##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K

þANNUAL
REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2003

OR

o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number 001-31344

Plumtree Software, Inc.


(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 52-2303761                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    identification no.)

500 Sansome Street, San Francisco, CA 94111

(Address of principal executive offices and zip
code)


Registrants telephone number, including
area code: (415) 263-8900

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 Par
Value

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 þ         No o

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 the 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. o

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of December 31,
2003 was approximately $81,415,504 based on the number of shares
held by non-affiliates of the registrant as of December 31,
2003, and based on the reported last sale price of common stock
on June 30, 2003, which is the last business day of the
registrants most recently completed second fiscal quarter.
This calculation does not reflect a determination that persons
are affiliates for any other purposes. Shares of stock held by
five percent stockholders have been excluded from this
calculation as they may be deemed affiliates.

The number of shares outstanding of the
issuers common stock as of December 31, 2003 was
31,264,722.



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DOCUMENTS INCORPORATED BY REFERENCE

|                                                                                                                                                                                                                                                                                                                            |  |           |     | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | --- | 
|Document Description                                                                                                                                                                                                                                                                                                        |  | 10-K Part
|                                                                                                                                                                                                                                                                                                                            |  |          
|Portions of the Proxy Statement for the Annual
    Meeting of Stockholders (the Proxy Statement) to be
    held on May 20, 2004, and to be filed pursuant to
    Regulation 14A within 120 days after registrants
    fiscal year ended December 31, 2003 are incorporated by
    reference into Part III of this Report |  |           | III | 



---






---










PLUMTREE SOFTWARE, INC.

FISCAL YEAR 2003 FORM 10-K ANNUAL
REPORT

Table of Contents

|              |  |                                                                                                                      |    |        |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|              |  |                                                                                                                      |    | Page  
|              |  |                                                                                                                      |    | Number
|              |  |                                                                                                                      |    |       
|PART I.       |  |                                                                                                                      |    |       
|Item 1.       |  | Business                                                                                                             |    |        | 2  | 
|Item 2.       |  | Properties                                                                                                           |    |        | 9  | 
|Item 3.       |  | Legal Proceedings                                                                                                    |    |        | 9  | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                              |    |        | 9  | 
|PART II.      |  |                                                                                                                      |    |       
|Item 5.       |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |    |        | 10 | 
|Item 6.       |  | Selected Financial Data                                                                                              |    |        | 11 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |    |        | 11 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                       |    |        | 34 | 
|Item 8.       |  | Financial Statements and
    Supplementary Data                                                                      |    |        | 34 | 
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |    |        | 34 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |    |        | 34 | 
|PART III.     |  |                                                                                                                      |    |       
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                               |    |        | 35 | 
|Item 11.      |  | Executive Compensation                                                                                               |    |        | 35 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |    |        | 35 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                                   |    |        | 36 | 
|Item 14.      |  | Principal Accountant Fees
    and Services                                                                           |    |        | 36 | 
|PART IV.      |  |                                                                                                                      |    |       
|Item 15.      |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                                  |    |        | 36 | 
|Signatures    |  |                                                                                                                      | 38 |       
|Exhibit 10.4 
|Exhibit 10.16
|Exhibit 10.17
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 31.1 
|Exhibit 31.2 
|Exhibit 32.1 
|Exhibit 32.2 



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Forward-Looking Statements

In addition to historical information, this
Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties that could cause
our actual results to differ materially from those stated or
suggested by such forward-looking statements. Factors that might
cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled
Managements Discussion and Analysis of Financial
Position and Results of Operations  Risk Factors That
May Affect Our Future Results and the Market Price of Our
Stock. When used in this report, the words
expects, anticipates,
intends, plans, believes,
seeks, estimates, and similar
expressions are generally intended to identify forward-looking
statements. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as
of the date of this Annual Report. We undertake no obligation to
publicly release any revisions to the forward-looking statements
after the date of this document. You should carefully review the
risk factors described in other documents we file from time to
time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed in 2004.




PART I




Item 1.     Business

Overview

Plumtree Software, Inc. (we,
our, Plumtree or the
Company), was incorporated in California on July 18,
1996 and reincorporated in Delaware on May 31, 2002. Our
initial public offering of 5,000,000 shares of common stock was
completed on June 4, 2002.

We develop, market and sell corporate portal,
collaboration, content management and search software as well as
related services for enterprises. These technologies work
together in an online work environment that we call the
Enterprise Web. The Enterprise Web offers customers a foundation
for building Web applications more quickly, at lower cost. Our
Enterprise Web solution allows an enterprises employees,
customers and partners to interact with different types of
information and applications in one Web environment and empowers
users to create new information and services. Our software also
supports a wide range of online business processes, so users can
complete tasks more efficiently. For example, using our
solution, a companys employees can send e-mail, read
competitive news or update a sales database, accessing multiple
systems in one experience. Similarly, a companys customers
can use the Enterprise Web to search for support articles,
participate in online discussions or access billing information.

We believe that the range of resources that our
software can integrate and our proprietary Internet technology
for performing this integration for hundreds of thousands of
users differentiate our products and create value for our
customers. We also provide professional services and training,
maintenance and support services to our customers. Since 1997,
we have licensed our software to more than 575 customers from a
broad range of industries and government around the world.

Strategy

Plumtrees mission is to create a
comprehensive Web environment for employees, customers and
partners across the corporate enterprise to interact with
different systems and work together. Plumtrees Enterprise
Web solution consists of integration products for bringing
resources from traditional systems together on the Web,
foundation services such as collaboration, content management
and search for building new Web applications, and an
applications management platform for delivering these Web
applications to broad audiences. Plumtrees Web Services
Architecture allow this solution to span rival platforms and
systems, maximizing customers return on their existing
technology investments. Key elements of our strategy include:



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Establishing the Enterprise Web Suite as a
    Platform for Building Service-Oriented
    Applications

We seek to establish our Enterprise Web software
as the primary platform for aggregating an organizations
existing information and services, and for creating new
service-oriented applications from these

2



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resources. To drive this strategy, we seek to
maximize the range of software systems integrated into our
platform using open technologies. As our solution is adopted by
our customers as an enterprise-wide Web platform, businesses can
use our platform to author new documents, build new applications
and create new Web-based business processes.




| |                                                      
| | -----------------------------------------------------
| | Developing New Products To Address Customer
    Needs

We believe our software provides a cost-effective
platform for delivering new Web applications to broad audiences.
Accordingly, we intend to build additional software products for
building service-oriented applications. We believe that new
product releases will increase our opportunities with each
customer and allow us to compete more effectively.

Products

Plumtrees products empower organizations to
create an open, enterprise-wide Web environment for people to
interact with applications, find information and work together.
We call this environment the Enterprise Web. The Enterprise Web
provides a common framework for delivering and managing Web
applications, and a set of services designed to overcome
technical and organizational boundaries  for
integrating systems, managing content, supporting collaboration
and administering security across a business.

To support the Enterprise Web, Plumtree offers
three product lines:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Plumtree Corporate Portal:the applications management framework
    for the Enterprise Web.                                           
|
| |  | Integration Web Services:products that bring to the Enterprise
    Web resources from existing systems.                               
|
| |  | Server Products:a
    foundation for building Enterprise Web applications, including
    content management, collaboration and search.

The Plumtree Corporate Portal

The Plumtree Corporate Portal is the applications
management framework for the Enterprise Web. The portal provides
a powerful enterprise-wide arena for employees, partners and
customers to interact with documents, applications, foundation
services, and one another. The portal integrates content,
applications, search and security from other systems through
Plumtrees integration products, and delivers capabilities
such as collaboration and content management through
Plumtrees server products. The platform also hosts the
main portal user components: the personalized and community
portal pages, the enterprise-wide Document Directory and
Web-based administration.

The applications management frameworks
primary user benefit is that it allows everyone in an
organization to use applications and find documents on their
own, in one place. By empowering users to meet their own
information technology needs, the portal helps reduce user
support and training costs, and provides a tool to improve
enterprise productivity and customer service. By providing a
single managed environment for integrating dozens or hundreds of
intranets, extranets and Web-enabled applications, the portal
can also lower application development costs, simplifies
maintenance and ensures that users can find all the electronic
resources being created across the enterprise. The portals
primary benefit for information technology groups is that it
allows organizations to build Web applications quickly and
efficiently using the content management, collaboration and
search resources available within Plumtrees Enterprise Web
solution.

Relying on a Web Services Architecture to
assemble all the resources available in the portal, the
applications management framework helps lower the cost of
integrating heterogeneous systems. At the center of this
architecture stands a Parallel Portal Engine that uses Internet
standards to communicate with other systems. Designed from the
outset to communicate with Web services running on different
platforms and networks, the patent-pending parallel engine is
the only integration infrastructure that has proven its ability
to communicate with thousands of systems via Internet protocols,
making an Enterprise Web environment based on heterogeneous
resources available for hundreds of thousands of users.

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Plumtree Integration Products

Plumtrees integration products bring
together on the Web electronic resources from across the
enterprise, introducing existing software systems to broader
audiences, and maximizing return on investment. We believe
integration is one of Plumtrees strengths: as an
Enterprise Web vendor, Plumtree seeks to span rival software
platforms and applications than the vendors of those systems.

Plumtrees integration products go beyond
simple views of other applications to combine the full range of
corporate systems in the Enterprise Web:



| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Plumtree Portletsfor integrating enterprise
    applications and delivering new services in portal pages;                                                                      
|
| |  | Crawler Web Servicesfor identifying content in file
    systems, databases and Web sites to be indexed and categorized
    in the Enterprise Webs knowledge management system;
|
| |  | Authentication Web Servicesfor synchronizing the Enterprise
    Webs security system with systems of record, including
    LDAP directories and Windows domains;              
|
| |  | Search Web Servicesfor federating searches from the
    Enterprise Web to indexes maintained by third-party search
    engines.                                                
|
| |  | Profile Web Servicesfor creating a master profile of each
    user, based on characteristics drawn from enterprise systems.                                                    

Plumtree Server Products

Plumtrees Server Products offers a set of
services for use within the portal:

Plumtree Content Server

Plumtree Content Server 4.0 is our
Enterprise Web publishing system, bringing intranet, extranet
and Internet sites into the Enterprise Webs global
framework for security, navigation and knowledge management.
Thoroughly integrated into the Enterprise Web Suite over the
past year, the technology in Plumtree Content Server 4.0
has been battle-tested at over one hundred customer sites.

We believe Plumtrees commitment to content
management is unique in the service-oriented applications
industry. For customers that have already deployed content
management systems, Plumtree currently offers integration with
Documentum, Interwoven, FileNET, Lotus, Open Text and Stellent,
embedding the administrative tools in the portal as Plumtree
portlets, and indexing and categorizing the content through
Crawler Web Services. For customers who seek to avoid buying a
separate content management system with a portal, Plumtree
offers Plumtree Content Server.

Content Server allows portal users across a
business to publish content such as win-loss reports, technical
support articles, corporate communications announcements,
product specifications and market updatesall in a
controlled, consistent way. The result is a portal that everyone
can use to route or share information.

Plumtree Collaboration Server

Plumtree Collaboration Server 2.0 allows
Enterprise Web users to collaborate on projects 
setting schedules, sharing documents and exchanging
ideas.Collaboration Server combines a view of active projects
with all the other resources integrated in the Enterprise Web,
including e-mail and sales reports, telephone directories and
competitive news. The result is an Enterprise Web environment
that employees, partners and customers can use as a working
platform for project teams and business units.

With an administrative environment for managing
announcements, calendars, schedules, documents and discussions,
we believe Collaboration Server provides a comprehensive
solution for driving projects to completion. For example, tasks
can require documents to be uploaded for team review; those
documents can be a topic for online discussions; and these
discussions can trigger an e-mail notification. Collaboration

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Servers integration with the Plumtree
Corporate Portal allows project members to monitor their
involvement with multiple projects from personalized portal
pages.


Plumtree Search Server

Plumtree Search Server indexes content throughout
the Enterprise Web, including project documents stored by
Collaboration Server, Web pages managed by Content Server and
content indexed from file systems, Web sites and document
databases into the portals Knowledge Directory. Based on
years of experience with search as corporate infrastructure,
Plumtree offers search technology with enterprise-class
security, scalability, reliability and ease-of-administration.
This search technology is closely integrated with all the other
systems in the Enterprise Web, freeing administrators from
having to separately secure and manage a search index.

This integration results in a more powerful
solution. Search Server relies on the Enterprise Webs
identity management to store users access privileges in
the content index, ensuring that searches are secure. Search
Server maintenance tasks are scheduled via the Plumtree
Enterprise Web Suites Automation Server, which queues all
asynchronous activity in the Enterprise Web, automating
administration. Crawler Web Services scan a wide range of
repositories outside the Enterprise Web for information to index
in Search Servers collections, and the Knowledge Directory
provides a visualization, subscription and administration
framework for publishing and categorizing indexed content.

Plumtree Studio Server

Plumtree Studio Server lets information
technology managers and content experts create application
components such as telephone lists, work order processes,
calendars and surveys, without any coding. Known as portlets,
the components that Studio Server builds feature a user
interface, application logic, and a database. By empowering a
wide range of audiences to develop numerous portlets quickly,
Studio Server lowers the cost of deploying new services through
the portal, and empowers portal managers to populate their own
sites within the Enterprise Web without involving developers.

Plumtree Web Services
Architecture

Plumtrees Web Services Architecture is
based on our use of Internet standards such as Hypertext
Transfer Protocol (HTTP), Simple Object Access Protocol (SOAP),
Universal Description Discovery and Integration (UDDI) and
Extensible Mark-up Language (XML). Through the use of these
protocols, we can integrate applications, content, security and
search services. We believe we offer the first software solution
in which all integration is based on Web services standards, and
that this architecture offers customers greater flexibility,
reduced development costs and maximum reliability. Because it
can broker resources across different platforms and networks,
the Plumtree Enterprise Web Suite can integrate a wide range of
resources from other systems, broadening the range of customers
our products can serve.

Services

In addition to offering software, we offer
customers, systems integrators and technology vendors deployment
and support services.

Professional
Services

We offer professional services to deploy Plumtree
products at customer sites, and to train alliance members,
including technology vendors and systems integrators. Our
consultants also participate in joint deployments with systems
integrators, increasing our capacity to deploy at a large number
of customer sites.

Customer Care
Services

We provide customer care through technical
support and assigned account managers. Technical support is
offered worldwide via e-mail and telephone through our support
centers in San Francisco, London, Sydney

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and Tokyo 24 hours per day, seven days per
week. Customers, systems integrators and technology vendors may
also receive technical support through Plumtrees Support
Center, powered by a deployment of our own Enterprise Web
software. In addition, local account managers act as advocates
within Plumtree to assist customers in defining their business
requirements and obtaining the needed resources for a successful
deployment. Plumtree also offers premium support, which includes
developer support, dedicated account management and on-site
support.


Training
Services

We offer a series of training classes designed to
provide our customers and alliance members with the knowledge
and tools necessary to deploy, administer and expand their
deployment of the Enterprise Web. Offered both at customer sites
and at training centers in various cities, these classes train
individuals from customer and alliance member organizations.

Customers

We have licensed our products to over
575 customers. Our clients represent a broad spectrum of
industries and public entities. For the year ended
December 31, 2003 no single customer accounted for 10% or
more of our net revenue.

Sales and Marketing

We pursue sales using our direct sales force and
through systems integrators and independent software vendors. We
focus our sales activities on large businesses and government
organizations.

As of December 31, 2003, our sales
organization consisted of 106 managers, account executives,
channel managers and product consultants, divided into six
teams. We have sales representatives throughout the United
States, Europe and Asia Pacific, located in major metro areas
such as Atlanta, Boston, Chicago, Dallas, Denver, London,
Los Angeles, Minneapolis, Munich, New York, Paris,
San Francisco, Seattle, Seoul, Singapore, Sydney, Tokyo and
Washington D.C.

Our marketing and technology alliance efforts are
conducted by a team that, as of December 31, 2003,
consisted of 17 professionals. The marketing organization
is generally responsible for product positioning, product
direction, communications, field events and sales tools. The
product management team drives product direction and technical
marketing and competitive analysis. We generate sales leads from
communications programs that include our Web site, public
relations, online and local seminars, tradeshows and events.

Technology

The Plumtree Enterprise Web Suite is based on Web
services technologies and a parallel engine designed to assemble
those services in an enterprise solution.

Parallel
Engine

In order to scale to meet the needs of a large
number of users who each require the integration of many Web
services in a personalized, secure fashion, we have developed
the parallel engine, which sends requests to multiple Web
services in parallel through HTTP. Our engine can retrieve
content from a large number of Web services, optimizing the
number of network sockets and computing threads required for
these requests. If, for example, a portal page embeds a remote
service for listing e-mail messages that takes one second to
prepare, an inventory report that takes one second to prepare
and an industry news services that takes one second to prepare,
the parallel portal engine assembles the page in approximately
one second, instead of three, even if each service is hosted on
an entirely different platform. This approach is also designed
to be fault-tolerant, as services operating on separate
computers cannot interfere with one another or with the
Enterprise Webs main application servers. Features of our
parallel engine include:



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Request chaining:the parallel engine combines multiple HTTP requests into a
    single virtual request, reducing the number of network sockets
    opened and closed, and improving performance.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Thread conservation:traditional HTTP libraries use a separate computing thread for
    each HTTP request, which quickly exhausts the memory of a system
    that may have to open thousands of HTTP requests per second. The
    parallel engine opens multiple HTTP requests using one thread,
    increasing performance.                                                                                                                                      
|
| |  | Address caching:the
    parallel engine stores in memory the addresses of computers
    hosting Web services, avoiding time-consuming address requests
    from a domain name server.                                                                                                                                                                                                                                                                            
|
| |  | Time-outs:because
    our Internet architecture isolates faults on separate computers,
    the engine can bypass Web services that fail to return a result
    within an administrator-configured time-frame. The portal
    displays a cached result or an error message where that Web
    service would have surfaced to the user, without causing the
    entire portal to fail or wait indefinitely, increasing the
    portals overall quality-of-service.
|
| |  | Load-balancing:the
    parallel engine balances loads against multiple instances of the
    same Web service, re-directing requests when one instance is
    overtaxed or fails.                                                                                                                                                                                                                                                                                 
|
| |  | Secure Sockets
    Layer:the parallel engine is designed
    to support optimized communications through the Secure Sockets
    Layer, for secure connections to thousands of Web services.                                                                                                                                                                                                                                                                      

Research and Development

Since inception, we have devoted significant
resources to develop our products and technology. We believe our
future success depends in large part on continuing innovation
and rapid development. Our engineering organization is
responsible for product architecture and technology, engineering
and quality assurance. As of December 31, 2003, our
engineering organization consisted of 128 employees. For the
years ended December 31, 2003, 2002 and 2001 our research
and development expenses totaled approximately
$20.7 million, $18.1 million and $14.1 million.
We expect to continue to devote substantial resources to our
research and development activities.

Competition

The market for our product is intensely
competitive and highly fragmented, characterized by rapid
technological change, evolving industry standards, changes in
customer needs and new product introductions.

We compete principally on the basis of:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | product features, quality and performance;                                                                 
|
| |  | interoperability of our solution with existing
    applications, content repositories and security systems;
|
| |  | number, size and satisfaction of customers;                                                                
|
| |  | range of applications that customers can build on
    our solution; and                                    
|
| |  | strength of sales and services channels.                                                                   

We believe we compete favorably with our
competitors on the basis of these factors.

Some large software vendors, such as PeopleSoft,
SAP and Siebel, are Web-enabling their proprietary client-server
applications. Prospective customers who require only a Web view
of their applications may not need an Enterprise Web solution
and may be satisfied with this category of products. Some
software vendors, such as BEA, IBM and Microsoft, are offering
portal-building infrastructure, but do not offer a complete
solution for building services-oriented applications. Since many
prospects already license other software from these vendors, a
customer-vendor relationship already exists. We also face
competition from information technology departments of potential
customers that have developed or may develop in-house
technologies that may substitute for those offered by us. We
expect these internal development initiatives will continue to
be a source of competition.

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We expect to face increased competition in the
future from our current competitors. In addition, new
competitors, combinations or alliances among existing and future
competitors, may emerge and rapidly gain significant market
share. Many of our competitors have longer operating histories,
significantly greater financial, technical, marketing and other
resources, greater name recognition, a broader range of products
to offer and a larger installed customer base, any of which
could provide them with a significant competitive advantage. We
expect that the rapid evolution of Internet-based software
applications and standards will require us to adapt our software
products to remain competitive. If we are unable to compete
successfully, we may be unable to attract and retain customers.
Increased competition could also result in price reductions for
our products and lower profit margins, either of which could
harm our business, results of operations and financial condition.

Employees

As of December 31, 2003, we had 350
full-time employees, of whom 299 were based in the United States
of America and 51 were based in Canada, Europe and Asia Pacific.
Of those employees, 123 were in sales and marketing, 128 were in
engineering, 72 were in professional services, technical support
and training, and 27 were in finance, human resources,
information systems and administrative functions. Our employees
are not represented by any collective bargaining agreements and
we have never experienced a work stoppage, and we consider our
relations with our employees to be good.

International Operations

Our revenue originating outside of the United
States, as a percentage of our total net revenue, was
approximately 21% percent in the year ended 2003, 19% percent in
the year ended 2002 and 9% percent in the year ended 2001. We
have no material long-lived assets located outside of the U.S..

Most of our sales in international markets in the
past three years were made by foreign sales subsidiaries, but
commencing in 2004, we expect to contract most of our
international sales directly from the U.S. In countries with low
sales volumes, we expect sales to be made primarily through
various local representatives and distributors.

Our international business is subject to risks
customarily encountered in foreign operations, changes in a
specific countrys or regions political or economic
conditions, trade protection measures, import or export
licensing requirements, changes in tax laws and regulatory
requirements, difficulty in staffing and managing operations,
differing labor regulations and differing protection of
intellectual property. We are also exposed to foreign currency
exchange rate risk inherent in our sales commitments,
anticipated sales, and assets and liabilities denominated in
currencies other than the local functional currency. The U.S.
and international response to recent terrorist activities could
exacerbate these risks.

Investor Information

We are subject to the informational requirements
of the Securities Exchange Act of 1934 (the Exchange
Act). Therefore, we file periodic reports, proxy
statements and other information with the Securities and
Exchange Commission (the SEC). Such reports, proxy
statements and other information may be obtained by visiting the
Public Reference Room of the SEC at 450 Fifth Street, NW,
Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding issuers
that file electronically.

You can access financial and other information at
our Investor Relations website. The address is
www.plumtree.com/ir. We make available, free of charge, copies
of our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically
or otherwise furnishing it to the SEC.

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Our Corporate Governance Standards, the charters
of our Audit and Finance Committee, our Compensation Committee,
our Executive Committee and our Nominating/ Corporate Governance
Committee and our Code of Business Conduct and Ethics (including
code of ethics provisions that apply to our principal executive
officer, principal financial officer, controller and senior
financial officers) are available on our website at
www.plumtree.com/ir under Corporate Governance
Policies. These items are also available in print to any
stockholder who requests them by calling (877) GET-PLUM
(877-438-7586) in the U.S. and Canada, and (415) 399-2554
outside the U.S. and Canada.




Item 2.     Properties

Our principal headquarters facility is located in
approximately 43,000 square feet of office space in San
Francisco, California under leases expiring in October 2006. Our
international headquarters facility is located in approximately
6,000 square feet of office space in Maidenhead, United Kingdom
under a lease expiring in August 2004. We believe our current
facilities are adequate for our needs for the foreseeable
future.




Item 3.     Legal
Proceedings

The material set forth in Note 7 of Notes to
Consolidated Financial Statements in Item 15 of this
Form 10-K is incorporated herein by reference.




Item 4.     Submission
of Matters to a Vote of Security Holders

None.

9



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##### Table of Contents






PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

Our common stock is traded on the Nasdaq National
Market under the symbol PLUM and has been traded on
Nasdaq since our initial public offering on June 4, 2002.
According to the records of our transfer agent, we had 137
stockholders of record as of December 31, 2003. The
following table sets forth the high and low sale price of our
common stock, based on the last daily sale, in each of the
quarters since our initial public offering:

|      |                                    |                |   |                 |  |  |   |      | 
|----- | ---------------------------------- | -------------- | - | --------------- |  |  | - | ---- | 
|      |                                    | Low Sale Price |   | High Sale Price
|      |                                    |                |   |                
|2003: |                                    |                |   |                 |  |  |   |     
|      | Fourth Quarter                     |                | $ | 4.08            |  |  | $ | 5.67 | 
|      | Third Quarter                      |                |   | 3.63            |  |  |   | 4.65 | 
|      | Second Quarter                     |                |   | 3.09            |  |  |   | 4.51 | 
|      | First Quarter                      |                |   | 2.63            |  |  |   | 4.50 | 
|2002: |                                    |                |   |                 |  |  |   |     
|      | Fourth Quarter                     |                | $ | 1.98            |  |  | $ | 3.07 | 
|      | Third Quarter                      |                |   | 2.60            |  |  |   | 4.49 | 
|      | Second Quarter (from June 4, 2002) |                |   | 4.30            |  |  |   | 8.50 | 

Dividend Policy

We have never declared or paid dividends on our
capital stock. We presently anticipate that we will retain all
of our future earnings to finance the development and expansion
of our business and provide working capital. Therefore, we do
not anticipate paying any cash dividends on our common stock for
the foreseeable future. The terms of our existing Silicon Valley
Bank line of credit and security agreement prohibit the payment
of dividends, except in specified circumstances.

