exceed 2,100,000 shares. The number of shares of common stock
available for issuance under the combined share reserve for the Purchase Plans automatically increases on the first trading day of each calendar year by an amount equal to 2%, of the total number of shares of our common stock outstanding on the last
trading day of the immediately preceding fiscal year, but in no event will any such annual increase exceed 800,000 shares.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The 2,173,647 shares may be issued under the 1999 Stock Incentive Plan upon the exercise of stock options or stock appreciation rights, or those shares may be issued without cash
consideration through stock bonus awards or pursuant to restricted stock awards or restricted stock units which vest upon the attainment of prescribed performance milestones or the completion of designated service periods.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(4) |  | Includes the number of shares available for issuance under the combined stockholder-approved reserve for the Purchase Plans.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



The 2000 Supplemental Stock Option Plan (the Supplemental Plan)
was implemented by the Board in December 4, 2000 as a non-stockholder approved plan under which option grants may be made to employees who are neither officers of Portal nor members of the Board on the grant date. The Board has authorized 1,200,000
shares of common stock for issuance under the Supplemental Plan. All option grants must have an exercise price per share not less than the fair market value per share of the common stock on the grant date. No option may have a maximum term in excess
of ten years, and each option will be subject to earlier termination within a specified period following the optionees cessation of service with Portal (or any parent or subsidiary corporation.) The option will vest in one or more installments
over the optionees period of service with Portal. However, all outstanding options will vest on an accelerated basis in the event we are acquired and those options are not assumed, replaced or otherwise continued in effect by the acquiring
entity. All options granted under the Supplemental Plan will be non-statutory stock options under the federal tax laws, and the plan administrator has the discretionary authority to implement option repricing programs from time to time for the
outstanding options. As of January 30, 2004, there were options for 306,341 shares outstanding under the Supplemental Plan, 140,208 shares had been issued, and 753,451 shares remained available for future option grants.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Change in Control Agreements and Employment Contracts



We have entered into a form of change in control agreement with each of the following executive officers: Messrs. Aronson, Bain, Gorti, Labuda, Little and Sullivan. Each agreement provides for severance payments to
each officer totaling three times that officers annual base salary and target bonus compensation and for accelerated vesting of all of such officers then unvested options in the event that the officer is terminated without cause (or
resigns in connection with a material reduction in responsibilities or compensation) within 12 months following a change in control of Portal. In addition, the Compensation Committee as plan administrator of the 1999 Stock Incentive Plan has
the authority to grant options and to structure repurchase rights under that plan so that the shares subject to those options or repurchase rights will immediately vest in connection with a change in control of Portal, whether by merger, asset sale,
successful tender offer for more than fifty percent of the outstanding voting stock or by a change in the majority of the board by reason of one or more contested elections for board membership, with this vesting to occur either at the time of this
change in control or upon the subsequent involuntary termination of the individuals service within a designated period, not to exceed 18 months, following a change in control.



In connection with our former Senior Vice President, Human Resources, Mr. Michael A. Vescusos departure from Portal in
September 2003, we entered into a Separation Agreement and General Release of All Claims under which we paid him total separation benefits in the amount of $67,788.48 (representing 3 months of salary continuation payments plus 3 months of COBRA
coverage at our expense in the amount of $1,346.16 per month). The benefits were paid in three equal monthly installments (subject to deduction of accrued interest in the amount of $2,698 from the first payment with respect to a loan for $60,000
dated May 22, 2002, the principal amount of which was repaid in full by Mr. Vescuso in September 2003). The first installment was paid on November 7, 2003, and the two other payments were made on December 5, 2003 and January 6, 2004, respectively.



In connection with our former Chief Operating Officer, Mr.
Glenn Wienkoops departure from Portal in February 2003, we entered into a General Release of All Claims under which we will pay him total severance benefits in the amount of $630,000 in semi-monthly installments of $26,250 pursuant to
Portals regular payroll schedule over the twelve months following March 2, 2004, the effective date of the agreement.



