PORTAL SOFTWARE INC - 10-Q Quarterly Report

	July 31, 2002			January 31, 2002
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	17,974		$	36,318
Short-term investments		50,483			75,463
Accounts receivable, net of allowance for doubtful accounts of $2,963 and $7,869 at July 31, 2002 and January 31, 2002, respectively		22,921			22,323
Restricted short-term investments		2,016			1,718
Deferred income taxes		—			2,733
Prepaids and other current assets		7,344			5,083

Total current assets		100,738			143,638
Property and equipment, net		39,043			43,146
Purchased developed technology, net		5,985			7,315
Restricted long-term investments		15,458			15,414
Other assets		2,748			3,693

	$	163,972		$	213,206

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,394		$	4,079
Accrued compensation		11,721			12,136
Accrued restructuring expenses		31,919			34,981
Other accrued liabilities		13,001			17,571
Current portion of capital lease obligations		214			587
Deferred revenue		26,490			37,466

Total current liabilities		87,739			106,820
Long-term notes payable		1,647			1,658
Long-term portion of capital lease obligations		—			11
Long-term deferred income taxes		—			2,733
Other long-term liabilities		29			49
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value		177			175
Additional paid-in capital		537,663			536,249
Accumulated other comprehensive income (loss)		343			(709	)
Notes receivable from stockholders		(79	)		(79	)
Deferred stock compensation		(126	)		(335	)
Accumulated deficit		(463,421	)		(433,366	)

Stockholders’ equity		74,557			101,935

	$	163,972		$	213,206

	Three Months Ended July 31,						Six Months Ended July 31,
	2002			2001			2002			2001
Revenues:
License fees	$	9,378		$	23,746		$	22,086		$	44,514
Services		19,384			20,983			37,788			44,782

Total revenues		28,762			44,729			59,874			89,296

Costs and expenses:
Cost of license fees		54			441			169			657
Cost of services		11,788			15,954			22,737			36,620
Amortization of purchased developed technology		665			1,200			1,330			2,063
Research and development		10,130			14,842			21,748			32,310
Sales and marketing		13,667			22,918			28,567			50,294
General and administrative		4,209			9,774			8,603			20,261
Amortization of deferred stock compensation(1)		99			562			209			1,124
Amortization of goodwill		—			15,276			—			30,624
Reduction in goodwill due to impairment		—			193,391			—			193,391
Restructuring costs		6,053			41,292			6,053			41,292

Total costs and expenses		46,665			315,650			89,416			408,636

Loss from operations		(17,903	)		(270,921	)		(29,542	)		(319,340	)
Interest and other income, net		270			1,933			968			4,427
Write-down of impaired investments		—			(4,000	)		—			(4,000	)

Loss before income taxes		(17,633	)		(272,988	)		(28,574	)		(318,913	)
Provision for income taxes		(413	)		(1,607	)		(1,481	)		(2,504	)

Net loss	$	(18,046	)	$	(274,595	)	$	(30,055	)	$	(321,417	)

Basic and diluted net loss per share	$	(0.10	)	$	(1.60	)	$	(0.17	)	$	( 1.88	)

Shares used in computing basic and diluted net loss per share		176,023			171,490			175,457			170,589

(1) Amortization of deferred stock compensation relates to the following expense categories:

Cost of services		16			86			33			177
Research and development		33			199			71			380
Sales and marketing		28			156			59			319
General and administrative		22			121			46			248

Total		99			562			209			1,124

	Six Months Ended July 31,
	2002			2001
OPERATING ACTIVITIES:
Net loss	$	(30,055	)	$	(321,417	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		8,159			10,292
Amortization of deferred stock compensation		209			1,124
Amortization of purchased developed technology and goodwill		1,330			32,786
Reduction in goodwill due to impairment		—			193,391
Restructuring costs		6,053			41,292
Write-down of impaired investments		—			4,000
Gain on sale of investments		(285	)		—
Changes in operating assets and liabilities:
Accounts receivable, net		(597	)		12,839
Prepaids and other current assets		(2,259	)		(106	)
Other assets		1,275			(360	)
Accounts payable		316			(1,268	)
Accrued compensation		(416	)		(7,543	)
Other accrued liabilities		(14,037	)		(18,390	)
Deferred revenue		(10,976	)		3,386

Net cash used in operating activities		(41,283	)		(49,974	)

INVESTING ACTIVITIES:
Purchases of short-term investments		(97,521	)		(86,587	)
Maturity of short-term investments		24,591			88,179
Sales of short-term investments		97,158			40,445
Purchases of long-term investments		—			(2,992	)
Purchases of property and equipment		(3,764	)		(10,372	)
Proceeds from sale of equity investments		—			1,112
Business combination, net of cash		—			(2,103	)