Equity Compensation Plan Information

The following table summarizes information about
our equity compensation plans as of December 31, 2003. All
outstanding awards relate to our common stock.

|                                                               |  |                      |            |                   |  |                           |      |  |  |  |             |          
|-------------------------------------------------------------- |  | -------------------- | ---------- | ----------------- |  | ------------------------- | ---- |  |  |  | ----------- | ---------
|                                                               |  |                      |            | Weighted-average  |  | Number of Securities     
|                                                               |  | Number of Securities |            | Exercise Price of |  | Remaining Available for  
|                                                               |  | to be Issued upon    |            | Outstanding       |  | Future Issuance under    
|                                                               |  | Exercise of          |            | Options,          |  | Equity Compensation Plans
|                                                               |  | Outstanding Options, |            | Warrants and      |  | (Excluding Securities    
|Plan category                                                  |  | Warrants and Rights  |            | Rights            |  | Reflected in Column (a)) 
|                                                               |  |                      |            |                   |  |                          
|                                                               |  | (a)                  |            | (b)               |  | (c)                      
|Equity compensation plans approved by security
    holders     |  |                      | 10,407,495 |                   |  | $                         | 4.15 |  |  |  | 9,087,435(1 | ),(2),(3)
|Equity compensation plans not approved by
    security holders |  |                      |           |                   |  |                           |     |  |  |  |            |          
|                                                               |  |                      |            |                   |  |                           |      |  |  |  |             |          
|Total                                                          |  |                      | 10,407,495 |                   |  | $                         | 4.15 |  |  |  | 9,087,435   |          
|                                                               |  |                      |            |                   |  |                           |      |  |  |  |             |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 2,124,342 of securities authorized and
    available for issuance in connection with the Plumtree Software,
    Inc. Employee Stock Purchase Plan (the 423(b) Plan).                                                                                                                                                                                                                  
|   
|(2) | Shares authorized for issuance in connection with
    the 423(b) Plan are subject to an automatic annual increase of
    the lesser of 1,500,00 shares or 2 percent of our
    outstanding common stock or an amount determined by our Board of
    Directors.                                                                                                                                   
|   
|(3) | Under the Plumtree Software, Inc. 2002 Stock Plan
    (Stock Plan), we may issue 6,963,093 options to
    purchase common stock. Shares authorized for issuance in
    connection with the Stock Plan are subject to an automatic
    annual increase of the lesser of 3,000,000 shares or 5 percent
    of our outstanding common stock or an amount determined by our
    Board of Directors.

10



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##### Table of Contents






Item 6. Selected Financial Data

The consolidated statements of operations data
for the years ended December 31, 2003, 2002, 2001, 2000 and
1999 and the consolidated balance sheet data at
December 31, 2003, 2002, 2001, 2000 and 1999, are derived
from our audited consolidated financial statements that have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The following data
should be read in conjunction with our consolidated financial
statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this report.

|                                                         |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   |         |   |  |   |        |  
|-------------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | - |  | - | ------ | -
|                                                         |  |                                      
|                                                         |  | Year Ended December 31,              
|                                                         |  |                                      
|                                                         |  | 2003                                  |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                         |  |                                       |        |      |  |      |        |      |  |     
|                                                         |  |                                      
|                                                         |  | (in thousands, except per share data)
|Revenue                                                  |  | $                                     | 71,452 |      |  | $    | 82,919 |      |  | $    | 81,473 |   |  | $ | 35,111  |   |  | $ | 3,367  |  
|Gross margin                                             |  |                                       | 57,673 |      |  |      | 64,761 |      |  |      | 62,350 |   |  |   | 20,758  |   |  |   | 2,107  |  
|Income (loss) from operations                            |  |                                       | (2,068 | )    |  |      | 2,852  |      |  |      | (7,132 | ) |  |   | (22,046 | ) |  |   | (6,879 | )
|Net income (loss)                                        |  |                                       | (1,467 | )    |  |      | 2,390  |      |  |      | (7,805 | ) |  |   | (21,683 | ) |  |   | (7,030 | )
|Net income (loss) per share, basic                       |  | $                                     | (0.05  | )    |  | $    | 0.12   |      |  | $    | (1.21  | ) |  | $ | (3.97   | ) |  | $ | (1.78  | )
|Net income (loss) per share, diluted                     |  | $                                     | (0.05  | )    |  | $    | 0.08   |      |  | $    | (1.21  | ) |  | $ | (3.97   | ) |  | $ | (1.78  | )
|Cash and cash equivalents and short-term
    investments |  |                                       | 67,689 |      |  |      | 65,322 |      |  |      | 24,040 |   |  |   | 13,098  |   |  |   | 2,344  |  
|Working capital                                          |  |                                       | 54,516 |      |  |      | 49,185 |      |  |      | 3,769  |   |  |   | 5,102   |   |  |   | 2,406  |  
|Total assets                                             |  |                                       | 90,762 |      |  |      | 90,722 |      |  |      | 51,260 |   |  |   | 38,001  |   |  |   | 5,600  |  
|Long-term liabilities                                    |  |                                       | 448    |      |  |      | 454    |      |  |      | 437    |   |  |   | 368     |   |  |   | 328    |  
|Total stockholders equity                               |  |                                       | 57,891 |      |  |      | 55,352 |      |  |      | 11,443 |   |  |   | 10,362  |   |  |   | 2,717  |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
    Financial Condition and Results of Operations

The following discussion of our financial
condition and results of operations should be read in
conjunction with our Consolidated Financial Statements and the
related Notes to Consolidated Financial Statements
in Item 15, in this Annual Report on Form 10-K. This
discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934. Our actual results could differ materially from those
projected in the forward-looking statements as a result of a
number of factors, risks and uncertainties, including the risk
factors set forth in this discussion, especially under the
caption Risk Factors that May Affect our Future Results
and the Market Price of our Stock, and elsewhere in this
Form 10-K. Generally, the words may,
will, could, would,
anticipate, expect, intend,
believe, continue, or the negatives of
such terms, or other comparable terminology and similar
expressions identify forward-looking statements. The information
included in this Form 10-K is as of the filing date with
the Securities and Exchange Commission and future events or
circumstances could differ significantly from the
forward-looking statements included herein. Accordingly, we
caution readers not to place undue reliance on such
statements.

Overview and Executive Summary

The following is a summary of the discussion
of our financial condition and results of operations and is
qualified in its entirety by the more complete discussion
contained in this Item 7. This summary should be read in
conjunction with Part I, Item 1, Business and
is qualified in its entirety by the risk factors set forth in
Item 7 as described below under Risk Factors that May
Affect Our Future Results and the Market Price of Our
Stock.

Plumtree Software, Inc. (we,
Plumtree or the Company), was
incorporated in California on July 18, 1996 and
reincorporated in Delaware on May 31, 2002. Our initial
public offering of 5,000,000 shares of common stock was
completed on June 4, 2002.

11



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##### Table of Contents



Plumtree develops, markets and sells corporate
portal, collaboration, content management and search software as
well as related services for enterprises. These technologies
work together in an online work environment that we call the
Enterprise Web. The Enterprise Web offers customers a foundation
designed to build Web applications more quickly, at lower cost.
Our Enterprise Web solution allows an enterprises
employees, customers and partners to interact with different
types of information and applications in one Web site and
empowers users to create new information and services. Our
software also supports a wide range of online business
processes, so users can complete tasks more efficiently.

We derive our revenue and generate cash from
customers from primarily two sources: (i) product license
revenue, and (ii) software license maintenance,
professional services and training revenue. For 2003 and 2002,
our net revenue was $71.5 million and $82.9 million,
respectively, and our net income (loss) was $(1.5) million and
$2.4 million, respectively. The decreased spending levels
of our potential corporate and government customers as well as
increased competition have adversely impacted our revenue and
net income. During the past two years, we have experienced
weakness in corporate level spending, with many of our customers
delaying new or expanded technology solution implementations.

In addition to total revenue and net income, in
evaluating our business, management considers, among many other
factors, the following:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | Revenue by category (license, maintenance and
    professional services and training):



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our license revenue for the year ended
    December 31, 2003 was $34.0 million, a 31% decrease
    over the year ended December 31, 2002, resulting primarily
    from the downturn in the overall market for information
    technology and software as well as increased competition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We offer professional services to deploy the
    Plumtree Corporate Portal and other products at customer sites,
    and to train alliance members, including technology vendors and
    systems integrators; maintenance and customer care through
    technical support and assigned account managers; and a series of
    training classes designed to provide our customers and alliance
    members with the knowledge and tools necessary to deploy,
    administer and expand the portal within the enterprise. Revenue
    from maintenance and technical support in 2003 was
    $22.5 million, an increase of $4.0 million or 22% over
    2002, resulting from an increase in maintenance revenue from our
    new customers as well as from renewals of maintenance contracts
    by our installed base of customers. Revenue attributable to
    professional services increased in 2003 to $11.9 million as
    compared to $11.7 in 2002, primarily related to increased
    headcount within the professional services department as
    headcount increased to 59 consultants in 2003 from 46
    consultants in 2002. Training revenue decreased in 2003 by
    approximately $190,000 as compared to 2002. We expect our
    maintenance, professional services and training revenue in
    general to increase in 2004, primarily due to increased
    maintenance revenue from both new customers as well as renewals
    from our installed customer base.



| |   |                           
| | - | --------------------------
| |  | Deferred revenue balances:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our deferred revenue balance at December 31,
    2003 was $19.0 million, of which approximately
    $1.2 million is deferred license revenue, approximately
    $16.6 million is deferred maintenance revenue and
    $1.2 million is deferred professional services and training
    revenue. In 2003, our total deferred revenue balance increased
    $488,000 over 2002. The increase in total deferred revenue from
    2002 to 2003 is principally related to an increase in deferred
    maintenance revenue offset by decreases in deferred license
    revenue and deferred professional services and training revenue.
|
| |  | Deferred license revenue decreased
    $2.4 million in 2003 as compared to 2002 due primarily to
    the recognition of approximately $2.8 million in revenue
    during 2003 from the December 31, 2002 balance.                                                                                                                                                                                                                                                                                                                                                                                                               

12



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Deferred maintenance revenue increased
    $3.1 million in 2003 as compared to 2002 related to an
    increase in deferred maintenance revenue from new customers as
    well as renewals of maintenance contracts by our installed base
    of customers.                                                                                                                                                                                                                                          
|
| |  | Deferred professional services and training
    revenue decreased $258,000 in 2003 as compared to 2002 as less
    of our customers at the end of 2003 prepaid for services and
    training than in 2002. During 2004 we expect our deferred
    revenue balances to remain consistent with 2003 with the
    breakdown of deferred revenue continuing to shift from deferred
    license revenue into deferred maintenance revenue as more of our
    customers renew their maintenance contracts.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Number of license revenue transactions and
    breakdown of new customers versus repeat customers: During the
    year ended December 31, 2003, we closed 322 license
    transactions, including 128 new customers or 40% of our total
    license transactions and 194 repeat orders or 60% of our total
    license transactions bringing our total number of customers
    since inception to over 575. During the year ended
    December 31, 2002, we closed 294 license transactions,
    which included 143 new customers or 49% of our total license
    transactions and 151 repeat orders or 51% of our total license
    transactions.
|
| |  | Revenue by geographic region: We operate our
    business in two geographic regions: United States and
    International, which consists of Europe, Middle East and Africa
    (EMEA), Japan and Asia-Pacific (APAC)
    and Canada. In 2003, 79% of our revenue was generated within the
    United States, with International revenue accounting for 21% of
    our total revenue. Our United States and International
    operations have experienced many of the same economic trends set
    forth above.                                                                                                                                
|
| |  | Cash and cash equivalents and short-term
    investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |   |                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | At December 31, 2003, our cash, cash
    equivalents and short-term investments were $67.7 million,
    up 4% from $65.3 million at December 31, 2002. We expect
    that our primary utilization of cash in 2004 will continue to be
    salaries, commissions, bonuses and other payroll related costs.                             
|
| |  | Net cash flows from operations in the year ended
    December 31, 2003 was $862,000 compared to $7.0 million for
    the year ended December 31, 2002. The decrease in net cash
    flows from operations flow was driven primarily by the decrease
    in our net income (loss) as well as a decrease in our accrued
    liabilities.

Critical Accounting Policies

Our critical accounting policies are as follows:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | Software revenue recognition;                                             
|
| |  | allowance for doubtful accounts;                                          
|
| |  | income taxes;                                                             
|
| |  | assessing the realizability of capitalized
    acquired technology; and   
|
| |  | determination of the fair value of stock options
    granted to employees.

Software Revenue Recognition

The Companys software arrangements
typically include: (i) an end user license that provides
for an initial fee in exchange for a customers use of the
Companys products in perpetuity based on a specified
number of users or CPUs; (ii) a maintenance arrangement
that provides for technical support and product updates over a
period of 12 months; and (iii) a professional service
arrangement on a time and materials basis. The Company
recognizes software revenue using the residual method pursuant
to the requirements of Statement of Position No. 97-2
Software Revenue Recognition (SOP 97-2),
as amended by Statement of Position No. 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements. Under the residual method, revenue is
recognized when Company-specific objective evidence of fair
value exists for all of the undelivered elements in the
arrangement (i.e., professional services and maintenance), but
does not exist

13



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##### Table of Contents



for one or more of the delivered elements in the
arrangement (i.e., the software product). The Company allocates
revenue to each undelivered element based on its respective fair
value, with the fair value determined by the price charged when
that element is sold separately. The Company determines the fair
value of the maintenance portion of the arrangement based on
consistent pricing of maintenance and maintenance renewals as a
percentage of net license fees. If evidence of fair value cannot
be established for the undelivered elements of a license
agreement, the entire amount of revenue from the arrangement is
deferred and recognized over the period that these elements are
delivered. For substantially all of the Companys software
arrangements, the Company defers revenue for the fair value of
the maintenance and professional services to be provided to the
customer and recognizes revenue for the software license when
persuasive evidence of an arrangement exists and delivery has
occurred, provided the fee is fixed or determinable, and
collection is deemed probable. The Company evaluates each of
these criteria as follows:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Evidence of an arrangement: The Company considers
    a non-cancelable agreement signed by the Company and the
    customer to be evidence of an arrangement.                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Delivery: Delivery is considered to occur when
    media containing the licensed programs is provided to a common
    carrier or, in the case of electronic delivery, the customer is
    given access to the licensed programs.                                                                                                                                                                                                                                                                               
|
| |  | Acceptance: The Companys typical end user
    license agreement does not include customer acceptance
    provisions. If the arrangement specifies acceptance provisions,
    the Company defers the revenue until the earlier of when written
    acceptance is received from the customer or the customers
    acceptance rights expire.                                                                                                                                                                    
|
| |  | Fixed or determinable fee: The Company considers
    the fee to be fixed or determinable if the fee is not subject to
    refund or adjustment and is on standard payment terms. If the
    arrangement fee is not fixed or determinable, the Company
    recognizes the revenue as amounts become due and payable.                                                                                                                                                                                            
|
| |  | Collection is deemed probable: The Company
    conducts a credit review for all significant transactions at the
    time of the arrangement to determine the credit worthiness of
    the customer. Collection is deemed probable if the Company
    expects that the customer will be able to pay amounts under the
    arrangement as payments become due. If the Company determines
    that collection is not probable, the Company defers the revenue
    and recognizes the revenue upon cash collection.

Allowance for Doubtful Accounts

We have provided an allowance for doubtful
accounts of $522,000 and $754,000 as of December 31, 2003
and 2002, respectively for estimated losses resulting from the
inability of our customers to make their required payments. The
decrease in our allowance for doubtful accounts is due primarily
to the improved economic environment, improved collection
efforts and increased management focus on collection matters.

The total allowance for doubtful accounts is
comprised of a specific reserve and a general reserve. We
regularly review the adequacy of our allowance for doubtful
accounts after considering the size of the accounts receivable
aging, the age of each invoice, each customers expected
ability to pay and our collection history with each customer.
Unless specific indications arise earlier, we review any invoice
greater than 120 days past due to determine if an allowance
is appropriate based on the risk category. In addition, we
maintain a general reserve for all invoices billed, and not
included in the specific reserve, by applying a percentage based
on each 30-day age category. In determining these percentages,
we analyze our historical collection experience and current
economic trends.

If the historical data we use to calculate the
allowance provided for doubtful accounts does not reflect the
future ability to collect outstanding receivables, additional
provisions for doubtful accounts may be needed and the future
results of operations could be materially affected. However,
historically the reserve has proven to be adequate.

14



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##### Table of Contents



Income Taxes

We provided a valuation allowance of
$7.3 million against the entire net deferred tax asset as
of December 31, 2003. The valuation allowance was recorded
given the accumulated losses we have incurred and uncertainties
regarding our future operating profitability and taxable income.
Our income tax provision is primarily related to income and
withholding taxes on sales and income generated in non-U.S. and
domestic state tax jurisdictions for which no U.S. benefit is
currently recognizable. For the years ended December 31,
2003 and 2002 we recorded an income tax provision of $824,000
and $1.2 million related to these tax liabilities.

Assessing the Realizability of Capitalized
Acquired Technology

We have capitalized the costs of certain
purchased technology. We periodically review these costs to
ensure they are being recorded at the lower of unamortized cost
or net realizable value. Net realizable value is determined
using assumed future cash flows related to sales of the
underlying technology. Had different assumed cash flows been
used, materially different amounts of the carrying amount of
these costs could have been reported. At December 31, 2003,
the unamortized costs related to the purchased software were
approximately $1.5 million and are included within other assets
in the accompanying consolidated balance sheets.

Determination of Fair Value of Options Granted
to Employees

In connection with the granting of certain stock
options, we recorded deferred stock-based compensation charges
in the periods before our initial public offering representing
the difference between the deemed fair value of our common stock
for accounting purposes and the option exercise price. We
determined the deemed fair value based upon several factors
including our operating performance, issuances of our
convertible preferred stock and valuations of comparable
publicly traded software companies. For the year ended
December 30, 2001, we recorded $4.4 million of
deferred stock-based compensation and we recognized
$4.5 million of stock-based compensation expense. For the
years ended December 31, 2003 and 2002, we did not record
any deferred stock-based compensation and we recognized
$1.4 million and $3.5 million of stock-based compensation
expense. We apply the intrinsic value method in accounting for
employee stock options apply in accordance with Accounting
Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees. Accordingly, we
recognize no compensation expense with respect to stock-based
awards to employees with exercise prices equal to the fair
market value of the award on the date of grant. Had different
assumptions or criteria been used to determine the deemed fair
value of the stock, materially different amounts of stock-based
compensation could have been reported. Had we applied fair value
accounting for our stock options as outlined in Statement of
Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation, our operating results would have
been affected as follows:

|                                                                                                              |                          |                          |        |       |   |      |        |       |   |   |        |       |  
|------------------------------------------------------------------------------------------------------------- | ------------------------ | ------------------------ | ------ | ----- | - | ---- | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                              |                          |                         
|                                                                                                              |                          | Years Ended December 31,
|                                                                                                              |                          |                         
|                                                                                                              |                          | 2003                     |        | 2002  |   | 2001
|                                                                                                              |                          |                          |        |       |   |     
|Net income (loss) as reported                                                                                 |                          | $                        | (1,467 | )     |   | $    | 2,390  |       |   | $ | (7,805 | )    
|Add: Stock-based employee compensation expense
    included in net income (loss)                              |                          |                          | 1,363  |       |   |      | 3,500  |       |   |   | 4,527  |      
|Deduct: Stock-based employee compensation expense
    determined under fair value based method for all awards |                          |                          | (8,429 | )     |   |      | (6,377 | )     |   |   | (6,618 | )    
|Pro forma net loss under SFAS 123                                                                             |                          | $                        | (8,533 | )     |   | $    | (487   | )     |   | $ | (9,896 | )    
|                                                                                                              |                          |                          |        |       |   |      |        |       |   |   |        |      
|Net income (loss) per common
    share  basic:                                                               |                          |                          |        |       |   |      |        |       |   |   |        |      
|As reported under APB 25                                                                                      |                          | $                        | (0.05  | )     |   | $    | 0.12   |       |   | $ | (1.21  | )    
|Pro forma under SFAS 123                                                                                      |                          | $                        | (0.28  | )     |   | $    | (0.02  | )     |   | $ | (1.53  | )    
|Net income (loss) per common
    share  diluted:                                                             |                          |                          |        |       |   |      |        |       |   |   |        |      
|                                                                                                              | As reported under APB 25 |                          | $      | (0.05 | ) |      | $      | 0.08  |   |   | $      | (1.21 | )
|                                                                                                              | Pro forma under SFAS 123 |                          | $      | (0.28 | ) |      | $      | (0.02 | ) |   | $      | (1.53 | )

15



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##### Table of Contents



Results of Operations

The following table sets forth the statements of
operations data for each of the periods indicated as a
percentage of total revenue.

|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |      |       | 
|--------------------------------- | -------------------------------------------------------------------- | ------------------------ | ---- | ---- | ----- | ---- | ---- | ---- | ----- |  | ---- | ---- | ----- | 
|                                  |                                                                      |                         
|                                  |                                                                      | Year Ended December 31, 
|                                  |                                                                      |                         
|                                  |                                                                      | 2003                     |      | 2002 |       | 2001
|                                  |                                                                      |                          |      |      |       |     
|Revenue:                          |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|                                  | Licenses                                                             |                          |      | 47.6 | %     |      |      | 59.8 | %     |  |      | 66.3 | %    
|                                  | Services and maintenance                                             |                          |      | 52.4 |       |      |      | 40.2 |       |  |      | 33.7 |      
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|                                  |                                                                      | Total revenue            |      |      | 100.0 |      |      |      | 100.0 |  |      |      | 100.0 | 
|Cost of revenue:                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|                                  | Cost of licenses                                                     |                          |      | 0.9  |       |      |      | 3.8  |       |  |      | 6.1  |      
|                                  | Cost of services and maintenance                                     |                          |      | 15.9 |       |      |      | 15.3 |       |  |      | 16.5 |      
|                                  | Amortization of stock-based compensation and
    acquired technology |                          |      | 2.5  |       |      |      | 2.8  |       |  |      | 0.9  |      
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|                                  |                                                                      | Total cost of revenue    |      |      | 19.3  |      |      |      | 21.9  |  |      |      | 23.5  | 
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|Gross margin                      |                                                                      |                          | 80.7 |      |       |      | 78.1 |      |       |  | 76.5 |     
|Operating expenses:               |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|                                  | Research and development                                             |                          |      | 28.9 |       |      |      | 21.9 |       |  |      | 17.4 |      
|                                  | Sales and marketing                                                  |                          |      | 42.8 |       |      |      | 40.1 |       |  |      | 49.6 |      
|                                  | General and administrative                                           |                          |      | 9.6  |       |      |      | 8.7  |       |  |      | 10.5 |      
|                                  | Aborted offering costs                                               |                          |      |     |       |      |      |     |       |  |      | 2.0  |      
|                                  | Restructuring charge                                                 |                          |      | 0.7  |       |      |      | 0.5  |       |  |      | 0.9  |      
|                                  | Amortization of stock-based compensation                             |                          |      | 1.6  |       |      |      | 3.4  |       |  |      | 4.8  |      
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|                                  |                                                                      | Total operating expenses |      |      | 83.6  |      |      |      | 74.6  |  |      |      | 85.2  | 
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|Operating income (loss)           |                                                                      |                          | (2.9 | )    |       |      | 3.5  |      |       |  | (8.7 | )   
|Other income (expense):           |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|                                  | Interest income (expense)                                            |                          |      | 1.4  |       |      |      | 0.9  |       |  |      | (0.3 | )    
|                                  | Other income (expense)                                               |                          |      | 0.6  |       |      |      | (0.1 | )     |  |      | 0.3  |      
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|                                  |                                                                      | Other income, net        |      |      | 2.0   |      |      |      | 0.8   |  |      |      | 0.0   | 
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|Income (loss) before income taxes |                                                                      |                          | (0.9 | )    |       |      | 4.3  |      |       |  | (8.7 | )   
|Provision for income taxes        |                                                                      |                          | 1.2  |      |       |      | (1.4 | )    |       |  | (0.8 | )   
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     
|Net income (loss)                 |                                                                      |                          | (2.1 | )%   |       |      | 2.9% |      |       |  | (9.6 | )%  
|                                  |                                                                      |                          |      |      |       |      |      |      |       |  |      |     

Year Ended December 31, 2003 and
2002

Revenue

Revenue decreased from $82.9 million in 2002
to $71.5 million in 2003. Between these periods, license
revenue decreased 31% and services and maintenance revenue
increased 12%.

Licenses.License
revenue decreased from $49.6 million in 2002 to $34.0
million in 2003. The decrease in license revenue was primarily
due to the downturn in the overall market for information
technology and software, offset by the addition of over 125 new
license customers in 2003. No customer accounted for more than
10% of our revenue for the years ended December 31, 2003
and 2002.

Services and Maintenance.Services and maintenance revenue
increased from $33.3 million in 2002 to $37.4 million
in 2003. This increase was due primarily to an increase in
maintenance revenue from new customers as well as renewals of
maintenance contracts by our installed base of customers. This
increase is

16



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##### Table of Contents



comprised of $4.0 million in additional
maintenance revenue and an increase of $80,000 in professional
services, training, billed expenses and partnership revenue. The
number of professional services consultants increased from 46 to
59 and the number of employees in technical support increased
from 12 to 13 between these periods.