86



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##### Table of Contents

Certain Relationships and Related Transactions



In fiscal year 2004, we made reimbursements to Mr. Little in the amount of $223,818 for expenses he incurred in connection
with his use of his own privately-leased aircraft for business-related travel. Our chief executive officer and other executive officers who own or lease aircraft used for business-related travel will be reimbursed for expenses actually incurred in
such use of their private aircraft as follows:



| | · |  | The executive will normally receive for each flight undertaken for business purposes, if such flight is by means of private aircraft, the cost of a first class ticket on a regularly
scheduled commercial aircraft flight between the applicable departure and arrival points (or if there is no service to one or both of such points, the commercial airports closest to the applicable departure and arrival points) on that date. If the
executive is accompanied by his spouse or other family members to an event where attendance by spouses or other family members is required or authorized, then a first class ticket reimbursement will also be provided for the spouse and other family
members accompanying the executive on the trip.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | In those cases where our chief financial officer reasonably determines there are no feasible regularly scheduled commercial airline alternatives for travel to be undertaken for a
reasonable business purpose within the reasonable time constraints required for such travel and we would accordingly have to charter a flight to achieve the required schedule (for example, the road show for a financing), then the executive will
receive, for the use of his aircraft in undertaking such travel, an amount equal to the total cost of the flight determined on the basis of the price charged by NetJets charter service (or a comparable charter service) for the equivalent itinerary.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | In no event will the total reimbursements to an executive with respect to flights during a fiscal year exceed the total actual operating charges incurred by that executive with
respect to those flights.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



During the fiscal years ended January 31, 2004 and 2003 Ernst & Young, LLP provided various audit, audit related, tax and other services to the
Company as follows:



|                       |  |      |           |      |   |          
|---------------------- |  | ---- | --------- | ---- | - | ---------
|                       |  | 2004 |           | 2003
|(a) Audit Fees         |  | $    | 906,234   |      | $ | 771,055  
|(b) Audit Related Fees |  | $    |          |      | $ | 11,319   
|(c) Tax Fees           |  | $    | 118,925   |      | $ | 221,430  
|(d) All Other Fees     |  | $    | 10,010    |      | $ | 23,444   
|Total                  |  | $    | 1,035,169 |      | $ | 1,027,248



The components of the
total fees were as follows:



Audit
Fees:  ($906,234; $771,055).    This category includes the audit of Portals annual financial statements, review of financial statements included in Portals Form 10-K, quarterly reports, and
services that are not normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. This category also includes advice on accounting matters that arose during, or as a result
of, the audit or the review of interim financial statements, statutory audits required by non-U.S. jurisdictions and the preparation of annual management letter on internal control matters.



Audit-Related Fees:  ($0;
$11,319).    The 2003 balance relates to a review of payroll and benefit compliance in EMEA.



Tax Fees:  ($118,925; $221,430).    This category consists of professional services rendered by Ernst & Young,
primarily in connection with Portals tax compliance activities, including the preparation of tax returns in certain overseas jurisdictions and technical tax advice related to the preparation of tax returns.



All Other Fees:($10,010;
$23,444).    This category consists of fees for business structuring and other professional services in EMEA and Asia Pacific.



87



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##### Table of Contents

PART IV



ITEM 15.    
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a)  The following documents are filed as part of this Report on Form 10-K:



1.  Financial Statements.    The consolidated financial statements of Portal Software, Inc. and Report of Independent
Auditors contained in this Report on Form 10-K are listed in the Index to Consolidated Financial Statements contained in Item 8 above:



|                                                                                           |  |     
|------------------------------------------------------------------------------------------ |  | ----
|                                                                                           |  | Page
|Report of Ernst & Young LLP, Independent Auditors                                          |  | 44  
|Consolidated Balance Sheets as of January 31, 2004 and 2003                                |  | 45  
|Consolidated Statements of Operations for the three years ended January 31, 2004           |  | 46  
|Consolidated Statements of Stockholders Equity for the three years ended January 31, 2004 |  | 47  
|Consolidated Statements of Cash Flows for the three years ended January 31, 2004           |  | 48  
|Notes to Consolidated Financial Statements                                                 |  | 49  



2.  Financial Statement Schedules.



|                                              |  |     
|--------------------------------------------- |  | ----
|                                              |  | Page
|Schedule IIValuation and Qualifying Accounts |  | 89  



All other required
schedules are either contained in the financial statement notes or such schedules are not applicable.