Net cash provided by investing activities		20,464			27,682

FINANCING ACTIVITIES:
Payments received on stockholder notes receivable		—			22
Payments on notes payable		(10	)		(2,356	)
Principal payments under capital lease obligations, net of proceeds		(383	)		(1,266	)
Proceeds from issuance of common stock, net of repurchases		1,416			7,007

Net cash provided by financing activities		1,023			3,407

Effect of exchange rate on cash and cash equivalents		1,452			(207	)

Net decrease in cash and cash equivalents		(18,344	)		(19,092	)
Cash and cash equivalents at beginning of period		36,318			69,323

Cash and cash equivalents at end of period	$	17,974		$	50,231

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

The accompanying unaudited condensed consolidated financial statements include the accounts of Portal and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at July 31, 2002 and the statement of operations for the three and six months ended July 31, 2002 and 2001 and the statement of cash flows for the six months ended July 31, 2002 and 2001 are not audited. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of the results for and as of the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The condensed consolidated financial statement information as of January 31, 2002 is derived from audited financial statements as of that date. These financial statements should be read in conjunction with the financial statements and related notes included in Portal’s Annual Report on Form 10-K/A for the year ended January 31, 2002 filed with the Securities and Exchange Commission on August 27, 2002.

License revenues are comprised of fees for multi-year or perpetual licenses, which are primarily derived from contracts with corporate customers and resellers. Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, no significant Portal obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. We recognize license revenue using the residual method. The software is considered to have been delivered when Portal has provided the customer with the access codes that allow for immediate possession of the software. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue from arrangements with customers who are not the ultimate users (resellers) is not recognized until evidence of an arrangement with an end user has been received. Portal’s policy should we enter into a transaction with a customer to purchase the customer’s products contemporaneously with the customer’s purchase of software from Portal, is to recognize the amount of license fees paid to Portal net of the fees paid for the customer’s products.

Services revenues are primarily comprised of revenue from systems integration or other consulting fees, maintenance agreements and training. Arrangements that include software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When software services are considered essential, license and service revenue under the arrangement is recognized using contract accounting. When software services are not considered essential, which has been the case in the majority of our license arrangements, the revenue related to the license is recorded upon delivery and the revenue related to the fair

value of the software services is recognized as the services are performed. Fair value is based on the price charged when these services are sold separately. Maintenance agreements provide technical support and include the right to unspecified upgrades on an if-and-when-available basis. Maintenance revenue is deferred and recognized on a straight-line basis as services revenue over the life of the related agreement, which is typically one year. Customer advances and billed amounts due from customers in excess of revenue recognized are generally recorded as deferred revenue.

Portal’s revenue recognition policy takes into consideration the creditworthiness of the customer in determining the probability of collection as a criterion for revenue recognition. The determination of creditworthiness requires the exercise of judgment, which affects Portal’s revenue recognition. If a customer is deemed to be not creditworthy, all revenue under arrangements with that customer is recognized upon receipt of cash. The creditworthiness of customers is re-assessed on a regular basis and revenue is deferred until cash receipt, if appropriate. Additionally, Portal enters into contracts with payment terms that extend beyond its normal credit period, which is currently 60 days. For such transactions, it is Portal’s policy to recognize such revenue only when payments are due, provided that the customer is deemed to be creditworthy.

Substantially all of Portal’s software and services have been sold to North American, European and Asia-Pacific communication and content service providers, including mobile wireless companies, broadband, electronic content and Internet access companies, as well as other Internet and e-commerce companies. Accordingly, adverse economic trends affecting the communications industry may increase our credit risk. Portal performs ongoing credit evaluations of its customers and does not require collateral. Portal maintains an allowance for potential credit losses. No individual customer accounted for more than 10% of total revenues during the three and six months ended July 31, 2002.

Portal operates solely in one segment, the development and marketing of business infrastructure software. Portal’s foreign offices consist of sales, marketing and support activities through its foreign subsidiaries and an overseas reseller network as well as one development site in Germany. Operating losses generated by the foreign operations of Portal and their corresponding identifiable assets were not material in any period presented. Portal’s chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Portal’s assets are primarily located in its corporate office in the United States and are not allocated to any specific region, therefore Portal does not produce reports for, or measure the performance of its geographic regions based on any asset-based metrics. Therefore, geographic information is presented only for revenues.