Cost of Revenue

Licenses.Our cost
of license consists primarily of royalty expenses paid to
third-party technology vendors and the amortization of acquired
technology. Cost of license decreased from $4.8 million in
2002 to $2.2 million in 2003 primarily due to a
$2.6 million decrease in royalty expense. The Company
released enhanced versions of our portal product which
incorporate proprietary technology not subject to royalty
payments replacing of certain royalty bearing functionality
previously provided by third-party vendors. In 2003 we also had
a one-time credit to expense of $525,000 associated with a
reduction in the estimated liability of an expired contract.

Services and Maintenance.Cost of services and maintenance
decreased from $12.7 million in 2002 to $11.3 million
in 2003. Cost of professional services decreased from
$10.5 million in 2002 to $9.1 million in 2003
primarily due to a reduction in our use of third-party
consultants to deploy our products offset by an increase in the
number of professional services staff. Cost of maintenance was
at $2.2 million in both 2002 and 2003.

Amortization of Stock-Based Compensation and
Acquired Technology.Amortization of
stock-based compensation related to cost of services was
$694,000 in 2002 and $246,000 in 2003. The amortization of
acquired technology was $1.6 million in 2003 and 2002.

Operating Expenses

Research and
Development.Research and development
expenses increased from $18.1 million in 2002 to
$20.7 million in 2003. This increase was due to an increase
in the average number of employees within our in-house
development staff tasked to the enhancement and expansion of our
product line. As of December 31, 2002, we had 105 employees
in engineering, compared to 128 employees as of
December 31, 2003.

Sales and Marketing.Sales and marketing expenses decreased from $33.3 million
in 2002 to $30.6 million in 2003. This decrease was due
primarily to reduced sales commissions expense of
$2.8 million resulting from decreased license sales offset
by an increase in the number of sales and marketing personnel.
As of December 31, 2002, we had 92 employees in sales
and 15 employees in marketing as compared to
106 employees in sales and 17 in marketing as of
December 31, 2003.

General and
Administrative.General and
administrative expenses decreased from $7.2 million in 2002
to $6.8 million in 2003. This decrease was primarily due to
a reduction in bad debt expense of approximately $600,000 in
2003 as compared to 2002. As of December 31, 2002 and 2003,
we had 24 and 27 general and administrative personnel. We
expect general and administrative expenses to increase in future
periods as we incur additional costs associated with being a
public company, including compliance with the Sarbanes-Oxley
Act, changes to the Nasdaq listing rules and other related rules
and regulations. Many of the requirements of the Sarbanes-Oxley
Act and changes to the Nasdaq listing rules are not yet fully
enacted or applicable to us yet. Our compliance obligations will
likely require us to hire additional full time employees or hire
third party consultants.

Restructuring
Charge.In 2003, we recorded a
restructuring charge of $475,000 primarily related to reductions
in employee headcount. In 2002, we recorded a restructuring
charge of $441,000 primarily related to reductions in employee
headcount.

Amortization of Stock-Based Compensation.Amortization of stock-based
compensation related to operating expenses was $2.8 million
in 2002 and $1.1 million in 2003.

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Other Income (Expense), Net

Other income, net primarily consists of foreign
currency gains and losses on transactions denominated in foreign
currencies, interest income earned on cash and cash equivalents
and interest expense incurred on our financing obligations. The
net balance of other income increased from $718,000 in 2002 to
$1.4 million in 2003 primarily due to a gain on the sale of
an investment and an increase in interest income, net of
expenses, offset by a decrease in the gain (loss) on
foreign currency transactions. During the year ended
December 31, 2003 we recognized a $475,000 gain on the sale
of an investment, net of legal fees and commissions. We do not
expect to benefit from similar gains on sales of investments in
future periods. Interest income, net of interest expense,
increased to $970,000 for 2003 from $773,000 in 2002 primarily
from a increase in interest income primarily from the full year
of interest earned on our cash proceeds from our initial public
offering and a decrease in interest expense due to the
expiration of our capital lease liability in 2003. The effect of
foreign currency transactions was a loss of $(45,000) for 2003
as compared to a gain of $70,000 in 2002.

Provision for Income Taxes

We recorded an income tax provision of
$1.2 million and $824,000 for the years ended
December 31, 2002 and 2003 related to income and
withholding taxes on sales and income generated in non-U.S. and
domestic state tax jurisdictions for which no U.S. benefit
is currently recognizable.

Year Ended December 31, 2002 and
2001

Revenue

Revenue increased from $81.5 million in 2001
to $82.9 million in 2002. Between these periods, license
revenue decreased 8% and services and maintenance revenue
increased 22%.

Licenses.License
revenue decreased from $54.1 million in 2001 to
$49.6 million in 2002. The decrease in license revenue was
primarily due to the downturn in the overall market for
information technology and software, offset by the addition of
over 140 new license customers in 2002. No customer
accounted for more than 10% of our revenue for the years ended
December 31, 2002 and 2001.

Services and Maintenance.Services and maintenance revenue
increased from $27.4 million in 2001 to $33.3 million
in 2002. This increase was due primarily to an increase in
maintenance and renewals of maintenance contracts by our
installed base of customers. This increase is comprised of
$7.3 million in additional maintenance revenue, offset by a
decrease of $1.4 million in professional services, training
and partnership revenue. The number of professional services
consultants decreased from 60 to 46 between these periods.

Cost of Revenue

Licenses.Our cost
of license consists primarily of royalty expenses paid to
third-party technology vendors. Cost of license decreased from
$5.1 million in 2001 to $4.8 million in 2002. Our cost
of license revenue decreased in 2002 as compared to 2001
primarily due to decreased royalty payments due to the shipment
of version 4.5WS of our portal product, which incorporates
proprietary technology not subject to royalty payments in
replacement of certain royalty bearing functionality previously
provided by third-party vendors.

Services and Maintenance.Cost of services and maintenance
decreased from $13.4 million in 2001 to $12.7 million
in 2002. This decrease was primarily due to a reduction in
professional services staff and a reduction in our use of
third-party consultants to deploy our products.

Amortization of Stock-Based Compensation and
Acquired Technology.Amortization of
stock-based compensation related to cost of services was
$627,000 in 2001 and $694,000 in 2002. The amortization of
acquired technology increased from $138,000 in 2001 to
$1.6 million in 2002.

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##### Table of Contents



Operating Expenses

Research and
Development.Research and development
expenses increased from $14.1 million in 2001 to
$18.1 million in 2002. This increase was due to an increase
in the average number of employees within our in-house
development staff driving the development and expansion of our
product line. As of December 31, 2001, we had
98 employees in engineering, as compared to 105 employees
as of December 31, 2002.

Sales and Marketing.Sales and marketing expenses decreased from $40.5 million
in 2001 to $33.3 million in 2002. This decrease was due
primarily to a decrease in sales commissions paid to sales
personnel of $2.9 million, a $545,000 benefit from the
favorable settlement of a lawsuit with a former employee and a
reduction in salaries and sales meetings. As of
December 31, 2001, we had 111 employees in sales and
marketing as compared to 107 as of December 31, 2002.

General and
Administrative.General and
administrative expenses decreased from $8.5 million in 2001
to $7.2 million in 2002. This decrease was primarily due to
a one-time sales tax adjustment resulting in a benefit of
$703,000 and decreased use of third-party contractors. As of
December 31, 2001 and 2002, we had 20 and 24 general
and administrative personnel. We expect this expense to increase
in future periods as we incur additional costs associated with
being a public company including compliance with Sarbanes-Oxley,
Nasdaq listing rules and other related regulations.

Restructuring
Charge.In 2002, we recorded a
restructuring charge of $441,000 primarily related to reductions
in employee headcount. In 2001, we recorded a restructuring
charge of $760,000 related to reductions in employee headcount
and the abandonment of leased facilities.

Aborted Offering Costs.Aborted offering costs of
approximately $1.6 million were recorded in 2001 related to
the postponement of our initial public offering, which was
completed in June 2002.

Amortization of Stock-Based Compensation.Amortization of stock-based
compensation related to operating expenses was $3.9 million
in 2001 and $2.8 million in 2002.

Other Income (Expense), Net

The net balance of other income increased from
$10,000 in 2001 to $718,000 in 2002 primarily due to a $480,000
increase in interest income primarily from increased cash
proceeds from our initial public offering, and a $165,000
decrease in interest expense on our short-term debt in 2002 as
compared to 2001.

Provision for Income Taxes

We recorded an income tax provision of $683,000
and $1.2 million for the years ended December 31, 2001
and 2002 related to income taxes currently payable on income
generated in non-U.S. and domestic state tax jurisdictions,
including withholding taxes for which no U.S. benefit is
currently recognizable.

Liquidity and Capital Resources

Since 2001, we have primarily financed our
operations and capital expenditures through cash flow from
operations. In June 2002, we completed our initial public
offering resulting in net proceeds of $37.9 million. As of
December 31, 2003, we had $67.7 million of cash and
cash equivalents and short-term investments and
$54.5 million in working capital.

Our net cash provided by operating activities was
$862,000 and $7.0 million for the years ended
December 31, 2003 and 2002. This decrease in our net cash
provided by operating activities is principally related to the
decrease in net income (loss) of $3.9 million in the
year ended December 31, 2003 as compared to the year ended
December 31, 2002.

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Capital expenditures were $823,000 and
$1.8 million for the years ended December 31, 2003 and
2002, respectively. Our capital expenditures consisted of
purchases of items to manage our operations, including computer
hardware and software, office furniture and equipment and
leasehold improvements.

We entered into a $7.5 million revolving
line of credit with Silicon Valley Bank, which originally
matured in March 2002, and was extended through August 2002. In
August 2003, we modified the line of credit agreement to
decrease the original principal amount to $3.1 million and
extended the maturity date through August 2004. To secure any
outstanding loans, we have granted Silicon Valley Bank a
security interest in our assets, including our accounts
receivable. Interest on the loans is payable monthly and accrues
at one percentage point above the prime rate as announced by
Silicon Valley Bank. We draw down on this bank line from time to
time. As of December 31, 2003, no amounts were outstanding
under this facility. In addition, we have issued a letter of
credit for $2.5 million, which is enforceable against the
facility. We are prohibited from declaring and paying dividends,
incurring any non-permitted indebtedness and acquiring the
capital stock of any other company under our loan agreements
with Silicon Valley Bank.

We expect to maintain our current operating
expenses for the foreseeable future in order to execute our
business plan. As a result, we anticipate that these operating
expenses, as well as planned capital expenditures, will
constitute a material use of our cash resources. In addition, we
may utilize cash resources to fund acquisitions of complementary
businesses, technologies or product lines. We believe that our
cash and cash equivalents and short-term investments on hand
will be sufficient to meet our cash requirements for at least
the next 18 months, including working capital requirements
and planned capital expenditures.

Contractual Obligations

The following table summarizes information about
our contractual obligations as of December 31, 2003 (in
thousands):

|                                              |       |       |        |                        |  |       |        |        |  |           |       |       |  |   |   |   |  |   |   |   | 
|--------------------------------------------- | ----- | ----- | ------ | ---------------------- |  | ----- | ------ | ------ |  | --------- | ----- | ----- |  | - | - | - |  | - | - | - | 
|                                              |       |       |        |                       
|                                              |       |       |        | Payments Due by Period
|                                              |       |       |        |                       
|                                              |       |       |        | Less than              |  | 1-3   |        | 3-5    |  | More Than
|Contractual Obligations                       |       | Total |        | 1 Year                 |  | Years |        | Years  |  | 5 Years  
|                                              |       |       |        |                        |  |       |        |        |  |          
|Operating Lease Obligations                   |       | $     | 7,861  |                        |  | $     | 2,796  |        |  | $         | 5,065 |       |  | $ |  |   |  | $ |  |  
|Capital Lease Obligations                     |       |       |       |                        |  |       |       |        |  |           |      |       |  |   |  |   |  |   |  |  
|Liabilities reflected on the balance sheet(1) |       |       | 13,396 |                        |  |       | 13,396 |        |  |           |      |       |  |   |  |   |  |   |  |  
|Purchase Obligations                          |       |       |       |                        |  |       |       |        |  |           |      |       |  |   |  |   |  |   |  |  
|Long-term Debt Obligations                    |       |       |       |                        |  |       |       |        |  |           |      |       |  |   |  |   |  |   |  |  
|                                              |       |       |        |                        |  |       |        |        |  |           |       |       |  |   |   |   |  |   |   |  
|                                              | Total |       | $      | 21,257                 |  |       | $      | 16,192 |  |           | $     | 5,065 |  |   | $ |  |  |   | $ |  | 
|                                              |       |       |        |                        |  |       |        |        |  |           |       |       |  |   |   |   |  |   |   |  



---



|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes only expected cash payments and
    therefore excludes deferred revenue as well as deferred rent,
    which is our sole long-term liability.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not
participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, often established for the purpose of
facilitating off-balance sheet arrangements or other
contractually limited purposes. All of our subsidiaries are 100%
owned by us and are fully consolidated into our consolidated
financial statements.

Recent Accounting Pronouncements

See Note 2 of the Consolidated Financial
Statements for a full description of recent accounting
pronouncements including their respective expected dates of
adoption and effects on results of operations and financial
condition.

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##### Table of Contents



Risk Factors that May Affect Our Future
Results and the Market Price of Our Stock

Risks Relating to Our Business



| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our efforts to establish and maintain the
    Enterprise Web Suite and related products as an enterprise-wide
    platform may fail and, as a result, our revenue may not increase
    and our ability to compete successfully may be
    impaired.

We have expended, and plan to continue to expend,
significant resources to establish our Enterprise Web Suite as
an enterprise-wide platform for integrating an
organizations diverse systems and applications and for
building new applications. To succeed, we must develop and
market both enhancements to our Plumtree Corporate Portal and
new products and services that expand its functionality.
Plumtree Collaboration Server and Plumtree Studio Server, each
released commercially in the first quarter of 2002, and our
Content Server released in November 2002, are our most
significant new product developments since the introduction of
the Plumtree Corporate Portal. These and other new products and
subsequent versions of our products may not achieve widespread
market acceptance.

Even if we are successful in establishing our
products as an enterprise-wide platform, we face, among others,
the following risks:



| |   |                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We will likely face new and in many cases larger
    competitors, and some of our current system integrators and
    technology partners with whom we work closely may come to view
    our new products and services as competitive with their own
    products and services.                                                   
|
| |  | In order to remain competitive, we must increase
    the number of systems and applications that can be integrated
    into and built with our portal platform as Web services, which
    will increasingly strain our development and support
    infrastructure and may require us to add significant additional
    personnel.
|
| |  | The industry may develop and adopt technology
    standards different from the standards presently incorporated in
    our products resulting in our products becoming less competitive.                                                                                                                                         



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have a short operating history, which
    limits your ability to evaluate our business and operating
    results and may increase the risk of your investment.

Our short operating history makes the evaluation
of our business operations and our prospects difficult. We were
founded in 1996 and began offering version 1.0 of our corporate
portal product in March 1998. The latest version of our portal
product, version 5.0, was released in June 2003. We cannot
predict whether this version of our portal will be successful.
We have derived all of our revenue from licensing our Enterprise
Web Suite and related products and services. You should consider
the risks and difficulties frequently encountered by early stage
companies such as ours in new and rapidly evolving markets,
particularly those companies whose businesses depend on the
Internet. These risks and difficulties include:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | potential fluctuations in operating results and
    uncertain growth rates;                                                
|
| |  | limited market acceptance of our products;                                                                                 
|
| |  | concentration of our revenue on a small range of
    products;                                                             
|
| |  | our need to expand our direct sales forces and
    indirect sales channels, particularly for international markets;
    and
|
| |  | our need to attract, train and retain qualified
    personnel.                                                             



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have a history of losses, and we may never
    sustain profitability on a quarterly or annual basis, which
    would have a harmful effect on our business and the value of our
    common stock.

We incurred substantial net losses in each year
from our inception in July 1996 through 2001. For the years
ended December 31, 2000 and 2001, we incurred net losses of
approximately $21.7 million and $7.8 million,
respectively. Although we achieved annual profitability of
approximately $2.4 million in 2002, for

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##### Table of Contents



the year ended December 31, 2003 we had a
net loss of $1.5 million. As of December 31, 2003, we
had an accumulated deficit of approximately $40.9 million.


Given the level of our planned operating and
capital expenditures, for the foreseeable future we expect our
results of operations to fluctuate, and during this period we
may incur losses and negative cash flows. If our revenue does
not increase, or if our expenses increase at a greater pace than
our revenue, we will not be able to sustain operating
profitability on a consistent basis, if at all. Our ability to
increase revenue and achieve and sustain operating profitability
also will be affected by other risks and uncertainties described
in this section and in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Our failure to operate profitably on a quarterly or annual basis
could have a harmful effect on our business and the value of our
common stock.



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because our quarterly operating results are
    volatile and difficult to predict, our operating results in one
    or more future periods are likely to fluctuate significantly,
    and if we fail to meet the expectations of securities analysts
    or investors, our stock price could decline
    significantly.

As a result of our limited operating history and
the emerging and evolving nature of the market in which we
compete, our quarterly operating results have varied
significantly in the past and are likely to continue to vary
significantly in the future. Our success depends upon our
ability to increase sales of our products and services to our
new and existing customers. Our license revenue is comprised
substantially of one-time license fees. As a result, we will be
required to regularly and increasingly attract and contract with
additional customers for substantial license fees on a timely
basis to realize comparable or increased license revenue. Our
services and maintenance revenue historically has been comprised
almost entirely of consulting fees and support and maintenance
fees. Our services revenue has a lower gross margin than our
license revenue. To the extent the percentage of our services
revenue increases compared to the percentage of license revenue,
our profitability would be impaired. Our maintenance contracts
are generally renewable for 12-month periods. If our customers
elect not to renew their maintenance contracts or seek to
renegotiate price each year, our revenue could decline.

We expect to continue to experience significant
fluctuations in our results of operations due to a variety of
factors, some of which are outside of our control, including:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | introduction of products and services and
    enhancements by us and our competitors;                                                                                                     
|
| |  | competitive factors that affect our pricing;                                                                                                                                              
|
| |  | the timing and magnitude of our capital
    expenditures, including costs relating to the management and
    expansion of our operations within the United States and
    internationally;
|
| |  | the size and timing of customer orders and
    deployments, particularly large orders;                                                                                                    
|
| |  | deployments, some of which may represent more
    than 10% of total revenue during a particular quarter; and                                                                              
|
| |  | costs associated with litigation, legal
    compliance and corporate events such as reorganizations.                                                                                      

As a result of these factors, we believe that
quarter-to-quarter comparisons of our revenue and operating
results are not necessarily meaningful, and that these
comparisons are not accurate indicators of future performance.
Because our staffing and operating expenses are based on
anticipated revenue levels, and because a high percentage of our
costs are fixed, small variations in the timing of the
recognition of specific revenue could cause significant
variations in operating results from quarter to quarter. If we
are unable to adjust spending in a timely manner to compensate
for any revenue shortfall, any significant revenue shortfall
would likely have an immediate negative effect on our operating
results. If our operating results in one or more future quarters
fail to meet the expectations of securities analysts or
investors, we would expect to experience an immediate and
significant decline in the trading price of our stock.

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| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | If we do not expand our customer base, we may
    be unable to increase our revenue and our stock price will
    likely decline.

The market for our software is newly emerging and
additional customers may not adopt our products. Accordingly, we
cannot accurately estimate the potential demand for our products
and services. We believe that market acceptance of our products
and services depends principally on our ability to:



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | withstand downturns in general economic
    conditions or conditions that slow corporate spending on
    software products, such as the downturn we are currently
    experiencing in the overall software market;
|
| |  | enhance our portal solution to meet changing
    customer demand;                                                                                                                                                 
|
| |  | effectively market the Enterprise Web Suite and
    related products and services;                                                                                                                                
|
| |  | hire, train and retain a sufficient number of
    qualified sales and marketing personnel;                                                                                                                        
|
| |  | provide high-quality and reliable customer
    support for our products;                                                                                                                                          
|
| |  | distribute and price our products and services to
    be more appealing to customers than those of our competitors or
    of our customers internally-developed solutions; and                                   
|
| |  | develop and maintain a favorable reputation among
    our customers, potential customers and participants in the
    software industry who can serve as reference accounts for our
    products and services.     

Some of these factors are beyond our control. If
our customer base does not expand, we may never become
consistently profitable.



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because our quarterly results often depend on
    a small number of large orders, if we were unable to complete
    one or more of these orders during any future period, our
    quarterly operating results and the trading price of our stock
    could be harmed.

We derive a significant portion of our software
license revenue in each quarter from a small number of
relatively large orders. For example, in the quarter ended
December 31, 2003, our top 10 customers accounted for
approximately 25.5% of our total revenue. Our operating results
and stock price would be harmed if we were unable to complete
one or more substantial license sales during any future
quarterly period.



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business currently depends on revenue
    related to our flagship product, the Plumtree Corporate Portal,
    and if the market does not increasingly accept this product and
    related products and services, our revenue may
    decline.

We generate our revenue from licenses of the
Enterprise Web Suite and related products and services,
including Plumtree Portlets (formerly known as gadget web
services), the building blocks from which users assemble a
personalized Web page, as well as our Server Products, which
provide significant ancillary functionality to our Portal
Platform of the Enterprise Web Suite. We expect that our
Enterprise Web Suite products, and future upgraded versions of
these products will continue to account for a large portion of
our revenue in the foreseeable future. Our future financial
performance will depend on increasing acceptance of our current
product and on the successful development, introduction and
customer acceptance of new and enhanced versions of our
products. For example, in June 2003 we released version 5.0 of
our portal product. If new and future versions of our products
and services, including version 5.0 of the Plumtree Corporate
Portal and planned future releases of the Plumtree Corporate
Portal, such as 5.0 for Java platforms, and planned future
updates to our Collaboration Server and Content Server, do not
gain market acceptance when released commercially, or if we fail
to deliver the product enhancements that customers want, demand
for our products and services, and our revenue, may decline.

23



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| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales and implementation cycles are long,
    unpredictable and subject to seasonal fluctuations, making it
    difficult to accurately forecast our revenue and causing it to
    fluctuate, which could harm our operating results.

As a result of our limited operating history, the
nature of our products, and the emerging and rapidly evolving
nature of the market in which we compete, the typical sales
cycle of our portal product is long and unpredictable. A
successful sales cycle may last six to nine months or longer,
and typically includes presentations to both business and
technical decision makers, often requiring us to expend
substantial resources educating prospective customers about the
benefits of our software to their business. The implementation
of our product can be time-consuming and often involves a
significant commitment of resources by prospective customers.
Our sales cycle is also affected by a number of other factors,
some of which we have little or no control over, including the
volatility of the overall software market, the business
conditions of each prospective customer, seasonal fluctuations
as a result of customers fiscal year budgeting and
purchasing cycles, and the selection and performance of our
technology and of our technology partners, systems integrators
and resellers, any of which could harm our operating results.



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on technology licensed from
    third-party software developers and our ability to develop and
    sell our products and services could be delayed or impaired if
    we fail to maintain these license arrangements.

We incorporate into our products and in certain
cases resell third-party software that enables, enhances or
compliments aspects of our products functionality. This
third-party software may not continue to be available on
commercially reasonable terms or with acceptable levels of
support, or at all. Some of these third-party software
developers offer products that compete with the Enterprise Web
Suite and our other products. Our loss of or inability to
maintain these software licenses on current terms could delay or
impair the sale of our products and services until equivalent
software, if available, is identified, licensed or developed,
and integrated. This could adversely affect our business and
impair our future growth.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on our direct sales force to sell
    our products, and if we fail to hire and train new sales
    personnel, our future growth will be impaired.

We sell our products primarily through our direct
sales force and we expect to continue to do so in the future.
Our ability to achieve revenue growth in the future will depend
on our ability to recruit, train and retain qualified direct
sales personnel. We have in the past and may in the future
experience difficulty in recruiting qualified sales personnel.
The complexity of our product and the length of our sales cycle
typically results in a lead time of six to nine months or more
before newly-hired direct sales people become productive and can
generate revenue. Our inability to rapidly and effectively
expand and train our direct sales force could impair our growth
and cause our stock price to fall.

If we are unable to establish and maintain
relationships with systems integrators and resellers, our
ability to market, sell and deploy our products and services
will be harmed.

We have relationships with a large number of
systems integrators and resellers, such as Booz Allen, Computer
Sciences Corporation, Lexis Nexis, Lockheed Martin, Project
Performance Corporation, SAIC and SRA International. We rely
significantly on these parties to market and sell our products
and to provide rapid and comprehensive deployment of our
products. These relationships are a key factor in our overall
business strategy and involve a number of risks, including:



| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Systems integrators and resellers may not view
    their relationships with us as valuable or significant to their
    own businesses. The related arrangements typically may be
    terminated by either party with limited notice and in some cases
    are not covered by a formal agreement.                       
|
| |  | Under our co-deployment model, we often rely on
    our system integrators and resellers employees to
    perform implementations. If we fail to work together
    effectively, or if these parties perform poorly, our reputation
    may be harmed and deployment of our products may be delayed or
    inadequate.

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| |   |                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Systems integrators may attempt to market their
    own products and services rather than ours.                                                                                                                                                                                                                                   
|
| |  | Our competitors may have stronger relationships
    with these parties and, as a result, these system integrators
    and resellers may recommend a competitors products and
    services over ours.                                                                                                                             
|
| |  | If we lose our relationships with our systems
    integrators and resellers, we will not have the personnel
    necessary to deploy our products effectively, and we will need
    to commit significant additional sales and marketing resources
    in an effort to reach the markets and customers served by these
    parties.

If our alliances with technology and content
providers are discontinued, our future growth will be
impaired.