3.  Exhibits Required by Item 601 of Regulation S-K.    The management contracts and compensatory plans required to
be filed as part of, or incorporated by reference into, this Report are: (i) 1999 Stock Incentive Plan and related documents, Exhibits 10.610.14; (ii) 1999 Employee Stock Purchase Plan, Exhibit 10.15; (iii) 1995 Stock Option/Stock Issuance
Plan and exhibits, Exhibit 10.5; (iv) Change in Control Severance Agreements, Exhibit 10.310.4; (v) 2000 Supplemental Stock Option Plan, Exhibit 10.19; (vi) 2000 International Employee Stock Purchase Plan, Exhibit 10.20; (vii) Separation
Agreement and General Release of all Claims dated October 28, 2003, between Portal Software, Inc. and Michael Vescuso, Exhibit 10.23 and (viii) General Release of all Claims dated February 24, 2004, between Portal Software, Inc. and Glenn Wienkoop,
Exhibit 10.24.



(b) Reports on Form 8-K.



8-Ks Filed with the SEC: None.



8-Ks Furnished to the SEC:



On November 13, 2003, we furnished to the SEC a current
report on Form 8-K under Items 7 and 12 announcing revised estimates for revenue and earnings for our third fiscal quarter ended October 31, 2003.



On November 20, 2003, we furnished to the SEC a current report on Form 8-K under Items 7 and 12 reporting our results of operations for
our third fiscal quarter ended October 31, 2003.



(c)  Exhibits.    See Exhibit Index on page 91. The Exhibits listed in the accompanying Exhibit Index are filed as part of this Annual Report on Form 10-K.



88



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##### Table of Contents

PORTAL SOFTWARE, INC.



SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

(in thousands)



|                                 |  |                            |       |                              |   |        |                       |  |   |                       |   |  |   |      
|-------------------------------- |  | -------------------------- | ----- | ---------------------------- | - | ------ | --------------------- |  | - | --------------------- | - |  | - | -----
|Allowance for Doubtful Accounts: |  | Balance atBeginningof Year |       | (Credited)Charged toExpenses |   |        | Additions(Deductions) |  |   | Balance at Endof Year
|Year ended January 31, 2004      |  | $                          | 2,458 |                              | $ | (189   | )                     |  | $ | (412                  | ) |  | $ | 1,857
|Year ended January 31, 2003      |  | $                          | 7,869 |                              | $ | (1,102 | )                     |  | $ | (4,309                | ) |  | $ | 2,458
|Year ended January 31, 2002      |  | $                          | 2,899 |                              | $ | 11,033 |                       |  | $ | (6,063                | ) |  | $ | 7,869



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf of the undersigned, thereunto duly authorized.



|               |  |  |  |                       |  |     |  |                                       
|-------------- |  |  |  | --------------------- |  | --- |  | --------------------------------------
|April 14, 2004 |  |  |  | PORTAL SOFTWARE, INC.
|               |  |  |  |                      
|               |  |  |  |                       |  | By: |  | /s/    JOHN E. LITTLE                 
|               |  |  |  |                       |  |     |  | John E. Little Chief Executive Officer