Portal’s export revenue represented 60% and 62% of total revenues in the three and six months ended July 31, 2002, compared with approximately 48% in the comparable periods ended July 31, 2001. Nearly all of the export sales to date have been denominated in U.S. dollars and were derived from sales to Europe (which is defined by Portal as Europe, Middle East and Africa) and Intercontinental (which is defined by Portal as Asia-Pacific, Japan and Latin America). For the three months ended July 31, 2002 and 2001, European revenues were $14.2 million and $15.1 million and Intercontinental revenues were $3.0 and $6.7 million. For the six months ended July 31, 2002 and 2001, European revenues were $26.4 and $27.9 million and Intercontinental revenues were $27.9 and $14.8 million.

Portal classifies, at the date of acquisition, its cash equivalents and short-term investments as available-for-sale in accordance with the provisions of the FASB’s Statement of Financial Accounting Standards No.115, “Accounting for Certain Investments in Debt and Equity Securities” (“FAS 115”). Securities are reported at fair market value, with the related unrealized gains and losses included within stockholders’ equity. As of July 31, 2002, unrealized gains, for cash equivalents and short-term investments, were $0.2 million. It is possible that a portion of the unrealized gains will be realized as securities may need to be sold to fund operations. As this happens, these securities will be sold resulting in a realized gain. In addition, as cash is required to fund operations, some securities may need to be sold which will result in realizing gains. Debt and discount securities are adjusted for straight-line amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Realized gains and losses are recorded using the specific identification method and were immaterial for all periods presented

As of July 31, 2002 and January 31, 2002, restricted short-term investments combined with restricted long-term investments of approximately $15.4 million represent collateral for six letters of credit and one bank guarantee. The six letters of credit issued in lieu of a cash security deposit are renewable annually and expire on various dates from November 30, 2002 through March 5, 2021. The bank guarantee, issued to secure outstanding bank loans of former shareholders of Solution42, is for $1.5 million and expires on April 30, 2003. Restricted investments consist of corporate bonds maturing over a period of up to two years.

Portal also invests in equity instruments of privately held companies for business and strategic purposes. These investments are included in other assets, in the amount of $1.5 million (total investment of $2.0 million net of a valuation allowance of $0.5 million) as of July 31, 2002 and January 31, 2002. The investments are accounted for using the cost method as Portal does not have the ability to exercise significant influence over the operations of these companies and Portal’s investment is less than 20% of the outstanding voting shares in each entity. Portal monitors its investments for other than temporary impairment, basing its assessment on a review of the investee’s operations and other indicators. Other indicators include, but are not limited to, limited capital resources, limited prospects of receiving additional financing and prospects for liquidity of the related securities.

During the fiscal year ended January 31, 2002, Portal recorded charges of $4.0 million to reflect the other than temporary decline in value of its equity investments. The remaining $1.5 million was determined to not be impaired based upon a review of the financial statements of the company in which we hold the investment. Even though the company is still generating losses, it has experienced growth in revenues and has continued its efforts to reduce its cost structure. Portal will continue to monitor its investment in this company for signs of deterioration.

FAS 142 requires long-lived assets and intangibles, including goodwill, be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. On a regular basis, the estimated future net cash flows associated with the asset are compared to the asset’s carrying amount to determine if impairment has occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets is recognized. If quoted market prices for the assets are not available, the fair value is calculated using the present value of estimated expected future net cash flows. The cash flow calculations are based on management’s best estimates, using appropriate assumptions and projections at the time. During the year ended January 31, 2002, Portal recorded charges of $199.2 million to reflect the impairment of goodwill and purchased developed technology related to Portal’s investments in Solution42 and BayGate.

	Three months ended July 31,						Six months ended July 31,
	2002			2001			2002			2001
Net loss as reported	$	(18,046	)	$	(274,595	)	$	(30,055	)	$	(321,417	)
Add back: Amortization of goodwill		—			15,276			—			30,624

Adjusted net loss	$	(18,046	)	$	(259,319	)	$	(30,055	)	$	(290,793	)

Basic and diluted net loss per share:
Net loss per share as reported	$	(0.10	)	$	(1.60	)	$	(0.17	)	$	(1.88	)
Add back: Amortization of goodwill per share		—			0.09			—			0.18

Adjusted net loss per share	$	(0.10	)	$	(1.51	)	$	(0.17	)	$	(1.70	)

	Three months ended July 31,						Six months ended July 31,
	2002			2001			2002			2001
Basic and diluted:
Net loss	$	(18,046	)	$	(274,595	)	$	(30,055	)	$	(321,417	)