We have relationships with technology providers,
such as Sun Microsystems, Cognos, MediaEdge, SEEC, Project
Performance Corporation, Stellent, Inxight, Oblix, BEA,
Handysoft, Pivia, Thomson Publishing, Yahoo! and Documentum, to
provide our customers with support of many applications and
services. Although these relationships are a key factor in our
overall business strategy, our alliance members may not view
their relationships with us as significant to their own
businesses. A number of our competitors may have stronger
relationships with these or other technology and content vendors
and, as a result, these alliance members may be more likely to
support our competitors products and services over ours.
In addition, our technology providers may offer products and
services that are competitive to ours. Our arrangements
generally do not establish minimum performance requirements but
instead rely on voluntary efforts. In addition, most of our
agreements with these entities may be terminated by either party
with limited notice. In some cases these arrangements are not
covered by a formal agreement. We currently invest significant
resources to develop these alliances and plan to continue to do
so. If we are unable to maintain our existing relationships or
fail to enter into additional relationships, our ability to
increase our sales could be harmed, and we could also lose
anticipated customer introductions and co-marketing benefits.
Even if we succeed in establishing and maintaining these
relationships, they may not result in additional customers or
revenue.

If our software or software we furnish
contains errors, our ability to develop and market our products
and services will be harmed and we may lose customers or
experience reduced market acceptance of our products.

Our software products are inherently complex and
may contain defects and errors that are detected only when the
product is in use. We periodically release updated versions of
our products, which increases the risk of undetected defects or
errors. It is also possible that our products including the
Plumtree Collaboration Server, the Plumtree Studio Server,
version 5.0 of our portal product (released in June 2003),
upcoming portal product version releases and our server
products, may contain undetected defects or errors that are
discovered after release. In addition, third-party software that
we bundle with, resell or incorporate into our products, or with
which we integrate to deploy our solution, has contained, and
may in the future contain, defects or errors for which we may
become liable. Further, we often render implementation,
consulting and other technical services, the performance of
which typically involves working with sophisticated software,
computing and networking systems. As a result of product defects
or our failure to meet project milestones for services, we may
lose customers, customers may not implement our products more
broadly within their organization, we may experience reduced
market acceptance of our products, and we may be subject to
product liability claims by our customers

Such errors or defects may produce a number of
risks, including:



| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Some of our customers require, or may require,
    enhanced modifications of our software for their specific needs
    which will divert the attention of our engineering team away
    from new product developments, upgrades of existing products and
    other revenue-generating developments.                          
|
| |  | Some of our customers may make increasingly
    frequent and larger demands on our customer care team,
    overwhelming our support personnel, diverting them from
    supporting new customers and possibly increasing frustration for
    most, if not all customers, with respect to technical support
    response times.

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| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our consultants may be required to assist in the
    implementation of software modifications and corrections of
    errors or defects, thereby reducing our capacity for
    revenue-generating services.                             
|
| |  | Modifications may increase the likelihood of
    undetected defects or errors and may further drain our
    engineering, customer care and consulting services resources.                                                              
|
| |  | We may lose customers, customers may not
    implement our products more broadly within their organization,
    customers may choose not to renew their maintenance contracts
    with us or they may choose to abandon their projects.
|
| |  | We may lose valuable customer references and our
    reputation in the industry may diminish, making our sales and
    marketing efforts more difficult.                                                                               
|
| |  | We may experience reduced demand for our
    products, reduced market acceptance of our products and loss of
    overall competitiveness.                                                                                              
|
| |  | We may be subject to product liability or
    warranty claims by our customers.                                                                                                                                                        

If we are unable to develop products that are
compatible and can be integrated with a large variety of
hardware, software, database and networking systems, our ability
to attract and retain customers will be harmed.

The Enterprise Web Suite is designed to support a
broad set of software applications and online services through
Plumtree Portlet Web Services. To gain broad market acceptance,
and to execute on our strategy of radical openness,
we believe that we must support an increased number of operating
environments, applications and services in the future. If the
underlying applications and services are upgraded or changed,
maintaining this support may be difficult or impossible. If we
are unable to support an increased number of applications and
services in the future or if we are unable to maintain
compatibility with these systems, our ability to attract and
retain customers will be harmed. Furthermore, providers of
competitive products and services may cease cooperating with our
development efforts to integrate our Enterprise Web Suite with
products in their portfolio.

Some of our customers are in the preliminary
phase of implementing our products and this implementation may
not proceed on a timely basis or at all.

Some of our customers, such as Aflac, Allergan,
Department of Health and Human Services, Government of Bermuda,
Hochtief, Invitrogen, ITT, Logica, Mercy Health Services,
Nisource, Ontario Ministry of Health, and others are currently
in a pre-deployment or preliminary stage of implementing our
products and may encounter delays or other problems in
introducing it. These delays or other problems may result from
matters specific to the customer and unrelated to us or our
products. A customers decision not to implement our
product, or a delay in implementation, could result in a delay
or loss in related service revenue or otherwise harm our
business or prospects. We cannot predict when or if any customer
currently in a pilot or preliminary phase will choose to
implement broader use of our products.

If we fail to adequately address our customer
support demands, our ability to attract and retain customers
will suffer.

We expect that our customers increasingly will
demand enhancements to the technical support services we
provide. To meet these demands, we must develop and implement
expanded customer support services and programs. In addition, if
we increase our customer base, we expect the demands on our
technical support resources to grow rapidly, and we may
experience difficulties in responding to customer demand for our
services and providing technical support in accordance with our
customers expectations. We expect that these demands will
require not only the addition of new management personnel, but
also the development of additional expertise by existing
personnel and the establishment of long-term relationships with
third-party service vendors. If we are unable to address these
customer demands, our ability to attract and retain customers
will suffer.

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Security breaches with our software may lead
to unexpected capital expenditures and cause a loss in revenue
and reputation.

The Enterprise Web Suite is designed to
facilitate the secure transmission of sensitive business
information to specified parties outside the business over the
Internet. This includes product information, competitive
intelligence, sales and inventory data, sales reports and
corporate e-mail. As a result, the reputation of our software
for providing security is vital to its acceptance by customers.
Problems caused by security breaches associated with our
products or products furnished by us could result in loss of or
delay in revenue, loss of market share, failure to achieve
market acceptance, diversion of research and development
resources, harm to our reputation, customer claims against us,
increased insurance costs or increased service and warranty
costs. Because the techniques used by computer hackers to access
or sabotage networks change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques. Moreover, our products may be even
more susceptible to security breaches, since portals and
integration framework software require the aggregation of many
different Web applications on many different servers, with
different security standards and protocols.

Capacity restrictions of our software could
reduce the demand for and use of our products, which may limit
our ability to generate license revenue.

Our products are designed to support
enterprise-wide deployments with hundreds of thousands of users.
However, the maximum amount of information and the maximum
number of concurrent users that our products can support in any
particular deployment is uncertain. It is also subject to
factors outside of our control such as customer architecture. If
the capacity boundaries of our products are reached, our
customers may be dissatisfied, and we may lose customers or fail
to gain new customers. Moreover, existing customers may seek
products with more use capacity and overall demand for our
products could decline.

If we are unable to retain key personnel, our
growth will be limited.

We are highly dependent on certain members of our
management staff, including, without limitation, our Chief
Executive Officer, John Kunze, and our Vice President of
Engineering, Eric Zocher. Our Vice President of WorldWide
Operations left the Company in April 2003 and has not yet been
replaced. Our ability to continue to deliver products and
services that are responsive to customer needs, which is
critical to our success, also depends on our ability to retain
several members of our management and engineering team. The loss
of one or more of these officers or key engineers may impede the
achievement of our business objectives. None of our officers or
key employees is bound by an employment agreement for any
specific term, and no one is constrained from terminating his or
her employment relationship with us at any time. In addition,
since a number of our long-standing employees have most of their
stock options vested, their economic incentive to remain in our
employ may be diminished.

If we are unable to recruit and train new
personnel, our operations will be disrupted and our growth
impaired.

Recruiting and retaining qualified technical
personnel is critical to our success. If our business grows, we
will also need to recruit a significant number of management,
technical and other personnel for our business. Competition for
specialized employees in our industry can be intense. If we are
not able to continue to attract and retain skilled and
experienced personnel on acceptable terms, our growth may be
limited due to our limited capacity to develop and market our
product. We are currently recruiting for a Vice President of
Worldwide Operations and skilled technical personnel for our
professional services group. It may take an extended period of
time to hire a new Vice President of Worldwide Operations and a
sufficient number of new technical professionals. Without a
senior operations executive in place our sales force may lack
direction and our sales process and productivity may suffer.
Similarly, we may not be able to meet customer or internal
demand for professional services. Once hired, new personnel will
need time to familiarize themselves with Plumtree and our
business practices. The integration of new personnel has
resulted and will continue to result in some disruption to our
ongoing operations. Our failure to complete this integration in
an efficient manner could harm our business and prospects.

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Managing the breadth of our operations will
continue to strain managerial, operational and financial
resources, and if we are unable to do so our business and
operating results could be harmed.

The planned conduct of our operations, coupled
with planned increases and reallocations in headcount, will
place a significant strain on our management, financial
controls, operations systems, personnel and other resources. Our
ability to manage our business and achieve growth depends in
large part upon a number of factors, including our ability to
rapidly:



| |   |                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | build and train our sales and marketing staff to
    create an effective presence in the evolving corporate portal
    market, and keep them fully informed over time regarding the
    technical features, issues and key selling points of our product;
|
| |  | attract and retain qualified technical personnel
    in order to continue to develop reliable and scalable products
    and services that address evolving customer needs;                                                                               
|
| |  | develop our customer support capacity as sales of
    our products increase, so that we can provide customer support
    without diverting resources from product development efforts; and                                                               
|
| |  | expand our internal management and financial
    controls significantly, so that we can maintain control over our
    operations and provide support to other functional areas within
    Plumtree.                                                      

Our inability to achieve any of these objectives
could harm our business and operating results.

We may be unable to manage or grow our
international operations, which could impair our overall
growth.

We have invested capital and management resources
in expanding our international operations, and we are seeking to
increase the portion of our revenue that is derived from sources
outside the United States. Our revenue from sales outside the
United States constituted approximately 21%, 19% and 9% of our
total revenue during the years ended December 31, 2003,
2002 and 2001, respectively. If we are unable to continue to
grow our international operations, we may not generate
sufficient revenue to offset the expenditures required to
establish and maintain the international sales and marketing
operations, which could slow or undermine our overall growth.

We have committed substantial resources to modify
our products for selected international markets, including the
United Kingdom, France, Germany, South Korea, Australia, Italy,
Spain, Brazil, Portugal, Sweden, Taiwan, China, the Netherlands
and Japan. We expect to continue to commit additional resources
to modify our products for other select international markets
and to develop our international sales and support organization.
However, even if we successfully expand our international
operations and successfully modify our products, we may be
unable to maintain or increase international market demand for
our products.

Our international operations are subject to a
number of risks, including:



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs of modifying our products for foreign
    countries;                                                                                                                   
|
| |  | compliance with multiple, conflicting and
    changing foreign governmental laws and regulations, including
    taxes, intellectual property, securities and employment laws;
|
| |  | increased reliance on systems integrators and
    resellers abroad;                                                                                                          
|
| |  | longer sales cycles;                                                                                                                                                         
|
| |  | import and export restrictions and tariffs;                                                                                                                                  
|
| |  | fluctuations in foreign currency exchange rates;                                                                                                                             
|
| |  | difficulties in staffing and managing
    international operations;                                                                                                          
|
| |  | greater difficulty in enforcing our intellectual
    property rights; and                                                                                                    
|
| |  | greater difficulty or delay in accounts
    receivable collection.                                                                                                           

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In consultation with our advisors, we have
structured our operations so that certain international license
contracts between certain foreign customers and our Swiss
subsidiary, Plumtree Software GmbH are not subject to tax at
source. There is a risk that local jurisdictions may challenge
the characterization of these transactions. In the event these
transactions are challenged by local tax authorities the process
would divert management attention and resources, and we may
incur substantial costs. If we fail to comply with complex and
changing tax requirements some tax authorities may seek to
collect applicable taxes from our customers and we may in turn
become subject to claims by our customers seeking reimbursement
for any tax assessed.

Product liability claims could divert
managements attention and be costly to defend.

Our license agreements with customers and
arrangements with our systems integrators and technology vendors
typically contain provisions designed to limit our exposure to
potential product liability claims. Not all domestic and
international jurisdictions may enforce these limitations.
Although we have not experienced any product liability claims to
date, we may encounter this type of claim in the future. Product
liability claims brought against us, whether or not successful,
could divert the attention and resources of our management and
key personnel, could be costly to defend and could require us to
pay significant monetary damages or impair our ability to market
our products.

If we are unable to effectively protect our
proprietary rights, our competitors may be able to copy
important aspects of our products or product presentations,
which would undermine the relative appeal of our products to
customers and reduce our sales.

We believe that proprietary rights are important
to our business. We have no issued patents. We have filed eleven
non-provisional patent applications with the U.S. Patent
and Trademark Office and four international patent applications
with the World Intellectual Property Organization. However,
current or future patent applications may not be granted, and it
is possible that any patents issued to us may be circumvented by
our competitors or otherwise may not provide significant
protection or commercial advantage to us. Similarly, our
trademark, service mark and copyright rights may not provide
significant protection or commercial advantage to us, and the
measures we take to maintain the confidentiality of our trade
secrets may not be effective.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 13, 2001, we commenced an action
    in the District Court in The Hague against an individual, Werner
    Linssen, to cancel the Benelux trademark registration for
    Plumtree held by Mr. Linssen. We asked the
    Hague District Court to (i) annul Mr. Linssens
    Benelux trademark registration for Plumtree and
    (ii) bar Mr. Linssen, pending the proceedings, from
    contacting our customers in a threatening or unfair manner. On
    September 24, 2003, the Hague District Court granted our
    request for a preliminary injunction barring Mr. Linssen,
    pending the proceedings, from contacting our customers in a
    threatening or unfair manner. On October 15, 2003,
    Mr. Linssen filed answering papers denying our allegations
    and asserting a counterclaim for infringement of his registered
    trademark. On January 21, 2004, we filed reply papers in
    further support of our claim and in response to
    Mr. Linssens counterclaim. Mr. Linssen has until
    March 3, 2004 to file papers in further support of his
    counterclaim.
|
| | On November 25, 2001, we also commenced a
    proceeding before the Swiss Federal Institute of Intellectual
    Property in opposition to Mr. Linssens trademark
    application for Plumtree. The Swiss Patent Office
    has dismissed the proceeding; however, we have appealed the
    dismissal. On December 18, 2003, Mr. Linssen commenced
    a proceeding before the Swiss Federal Institute of Intellectual
    Property in opposition to our trademark registration for
    Plumtree Software; this proceeding has been
    suspended pending disposition of our prior appeal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | On May 2, 2003, we initiated a civil lawsuit
    against Mr. Linssen in the Commercial Court of the Canton
    of Zurich, Switzerland, seeking (i) an injunction barring
    Mr. Linssens use of the Plumtree
    trademark, and (ii) the transfer of Mr. Linssens
    Swiss trademark registration for Plumtree, or in the
    alternative, the cancellation of Mr. Linssens Swiss
    registration. On October 6, 2003, Mr. Linssen filed
    answering papers denying our allegations and asserting a
    counterclaim for infringement of his registered trademark. We
    are reviewing the counterclaim and will file a timely reply.                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, Mr. Linssen and we have each
    commenced proceedings before the E.U.s Office of
    Harmonization of the Internal Market in opposition to each
    others Community Trade Mark applications. Those
    proceedings have been suspended pending disposition of the
    Benelux action in The Hague.

Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise
obtain and use our software product or technology without
authorization. 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 those in the United States.

We generally enter into confidentiality or
license agreements with our employees, consultants and alliance
members, control access to our source code and other proprietary
technology and limit distribution of our software, documentation
and other proprietary information. These measures afford only
limited protection and may be inadequate. Others may develop
noninfringing technologies that are similar or superior to our
own.

If our products employ technology that
infringes the proprietary rights of others, we may be subject to
infringement claims, forced to pay high prices to license
technology or required to stop selling our products.

We expect that software products, including ours,
may be increasingly subject to third-party infringement claims
as the number of competitors in our industry segment grows and
the functionality of products in different industry segments
expands and overlaps. Third parties may claim our products
infringe their intellectual property rights. Regardless of
whether these claims have any merit, they could:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | be time-consuming to defend;                                                                                                         
|
| |  | result in costly litigation;                                                                                                         
|
| |  | divert our managements attention and
    resources;                                                                                 
|
| |  | require us to indemnify technology vendors,
    system integrators or customers;                                                     
|
| |  | require us to refund license fees;                                                                                                   
|
| |  | cause product shipment delays;                                                                                                       
|
| |  | require us to enter into royalty or licensing
    agreements, which may not be available on terms acceptable to
    us, if at all; or
|
| |  | result in court orders limiting our ability to
    license our products.                                                             

On May 17, 2002 Datamize LLC filed a lawsuit
against us in the United States District Court for the
District of Montana (Civil Action No. 02-86-M-LBE)
alleging, in general, that by supplying software and
systems for the personalization and customization of networked
kiosk and computer screens, we infringe U.S. Patent
Number 6,014,137 (the 137 patent)
owned by Datamize. Datamize, based in Florence, Montana
described itself in its complaint as engaged in the
business of designing, creating and commercially exploiting
software useful in the personalization and customization of
networked kiosk and computer screens. Datamize was
seeking, among other things, injunctive relief and unspecified
damages. We filed a motion (Motion) to dismiss the
action for lack of personal jurisdiction, or in the alternative,
have the action transferred to the Northern District of
California. In early July 2003, the Court granted the Motion and
entered judgment in favor of us on July 7, 2003 in
accordance with that order. Datamize had thirty (30) days
to appeal this judgment, which period elapsed on August 6,
2003 without Datamize taking any action with the Court.

In December 2002, we filed a complaint for
declaratory relief against Datamize in U.S. District Court
for the Northern District of California (Civil Action
No. 02-5693 VRW). We seek a declaratory judgment that
it does not infringe any valid claim of the
137 patent, which Datamize claims to own. Datamize
has filed its answer and a counterclaim alleging that we
infringe the 137 patent. Datamize is seeking, among
other things, injunctive relief and unspecified damages. In
response to a procedural motion, the Court realigned the parties

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so that we are now the defendant, and Datamize is
now the plaintiff. The parties are engaging in discovery, and
construction of the patent claims. No trial date has been set,
although the final pretrial conference is scheduled for
March 29, 2005.


Based on other communications by Datamizes
counsel, we expect Datamize may take further legal action
against us with respect to additional intellectual property that
Datamize purportedly owns or will own in the future. At this
time, we do not believe we infringe on any valid patent claim of
Datamize and we intend to pursue vigorously available claims and
defenses.

A successful claim of infringement against us or
our failure or inability to license the infringed or similar
technology could damage our business to the extent that we are
required to pay substantial monetary damages or if, as result of
a successful claim, we became unable to sell our products
without redeveloping them or otherwise were forced to incur
significant additional expenses.

We may be subject to misappropriation claims
by former employers of our personnel, which could be costly and
disruptive to our business.

From time to time, we hire or retain employees or
consultants who have worked for independent software vendors or
other companies developing products similar to those offered by
us. Those prior employers may claim that our products are based
on their products and that we have misappropriated their
intellectual property. Any claims of that variety, with or
without merit, could cause a significant diversion of management
attention, result in costly and protracted litigation, cause
product shipment delays, require us to indemnify our alliance
members and customers, require us to refund license fees or
require us to enter into royalty or licensing agreements. Those
royalty or licensing agreements, if required, may not be
available on terms acceptable to us, or at all, which could harm
our business.

Acquisitions of companies or technologies may
result in disruptions to our business and management due to
difficulties in assimilating personnel, acquired products and
technology and operations and may dilute stockholder
value.

We have made, and in the future may make
acquisitions or investments in other companies or technologies.
We may not realize the anticipated benefits of any acquisitions
or investments we undertake. For instance, we made three small
acquisitions in late 2001. Acquisitions such as these require us
to assimilate the operations, products, technology 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. If we consummate acquisitions through an
exchange of our securities, our existing stockholders could
suffer significant dilution. In addition, our profitability may
suffer because of acquisition-related costs or impairment costs
for acquired goodwill and other intangible assets, or
undisclosed liabilities of the acquired business. Finally, the
terms of our existing contractual obligations may restrict or
prohibit acquisitions that we may seek to consummate.

If we are required to raise additional funds,
we may be unable to obtain these funds on terms acceptable to
us, or at all.

The development and expansion of our business
will require significant capital to fund our operating expenses,
working capital needs and capital expenditures. During the next
18 months, we expect to meet our cash requirements with
existing cash and cash equivalents and short-term investments,
cash flow from sales of our product and services and proceeds
from existing and future working capital lines of credit and
other borrowings. Our failure to generate sufficient cash flows
from sales of products and services or to raise sufficient funds
may require us to delay or abandon some or all of our
development and expansion plans or otherwise forego market
opportunities.

Future equity or debt financing may not be
available to us on favorable terms or at all. The terms of our
existing loan agreement with Silicon Valley Bank limit our
ability, among other things, to incur additional

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indebtedness. Future borrowing instruments, such
as credit facilities and lease agreements, are also likely to
contain restrictive covenants and will likely require us to
pledge assets as security for borrowings under those future
arrangements. If we raise additional funds through the issuance
of equity securities, the issuance could result in substantial
dilution to existing stockholders. Our inability to obtain
additional capital on satisfactory terms may result in a delay
or failure to develop and enhance our products, acquire new
technologies or businesses, expand operations and hire and train
employees.


Risks Relating to Our Industry

Intense competition and consolidation in our
industry could limit our ability to attract and retain
customers.

The market for our products is intensely
competitive and highly fragmented, characterized by rapid
technological change, evolving industry standards, changes in
customer needs, and new product introductions and improvements.
Our current competitors include established software vendors
that are Web-enabling their applications or are building
infrastructure software, emerging companies offering competitive
products and companies choosing to build their own solutions.
Some of our large competitors may expand their competitive
product offerings through acquisitions. For example, SAP
expanded its competitive offerings through its acquisition of
TopTier in March 2001; Vignette acquired Epicentric, Inc. in
December 2002; Open Text Corporation acquired Corechange, Inc.
in February 2003; WebMethods acquired certain assets of Data
Channel in October 2003; and Vignette acquired Intraspect in
December 2003. Many of our competitors have longer operating
histories, significantly greater financial, technical, marketing
and other resources, greater name recognition, a broader range
of products and a larger installed customer base, any of which
could provide them with a significant competitive advantage. In
addition, new competitors, or alliances among existing and
future competitors may emerge and rapidly gain significant
market share. Some of our competitors, particularly established
software vendors, may also be able to provide customers with
products and services comparable to ours at lower or at
aggressively reduced prices in an effort to increase market
share or as part of a broader software package they are selling
to a customer. We may be unable to match competitors
prices or price reductions, and we may fail to win customers
that choose to purchase a portal solution as part of a broader
software and services package. If we cannot compete successfully
against current and future competitors, we may be unable to
attract and retain customers. Increased competition could also
result in price reductions for our products and lower profit
margins and reduced market share, any of which could harm our
business, results of operations and financial condition.

Downturns in the software market may decrease
our revenue and margins.

The market for our products is affected by
economic conditions of the broader software market. Downturns in
the economy may cause businesses and governments to delay or
cancel corporate portal projects, reduce their overall
information technology budgets or reduce or cancel orders for
our products. In this environment, customers may experience
financial difficulty, fail to or defer the budget for the
purchase of our products or cease operations. This, in turn, may
lead to longer sales cycles, delays or failures in payment and
collection, and price pressures, causing us to realize lower
revenues and margins. In particular, capital spending in the
information technology sector generally has decreased in most of
the past 36 months, and many of our customers and potential
customers have experienced severe declines in their revenues and
operations. We believe that, in light of these events, some
businesses and governments may curtail or eliminate capital
spending on information technology. If capital spending in our
markets declines, it may be necessary for us to gain significant
market share from our competitors in order to achieve our
financial goals or to sustain annual or quarterly profitability.

Our failure to introduce new products and
enhancements in a timely manner will make market acceptance of
our products less likely.

New products, platforms and language support can
require long development and testing periods. Any delays in
developing and releasing new products could harm our business.
New products or enhancements may

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not be released according to schedule or may
contain defects when released. Version 5.0 of the Plumtree
Corporate Portal, the Plumtree Collaboration Server, Plumtree
Studio Server and Plumtree Content Server have been recently
released commercially, increasing the risk of undetected defects
or errors. Efforts to correct any such errors or defects could
divert our engineers from or delay development of new products.
Our efforts to develop and release new products, such as the
planned version 5.0J (Java) of the Plumtree Corporate
Portal, and applications, such as dashboard and score carding
with Cognos, an Enterprise Web customer service application for
insurers with SEEC and an electronic courtroom management
application with MediaEdge, could be delayed or hindered by
development problems. Product release delays or product defects,
could result in adverse publicity, loss of sales, delay in
market acceptance of our products or customer claims against us,
any of which could harm our business. We may be unable to
successfully develop and market product enhancements or new
products that respond to technological changes, shifting
customer tastes or evolving industry standards, and may
experience difficulties that could delay or prevent the
successful development, introduction and marketing of new or
enhanced products. If we are unable to develop and introduce new
products or enhancements of existing products in a timely
manner, or if we experience delays in the commencement of
commercial shipments of new products and enhancements, our
ability to attract and retain customers will be harmed.


If we fail to manage technological change,
demand for our products and services will drop and our revenue
will decline.