Pursuant to the
requirements of the Securities Exchange Act of 1934, this Annual Report on 10-K has been signed by the following persons in the capacities and on the dates indicated:



|                                                |  |                                                                                                |  |               
|----------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|Signature                                       |  | Title                                                                                          |  | Date          
|                                                |  |                                                                                               
|/s/    JOHN E.
LITTLE(John E.
Little)           |  | Chief Executive Officer and Director (Principal Executive Officer)                             |  | April 14, 2004
|                                                |  |                                                                                               
|/s/    HOWARD A. BAIN
III(Howard A. Bain III)   |  | Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) |  | April 14, 2004
|                                                |  |                                                                                               
|/s/    GEORGE J.
GOLDSMITH(George J.
Goldsmith) |  | Director                                                                                       |  | April 14, 2004
|                                                |  |                                                                                               
|/s/    J. DAVID
MARTIN(J. David
Martin)         |  | Director                                                                                       |  | April 14, 2004
|                                                |  |                                                                                               
|/s/    RICHARD A.
MORAN(Richard A.
Moran)       |  | Director                                                                                       |  | April 14, 2004
|                                                |  |                                                                                               
|/s/    JENNIFER
TAYLOR(Jennifer
Taylor)         |  | Director                                                                                       |  | April 14, 2004
|                                                |  |                                                                                               
|/s/    ROBERT P.
WAYMAN(Robert P.
Wayman)       |  | Director                                                                                       |  | April 14, 2004



90



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##### Table of Contents

EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                    
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                        
|           | 
|3.1(1)     |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                                 
|           | 
|3.2(2)     |  | Bylaws.                                                                                                                                                                                                            
|           | 
|3.3        |  | Certificate of Amendment to Restated Certificate of Incorporation (incorporated by reference to Registrants Form 10-Q filed on
December 14, 2000).                                                                
|           | 
|3.4        |  | Certificate of Amendment to Restated Certificate of Incorporation dated September 29, 2003.*                                                                                                                       
|           | 
|3.5        |  | Certificate of Designation for Series A Junior Preferred Stock (included in Exhibit 4.4 below)                                                                                                                     
|           | 
|4.1(1)     |  | Form of Registrants Specimen Common Stock Certificate.                                                                                                                                                            
|           | 
|4.2(1)     |  | Amended and Restated Investors Rights Agreement, among the Registrant and the investors and founders named therein, dated January 29,
1998.                                                                       
|           | 
|4.3(1)     |  | Amendment No. 1 to the Amended and Restated Investors Rights Agreement, dated March 3, 1998.                                                                                                                      
|           | 
|4.4        |  | Rights Agreement between Registrant and EquiServe Trust Company, N.A. dated August 16, 2002 (incorporated by reference from
Registrants Current Report on Form 8-K (file no. 000-25829) filed on August 20, 2002).
|           | 
|4.5        |  | Form of Indenture (incorporated by reference from Registrants Registration Statement on Form S-3 (file no. 333-85070) filed on
March 27, 2002).                                                                   
|           | 
|10.1(1)    |  | Lease Agreement between Registrant and Stevens Creek Office Center Associates for office facilities at Stevens Creek Office Center,
Cupertino, California, dated November 4, 1991, as amended.                     
|           | 
|10.2(1)    |  | Lease Agreement between Registrant and Stevens Creek Office Center Associates for office facilities at 20833 Stevens Creek Boulevard,
Cupertino, California, dated as of September 8, 1998.                        
|           | 
|10.3(5)    |  | Form of Change in Control Severance Agreement for Executive Officers.**                                                                                                                                            
|           | 
|10.4(5)    |  | Form of Change in Control Severance Agreement for Non-executive Officers.**                                                                                                                                        
|           | 
|10.5(1)    |  | Registrants 1995 Stock Option/Stock Issuance Plan and exhibits.**                                                                                                                                                 
|           | 
|10.6(4)    |  | Registrants 1999 Stock Incentive Plan (as Amended and Restated through February 1, 2002).**                                                                                                                       
|           | 
|10.7(1)    |  | Form of Notice of Grant of Stock Option.**                                                                                                                                                                         
|           | 
|10.8(1)    |  | Form of Stock Option Agreement.**                                                                                                                                                                                  
|           | 
|10.9(1)    |  | Form of Addendum to Stock Option Agreement (Involuntary Termination Following Corporate Transaction/Change in
Control).**                                                                                          
|           | 
|10.10(1)   |  | Form of Addendum to Stock Option Agreement (Limited Stock Appreciation Right)**                                                                                                                                    
|           | 
|10.11(1)   |  | Form of Stock Issuance Agreement.**                                                                                                                                                                                
|           | 
|10.12(1)   |  | Form Addendum to Stock Issuance Agreement (Involuntary Termination Following Corporate Transaction/Change in
Control).**                                                                                           
|           | 
|10.13(1)   |  | Form Automatic Stock Option Agreement.**                                                                                                                                                                           
|           | 
|10.14(1)   |  | Form Notice of Grant of Non-Employee DirectorAutomatic Stock Option.**                                                                                                                                            
|           | 
|10.15(4)   |  | Registrants 1999 Employee Stock Purchase Plan.**                                                                                                                                                                  
|           | 
|10.16(1)   |  | Form of Directors and Officers Indemnification Agreement (pre-October 2002).                                                                                                                                     
|           | 
|10.17(5)   |  | Form of Directors and Officers Indemnification Agreement (as Amended through October 2002).                                                                                                                      