Weighted-average shares of common stock outstanding		176,089			172,552			175,559			171,960
Less: Weighted-average shares subject to repurchase		(66	)		(1,062	)		(102	)		(1,371	)

Weighted-average shares used in computing basic and diluted net loss per share		176,023			171,490			175,457			170,589

Basic and diluted net loss per share	$	(0.10	)	$	(1.60	)	$	(0.17	)	$	(1.88	)

	Three months ended July 31,						Six months ended July 31,
	2002			2001			2002			2001
Net loss	$	(18,046	)	$	(274,595	)	$	(30,055	)	$	(321,417	)
Unrealized gain (loss) on marketable securities		(97	)		67			(400	)		121
Change in cumulative translation adjustment		794			(107	)		1,452			(206	)

Comprehensive loss	$	(17,349	)	$	(274,635	)	$	(29,003	)	$	(321,502	)

In July 2001, the Financial Accounting Standards Board (“FASB”) issued FAS 141 “Business Combinations” (“FAS 141”) and FAS 142 “Goodwill and Other Intangible Assets” (FAS 142). FAS 141 requires the purchase method of accounting for all business combinations and specifies criteria required to recognize and report intangible assets separate from goodwill. FAS 141 is effective for all business combinations accounted for using the purchase method that are completed after June 30, 2001 and for all business combinations initiated after June 30, 2001. The adoption of FAS 141 did not have a significant impact on our financial statements.

FAS 142 requires that goodwill and other intangible assets with indefinite useful lives be tested for impairment, at least annually, instead of being amortized. Intangible assets with finite useful lives will continue to be amortized over their estimated useful lives. Adoption of FAS 142 in its entirety is required for fiscal years beginning after December 15, 2001. Transitional provisions also require that upon adoption of FAS 142 in its entirety, intangible assets acquired in business combinations, accounted for using the purchase method and completed prior to July 1, 2001, must be classified using the criteria outlined in FAS 141. The adoption of FAS 142 did not have a significant impact on our financial statements.

In August 2001, the FASB issued FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144) which supersedes FAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (FAS 121). FAS 144 also supersedes certain aspects of the Accounting Principles Board Opinion Number 30 (APB 30), “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” as related to the reporting of the effects of a disposal of a segment of a business. FAS 144 will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period incurred rather than as of the measurement date as presently required by APB 30. Additionally, more dispositions may qualify as discontinued operations. Adoption of FAS 144 is required for fiscal years beginning after December 15, 2001. The adoption of FAS 144 did not have a significant impact on our financial statements.

In April 2002, the FASB issued FAS 145, “Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13 (FAS 13), and Technical Corrections” which requires the gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required. Additionally, FAS 145 amends FAS 13, requiring certain modifications to capital leases be treated as sale-leaseback transactions and modifies the accounting for subleases when the original lessee remains as a guarantor. Adoption of FAS 145 is required for fiscal years beginning after May 15, 2002. The adoption of FAS 145 will not have a significant impact on our financial statements.

In July 2002, the FASB issued FAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” which supersedes Emerging Issues Task Force (“EITF) Issue 94-3. FAS 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of FAS 146 is required for fiscal years beginning after December 31, 2002. We have not yet evaluated the effect FAS 146 will have on our financial statements.

In fiscal 2002, Portal’s Board of Directors approved two plans to reduce its cost structure. The plans were a combination of a reduction in workforce, consolidations of facilities and asset write-offs. As a result of the restructuring plan, Portal incurred charges of $71.0 million in fiscal 2002. The estimated costs of abandoning leased facilities, including estimated costs to sublease were determined through assessment of market information trend analyses.

In July 2002, Portal began implementation of a third plan to further reduce its cost structure in response to the continued global deferral of capital expenditures by telecommunication companies and the deterioration in the long term outlook for a telecommunications market recovery. The plan includes a reduction in workforce of approximately 250 employees, facilities reductions and asset write-offs. Portal recorded a restructuring charge of

As a result of the abandonment of various operating lease facilities as defined in the first two restructuring plans, Portal wrote-off the net book values of the related leasehold improvements. Portal continued to record depreciation expense, included in operating expenses, for the leasehold improvements until it no longer occupied the facilities or a portion of the facilities. Upon vacating these facilities, Portal wrote-off the net book value of these leasehold improvements. This charge impacted its Asia Pacific region.