The market for our products is still in an early
stage of development and is characterized by rapidly changing
technology, evolving industry standards, frequent new service
and product introductions and changes in customer demands. Our
future success will depend to a substantial degree on our
ability to offer products and services that incorporate leading
technologies and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective
basis. You should be aware that:



| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our technology or systems may become obsolete
    upon the introduction of alternative technologies;                                                                                                                                                             
|
| |  | the technological life cycles of our products may
    end abruptly and, in any event, are difficult to estimate;                                                                                                                                                 
|
| |  | we may not have sufficient resources to develop
    or acquire new technologies or to introduce new services capable
    of competing with future technologies or service offerings; and                                                                         
|
| |  | the price of the products and services we provide
    may decline as rapidly as, or more rapidly than, the price of
    any competitive alternatives, particularly if the unique
    features of our products become widely adopted through new
    technologies.

We may not be able to effectively respond to the
technological requirements of the changing market for corporate
portals. To the extent we determine that new technologies and
equipment are required to remain competitive, the development,
acquisition and implementation of those technologies and
equipment are likely to continue to require significant capital
investment by us. We may not have sufficient capital for these
purposes in the future. Even if we successfully raise capital to
develop new technologies, investments in these technologies may
not result in commercially viable technological processes, or
there may not be commercial applications for those technologies.
If we do not develop and introduce new products and services,
and achieve market acceptance in a timely manner, demand for our
products and services will drop and our revenue will decline.

Terrorist activities and resulting military
and other actions could harm our business.

Terrorist attacks in New York and Washington,
D.C. in September of 2001 and the war in Iraq disrupted commerce
throughout the world. The continued threat of terrorism and
continued military action and heightened security measures in
response to this threat have caused and may continue to cause
significant disruption to commerce throughout the world. To the
extent that these continued disruptions result in a general
decrease in corporate spending on information technology, our
business and results of operations could be harmed. We are
unable to predict whether these threats or the responses thereto
will result in any long-

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term commercial disruptions or if such activities
or responses will have a long-term adverse effect on our
business, results of operations or financial condition.
Additionally, if any attacks were to affect the operation of the
Internet or key data centers, our business could be harmed.







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About
    Market Risk

As of December 31, 2003, we had cash, cash
equivalents and short-term investments totaling
$67.7 million. Our investment portfolio consists of money
market funds, corporate-backed debt obligations, municipal bonds
and U.S. government discount notes, generally due within one to
two years. We place investments with high quality issuers and
limit the amount of credit exposure to any one issuer. These
securities are subject to interest rate risks. Based on the
duration of our portfolio and our ability to hold investments to
maturity, we believe that, if a significant change in interest
rates were to occur, it would not have a material effect on our
financial condition, although there can be no assurance
of this.

For the year ended December 31, 2003, we
earned approximately 21% of our revenue from international
markets, most of which are denominated in various currencies. As
a result, our operating results are and may become subject to
more significant fluctuations based upon changes in the exchange
rates of some currencies in relation to the U.S. dollar and
diverging economic conditions in foreign markets. We will
continue to monitor our exposure to currency fluctuation and
evaluate the benefits of implementing a hedging strategy to
mitigate our foreign exchange risks. We cannot assure you that
exchange rate fluctuations will not affect adversely our
financial results in the future.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The response to this item is submitted as a
separate section of this Form 10-K. See Item 15.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with Accountants
    on Accounting and Financial Disclosure

In April 2002, with the approval of our board of
directors (including the audit committee of the board), we
changed our outside accounting firm from Arthur Andersen LLP to
KPMG LLP. Arthur Andersens reports on our 1999, 2000 and
2001 consolidated financial statements contained no adverse
opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting
principles. In addition, during 2000 and 2001 and the interim
period prior to this change, there were no disagreements with
Arthur Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the
satisfaction of Arthur Andersen, would have caused it to make a
reference to the subject matter of the disagreements in
connection with its reports. We did not consult KPMG LLP on any
financial or accounting reporting matters in the period before
their appointment.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We carried out an evaluation required by
Rule 13a-15(b) of the Securities Exchange Act of 1934 of
the effectiveness of the design and operation of Plumtrees
disclosure controls and procedures and
internal controls over financial reporting as of the
end of the period covered by this report.

Disclosure controls and procedures are designed
with the objective of ensuring that (i) information
required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms and (ii) information is
accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosures. Internal
controls over financial reporting are procedures designed with
the objective of providing reasonable assurance that our
(a) transactions are properly authorized, (b) assets
are safeguarded against unauthorized or improper use and
(c) transactions are properly recorded and reported; all to
permit the preparation of our financial statements in conformity
with generally accepted accounting principles.

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Based on their evaluation, Plumtrees Chief
Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the
company (including our consolidated subsidiaries) required to be
included in our periodic reports filed with the SEC as of the
end of the period covered by this report. There were no changes
in our internal control over financial reporting that occurred
during Plumtrees last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting. However, a control
system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of
the control system are met. Management necessarily applied its
judgment in assessing the benefits of controls relative to their
costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within the company have been detected. The design of any
system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how
remote. Because of the inherent limitations in a control system,
misstatements due to error or fraud may occur and may not be
detected.






|         |                                             
|-------- | --------------------------------------------
|Item 10. | Directors and Officers of the
    Registrant

Information regarding our directors and executive
officers appears under Directors and Officers of the
Company in our Proxy Statement for the Annual Meeting of
Stockholders (the Proxy Statement), to be held
May 20, 2004. That portion of the Proxy Statement is
incorporated by reference into this report.

We have adopted a code of business conduct and
ethics (Code of Business Conduct and Ethics) that
applies to our principal executive officer and all members of
our finance department, including the principal financial
officer and principal accounting officer. This Code of Business
Conduct and Ethics, which applies to employees generally, is
posted on our Internet website. The Internet address for our
website is http://www.plumtree.com.

We intend to satisfy the disclosure requirement
under Item 10 of Form 8-K regarding an amendment to,
or waiver from, a provision of this Code of Business Conduct and
Ethics by posting such information on our website.

Section 16(a) Beneficial Ownership
Reporting Compliance

Information about compliance with
Section 16(a) of the Exchange Act appears under
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement. That portion of the
Proxy Statement is incorporated by reference into this report.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information about compensation of our named
executive officers appears under Executive
Compensation in the Proxy Statement. Information about
compensation of our directors appears under Director
Compensation in the Proxy Statement. Those portions of the
Proxy Statement are incorporated by reference into this report.






|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters

Information about security ownership of certain
beneficial owners and management appears under Security
Ownership of Certain Beneficial Owners and Management in
the Proxy Statement. That portion of the Proxy Statement is
incorporated by reference into this report. Information
regarding securities authorized for issuance under equity
compensation plans appears in Item 5 of this report.

35



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|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information about certain relationships and
related transactions appears under Certain Relationships
and Related Transactions in the Proxy Statement. That
portion of the Proxy Statement is incorporated by reference into
this report.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information about principal accountant fees and
services as well as related pre-approval policies appears under
Fees Paid to KPMG, LLP and Audit and Finance
Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors in the Proxy Statement.
Those portions of the Proxy Statement are incorporated by
reference into this report.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) 1. Financial
Statements

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

|                                   |                                                                                                                                 |      |     |     | 
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ---- | --- | --- | 
|                                   |                                                                                                                                 | Page
|                                   |                                                                                                                                 |     
|Report of Independent Auditors     |                                                                                                                                 |      | F-1 |    
|Consolidated Financial Statements: |                                                                                                                                 |      |     |    
|                                   | Balance Sheets as of December 31, 2003 and
    2002                                                                             |      |     | F-2 | 
|                                   | Statements of Operations for the years ended
    December 31, 2003, 2002 and 2001                                               |      |     | F-3 | 
|                                   | Statements of Stockholders Equity and
    Comprehensive Income (Loss) for the years ended
    December 31, 2003, 2002 and 2001 |      |     | F-4 | 
|                                   | Statements of Cash Flows for the years ended
    December 31, 2003, 2002 and 2001                                               |      |     | F-5 | 
|                                   | Notes to Consolidated Financial Statements                                                                                      |      |     | F-6 | 

(a) 2. Financial Statement
Schedules

None. All schedules are omitted because they are
not required or the required information is shown in the
financial statements or notes thereto.

(a) 3. Exhibits

EXHIBIT INDEX

|        |       |             |  |                                                                                                                    
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 3.1   |             |  | Amended and Restated Certificate of Incorporation
    of the Registrant(1)                                         
|        | 3.2   |             |  | Bylaws of the Registrant(1)                                                                                        
|        | 4.1   |             |  | Specimen common stock certificate(1)                                                                               
|        | 4.9   |             |  | Warrant to purchase Common Stock, dated
    May 31, 2000, issued to WXI/ SAN Realty, L.L.C.(1)                     
|        | 4.10  |             |  | Warrant to purchase Common Stock, dated Sept. 20,
    2000, issued to WXI/ SAN Realty, L.L.C.(1)                   
|        | 10.1* |             |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and officers(1)             
|        | 10.2* |             |  | 1997 Equity Incentive Plan, as amended, and form
    of agreements thereunder(1)                                   
|        | 10.3* |             |  | 2002 Stock Plan, as amended, and form of
    agreements thereunder(1)                                              
|        | 10.4  |             |  | 2002 Employee Stock Purchase Plan, and form of
    agreements thereunder                                           
|        | 10.5* |             |  | 2002 Director Option Plan, and form of agreements
    thereunder (1)                                               
|        | 10.6  |             |  | Loan and Security Agreement, dated March 14,
    2001, between the Registrant and Silicon Valley Bank(1)           
|        | 10.7  |             |  | Office Lease for 500 Sansome Street, dated
    April 7, 1999, between the Registrant and BPG Sansome,
    L.L.C.(1)

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|        |        |             |  |                                                                                                                                          
|------- | ------ | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        | Description
|        |        |            
|        | 10.8   |             |  | First Amendment to Lease for 500 Sansome Street,
    dated May 3, 2000, between the Registrant and WXI/ SAN
    Realty, L.L.C.(1)        
|        | 10.9*  |             |  | Offer letter between the Registrant and John H.
    Kunze(1)                                                                             
|        | 10.10* |             |  | Offer letter between the Registrant and Eric
    Borrmann(1)                                                                             
|        | 10.11  |             |  | Second Amendment to Lease for 500 Sansome Street,
    dated September 20, 2000, between the Registrant and WXI/
    SAN Realty, L.L.C.(1)
|        | 10.12  |             |  | Third Amendment to Lease for 500 Sansome Street,
    dated November 22, 2000, between the Registrant and WXI/
    SAN Realty, L.L.C.(1)  
|        | 10.13  |             |  | Fourth Amendment to Lease for 500 Sansome Street,
    dated July 31, 2002, between the Registrant and WXI/ SAN
    Realty, L.L.C.(4)     
|        | 10.14  |             |  | Fifth Amendment to Lease for 500 Sansome Street,
    dated July 31, 2003, between the Registrant and WXI/ SAN
    Realty, L.L.C.(4)      
|        | 10.15* |             |  | Offer letter between the Registrant and Eric
    Zocher(4)                                                                               
|        | 10.16* |             |  | 2004 Bonus Plan                                                                                                                          
|        | 10.17  |             |  | 2004 Outside Director Stock in Lieu of Fees Plan                                                                                         
|        | 21.1   |             |  | Subsidiaries of the Registrant                                                                                                           
|        | 23.1   |             |  | Consent of KPMG LLP                                                                                                                      
|        | 31.1   |             |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes Oxley Act of 2002 (S-O
    Act)                   
|        | 31.2   |             |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the S-O Act                                                      
|        | 32.1   |             |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the S-O Act                                                      
|        | 32.2   |             |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the S-O Act                                                      



---



| |   |                                                             
| | - | ------------------------------------------------------------
| | * | Management contract or compensatory plan or
    arrangement.



|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Exhibits filed with
    Registration Statement No. 333-45950, as amended, which
    became effective on June 3, 2002.                                                
|   
|(2) | Incorporated by reference to Exhibits filed with
    the Registrants Form 10-Q for the quarter ended
    June 30, 2002 and filed with the SEC on August 14,
    2002 (File No. 001-31344).       
|   
|(3) | Incorporated by reference to Exhibits filed with
    the Registrants Form 10-Q for the quarter ended
    September 30, 2002 and filed with the SEC on
    November 12, 2002 (File No. 001-31344).
|   
|(4) | Incorporated by reference to Exhibits filed with
    the Registrants Form 10-Q for the quarter ended
    September 30, 2003 and filed with the SEC on
    November 3, 2003 (File No. 001-31344). 

(b) Reports on Form 8-K

On January 20, 2004, we furnished a current
report on Form 8-K to file our press release announcing the
Companys results for the fiscal quarter ended
December 31, 2003.

On December 3, 2003, we furnished a current
report on Form 8-K to file our press release announcing the
election of David Pratt to the Companys Board of Directors.

On October 14,2003, we furnished a current
report on Form 8-K to file our press release announcing the
Companys results for the fiscal quarter ended
September 30, 2003.

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Plumtree Software, Inc.:

We have audited the accompanying consolidated
balance sheets of Plumtree Software, Inc. and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss) and cash flows for each of the
years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Plumtree Software, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

/s/ KPMG LLP

Mountain View, California

January 14, 2004


F-1



---



##### Table of Contents



PLUMTREE SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share
amounts)


|                                     |                                                                                   |                                                                                |       |         |        |  |       |         |        | 
|------------------------------------ | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----- | ------- | ------ |  | ----- | ------- | ------ | 
|                                     |                                                                                   |                                                                               
|                                     |                                                                                   | As of December 31,                                                            
|                                     |                                                                                   |                                                                               
|                                     |                                                                                   | 2003                                                                           |       | 2002   
|                                     |                                                                                   |                                                                                |       |        
|Assets                               |                                                                                   |                                                                                |       |         |        |  |       |        
|Current assets:                      |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     | Cash and cash equivalents                                                         |                                                                                | $     | 20,434  |        |  | $     | 20,655  |       
|                                     | Short-term investments                                                            |                                                                                |       | 47,255  |        |  |       | 44,667  |       
|                                     | Accounts receivable (net of allowance for
    doubtful accounts of $522 and $754) |                                                                                |       | 17,171  |        |  |       | 16,619  |       
|                                     | Prepaid and other current assets                                                  |                                                                                |       | 2,079   |        |  |       | 2,160   |       
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     |                                                                                   | Total current assets                                                           |       |         | 86,939 |  |       |         | 84,101 | 
|Property and equipment, net          |                                                                                   |                                                                                | 1,798 |         |        |  | 2,698 |        
|Other assets                         |                                                                                   |                                                                                | 2,025 |         |        |  | 3,923 |        
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     |                                                                                   | Total assets                                                                   |       | $       | 90,762 |  |       | $       | 90,722 | 
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        
|Liabilities and Stockholders Equity |                                                                                   |                                                                                |       |         |        |  |       |        
|Current liabilities:                 |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     | Accounts payable                                                                  |                                                                                | $     | 1,312   |        |  | $     | 1,630   |       
|                                     | Accrued and other current liabilities                                             |                                                                                |       | 12,084  |        |  |       | 14,747  |       
|                                     | Deferred revenue                                                                  |                                                                                |       | 19,027  |        |  |       | 18,539  |       
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     |                                                                                   | Total current liabilities                                                      |       |         | 32,423 |  |       |         | 34,916 | 
|Other long-term liabilities          |                                                                                   |                                                                                | 448   |         |        |  | 454   |        
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     |                                                                                   | Total liabilities                                                              |       |         | 32,871 |  |       |         | 35,370 | 
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        
|Stockholders equity:                |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     | Convertible preferred stock, $0.001 par value:                                    |                                                                                |       |         |        |  |       |         |       
|                                     |                                                                                   | Authorized  20,000 shares;
    Outstanding  0 shares                         |       |         |       |  |       |         |       | 
|                                     | Common stock, $0.001 par value:                                                   |                                                                                |       |         |        |  |       |         |       
|                                     |                                                                                   | Authorized  100,000 shares,
    Outstanding  31,265 shares and 29,439 shares |       |         | 31     |  |       |         | 30     | 
|                                     | Additional paid in capital                                                        |                                                                                |       | 99,747  |        |  |       | 98,384  |       
|                                     | Notes receivable from stockholders                                                |                                                                                |       |        |        |  |       | (674    | )     
|                                     | Deferred stock-based compensation                                                 |                                                                                |       | (868    | )      |  |       | (2,951  | )     
|                                     | Accumulated other comprehensive income (loss)                                     |                                                                                |       | (92     | )      |  |       | 23      |       
|                                     | Accumulated deficit                                                               |                                                                                |       | (40,927 | )      |  |       | (39,460 | )     
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     |                                                                                   | Total stockholders equity                                                     |       |         | 57,891 |  |       |         | 55,352 | 
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        
|                                     |                                                                                   | Total liabilities and stockholders equity                                     |       | $       | 90,762 |  |       | $       | 90,722 | 
|                                     |                                                                                   |                                                                                |       |         |        |  |       |        

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

F-2



---



##### Table of Contents



PLUMTREE SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |        |        |  
|---------------------------- | -------------------------------------------------------------------- | --------------------------------- | ------ | ------ | ------ | ---- | ----- | ------ | ------ | - | ------ | ------ | ------ | -
|                             |                                                                      |                                  
|                             |                                                                      | For the Year Ended December 31,  
|                             |                                                                      |                                  
|                             |                                                                      | 2003                              |        | 2002   |        | 2001
|                             |                                                                      |                                   |        |        |        |     
|Revenue:                     |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             | Licenses                                                             |                                   | $      | 34,044 |        |      | $     | 49,581 |        |   | $      | 54,055 |       
|                             | Services and maintenance                                             |                                   |        | 37,408 |        |      |       | 33,338 |        |   |        | 27,418 |       
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             |                                                                      | Total revenue                     |        |        | 71,452 |      |       |        | 82,919 |   |        |        | 81,473 |  
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|Cost of revenue:             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             | Licenses                                                             |                                   |        | 625    |        |      |       | 3,181  |        |   |        | 4,938  |       
|                             | Services and maintenance                                             |                                   |        | 11,331 |        |      |       | 12,685 |        |   |        | 13,433 |       
|                             | Amortization of stock-based compensation and
    acquired technology |                                   |        | 1,823  |        |      |       | 2,292  |        |   |        | 752    |       
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             |                                                                      | Total cost of revenue             |        |        | 13,779 |      |       |        | 18,158 |   |        |        | 19,123 |  
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             |                                                                      | Gross margin                      |        |        | 57,673 |      |       |        | 64,761 |   |        |        | 62,350 |  
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|Operating expenses:          |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             | Research and development                                             |                                   |        | 20,667 |        |      |       | 18,140 |        |   |        | 14,136 |       
|                             | Sales and marketing                                                  |                                   |        | 30,637 |        |      |       | 33,281 |        |   |        | 40,524 |       
|                             | General and administrative                                           |                                   |        | 6,845  |        |      |       | 7,241  |        |   |        | 8,519  |       
|                             | Restructuring charges                                                |                                   |        | 475    |        |      |       | 441    |        |   |        | 760    |       
|                             | Aborted offering costs                                               |                                   |        |       |        |      |       |       |        |   |        | 1,643  |       
|                             | Amortization of stock-based compensation                             |                                   |        | 1,117  |        |      |       | 2,806  |        |   |        | 3,900  |       
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             |                                                                      | Total operating expenses          |        |        | 59,741 |      |       |        | 61,909 |   |        |        | 69,482 |  
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             |                                                                      | Income (loss) from operations     |        |        | (2,068 | )    |       |        | 2,852  |   |        |        | (7,132 | )
|Other income (expense):      |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             | Interest income (expense), net                                       |                                   |        | 970    |        |      |       | 773    |        |   |        | (247   | )     
|                             | Other income (expense)                                               |                                   |        | 455    |        |      |       | (55    | )      |   |        | 257    |       
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             |                                                                      | Other income, net                 |        |        | 1,425  |      |       |        | 718    |   |        |        | 10     |  
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             |                                                                      | Income (loss) before income taxes |        |        | (643   | )    |       |        | 3,570  |   |        |        | (7,122 | )
|                             |                                                                      | Provision for income taxes        |        |        | 824    |      |       |        | 1,180  |   |        |        | 683    |  
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|Net income (loss)            |                                                                      | $                                 | (1,467 | )      |        | $    | 2,390 |        |        | $ | (7,805 | )     
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|Net income (loss) per share: |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             | Basic                                                                |                                   | $      | (0.05  | )      |      | $     | 0.12   |        |   | $      | (1.21  | )     
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             | Diluted                                                              |                                   | $      | (0.05  | )      |      | $     | 0.08   |        |   | $      | (1.21  | )     
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             | Weighted average shares outstanding:                                 |                                   |        |        |        |      |       |        |        |   |        |        |       
|                             | Basic                                                                |                                   |        | 30,640 |        |      |       | 19,861 |        |   |        | 6,464  |       
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       
|                             | Diluted                                                              |                                   |        | 30,640 |        |      |       | 30,267 |        |   |        | 6,464  |       
|                             |                                                                      |                                   |        |        |        |      |       |        |        |   |        |       

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

F-3



---



##### Table of Contents



PLUMTREE SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME (LOSS)

(In thousands)