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##### Table of Contents

|           |  |                                                                                                                                                                                                                                                                                
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                    
|           | 
|10.18(4)   |  | Form of Registrants Software License Agreement.                                                                                                                                                                                                                               
|           | 
|10.19      |  | Registrants 2000 Supplemental Stock Option Plan (incorporated by reference from Registrants Registration Statement on Form S-8
(file no 333-56472) filed on March 2, 2001.**                                                                                                 
|           | 
|10.20(4)   |  | Registrants 2000 International Employee Stock Purchase Plan.**                                                                                                                                                                                                                
|           | 
|10.21(1)   |  | Lease agreement dated June 25, 1999 by and between Registrant and TST Cupertino, L.L.C. for office facilities at Cupertino City Center V,
10200 South De Anza Boulevard, Cupertino, California.                                                                                
|           | 
|10.22      |  | Lease dated September 1999 between TST Torre, L.L.C. and Portal Software, Inc. for office facilities located at 10201 Torre Avenue,
Cupertino, California. (incorporated by reference from Registrants Form 10-K for the year ended January 31, 2001 filed on April 28, 2000).
|           | 
|10.23      |  | Separation Agreement and General Release of all Claims dated October 28, 2003 between Michael Vescuso and Registrant.*
**                                                                                                                                                      
|           | 
|10.24      |  | General Release of all Claims dated February 24, 2004, between Glenn Wienkoop and Registrant.* **                                                                                                                                                                              
|           | 
|10.25      |  | Placement Agency Agreement dated September 11, 2003 between Portal Software, Inc., Raymond James & Associates, Inc. and Kaufman Bros.
L.P. (incorporated by reference from Registrants Current Report on Form 8-K filed on September 11, 2003).                               
|           | 
|21.1       |  | Subsidiaries of the Registrant.*                                                                                                                                                                                                                                               
|           | 
|23.1       |  | Consent of Ernst & Young LLP, Independent Auditors.*                                                                                                                                                                                                                           
|           | 
|31.1       |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                       
|           | 
|31.2       |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                       
|           | 
|32.1       |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                

---

|(1) |  | Incorporated herein by reference from Registration Statement on Form S-1 (No. 333-72999).
|--- |  | -----------------------------------------------------------------------------------------



|(2) |  | Incorporated herein by reference from Annual Report on Form 10-K (No. 000-25829).
|--- |  | ---------------------------------------------------------------------------------



|(3) |  | Incorporated herein by reference from Registration Statement on Form S-8 (No. 333-62126).
|--- |  | -----------------------------------------------------------------------------------------



|(4) |  | Incorporated herein by reference from Annual Report on Form 10-K filed March 25, 2002 (No. 000-25829).
|--- |  | ------------------------------------------------------------------------------------------------------



|(5) |  | Incorporated herein by reference from Annual Report on Form 10-K filed May 1, 2003 (No. 000-25829).
|--- |  | ---------------------------------------------------------------------------------------------------



|* |  | Filed herewith
|- |  | --------------



|** |  | Compensatory Plan or Arrangement
|-- |  | --------------------------------



92