|                             |                                                                                             |                 |        |              |   |            |    |        |   |         |        |        |   |   |    |    |  |   |        |        |  
|---------------------------- | ------------------------------------------------------------------------------------------- | --------------- | ------ | ------------ | - | ---------- | -- | ------ | - | ------- | ------ | ------ | - | - | -- | -- |  | - | ------ | ------ | -
|                             |                                                                                             |                 |        |              |   |            |    |       
|                             |                                                                                             | Convertible     |        |              |   |           
|                             |                                                                                             | Preferred Stock |        | Common Stock |   | Additional
|                             |                                                                                             |                 |        |              |   | Paid in   
|                             |                                                                                             | Shares          |        | Amount       |   | Shares     |    | Amount |   | Capital
|                             |                                                                                             |                 |        |              |   |            |    |        |   |        
|Balance at December 31, 2000 |                                                                                             |                 | 16,581 |              |   | $          | 17 |        |   |         | 7,444  |        |   | $ | 7  |    |  | $ | 55,555 |       
|                             | Exercise of stock options                                                                   |                 |        |             |   |            |    |       |   |         |        | 75     |   |   |    |    |  |   |        | 168    |  
|                             | Acquisition of technology                                                                   |                 |        |             |   |            |    |       |   |         |        | 357    |   |   |    | 1  |  |   |        | 4,497  |  
|                             | Repurchase of stock                                                                         |                 |        |             |   |            |    |       |   |         |        | (226   | ) |   |    |   |  |   |        | (167   | )
|                             | Notes receivable from stockholders                                                          |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Acceleration of employee stock options                                                      |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        | 31     |  
|                             | Deferred stock- based compensation                                                          |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        | 4,410  |  
|                             | Amortization of stock-based compensation                                                    |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Cancellation of unvested options                                                            |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        | (2,217 | )
|                             | Translation adjustment                                                                      |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Net loss                                                                                    |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             |                                                                                             |                 |        |              |   |            |    |        |   |         |        |        |   |   |    |    |  |   |        |       
|Balance at December 31, 2001 |                                                                                             |                 | 16,581 |              |   |            | 17 |        |   |         | 7,650  |        |   |   | 8  |    |  |   | 62,277 |       
|                             | Issuance of common stock from initial public
    offering, net of issuance costs of $4,555. |                 |        |             |   |            |    |       |   |         |        | 5,000  |   |   |    | 5  |  |   |        | 37,940 |  
|                             | Conversion of preferred stock to common stock                                               |                 |        | (16,581      | ) |            |    | (17    | ) |         |        | 16,629 |   |   |    | 17 |  |   |        |       |  
|                             | Exercise of warrants                                                                        |                 |        |             |   |            |    |       |   |         |        | 187    |   |   |    |   |  |   |        |       |  
|                             | Exercise of stock options                                                                   |                 |        |             |   |            |    |       |   |         |        | 48     |   |   |    |   |  |   |        | 73     |  
|                             | Repurchase of common stock                                                                  |                 |        |             |   |            |    |       |   |         |        | (75    | ) |   |    |   |  |   |        | (56    | )
|                             | Amortization of stock-based compensation                                                    |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Cancellation of unvested options                                                            |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        | (1,850 | )
|                             | Unrealized gain on investments                                                              |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Translation adjustment                                                                      |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Net income                                                                                  |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             |                                                                                             |                 |        |              |   |            |    |        |   |         |        |        |   |   |    |    |  |   |        |       
|Balance at December 31, 2002 |                                                                                             |                 |       |              |   |            |   |        |   |         | 29,439 |        |   |   | 30 |    |  |   | 98,384 |       
|                             |                                                                                             |                 |        |              |   |            |    |        |   |         |        |        |   |   |    |    |  |   |        |       
|                             | Exercise of stock options                                                                   |                 |        |             |   |            |    |       |   |         |        | 1,377  |   |   |    | 1  |  |   |        | 823    |  
|                             | Issuance of common stock from ESPP                                                          |                 |        |             |   |            |    |       |   |         |        | 462    |   |   |    |   |  |   |        | 1,272  |  
|                             | Repayment of notes receivable from stockholders                                             |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Repurchase of common stock                                                                  |                 |        |             |   |            |    |       |   |         |        | (13    | ) |   |    |   |  |   |        | (12    | )
|                             | Amortization of stock-based compensation                                                    |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Cancellation of unvested options                                                            |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        | (720   | )
|                             | Unrealized loss on investments                                                              |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Translation adjustment                                                                      |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             | Net loss                                                                                    |                 |        |             |   |            |    |       |   |         |        |       |   |   |    |   |  |   |        |       |  
|                             |                                                                                             |                 |        |              |   |            |    |        |   |         |        |        |   |   |    |    |  |   |        |       
|Balance at December 31, 2003 |                                                                                             |                 |       |              |   | $          |   |        |   |         | 31,265 |        |   | $ | 31 |    |  | $ | 99,747 |       
|                             |                                                                                             |                 |        |              |   |            |    |        |   |         |        |        |   |   |    |    |  |   |        |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                             |                                                                                             |              |      |              |   |               |         |             |   |               |     |               |   |   |         |        |   |   |        |        |   |   |         |        |  
|---------------------------- | ------------------------------------------------------------------------------------------- | ------------ | ---- | ------------ | - | ------------- | ------- | ----------- | - | ------------- | --- | ------------- | - | - | ------- | ------ | - | - | ------ | ------ | - | - | ------- | ------ | -
|                             |                                                                                             |              |      |              |   | Accumulated   |         |             |   |               |     |              
|                             |                                                                                             | Notes        |      |              |   | Other         |         |             |   |               |     |              
|                             |                                                                                             | Receivable   |      | Deferred     |   | Comprehensive |         |             |   | Total         |     |              
|                             |                                                                                             | from         |      | Stock- based |   | Income        |         | Accumulated |   | Stockholders |     | Comprehensive
|                             |                                                                                             | Stockholders |      | Compensation |   | (Loss)        |         | Deficit     |   | Equity        |     | Income (Loss)
|                             |                                                                                             |              |      |              |   |               |         |             |   |               |     |              
|Balance at December 31, 2000 |                                                                                             | $            | (520 | )            |   | $             | (10,635 | )           |   | $             | (17 | )             |   | $ | (34,045 | )      |   | $ | 10,362 |        |   | $ | (21,700 | )     
|                             | Exercise of stock options                                                                   |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | 168    |   |   |         |        |  
|                             | Acquisition of technology                                                                   |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | 4,498  |   |   |         |        |  
|                             | Repurchase of stock                                                                         |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | (167   | ) |   |         |        |  
|                             | Notes receivable from stockholders                                                          |              |      | (154         | ) |               |         |            |   |               |     |              |   |   |         |       |   |   |        | (154   | ) |   |         |        |  
|                             | Acceleration of employee stock options                                                      |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | 31     |   |   |         |        |  
|                             | Deferred stock- based compensation                                                          |              |      |             |   |               |         | (4,410      | ) |               |     |              |   |   |         |       |   |   |        |       |   |   |         |        |  
|                             | Amortization of stock-based compensation                                                    |              |      |             |   |               |         | 4,527       |   |               |     |              |   |   |         |       |   |   |        | 4,527  |   |   |         |        |  
|                             | Cancellation of unvested options                                                            |              |      |             |   |               |         | 2,217       |   |               |     |              |   |   |         |       |   |   |        |       |   |   |         |        |  
|                             | Translation adjustment                                                                      |              |      |             |   |               |         |            |   |               |     | (17           | ) |   |         |       |   |   |        | (17    | ) |   |         | (17    | )
|                             | Net loss                                                                                    |              |      |             |   |               |         |            |   |               |     |              |   |   |         | (7,805 | ) |   |        | (7,805 | ) |   |         | (7,805 | )
|                             |                                                                                             |              |      |              |   |               |         |             |   |               |     |               |   |   |         |        |   |   |        |        |   |   |         |       
|Balance at December 31, 2001 |                                                                                             |              | (674 | )            |   |               | (8,301  | )           |   |               | (34 | )             |   |   | (41,850 | )      |   |   | 11,443 |        |   |   | (7,822  | )     
|                             |                                                                                             |              |      |              |   |               |         |             |   |               |     |               |   |   |         |        |   |   |        |        |   |   |         |       
|                             | Issuance of common stock from initial public
    offering, net of issuance costs of $4,555. |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | 37,945 |   |   |         |        |  
|                             | Conversion of preferred stock to common stock                                               |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        |       |   |   |         |        |  
|                             | Exercise of warrants                                                                        |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        |       |   |   |         |        |  
|                             | Exercise of stock options                                                                   |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | 73     |   |   |         |        |  
|                             | Repurchase of common stock                                                                  |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | (56    | ) |   |         |        |  
|                             | Amortization of stock-based compensation                                                    |              |      |             |   |               |         | 3,500       |   |               |     |              |   |   |         |       |   |   |        | 3,500  |   |   |         |        |  
|                             | Cancellation of unvested options                                                            |              |      |             |   |               |         | 1,850       |   |               |     |              |   |   |         |       |   |   |        |       |   |   |         |        |  
|                             | Unrealized gain on investments                                                              |              |      |             |   |               |         |            |   |               |     | 229           |   |   |         |       |   |   |        | 229    |   |   |         | 229    |  
|                             | Translation adjustment                                                                      |              |      |             |   |               |         |            |   |               |     | (172          | ) |   |         |       |   |   |        | (172   | ) |   |         | (172   | )
|                             | Net income                                                                                  |              |      |             |   |               |         |            |   |               |     |              |   |   |         | 2,390  |   |   |        | 2,390  |   |   |         | 2,390  |  
|                             |                                                                                             |              |      |              |   |               |         |             |   |               |     |               |   |   |         |        |   |   |        |        |   |   |         |       
|Balance at December 31, 2002 |                                                                                             |              | (674 | )            |   |               | (2,951  | )           |   |               | 23  |               |   |   | (39,460 | )      |   |   | 55,352 |        |   |   | 2,447   |       
|                             |                                                                                             |              |      |              |   |               |         |             |   |               |     |               |   |   |         |        |   |   |        |        |   |   |         |       
|                             | Exercise of stock options                                                                   |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | 824    |   |   |         |        |  
|                             | Issuance of common stock from ESPP                                                          |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | 1,272  |   |   |         |        |  
|                             | Repayment of notes receivable from stockholders                                             |              |      | 674          |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | 674    |   |   |         |        |  
|                             | Repurchase of common stock                                                                  |              |      |             |   |               |         |            |   |               |     |              |   |   |         |       |   |   |        | (12    | ) |   |         |        |  
|                             | Amortization of stock-based compensation                                                    |              |      |             |   |               |         | 1,363       |   |               |     |              |   |   |         |       |   |   |        | 1,363  |   |   |         |        |  
|                             | Cancellation of unvested options                                                            |              |      |             |   |               |         | 720         |   |               |     |              |   |   |         |       |   |   |        |       |   |   |         |        |  
|                             | Unrealized loss on investments                                                              |              |      |             |   |               |         |            |   |               |     | (103          | ) |   |         |       |   |   |        | (103   | ) |   |         | (103   | )
|                             | Translation adjustment                                                                      |              |      |             |   |               |         |            |   |               |     | (12           | ) |   |         |       |   |   |        | (12    | ) |   |         | (12    | )
|                             | Net loss                                                                                    |              |      |             |   |               |         |            |   |               |     |              |   |   |         | (1,467 | ) |   |        | (1,467 | ) |   |         | (1,467 | )
|                             |                                                                                             |              |      |              |   |               |         |             |   |               |     |               |   |   |         |        |   |   |        |        |   |   |         |       
|Balance at December 31, 2003 |                                                                                             | $            |     |              |   | $             | (868    | )           |   | $             | (92 | )             |   | $ | (40,927 | )      |   | $ | 57,891 |        |   | $ | (1,582  | )     
|                             |                                                                                             |              |      |              |   |               |         |             |   |               |     |               |   |   |         |        |   |   |        |        |   |   |         |       

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

F-4



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##### Table of Contents



PLUMTREE SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |        |       |        |  
|------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ----- | ------ | ------ | ------- | ----- | ------- | ------ | ------ | ----- | ------ | -
|                                                                    |                                                                                                            |                                                                                  
|                                                                    |                                                                                                            | For the Year Ended December 31,                                                  
|                                                                    |                                                                                                            |                                                                                  
|                                                                    |                                                                                                            | 2003                                                                              |                                                         | 2002    |       | 2001  
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |       
|Cash flows from operating activities:                               |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    | Net income (loss)                                                                                          |                                                                                   | $                                                       | (1,467  | )     |        | $      | 2,390   |       |         | $      | (7,805 | )    
|                                                                    | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                                   |                                                         |         |       |        |        |         |       |         |        |        |      
|                                                                    |                                                                                                            | Provision for doubtful accounts                                                   |                                                         |         | (111  | )      |        |         | 505   |         |        |        | 1,089 |       
|                                                                    |                                                                                                            | Depreciation and amortization                                                     |                                                         |         | 1,722 |        |        |         | 1,846 |         |        |        | 1,771 |       
|                                                                    |                                                                                                            | Loss on disposal of property & equipment                                          |                                                         |         |      |        |        |         | 214   |         |        |        |      |       
|                                                                    |                                                                                                            | Accretion of short-term investments                                               |                                                         |         | 716   |        |        |         |      |         |        |        |      |       
|                                                                    |                                                                                                            | Gain on sale of investment                                                        |                                                         |         | (475  | )      |        |         |      |         |        |        |      |       
|                                                                    |                                                                                                            | Amortization of stock-based compensation                                          |                                                         |         | 1,363 |        |        |         | 3,500 |         |        |        | 4,527 |       
|                                                                    |                                                                                                            | Acceleration of employee stock options                                            |                                                         |         |      |        |        |         |      |         |        |        | 31    |       
|                                                                    |                                                                                                            | Amortization of acquired technology                                               |                                                         |         | 1,577 |        |        |         | 1,597 |         |        |        | 138   |       
|                                                                    |                                                                                                            | Amortization of warrants issued for services                                      |                                                         |         | 42    |        |        |         | 52    |         |        |        | 86    |       
|                                                                    |                                                                                                            | Changes in assets and liabilities:                                                |                                                         |         |       |        |        |         |       |         |        |        |       |       
|                                                                    |                                                                                                            |                                                                                   | Accounts receivable                                     |         |       | (441   | )      |         |       | 733     |        |        |       | (3,326 | )
|                                                                    |                                                                                                            |                                                                                   | Prepaid and other current assets                        |         |       | 68     |        |         |       | (908    | )      |        |       | 2,397  |  
|                                                                    |                                                                                                            |                                                                                   | Other long term assets                                  |         |       | 293    |        |         |       | (395    | )      |        |       | (82    | )
|                                                                    |                                                                                                            |                                                                                   | Accounts payable                                        |         |       | (318   | )      |         |       | 167     |        |        |       | 574    |  
|                                                                    |                                                                                                            |                                                                                   | Accrued and other current liabilities                   |         |       | (2,589 | )      |         |       | (791    | )      |        |       | 5,749  |  
|                                                                    |                                                                                                            |                                                                                   | Deferred revenue                                        |         |       | 488    |        |         |       | (2,060  | )      |        |       | 4,092  |  
|                                                                    |                                                                                                            |                                                                                   | Other long-term liabilities                             |         |       | (6     | )      |         |       | 120     |        |        |       | 334    |  
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    |                                                                                                            |                                                                                   | Net cash provided by operating activities               |         |       | 862    |        |         |       | 6,970   |        |        |       | 9,575  |  
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|Cash flows from investing activities:                               |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    | Acquisition of technology                                                                                  |                                                                                   |                                                         |        |       |        |        |        |       |         |        | (250   | )    
|                                                                    | Proceeds from sale of investment                                                                           |                                                                                   |                                                         | 475     |       |        |        |        |       |         |        |       |      
|                                                                    | Purchases of short-term investments                                                                        |                                                                                   |                                                         | (41,267 | )     |        |        | (46,141 | )     |         |        |       |      
|                                                                    | Maturities of short-term investments                                                                       |                                                                                   |                                                         | 37,861  |       |        |        | 1,703   |       |         |        |       |      
|                                                                    | Return of deposit                                                                                          |                                                                                   |                                                         |        |       |        |        |        |       |         |        | 2,533  |      
|                                                                    | Purchases of property and equipment                                                                        |                                                                                   |                                                         | (823    | )     |        |        | (1,824  | )     |         |        | (1,953 | )    
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    |                                                                                                            |                                                                                   | Net cash provided by (used in) investing
    activities |         |       | (3,754 | )      |         |       | (46,262 | )      |        |       | 330    |  
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|Cash flows from financing activities:                               |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    | Payments on capital lease obligations                                                                      |                                                                                   |                                                         | (74     | )     |        |        | (283    | )     |         |        | (265   | )    
|                                                                    | Proceeds from short-term debt                                                                              |                                                                                   |                                                         |        |       |        |        | 1,600   |       |         |        | 4,667  |      
|                                                                    | Repayments on short-term debt                                                                              |                                                                                   |                                                         |        |       |        |        | (3,200  | )     |         |        | (3,183 | )    
|                                                                    | Issuance of employee notes receivable                                                                      |                                                                                   |                                                         |        |       |        |        |        |       |         |        | (154   | )    
|                                                                    | Repayments of employee notes receivable                                                                    |                                                                                   |                                                         | 674     |       |        |        |        |       |         |        |       |      
|                                                                    | Proceeds from initial public offering, net                                                                 |                                                                                   |                                                         |        |       |        |        | 37,945  |       |         |        |       |      
|                                                                    | Proceeds from issuance of common stock                                                                     |                                                                                   |                                                         | 2,096   |       |        |        | 73      |       |         |        | 168    |      
|                                                                    | Repurchase of common stock                                                                                 |                                                                                   |                                                         | (12     | )     |        |        | (56     | )     |         |        | (167   | )    
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    |                                                                                                            |                                                                                   | Net cash provided by financing activities               |         |       | 2,684  |        |         |       | 36,079  |        |        |       | 1,066  |  
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|Effect of change in exchange rates on cash and
    cash equivalents |                                                                                                            |                                                                                   | (13                                                     | )       |       |        | (172   | )       |       |         | (29    | )     
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|Net increase (decrease) in cash and cash
    equivalents            |                                                                                                            |                                                                                   | (221                                                    | )       |       |        | (3,385 | )       |       |         | 10,942 |       
|Cash and cash equivalents at beginning of year                      |                                                                                                            |                                                                                   | 20,655                                                  |         |       |        | 24,040 |         |       |         | 13,098 |       
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|Cash and cash equivalents at end of year                            |                                                                                                            | $                                                                                 | 20,434                                                  |         |       | $      | 20,655 |         |       | $       | 24,040 |       
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|Supplemental disclosure of cash flow information:                   |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    |                                                                                                            | Cash paid for income taxes                                                        |                                                         | $       | 576   |        |        | $       | 814   |         |        | $      |      |       
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    |                                                                                                            | Cash paid for interest                                                            |                                                         | $       | 155   |        |        | $       | 113   |         |        | $      | 232   |       
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|Non-cash financing activity:                                        |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    |                                                                                                            | Issuance of common stock for acquisitions of a
    company and certain technology |                                                         | $       |      |        |        | $       |      |         |        | $      | 4,498 |       
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       
|                                                                    |                                                                                                            | Liabilities assumed on acquisition                                                |                                                         | $       |      |        |        | $       |      |         |        | $      | 228   |       
|                                                                    |                                                                                                            |                                                                                   |                                                         |         |       |        |        |         |       |         |        |       

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

F-5



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##### Table of Contents



PLUMTREE SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     ORGANIZATION
OF THE COMPANY

Plumtree Software, Inc. (the Company)
was originally incorporated in the State of California on
July 18, 1996 to develop and market infrastructure software
and services that enable a business to deploy a corporate portal
to information applications and Internet-based services. The
Company reincorporated in the State of Delaware on May 31,
2002 (see Note 3).

The Company is subject to a number of risks
associated with companies at a similar stage of development
including competition from larger, more established companies,
dependence on new product introductions, volatility of the
industry, ability to obtain adequate funding to support growth,
dependence on key individuals and the ability to attract and
retain additional qualified personnel to manage the anticipated
growth of the Company.

2.     SIGNIFICANT
ACCOUNTING POLICIES

Principles of
Consolidation

The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Foreign
Currency Translation

The functional currency of the Companys
subsidiaries is the local currency (with the exception of
Switzerland which uses the Euro as its functional currency).
Accordingly, all assets and liabilities are translated into U.S.
dollars at the current exchange rate as of the applicable
balance sheet date. Revenues and expenses are translated at the
average exchange rate prevailing during the period. Gains and
losses resulting from the translation of the financial
statements are reported as a separate component of
stockholders equity. Foreign currency transaction gains
and losses are included in other income (expense) and for
the three years ended December 31, 2003 these amounts have
not been material.

Cash
Equivalents and Short-Term Investments

Cash equivalents consist of highly liquid
investments including corporate debt securities and money market
funds with maturities of 90 days or less from the date of
purchase.

The following is a chart of the principal amounts
of short-term investments by expected maturity (in thousands):

|                                |       |                                |        |              |  |            |        |                  |  |   |        |        |  |   |        |        | 
|------------------------------- | ----- | ------------------------------ | ------ | ------------ |  | ---------- | ------ | ---------------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                |       |                                |        | As of       
|                                |       | Expected Maturity Date For the |        | December 31,
|                                |       | Year Ending December 31,       |        | 2003        
|                                |       |                                |        |             
|                                |       | 2004                           |        | 2005         |  | Total Cost |        | Total Fair Value
|                                |       |                                |        |              |  |            |        |                 
|Taxable auction rate securities |       | $                              | 3,500  |              |  | $          |       |                  |  | $ | 3,500  |        |  | $ | 3,500  |       
|US Government agencies          |       |                                | 2,528  |              |  |            | 16,900 |                  |  |   | 19,428 |        |  |   | 19,435 |       
|Corporate notes                 |       |                                | 17,406 |              |  |            | 6,796  |                  |  |   | 24,202 |        |  |   | 24,320 |       
|                                |       |                                |        |              |  |            |        |                  |  |   |        |        |  |   |        |       
|                                | Total |                                | $      | 23,434       |  |            | $      | 23,696           |  |   | $      | 47,130 |  |   | $      | 47,255 | 
|                                |       |                                |        |              |  |            |        |                  |  |   |        |        |  |   |        |       

With respect to the above investments we are
exposed to market risks for changes in interest rates. We place
our investments with high quality credit issuers that have a
rating by Moodys of A-1 or higher, Fitchs F-1 or
higher or Standard & Poors of P-1 or higher.

The Companys general policy is to limit the
risk of principal loss and ensure the safety of invested funds
by limiting market and credit risk. The Company considers all
investments to be short-term investments, which are classified
in the balance sheet as current assets, because (1) the
investments can be readily

F-6



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##### Table of Contents



converted at any time into cash or into
securities with a shorter remaining time to maturity and
(2) the investments are selected for yield management
purposes only and the Company is not committed to holding the
investments until maturity. The Company determines the
appropriate classification of its investments at the time of
purchase and re-evaluates such designations as of each balance
sheet date. All short-term investments and cash equivalents in
the Companys portfolio are classified as
available-for-sale and are stated at fair market
value, with the unrealized gains and losses reported as a
component of accumulated other comprehensive income (loss). The
amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such
amortization and accretion is included in interest income, net.
The cost of securities sold is based on the specific
identification method.


Concentration
of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily
of cash and cash equivalents, short-term investments and
accounts receivable. The Company places all of its cash and cash
equivalents and short-term investments with high credit issuers.
Carrying amounts of financial instruments held by the Company,
which include cash and cash equivalents, short-term investments
and accounts receivable, approximate fair value due to their
short duration. The Company performs ongoing credit evaluations
of its customers, generally requires customers to prepay for
maintenance and maintains reserves for potential losses. The
Companys customer base is primarily composed of businesses
throughout the United States, Europe and Asia.

No customer accounted for greater than 10% of
total revenue for the years ended December 31, 2001, 2002
and 2003. As of December 31, 2003 and 2002 no customer
accounted for greater than 10% of accounts receivable.



| |                   
| | ------------------
| | Valuation Accounts

Below is a summary of the changes in the
Companys allowance for doubtful accounts for the years
ended December 31, 2003, 2002 and 2001 (in thousands):

|                             |  |           |       |           |  |            |       |         |  |   |       |  |  |   |       | 
|---------------------------- |  | --------- | ----- | --------- |  | ---------- | ----- | ------- |  | - | ----- |  |  | - | ----- | 
|                             |  | Beginning |       |           |  |            |       | Ending 
|                             |  | Balance   |       | Provision |  | Write-offs |       | Balance
|                             |  |           |       |           |  |            |       |        
|Year ended December 31, 2001 |  | $         | 1,606 |           |  | $          | 1,089 |         |  | $ | 1,511 |  |  | $ | 1,184 | 
|Year ended December 31, 2002 |  | $         | 1,184 |           |  | $          | 505   |         |  | $ | 935   |  |  | $ | 754   | 
|Year ended December 31, 2003 |  | $         | 754   |           |  | $          | (111  | )       |  | $ | 121   |  |  | $ | 522   | 



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost.
Depreciation and amortization is provided using the
straight-line method over the shorter of the lease term or the
estimated useful life of two to four years.



| |             
| | ------------
| | Income Taxes

Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities from a change on tax rates is recognized in income
in the period the change is enacted. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amounts to be recovered.



| |            
| | -----------
| | Commissions

The Company recognizes the commission expense in
the period in which the commission is earned, which may or may
not coincide with the recognition of revenue for the respective
contract.

F-7



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##### Table of Contents



Stock-Based
Compensation

The Company has elected to follow the guidance in
Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees to account for employee
stock options. Accordingly, the Company recognizes no
compensation expense with respect to stock-based awards to
employees for which the exercise price equals the fair market
value of the underlying stock on the date of grant. The Company
has determined pro forma information regarding net income
(loss) and net income (loss) per share as if the
Company had accounted for employee stock options under the fair
value method under Statement of Financial Accounting Standards
No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, and Statement of Financial Accounting Standards
No. 148 (SFAS 148), Accounting for Stock-Based Compensation
Transition and Disclosure. The fair value of these stock-based
awards to employees were estimated using the Black-Scholes
option pricing model, using the following weighted average
assumptions:

|                            |  |                          |         |      |  |      |         |  |  |  |         | 
|--------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                            |  |                         
|                            |  | Years Ended December 31,
|                            |  |                         
|                            |  | 2003                     |         | 2002 |  | 2001
|                            |  |                          |         |      |  |     
|Risk-free interest rate     |  |                          | 2.6%    |      |  |      | 3.6%    |  |  |  | 4.1%    | 
|Expected life of the option |  |                          | 4 years |      |  |      | 4 years |  |  |  | 4 years | 
|Dividend yield              |  |                          | 0%      |      |  |      | 0%      |  |  |  | 0%      | 
|Volatility                  |  |                          | 94%     |      |  |      | 105%    |  |  |  | 0%      | 

The fair value of share purchase rights under the
ESPP was estimated using the Black-Scholes option pricing model,
using the following weighted average assumptions for 2003: risk
free interest rate of 2.4%; expected life of 1.25 years;
dividend yield of 0%; and volatility of 105%.

For pro forma purposes, the estimated fair value
of the Companys stock-based awards to employees is
amortized over the options vesting period (generally four
years) and the ESPPs lookback period of up to two years.
The weighted-average estimated fair value of stock options
issued for the years ended December 31, 2003, 2002 and 2001
were $2.43, $ 2.88 and $ 2.17 per share, respectively. The
weighted-average estimated fair value of share purchase rights
under the ESPP for the years ended December 31, 2003 and
2002 were $1.36 and $ 4.94 per share, respectively. The
Companys pro forma net income (loss) and pro forma
net income (loss) per share data under SFAS No. 123 is
as follows:

|                                                                                                              |                            |                          |        |       |   |      |        |       |   |   |        |       |  
|------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ----- | - | ---- | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                              |                            |                         
|                                                                                                              |                            | Years Ended December 31,
|                                                                                                              |                            |                         
|                                                                                                              |                            | 2003                     |        | 2002  |   | 2001
|                                                                                                              |                            |                          |        |       |   |     
|Net income (loss) as reported                                                                                 |                            | $                        | (1,467 | )     |   | $    | 2,390  |       |   | $ | (7,805 | )    
|Add: Stock-based employee compensation expense
    included in net income (loss)                              |                            |                          | 1,363  |       |   |      | 3,500  |       |   |   | 4,527  |      
|Deduct: Stock-based employee compensation expense
    determined under fair value based method for all awards |                            |                          | (8,429 | )     |   |      | (6,377 | )     |   |   | (6,618 | )    
|Pro forma net loss under SFAS 123.                                                                            |                            | $                        | (8,533 | )     |   | $    | (487   | )     |   | $ | (9,896 | )    
|                                                                                                              |                            |                          |        |       |   |      |        |       |   |   |        |      
|Net income (loss) per common
    share  basic:                                                               |                            |                          |        |       |   |      |        |       |   |   |        |      
|As reported under APB 25.                                                                                     |                            | $                        | (0.05  | )     |   | $    | 0.12   |       |   | $ | (1.21  | )    
|As reported under SFAS 123                                                                                    |                            | $                        | (0.28  | )     |   | $    | (0.02  | )     |   | $ | (1.53  | )    
|Net income (loss) per common
    share  diluted:                                                             |                            |                          |        |       |   |      |        |       |   |   |        |      
|                                                                                                              | As reported under APB 25   |                          | $      | (0.05 | ) |      | $      | 0.08  |   |   | $      | (1.21 | )
|                                                                                                              | As reported under SFAS 123 |                          | $      | (0.28 | ) |      | $      | (0.02 | ) |   | $      | (1.53 | )

In connection with the grant of certain stock
options to employees during the years ended December 31,
2001, the Company recorded deferred stock-based compensation of
approximately $4.4 million, representing the difference
between the deemed value of the common stock for accounting
purposes and the option exercise price or stock sale price at
the date of the option grant or stock sale. Such amount is
presented as a reduction of stockholders equity and
amortized on an accelerated basis over the vesting period of the
applicable options, generally four years. No deferred stock
based compensation was recorded during the years ended Decem-

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ber 31, 2003 and 2002. Approximately
$1.4 million, $3.5 million and $4.5 million was
expensed during the years ended December 31, 2003, 2002 and
2001, respectively. Compensation expense is decreased in the
period of forfeiture for any accrued but unvested compensation
arising from the termination of an option holder. The
Companys stock-based compensation expense by category is
as follows:


|                                                                             |                            |                                                                   |                                |      |       |       |     |       |       |       |     |       |       |       | 
|---------------------------------------------------------------------------- | -------------------------- | ----------------------------------------------------------------- | ------------------------------ | ---- | ----- | ----- | --- | ----- | ----- | ----- | --- | ----- | ----- | ----- | 
|                                                                             |                            |                                                                  
|                                                                             |                            | For the Year Ended                                               
|                                                                             |                            | December 31,                                                     
|                                                                             |                            |                                                                  
|                                                                             |                            | 2003                                                              |                                | 2002 |       | 2001 
|                                                                             |                            |                                                                   |                                |      |       |      
|Amortization of stock-based compensation included
    in cost of revenue     |                            | $                                                                 | 246                            |      |       | $     | 694 |       |       | $     | 627 |      
|                                                                             |                            |                                                                   |                                |      |       |       |     |       |       |       |     |      
|Amortization of stock-based compensation included
    in operating expenses: |                            |                                                                   |                                |      |       |       |     |       |       |       |     |      
|                                                                             | Research and development   |                                                                   | $                              | 510  |       |       | $   | 1,247 |       |       | $   | 908   |      
|                                                                             | Sales and marketing        |                                                                   |                                | 494  |       |       |     | 1,281 |       |       |     | 1,695 |      
|                                                                             | General and administrative |                                                                   |                                | 113  |       |       |     | 278   |       |       |     | 1,297 |      
|                                                                             |                            |                                                                   |                                |      |       |       |     |       |       |       |     |      
|                                                                             |                            | Total stock-based compensation included in
    operating expenses |                                |      | 1,117 |       |     |       | 2,806 |       |     |       | 3,900 |      
|                                                                             |                            |                                                                   |                                |      |       |       |     |       |       |       |     |      
|                                                                             |                            |                                                                   | Total stock-based compensation |      | $     | 1,363 |     |       | $     | 3,500 |     |       | $     | 4,527 | 
|                                                                             |                            |                                                                   |                                |      |       |       |     |       |       |       |     |      

Restructuring
Charges

In July 2003, the Company undertook a workforce
reduction and incurred a charge of $475,000. The Company had
paid for all of the costs incurred with the restructuring as of
December 31, 2003.

In October 2002, the Company undertook a
workforce reduction and incurred a charge of $441,000. The
Company had paid for all of the costs incurred with the
restructuring as of December 31, 2002.

In March 2001, the Company undertook a workforce
reduction and abandonment of a leased facility and incurred a
charge of $760,000. The Company had paid for all of the costs
incurred with the restructuring as of December 31, 2001.

Software
Development Costs

The Company accounts for internally generated
software development costs in accordance with
SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise
Marketed. Capitalization of software development costs
begins upon the establishment of technological feasibility of
the product, which the Company defines as the development of a
working model and further defines as the completion of beta
testing of the software. The establishment of technological
feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with
respect to certain external factors, including, but not limited
to, anticipated future gross product revenue, estimated economic
life and changes in technology. Such costs are reported at the
lower of unamortized cost or net realizable value. To date,
internal software development costs that were eligible for
capitalization have been insignificant and the Company has
charged all software development costs to research and
development expense as incurred.

The Company has capitalized technology costs
associated with the acquisitions discussed in Note 5, as
the technology acquired had reached technological feasibility
prior to acquisition. The Company periodically reviews these
costs to ensure they are being recorded at the lower of
unamortized cost or net realizable value. Net realizable value
is determined using assumed future cash flows related to sales
of the underlying technology.

Use
of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported

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amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates and
assumptions made by management include utilizing the percentage
of completion method for recognition of certain revenues, the
valuation allowance related to net deferred tax assets, the
determination of the fair value of stock options, allowance for
doubtful accounts and assessing the net realizable value of
capitalized acquired technology.


Revenue
Recognition

License revenue consists principally of revenue
from the licensing of the Companys software and is
generally recognized when a contract is executed, all delivery
obligations have been met, the fee is fixed or determinable, and
collectibility is probable. When licenses are sold together with
services, in accordance with the provisions of the American
Institute of Certified Public Accountants Statement of
Position 97-2, Software Revenue Recognition
(SOP 97-2), license fees are recognized upon
delivery, provided that (1) the above criteria have been
met, (2) payment of the license fees is not dependent upon
the performance of the services, (3) the services do not
include significant modifications to the features and
functionality of the software, and (4) the services are not
essential to the functionality of the software.

The Company has not established vendor specific
objective evidence of fair value (VSOE) for license
sales and recognizes revenue from arrangements with multiple
elements involving software licenses under the residual method
as outlined in SOP 97-2. To the extent that a discount
exists on any of the elements, the Company follows the residual
method and attributes that discount entirely to the delivered
elements.

Service revenue consists of consulting, training
and installation services that the Company provides to its
customers. Revenue from such services is generally recognized as
the service is performed. If services are included with a
license agreement, amounts related to services are unbundled
from the license fee based on VSOE as established by
transactions where such services have been sold separately.

Maintenance revenue relates to the technical
support and software updates the Company provides to its
customers. Revenue on maintenance contracts is recognized
ratably over the term of the contract. If maintenance is bundled
with a license agreement, amounts related to maintenance are
unbundled from the license fee based on VSOE as established by
the renewals the Company charges in accordance with its
contracts and its established pricing.

Net Income (Loss) Per Share

Basic and diluted net income (loss) per
share are presented in conformity with SFAS No. 128,
Earnings Per Share, for all periods presented. In
accordance with SFAS No. 128, basic net income
(loss)per share is calculated by dividing net income (loss)by
the weighted average common shares outstanding during the
period, less shares subject to repurchase. Diluted income
(loss)per share is calculated by dividing net income by the
weighted average common shares outstanding adjusted for all
potential common shares, which includes shares issuable upon the
exercise of outstanding common stock options and warrants, and
common stock subject to repurchase, using the treasury stock
method, and from convertible preferred stock, using the
if-converted method.

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|                                                                                |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |   |          |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------- | ---- | ------- | ---- | ---------- | --------- | -------- | - | --------- | - | -------- | -
|                                                                                |                                                                                                             |                                                        
|                                                                                |                                                                                                             | Years Ended December 31,                               
|                                                                                |                                                                                                             |                                                        
|                                                                                |                                                                                                             | 2003                                                    |            | 2002 |         | 2001
|                                                                                |                                                                                                             |                                                         |            |      |         |     
|Net income (loss) (in thousands)                                                |                                                                                                             | $                                                       | (1,467     | )    |         | $    | 2,390      |           |          | $ | (7,805    | )
|                                                                                |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  
|Basic:                                                                          |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  
|Weighted average shares of common stock
    outstanding                         |                                                                                                             |                                                         | 30,699,874 |      |         |      | 20,140,360 |           |          |   | 7,382,846 |  
|                                                                                |                                                                                                             | Less: Weighted average shares subject to
    repurchase |            |      | (59,652 | )    |            |           | (279,046 | ) |           |   | (919,043 | )
|                                                                                |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  
|Weighted average shares used in computing basic
    net income (loss) per share |                                                                                                             |                                                         | 30,640,222 |      |         |      | 19,861,314 |           |          |   | 6,463,803 |  
|                                                                                |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  
|Basic net income (loss) per share                                               |                                                                                                             | $                                                       | (0.05      | )    |         | $    | 0.12       |           |          | $ | (1.21     | )
|                                                                                |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  
|Diluted:                                                                        |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  
|Weighted average shares used above                                              |                                                                                                             |                                                         | 30,640,222 |      |         |      | 19,861,314 |           |          |   | 6,463,803 |  
|                                                                                | Add: Weighted average shares subject to repurchase                                                          |                                                         |            |     |         |      |            | 279,046   |          |   |           |  |         
|                                                                                | Add: Weighted average adjustment to reflect the
    effect of the conversion of convertible preferred stock |                                                         |            |     |         |      |            | 6,995,747 |          |   |           |  |         
|                                                                                | Add: Net additional shares related to assumed
    option and warrant exercises under the treasury method    |                                                         |            |     |         |      |            | 3,130,836 |          |   |           |  |         
|Weighted average shares used in computing diluted
    net                       |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  
|Income (loss) per share                                                         |                                                                                                             |                                                         | 30,640,222 |      |         |      | 30,266,943 |           |          |   | 6,463,803 |  
|                                                                                |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  
|Diluted net income (loss) per share                                             |                                                                                                             | $                                                       | (0.05      | )    |         | $    | 0.08       |           |          | $ | (1.21     | )
|                                                                                |                                                                                                             |                                                         |            |      |         |      |            |           |          |   |           |  

Potentially dilutive securities not included in
diluted weighted average shares outstanding include:

|                                   |       |                    |            |            |  |  |           |           | 
|---------------------------------- | ----- | ------------------ | ---------- | ---------- |  |  | --------- | --------- | 
|                                   |       |                   
|                                   |       | As of December 31,
|                                   |       |                   
|                                   |       | 2003               |            | 2002      
|                                   |       |                    |            |           
|Common stock subject to repurchase |       |                    | 15,635     |            |  |  |          |          
|Options to purchase common stock   |       |                    | 10,366,465 |            |  |  | 4,684,791 |          
|Employee stock purchase plan       |       |                    | 224,270    |            |  |  | 118,411   |          
|Warrants                           |       |                    | 41,030     |            |  |  | 41,030    |          
|                                   |       |                    |            |            |  |  |           |          
|                                   | Total |                    |            | 10,647,400 |  |  |           | 4,844,232 | 
|                                   |       |                    |            |            |  |  |           |          

Common stock subject to repurchase includes
founders stock and common stock issued pursuant to
unvested option exercises.

Comprehensive
Income (Loss)

SFAS No. 130, Reporting Comprehensive
Income, establishes standards for reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. The objective of
SFAS No. 130 is to report a measure of all changes in
equity of an enterprise that result from transactions and other
economic events of the period other than transactions with
stockholders (comprehensive income). Comprehensive
income (loss) is the total of net income (loss) and
all other non-owner changes in stockholders equity.

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Recent
Accounting Pronouncements

In June 2001, the FASB issued Statement of
Financial Accounting Standards Nos. 143, Accounting for
Asset Retirement Obligations(SFAS 143).
Under SFAS 143, the fair value of a liability for an asset
retirement obligation must be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset.
SFAS 143 is effective for fiscal years beginning after
June 15, 2002. SFAS 143 was adopted in the year ended
December 31, 2003 and did not have a material impact on the
financial position or results of the Companys operations.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities
(SFAS 146), which addresses financial
accounting and reporting for costs associated with exit or
disposal activities. This statement requires that a liability be
recognized at fair value for costs associated with exit or
disposal activities only when the liability is incurred as
opposed to at the time the Company commits to an exit plan as
permitted under EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit and Activity. SFAS 146 is effective for
exit or disposal activities that are initiated after
December 31, 2002. SFAS 146 was adopted in the year
ended December 31, 2003 and did not have a material impact
on the financial position or results of the Companys
operations.

In November 2002, the EITF reached a consensus on
Issue No. 00-21 Revenue Arrangements with Multiple
Deliverables(EITF 00-21). EITF 00-21
addresses certain aspects of accounting by a vendor for
arrangements under which the vendor will perform multiple
revenue generating activities. EITF 00-21 is effective for
fiscal periods beginning after June 15, 2003. The adoption
of EITF 00-21 did not have a material impact on its
financial position or results of the Companys operations.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(FIN 45), which clarifies disclosure and
recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for
financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a
prospective basis for guarantees issued or modified after
December 31, 2002. The Company typically grants its
customers a warranty, which guarantees that the Companys
products will substantially conform to the Companys
current specifications for ninety days from the delivery date as
well as indemnification for customers from third party claims.
Through the year ended December 31, 2003, costs related to
these guarantees and indemnifications have not been significant.
The Company cannot estimate the potential impact of these
guarantees and indemnifications on future results of operations.

Reclassifications

Certain prior year amounts have been reclassified
to conform with the current period presentation.

3.     INITIAL PUBLIC
OFFERING

On June 4, 2002, the Company closed the sale
of 5,000,000 shares of common stock in an initial public
offering at a price of $8.50 per share. A total of
$42.5 million in gross proceeds was raised from this
transaction. After deducting the underwriting discount of
approximately $3.0 million and approximately
$1.6 million of offering expenses, net proceeds were $37.9
million.

In connection with the IPO, the Board of
Directors and stockholders approved the reincorporation of the
Company from the State of California into the State of Delaware.
The Company effected the reincorporation on May 31, 2002.

Upon the closing of the Companys IPO,
16,580,830 shares of the Companys convertible preferred
stock converted into common stock. Due to the anti-dilutive
provisions of the Companys Series E convertible
preferred stock, the holders of the outstanding shares of
Series E convertible preferred stock received an additional
48,605 shares of common stock upon the completion of the IPO.

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4.     PROPERTY AND
EQUIPMENT

Property and equipment consists of the following
(in thousands):

|                                          |  |                    |        |      |  |   |        |  
|----------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                          |  |                   
|                                          |  | As of December 31,
|                                          |  |                   
|                                          |  | 2003               |        | 2002
|                                          |  |                    |        |     
|Software and computer equipment           |  | $                  | 6,165  |      |  | $ | 5,356  |  
|Furniture and fixtures                    |  |                    | 570    |      |  |   | 568    |  
|Leasehold improvements and other          |  |                    | 879    |      |  |   | 867    |  
|                                          |  |                    |        |      |  |   |        |  
|                                          |  |                    | 7,614  |      |  |   | 6,791  |  
|Accumulated depreciation and amortization |  |                    | (5,816 | )    |  |   | (4,093 | )
|                                          |  |                    |        |      |  |   |        |  
|                                          |  | $                  | 1,798  |      |  | $ | 2,698  |  
|                                          |  |                    |        |      |  |   |        |  

Depreciation expense for the years ended
December 31, 2003, 2002 and 2001 was $1.7 million,
$1.8 million, and $1.8 million, respectively.

5.     OTHER
ASSETS

Other assets consist of the following (in
thousands):

|                                                                                            |  |                    |       |      |  |   |       | 
|------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ---- |  | - | ----- | 
|                                                                                            |  |                   
|                                                                                            |  | As of December 31,
|                                                                                            |  |                   
|                                                                                            |  | 2003               |       | 2002
|                                                                                            |  |                    |       |     
|Acquired technology, net of accumulated
    amortization of $3,312 and $1,735, respectively |  | $                  | 1,497 |      |  | $ | 3,074 | 
|Prepaid royalties, net of current portion                                                   |  |                    | 163   |      |  |   | 557   | 
|Other                                                                                       |  |                    | 365   |      |  |   | 292   | 
|                                                                                            |  |                    |       |      |  |   |       | 
|                                                                                            |  | $                  | 2,025 |      |  | $ | 3,923 | 
|                                                                                            |  |                    |       |      |  |   |       | 

In November 2001, the Company acquired certain
technology for $85,000 and 60,000 shares of common stock. In
November 2001, the Company also acquired a company (the
Acquired Company) for 297,594 shares of common
stock. The acquisition of the Acquired Company was accounted for
under the purchase method with the results of the Acquired
Company included in the consolidated statements of operations
for the year ended December 31, 2001 subsequent to the
November 2001 acquisition date. In connection with these
acquisitions, the Company incurred approximately $70,000 of
transaction related costs. The common stock issued in connection
with these transactions was recorded at its estimated fair value
for accounting purposes of $12.60 per share on the date of
issuance. The purchase price was allocated to acquired
technology and is being amortized over its estimated useful life
of three years. Amortization is being recorded as cost of
revenue and was $1.6 million, $1.6 million and
$138,000 for the years ended December 31, 2003, 2002 and
2001.

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6.     ACCRUED AND
OTHER CURRENT LIABILITIES

Accrued liabilities consist of the following (in
thousands):

|                              |  |                    |        |      |  |   |        | 
|----------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|                              |  |                   
|                              |  | As of December 31,
|                              |  |                   
|                              |  | 2003               |        | 2002
|                              |  |                    |        |     
|Accrued commissions and bonus |  | $                  | 1,808  |      |  | $ | 3,839  | 
|Accrued sales taxes           |  |                    | 995    |      |  |   | 1,361  | 
|Accrued vacation              |  |                    | 1,559  |      |  |   | 1,249  | 
|Accrued royalties             |  |                    | 134    |      |  |   | 647    | 
|Accrued third party software  |  |                    | 787    |      |  |   | 928    | 
|Accrued ESPP                  |  |                    | 623    |      |  |   | 856    | 
|Accrued other                 |  |                    | 6,178  |      |  |   | 5,867  | 
|                              |  |                    |        |      |  |   |        | 
|                              |  | $                  | 12,084 |      |  | $ | 14,747 | 
|                              |  |                    |        |      |  |   |        | 

7.     COMMITMENTS
AND CONTINGENCIES



| |                            
| | ---------------------------
| | Operating Lease Commitments

The Company leases its facilities under operating
lease agreements. The leases expire at various dates through
2006. As of December 31, 2003, future minimum lease
payments under these agreements are as follows (in thousands):

|                        |  |   |       | 
|----------------------- |  | - | ----- | 
|Year Ended December 31, |  |  
|                        |  |  
|2004                    |  | $ | 2,796 | 
|2005                    |  |   | 2,737 | 
|2006                    |  |   | 2,328 | 
|                        |  |   |       | 
|                        |  | $ | 7,861 | 
|                        |  |   |       | 

Rent expense under operating leases was
approximately $4.2 million, $4.0 million, and
$3.8 million for the years ended December 31, 2003,
2002, and 2001, respectively.

Notes Payable and Line of Credit

The Company has a $3.1 million revolving
line of credit with Silicon Valley Bank with a maturity date of
August 2004. To secure any outstanding loans, the Company has
granted Silicon Valley Bank a security interest in our assets,
including our accounts receivable. Interest on the loans is
payable monthly and accrues at one percentage point above the
prime rate as announced by Silicon Valley Bank. As of
December 31, 2003, no amounts were outstanding under this
facility. The Company has issued a letter of credit for
$2.5 million to the landlord of the Companys
corporate headquarters, which is enforceable against the
facility. The Company has limitations on declaring and paying
dividends, incurring any non-permitted indebtedness and
acquiring the capital stock of any other company under our loan
agreements with Silicon Valley Bank. The Company is also
required to maintain a minimum cash balance with Silicon Valley
Bank, which we were in compliance with at December 31, 2003.

Royalties

The Company has entered into various license
arrangements with other software providers to incorporate the
software providers software in the Companys product.
In return for these licenses, the Company is required to pay
certain fees upon signing of the arrangements plus a certain
percentage of the Companys net revenue, as defined in
these agreements, generated from the sales of its product.
Royalty expense is recognized in the period in which liability
is incurred. Up-front fees are amortized over the period
benefited or as the incorporated software is sublicensed, as
applicable. For the years ended December 31, 2003, 2002 and
2001,

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the Company incurred royalty expense of
approximately $625,000, $3.2 million and $4.9 million,
respectively, related to these arrangements. The Company
classifies all royalty expenses as cost of revenues.


Litigation

On May 17, 2002 Datamize LLC filed a lawsuit
against the Company in the United States District Court for the
District of Montana (Civil Action No. 02-86-M-LBE) alleging, in
general, that by supplying software and systems for the
personalization and customization of networked kiosk and
computer screens, the Company infringes U.S. Patent
Number 6,014,137 (the 137 patent) owned
by Datamize. Datamize, based in Florence, Montana described
itself in its complaint as engaged in the business of
designing, creating and commercially exploiting software useful
in the personalization and customization of networked kiosk and
computer screens. Datamize was seeking, among other
things, injunctive relief and unspecified damages. The Company
filed a motion (Motion) to dismiss the action for
lack of personal jurisdiction or, in the alternative, have the
action transferred to the Northern District of California. In
early July 2003, the Court granted the Motion and entered
judgment in favor of the Company on July 7, 2003 in
accordance with that order. Datamize had thirty (30) days
to appeal this judgment, which period elapsed on August 6,
2003 without Datamize taking any action with the Court.

In December 2002, the Company filed a complaint
for declaratory relief against Datamize in U.S. District
Court for the Northern District of California (Civil Action
No. 02-5693 VRW). The Company seeks a declaratory judgment
that it does not infringe any valid claim of the
137 patent, which Datamize claims to own. Datamize
has filed its answer and a counterclaim alleging that the
Company infringes the 137 patent. Datamize is
seeking, among other things, injunctive relief and unspecified
damages. In response to a procedural motion, the Court realigned
the parties so that the Company is now the defendant, and
Datamize is now the plaintiff. The parties are engaging in
discovery, and construction of the patent claims. No trial date
has been set, although the final pretrial conference is
scheduled for March 29, 2005.

Based on other communications by Datamizes
counsel, the Company expects Datamize may take further legal
action against the Company with respect to additional
intellectual property that Datamize purportedly owns or will own
in the future. At this time, the Company does not believe it is
infringing on any valid patent claim of Datamize and intends to
pursue vigorously its claims and defenses.

On November 13, 2001, the Company commenced
an action in the District Court in The Hague against an
individual, Werner Linssen, to cancel the Benelux trademark
registration for Plumtree held by Mr. Linssen.
The Company asked the Hague District Court to (i) annul
Mr. Linssens Benelux trademark registration for
Plumtree and (ii) bar Mr. Linssen, pending
the proceedings, from contacting the Companys customers in
a threatening or unfair manner. On September 24, 2003, the
Hague District Court granted the Companys request for a
preliminary injunction barring Mr. Linssen, pending the
proceedings, from contacting the Companys customers in a
threatening or unfair manner. On October 15, 2003,
Mr. Linssen filed answering papers denying the
Companys allegations and asserting a counterclaim for
infringement of his registered trademark. On January 21,
2004, the Company filed reply papers in further support of its
claim and in response to Mr. Linssens counterclaim.
Mr. Linssen has until March 3, 2004 to file papers in
further support of his counterclaim.

On November 25, 2001, the Company also
commenced a proceeding before the Swiss Federal Institute of
Intellectual Property in opposition to Mr. Linssens
trademark application for Plumtree. The Swiss Patent
Office has dismissed the proceeding; however, the Company has
appealed the dismissal. On December 18, 2003,
Mr. Linssen commenced a proceeding before the Swiss Federal
Institute of Intellectual Property in opposition to the
Companys trademark registration for Plumtree
Software; this proceeding has been suspended pending
disposition of the Companys prior appeal.

On May 2, 2003, the Company initiated a
civil lawsuit against Mr. Linssen in the Commercial Court
of the Canton of Zurich, Switzerland, seeking (i) an
injunction barring Mr. Linssens use of the
Plumtree trademark, and (ii) the transfer of
Mr. Linssens Swiss trademark registration for
Plumtree, or in the alternative, the cancellation of
Mr. Linssens Swiss registration. On October 6,
2003, Mr. Linssen filed

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answering papers denying the Companys
allegations and asserting a counterclaim for infringement of his
registered trademark. The Company is reviewing the counterclaim
and will file a timely reply.


In addition, the Company and Mr. Linssen
have each commenced proceedings before the E.U.s Office of
Harmonization of the Internal Market in opposition to each
others Community Trade Mark applications. Those
proceedings have been suspended pending disposition of the
Benelux action in The Hague.

The results of the above proceedings cannot be
predicted with certainty; however, in the opinion of management,
the potential liabilities associated with these complaints are
not expected to have a material adverse effect on the
Companys financial condition, liquidity or results of
operations.

8.     WARRANTS

In May 2000, in connection with the extension of
a facilities lease, a warrant was issued to the landlord to
purchase 32,391 shares of common stock at $9.60 per
share. The right to purchase the common stock was immediately
effective upon signing and exercisable for a period of
six years. The estimated fair value of the warrant at the
date of issuance was approximately $155,000. This amount is
being recognized as additional rent expense over the term of the
facilities lease, which expires in 2006.

In September 2000, in connection with the
extension of an operating lease, a warrant was issued to the
lessor to purchase 8,639 shares of common stock at
$9.60 per share. The right to purchase the common stock was
immediately effective upon signing and exercisable for a period
of six years. The estimated fair value of the warrant at
the date of issuance was approximately $79,000. This amount will
be recognized as additional rent expense over the term of the
operating lease, which expires in 2006.

The fair market value of warrants on the date of
grant was computed using the Black-Scholes pricing model with
the following assumptions: risk-free interest rates ranging from
5.6 percent to 6.8 percent, expected dividend yield of
0 percent, contractual lives of 6 years, and expected
volatility of 70 percent.

9.     EQUITY
INCENTIVE PLANS

In June 1997, the Company adopted the 1997 Equity
Incentive Plan (the 1997 Plan) and has reserved
12,700,000 shares of common stock for issuance thereunder. Under
the 1997 Plan, the board of directors may grant incentive and
nonqualified stock options to purchase shares of the
Companys common stock to employees, directors and
consultants of the Company. The exercise price per share for an
incentive stock option cannot be less than 100% of the fair
market value as determined by the board of directors on the date
of grant. The exercise price per share for nonqualified stock
options cannot be less than 85% of the fair market value, as
determined by the board of directors, on the date of grant.
Options generally expire ten years after the date of grant and
generally vest over a one to four year Period. In addition,
certain option holders are entitled to exercise prior to the
options vesting as long as they are employees. Should the
employee subsequently leave, the Company has the right to
repurchase unvested shares at the original exercise price.

In 2002, the Company adopted the 2002 Equity
Incentive Plan (the 2002 Plan) and has reserved
12,700,000 shares of common stock for issuance thereunder.
Shares authorized for issuance in connection with the 2002 Plan
are subject to an automatic annual increase of the lesser of
3,000,000 shares or 5 percent of the Companys
outstanding common stock or an amount determined by the Board of
Directors. Under the 2002 Plan, the board of directors may grant
incentive and nonqualified stock options to purchase shares of
the Companys common stock to employees, directors and
consultants of the Company. The exercise price per share for an
incentive stock option cannot be less than 100% of the fair
market value as determined by the board of directors on the date
of grant. The exercise price per share for nonqualified stock
options cannot be less than 85% of the fair market value, as
determined by the board of directors, on the date of grant.
Options generally expire ten years after the date of grant and
generally vest over a one to four year period.

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Option activity under the Plans through
December 31, 2003 were as follows:

|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |      | 
|----------------------------- | ---------------------------------------------------------------------- | ------------- | --------- | ----------- | - | -------------- | ---------- | ---------- | - | - | ---- | ---- |  |  | - | ---- | 
|                              |                                                                        |               |           |             |   |                |            | Weighted  
|                              |                                                                        | Shares        |           |             |   | Weighted       |            | Average   
|                              |                                                                        | Available for |           | Options     |   | Average        |            | Fair      
|                              |                                                                        | Grant         |           | Outstanding |   | Exercise Price |            | Value     
|                              |                                                                        |               |           |             |   |                |            |           
|Balance at December 31, 2000  |                                                                        |               | 2,103,179 |             |   |                | 5,239,883  |            |   | $ | 2.35 |      |  |  |   |     
|                              | Authorized                                                             |               |           | 2,000,000   |   |                |            |           |   |   |      |     |  |  |   |      | 
|                              | Granted with exercise prices equal to fair value
    at date of grant  |               |           | (3,555,250  | ) |                |            | 3,555,250  |   |   |      | 7.01 |  |  | $ | 1.16 | 
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|                              | Granted with exercise prices less than fair value
    at date of grant |               |           | (580,000    | ) |                |            | 580,000    |   |   |      | 5.00 |  |  | $ | 8.34 | 
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|                              | Exercised                                                              |               |           |            |   |                |            | (74,910    | ) |   |      | 2.24 |  |  |   |      | 
|                              | Repurchased                                                            |               |           | 226,226     |   |                |            |           |   |   |      | 0.74 |  |  |   |      | 
|                              | Cancelled                                                              |               |           | 969,225     |   |                |            | (969,225   | ) |   |      | 6.02 |  |  |   |      | 
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|Balance at December 31, 2001. |                                                                        |               | 1,163,380 |             |   |                | 8,330,998  |            |   | $ | 4.11 |      |  |  |   |     
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|                              | Authorized                                                             |               |           | 7,700,000   |   |                |            |           |   |   |      |     |  |  |   |      | 
|                              | Granted with exercise prices equal to fair value
    at date of grant  |               |           | (1,175,300  | ) |                |            | 1,175,300  |   |   | $    | 7.27 |  |  | $ | 2.88 | 
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|                              | Exercised                                                              |               |           |            |   |                |            | (47,587    | ) |   | $    | 1.54 |  |  |   |      | 
|                              | Repurchased                                                            |               |           | 74,841      |   |                |            |           |   |   | $    | 0.74 |  |  |   |      | 
|                              | Cancelled                                                              |               |           | 1,167,558   |   |                |            | (1,167,558 | ) |   | $    | 7.17 |  |  |   |      | 
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|Balance at December 31, 2002  |                                                                        |               | 8,930,479 |             |   |                | 8,291,153  |            |   | $ | 4.08 |      |  |  |   |     
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|                              | Authorized                                                             |               |           | 1,471,633   |   |                |            |           |   |   |      |     |  |  |   |      | 
|                              | Granted with exercise prices equal to fair value
    at date of grant  |               |           | (5,258,900  | ) |                |            | 5,258,900  |   |   | $    | 3.69 |  |  | $ | 2.42 | 
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|                              | Exercised                                                              |               |           |            |   |                |            | (1,376,872 | ) |   | $    | 0.60 |  |  |   |      | 
|                              | Repurchased                                                            |               |           | 13,165      |   |                |            |           |   |   | $    | 0.97 |  |  |   |      | 
|                              | Cancelled                                                              |               |           | 1,806,716   |   |                |            | (1,806,716 | ) |   | $    | 4.54 |  |  |   |      | 
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     
|Balance at December 31, 2003  |                                                                        |               | 6,963,093 |             |   |                | 10,366,465 |            |   | $ | 4.13 |      |  |  |   |     
|                              |                                                                        |               |           |             |   |                |            |            |   |   |      |      |  |  |   |     

The following table summarizes the options
outstanding at December 31, 2003:

|                         |  |             |            |              |  |                  |     |                   |  |                     |       |  |  |  |           |  |  |   |      | 
|------------------------ |  | ----------- | ---------- | ------------ |  | ---------------- | --- | ----------------- |  | ------------------- | ----- |  |  |  | --------- |  |  | - | ---- | 
|                         |  |             |            | Weighted     |  |                  |     |                   |  |                    
|                         |  |             |            | Average      |  |                  |     |                   |  |                    
|                         |  | Number of   |            | Remaining    |  |                  |     |                   |  | Weighted Average   
|                         |  | Options     |            | Contractual  |  | Weighted Average |     | Number of Options |  | Exercise Price of  
|Range of Exercise Prices |  | Outstanding |            | Life (Years) |  | Exercise Price   |     | Exercisable       |  | Exercisable Options
|                         |  |             |            |              |  |                  |     |                   |  |                    
|$0.06 - $0.09            |  |             | 1,235,635  |              |  |                  | 4.6 |                   |  | $                   | 0.08  |  |  |  | 1,235,635 |  |  | $ | 0.08 | 
|$0.16                    |  |             | 5,250      |              |  |                  | 5.7 |                   |  | $                   | 0.16  |  |  |  | 5,250     |  |  | $ | 0.16 | 
|$0.32                    |  |             | 50,000     |              |  |                  | 6.0 |                   |  | $                   | 0.32  |  |  |  | 50,000    |  |  | $ | 0.32 | 
|$1.25                    |  |             | 464        |              |  |                  | 6.0 |                   |  | $                   | 1.25  |  |  |  | 464       |  |  | $ | 1.25 | 
|$2.00 - $2.83            |  |             | 2,223,036  |              |  |                  | 7.7 |                   |  | $                   | 2.53  |  |  |  | 1,342,705 |  |  | $ | 2.41 | 
|$3.09 - $4.36            |  |             | 3,357,500  |              |  |                  | 9.5 |                   |  | $                   | 3.85  |  |  |  | 143,443   |  |  | $ | 3.30 | 
|$5.00 - $7.18            |  |             | 2,305,242  |              |  |                  | 8.0 |                   |  | $                   | 5.27  |  |  |  | 1,261,936 |  |  | $ | 5.24 | 
|$9.00 - $12.60           |  |             | 1,189,338  |              |  |                  | 7.3 |                   |  | $                   | 10.08 |  |  |  | 831,736   |  |  | $ | 9.90 | 
|                         |  |             |            |              |  |                  |     |                   |  |                     |       |  |  |  |           |  |  |   |      | 
|$0.06 - $12.60           |  |             | 10,366,465 |              |  |                  | 7.9 |                   |  | $                   | 4.13  |  |  |  | 4,871,169 |  |  | $ | 3.83 | 
|                         |  |             |            |              |  |                  |     |                   |  |                     |       |  |  |  |           |  |  |   |      | 

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##### Table of Contents



At December 31, 2003, 15,635 shares of
common stock were subject to repurchase by the Company at a
weighted average exercise price of $2.36 per share.

10.     INCOME
TAXES

The following is a geographic breakdown of income
(loss) before the provision for income taxes (in thousands):

|         |       |                          |        |      |   |      |        |       |  |   |        |        |  
|-------- | ----- | ------------------------ | ------ | ---- | - | ---- | ------ | ----- |  | - | ------ | ------ | -
|         |       |                         
|         |       | Years Ended December 31,
|         |       |                         
|         |       | 2003                     |        | 2002 |   | 2001
|         |       |                          |        |      |   |     
|Domestic |       | $                        | 2,343  |      |   | $    | 6,202  |       |  | $ | (995   | )     
|Foreign  |       |                          | (2,986 | )    |   |      | (2,632 | )     |  |   | (6,127 | )     
|         |       |                          |        |      |   |      |        |       |  |   |        |       
|         | Total |                          | $      | (643 | ) |      | $      | 3,570 |  |   | $      | (7,122 | )
|         |       |                          |        |      |   |      |        |       |  |   |        |       

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

|         |         |                          |   |      |     |      |   |       |       |  |   |     |     | 
|-------- | ------- | ------------------------ | - | ---- | --- | ---- | - | ----- | ----- |  | - | --- | --- | 
|         |         |                         
|         |         | Years Ended December 31,
|         |         |                         
|         |         | 2003                     |   | 2002 |     | 2001
|         |         |                          |   |      |     |     
|Current: |         |                          |   |      |     |      |   |       |       |  |   |    
|         | Federal |                          | $ | 71   |     |      | $ |      |       |  | $ |    |    
|         | State   |                          |   | 96   |     |      |   | 164   |       |  |   | 168 |    
|         | Foreign |                          |   | 657  |     |      |   | 1,016 |       |  |   | 515 |    
|         |         |                          |   |      |     |      |   |       |       |  |   |    
|         |         | Total provision          |   | $    | 824 |      |   | $     | 1,180 |  |   | $   | 683 | 
|         |         |                          |   |      |     |      |   |       |       |  |   |    

The Company accounts for income taxes pursuant to
the provisions of SFAS No. 109, Accounting for
Income Taxes. SFAS 109 requires recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax
liabilities and assets are determined using the current
applicable enacted tax rate and provisions of the enacted tax
law. Provision for income taxes recorded to date primarily
relates to income taxes payable on income generated in foreign
and domestic state tax jurisdictions. The components of the net
deferred tax asset are as follows (in thousands):

|                                                  |  |                    |        |      |  |   |        |  
|------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                                  |  |                   
|                                                  |  | As of December 31,
|                                                  |  |                   
|                                                  |  | 2003               |        | 2002
|                                                  |  |                    |        |     
|Cumulative net operating loss carryforwards       |  | $                  | 2,111  |      |  | $ | 2,580  |  
|Research and development tax credit carryforwards |  |                    | 3,844  |      |  |   | 2,699  |  
|Alternative minimum tax credit                    |  |                    | 71     |      |  |   |       |  
|Cumulative temporary differences                  |  |                    | 1,288  |      |  |   | 1,878  |  
|                                                  |  |                    |        |      |  |   |        |  
|Total deferred tax assets                         |  |                    | 7,314  |      |  |   | 7,157  |  
|Valuation allowance                               |  |                    | (7,314 | )    |  |   | (7,157 | )
|                                                  |  |                    |        |      |  |   |        |  
|Net deferred tax assets                           |  | $                  |       |      |  | $ |       |  
|                                                  |  |                    |        |      |  |   |        |  

The Company has federal and state net operating
loss carryforwards as of December 31, 2003 of approximately
$3.0 million and $22.0 million, respectively, to
offset future federal and state taxable income. The net
operating loss carryforwards expire at various dates through the
year 2023. Additionally, the Company has federal research
credits, expiring at various dates through the year 2023, of
approximately $2.3 million and state of California research
credits carrying forward indefinitely of approximately
$2.3 million. A valuation allowance has been recorded for
the entire net deferred tax asset as a result of
managements uncertainties regarding realization of the
asset including limited operating history of the Company, the
lack of sustained annual profitability and uncertainty over
future operating profitability and taxable income.

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##### Table of Contents



The Tax Reform Act of 1986 contains provisions,
which may limit the net operating loss and credit carryforwards
to be used in any given year upon the occurrence of certain
events, including a significant change in ownership interest.

The provision for income taxes differs from the
expected amount computed by applying the statutory Federal
income tax rate of 34% to pre-tax income (loss) as follows:

|                                                                 |  |                    |        |      |  |      |        |   |  |  |       |   
|---------------------------------------------------------------- |  | ------------------ | ------ | ---- |  | ---- | ------ | - |  |  | ----- | --
|                                                                 |  |                   
|                                                                 |  | As of December 31,
|                                                                 |  |                   
|                                                                 |  | 2003               |        | 2002 |  | 2001
|                                                                 |  |                    |        |      |  |     
|Federal statutory rate                                           |  |                    | 34.0   | %    |  |      | 34.0   | % |  |  | (34.0 | )%
|State taxes net of federal benefit                               |  |                    | (15.0  | )    |  |      | 4.6    |   |  |  | (5.8  | ) 
|Alternative minimum taxes                                        |  |                    | (11.1  | )    |  |      |       |   |  |  | 2.3   |   
|Non-deductible compensation                                      |  |                    | (82.7  | )    |  |      | 37.9   |   |  |  | 25.5  |   
|Federal and state credits                                        |  |                    | 177.6  |      |  |      | (36.1  | ) |  |  | (16.1 | ) 
|Other                                                            |  |                    |       |      |  |      |       |   |  |  | 0.3   |   
|Foreign taxes                                                    |  |                    | (102.1 | )    |  |      | 27.1   |   |  |  | 6.9   |   
|Change in valuation allowance                                    |  |                    | 24.4   |      |  |      | (215.1 | ) |  |  | 35.1  |   
|Utilization of deferred tax assets not previously
    benefitted |  |                    | (153.2 | )    |  |      | 180.7  |   |  |  | (4.6  | ) 
|                                                                 |  |                    |        |      |  |      |        |   |  |  |       |   
|                                                                 |  |                    | (128.1 | )%   |  |      | 33.1   | % |  |  | 9.6   | % 
|                                                                 |  |                    |        |      |  |      |        |   |  |  |       |   

11.     SEGMENT
REPORTING

SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information,
established standards for reporting information about operating
segments. Operating segments are defined as components of an
enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance.

The Company has organized its operations based on
a single operating segment: the development and delivery of
corporate portal, collaboration, content management and search
software as well as related maintenance and services for
enterprises.

The disaggregated information reviewed on a
product basis by the CEO is as follows (in thousands):

|          |                                    |                         |   |        |        |      |   |        |        |  |   |        |        | 
|--------- | ---------------------------------- | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|          |                                    |                        
|          |                                    | Year Ended December 31,
|          |                                    |                        
|          |                                    | 2003                    |   | 2002   |        | 2001
|          |                                    |                         |   |        |        |     
|Revenues: |                                    |                         |   |        |        |      |   |        |        |  |   |       
|          | License                            |                         | $ | 34,044 |        |      | $ | 49,581 |        |  | $ | 54,055 |       
|          | Maintenance                        |                         |   | 22,451 |        |      |   | 18,462 |        |  |   | 11,102 |       
|          | Professional services and training |                         |   | 14,957 |        |      |   | 14,876 |        |  |   | 16,316 |       
|          |                                    |                         |   |        |        |      |   |        |        |  |   |       
|          |                                    | Total                   |   | $      | 71,452 |      |   | $      | 82,919 |  |   | $      | 81,473 | 
|          |                                    |                         |   |        |        |      |   |        |        |  |   |       

The Company markets its products primarily from
its operations in the United States. International sales
are made primarily to customers in Europe, Japan and Asia
Pacific. Substantially all of our assets are located

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within the United States of America.
Information regarding the Companys revenues in different
geographic regions is as follows (in thousands):


|                              |                          |                         |   |        |        |      |   |        |        |  |   |        |        | 
|----------------------------- | ------------------------ | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                              |                          |                        
|                              |                          | Year Ended December 31,
|                              |                          |                        
|                              |                          | 2003                    |   | 2002   |        | 2001
|                              |                          |                         |   |        |        |     
|Revenue by geographic region: |                          |                         |   |        |        |      |   |        |        |  |   |       
|                              | United States of America |                         | $ | 56,642 |        |      | $ | 67,263 |        |  | $ | 74,451 |       
|                              | International            |                         |   | 14,810 |        |      |   | 15,656 |        |  |   | 7,022  |       
|                              |                          |                         |   |        |        |      |   |        |        |  |   |       
|                              |                          | Total                   |   | $      | 71,452 |      |   | $      | 82,919 |  |   | $      | 81,473 | 
|                              |                          |                         |   |        |        |      |   |        |        |  |   |       

12.     RELATED PARTY
TRANSACTIONS

In August 2000, the Company entered into a note
with an officer of the Company in the amount of $520,000 to
exercise options. This note is full recourse at 6.0 percent
per annum and is payable upon demand. This note was repaid in
full during 2003.

In October 2001, the Company entered into notes
with two employees for a total of $154,000. These notes are full
recourse at 6.0 percent per annum and mature in October
2003. These notes were repaid in full during February 2003.

13.     SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table presents selected quarterly
information for 2002 and 2003 (in thousands, except per share
data):

|      |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |        |  
|----- | ----------------------------------- | ------- | - | ------- |  | ------- | - | ------- | - |  | - | ------ | - |  | - | ------ | -
|      |                                     | First   |   | Second  |  | Third   |   | Fourth 
|      |                                     | Quarter |   | Quarter |  | Quarter |   | Quarter
|      |                                     |         |   |         |  |         |   |        
|2002: |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |       
|      | Total revenue                       |         | $ | 23,176  |  |         | $ | 22,585  |   |  | $ | 17,678 |   |  | $ | 19,480 |  
|      | Gross margin                        |         |   | 17,495  |  |         |   | 17,670  |   |  |   | 13,850 |   |  |   | 15,746 |  
|      | Net income (loss)                   |         | $ | 157     |  |         | $ | 1,269   |   |  | $ | (889   | ) |  | $ | 1,853  |  
|      |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |       
|      | Basic net income (loss) per share   |         | $ | 0.02    |  |         | $ | 0.09    |   |  | $ | (0.03  | ) |  | $ | 0.06   |  
|      |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |       
|      | Diluted net income (loss) per share |         | $ | 0.01    |  |         | $ | 0.04    |   |  | $ | (0.03  | ) |  | $ | 0.06   |  
|      |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |       
|2003: |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |       
|      | Total revenue                       |         | $ | 17,169  |  |         | $ | 17,031  |   |  | $ | 18,480 |   |  | $ | 18,772 |  
|      | Gross margin                        |         |   | 14,109  |  |         |   | 13,527  |   |  |   | 14,901 |   |  |   | 15,135 |  
|      | Net income (loss)                   |         | $ | 529     |  |         | $ | (1,071  | ) |  | $ | (373   | ) |  | $ | (552   | )
|      |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |       
|      | Basic net income (loss) per share   |         | $ | 0.02    |  |         | $ | (0.04   | ) |  | $ | (0.01  | ) |  | $ | (0.02  | )
|      |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |       
|      | Diluted net income (loss) per share |         | $ | 0.02    |  |         | $ | (0.04   | ) |  | $ | (0.01  | ) |  | $ | (0.02  | )
|      |                                     |         |   |         |  |         |   |         |   |  |   |        |   |  |   |       

F-20



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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 report to be signed on its behalf by the
undersigned, thereunto duly authorized



| |                        
| | -----------------------
| | PLUMTREE SOFTWARE, INC.



| |     |               
| | --- | --------------
| | By: | /s/ JOHN KUNZE

| |                                                  
| | -------------------------------------------------
| |                                                  
| | John Kunze, President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below hereby constitutes and
appoints John Kunze, Eric Borrmann and Greg Wharton, and each of
them acting individually, as his or her attorney-in-fact, each
with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the SEC, hereby
ratifying and confirming all that each of said
attorneys-in-fact, or any substitute, may do or cause to be done
by virtue hereof.

|                                     |  |                                                                                   |  |                |  | 
|------------------------------------ |  | --------------------------------------------------------------------------------- |  | -------------- |  | 
|                                     |  |                                                                                   |  |               
|Signature                            |  | Title                                                                             |  | Date          
|                                     |  |                                                                                   |  |               
|                                    
|/s/ John KunzeJohn Kunze             |  | President, Chief Executive Officer and Director
    (Principal Executive Officer) |  | March 11, 2004
|                                    
|/s/ Eric BorrmannEric Borrmann       |  | Chief Financial Officer (Principal Financial and
    Accounting Officer)          |  | March 11, 2004
|                                    
|/s/ John DillonJohn Dillon           |  | Director                                                                          |  | March 11, 2004
|                                    
|/s/ Rupen DolasiaRupen Dolasia       |  | Director                                                                          |  | March 11, 2004
|                                    
|/s/ James RichardsonJames Richardson |  | Director                                                                          |  | March 11, 2004
|                                    
|/s/ Bernard WhitneyBernard Whitney   |  | Director                                                                          |  | March 11, 2004
|                                    
|/s/ David PrattDavid Pratt           |  | Director                                                                          |  | March 11, 2004

38



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##### Table of Contents



EXHIBIT INDEX

|        |        |             |  |                                                                                                                                          
|------- | ------ | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        | Description
|        |        |            
|        | 3.1    |             |  | Amended and Restated Certificate of Incorporation
    of the Registrant(1)                                                               
|        | 3.2    |             |  | Bylaws of the Registrant(1)                                                                                                              
|        | 4.1    |             |  | Specimen common stock certificate(1)                                                                                                     
|        | 4.9    |             |  | Warrant to purchase Common Stock, dated
    May 31, 2000, issued to WXI/ SAN Realty, L.L.C.(1)                                           
|        | 4.10   |             |  | Warrant to purchase Common Stock, dated Sept. 20,
    2000, issued to WXI/ SAN Realty, L.L.C.(1)                                         
|        | 10.1*  |             |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and officers(1)                                   
|        | 10.2*  |             |  | 1997 Equity Incentive Plan, as amended, and form
    of agreements thereunder(1)                                                         
|        | 10.3*  |             |  | 2002 Stock Plan, as amended, and form of
    agreements thereunder(1)                                                                    
|        | 10.4   |             |  | 2002 Employee Stock Purchase Plan, and form of
    agreements thereunder                                                                 
|        | 10.5*  |             |  | 2002 Director Option Plan, and form of agreements
    thereunder (1)                                                                     
|        | 10.6   |             |  | Loan and Security Agreement, dated March 14,
    2001, between the Registrant and Silicon Valley Bank(1)                                 
|        | 10.7   |             |  | Office Lease for 500 Sansome Street, dated
    April 7, 1999, between the Registrant and BPG Sansome,
    L.L.C.(1)                      
|        | 10.8   |             |  | First Amendment to Lease for 500 Sansome Street,
    dated May 3, 2000, between the Registrant and WXI/ SAN
    Realty, L.L.C.(1)        
|        | 10.9*  |             |  | Offer letter between the Registrant and John H.
    Kunze(1)                                                                             
|        | 10.10* |             |  | Offer letter between the Registrant and Eric
    Borrmann(1)                                                                             
|        | 10.11  |             |  | Second Amendment to Lease for 500 Sansome Street,
    dated September 20, 2000, between the Registrant and WXI/
    SAN Realty, L.L.C.(1)
|        | 10.12  |             |  | Third Amendment to Lease for 500 Sansome Street,
    dated November 22, 2000, between the Registrant and WXI/
    SAN Realty, L.L.C.(1)  
|        | 10.13  |             |  | Fourth Amendment to Lease for 500 Sansome Street,
    dated July 31, 2002, between the Registrant and WXI/ SAN
    Realty, L.L.C.(4)     
|        | 10.14  |             |  | Fifth Amendment to Lease for 500 Sansome Street,
    dated July 31, 2003, between the Registrant and WXI/ SAN
    Realty, L.L.C.(4)      
|        | 10.15* |             |  | Offer letter between the Registrant and Eric
    Zocher(4)                                                                               
|        | 10.16* |             |  | 2004 Bonus Plan                                                                                                                          
|        | 10.17  |             |  | 2004 Outside Director Stock in Lieu of Fees Plan                                                                                         
|        | 21.1   |             |  | Subsidiaries of the Registrant                                                                                                           
|        | 23.1   |             |  | Consent of KPMG LLP                                                                                                                      
|        | 31.1   |             |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes Oxley Act of 2002 (S-O
    Act)                   
|        | 31.2   |             |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the S-O Act                                                      
|        | 32.1   |             |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the S-O Act                                                      
|        | 32.2   |             |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the S-O Act                                                      



---



| |   |                                                             
| | - | ------------------------------------------------------------
| | * | Management contract or compensatory plan or
    arrangement.



|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Exhibits filed with
    Registration Statement No. 333-45950, as amended, which
    became effective on June 3, 2002.                                                
|   
|(2) | Incorporated by reference to Exhibits filed with
    the Registrants Form 10-Q for the quarter ended
    June 30, 2002 and filed with the SEC on August 14,
    2002 (File No. 001-31344).       
|   
|(3) | Incorporated by reference to Exhibits filed with
    the Registrants Form 10-Q for the quarter ended
    September 30, 2002 and filed with the SEC on
    November 12, 2002 (File No. 001-31344).
|   
|(4) | Incorporated by reference to Exhibits filed with
    the Registrants Form 10-Q for the quarter ended
    September 30, 2003 and filed with the SEC on
    November 3, 2003 (File No. 001-31344). 

39