As of July 31, 2002, the remaining restructuring expense reserves were $31.9 million. The remaining severance is expected to be paid out through the fourth quarter of fiscal 2003. Facility related costs are currently expected to be paid out through April 2011. Actual future cash requirements may differ materially from the accrual at July 31, 2002, particularly if actual sublease income is significantly different from current estimates or if the company is successful in its efforts to renegotiate its facility leases. A summary of restructuring activities along with the respective remaining reserves follows (in thousands; unaudited).

During the three and six months ended July 31, 2002, we recognized tax expense of $0.4 million and $1.5 million primarily as a result of foreign withholding taxes on revenue and tax on earnings generated from our foreign operations. Under Statement of Financial Accounting Standards No. 109 (FAS 109), deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if realization of such assets are more likely than not. Based on the weight of available evidence, Portal has provided a valuation allowance against its deferred tax assets. Portal will continue to evaluate the realizability of the deferred tax assets on a quarterly basis.

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

The cases have been consolidated into a single action, and a consolidated complaint was filed on April 19, 2002. These actions are part of the IPO Securities Litigation against over 300 issuers and nearly 40 underwriters alleging claims virtually identical to those alleged against the Company. The action seeks damages in an unspecified amount. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002.

Beginning with fiscal year 1997, substantially all of our revenues have come from the license of one product line, Infranet, and from related services. Revenues consist of Infranet license, consulting, training, support and maintenance fees. License revenues are comprised of perpetual or multiyear license fees, which are primarily derived from contracts with corporate customers and resellers. We believe that future license revenues will be generated from three sources:

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

We recognize revenue in accordance with current generally accepted accounting principles that have been prescribed for the software industry. Revenue recognition requirements are very complex and are affected by interpretations of the rules and an understanding of industry practices, both of which are subject to change. Our revenue recognition policy is significant because our revenue is a key component of our results of operations. We follow very specific and detailed guidelines in measuring revenue, several of which are discussed in Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements; however, certain judgments affect the application of our revenue recognition policy.

Our revenue recognition policy takes into consideration the creditworthiness of the customer in determining the probability of collection as a criterion for revenue recognition. The determination of creditworthiness requires the exercise of judgment, which affects our revenue recognition. If a customer is deemed to be not creditworthy, all revenue under arrangements with that customer is recognized upon receipt of cash. The creditworthiness of

customers is re-assessed on a regular basis and revenue is deferred until cash receipt, if appropriate. Additionally, Portal enters into contracts with payment terms that extend beyond our normal credit period, which is currently 60 days. For such transactions, it is our policy to recognize such revenue only when payments are due, provided that the customer is deemed to be creditworthy. As stated previously, if the customer is deemed not creditworthy, revenue is recognized upon receipt of cash.

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

During the fiscal year ended January 31, 2002 and the quarter ended July 31, 2002, we implemented plans to restructure the company that were a combination of a reduction in workforce, consolidation of facilities and the write-off of assets. The restructuring charges were based on actual and estimated costs incurred in connection with these restructuring plans. These estimates have been impacted by the rules governing the termination of employees, especially those in foreign countries. We have not recorded payments related to potential settlements, as these amounts are not reasonably estimable and probable. If, in the future, we were to agree upon additional severance payments, we would have to record additional restructuring charges in the period in which the settlement was determined to be reasonably estimable and probable. We have reduced the amount of the facilities restructuring charge by the estimated amount of sublease income. The assumptions we have made are based on the current market conditions in the various areas we have vacant space. These market conditions can fluctuate greatly due to such factors as changes in property occupancy rates and the rental prices charged for comparable properties. These changes could materially affect our accrual. If, in future periods, it is determined that we have over accrued for restructuring charges for the consolidation of facilities, the reversal of such over accrual would have a favorable impact on our financial statements in the period this was determined and would be recorded as a credit to restructuring charges. Conversely, if it is determined that our accrual is insufficient, an additional charge would have an unfavorable impact on our financial statements in the period this was determined.

	Three Months Ended July 31,						Percent Change		Six Months Ended July 31,						Percent Change
(in millions; unaudited)	2002			2001			Percent Change		2002			2001			Percent Change
License fees	$	9.4		$	23.7		(60	)%	$	22.1		$	44.5		(50	)%
Percentage of total revenues		33	%		53	%				37	%		50	%
Services		19.4			21.0		(8	)%		37.8			44.8		(16	)%
Percentage of total revenues		67	%		47	%				63	%		50	%

Total revenues	$	28.8		$	44.7		(36	)%	$	59.9		$	89.3		(33	)%

Total revenues decreased significantly in the three and six months ended July 31, 2002 from the comparable periods in 2001. License fees revenue decreased as a percentage of total revenues in the three and six months ended July 31, 2002 compared to the three and six months ended July 31, 2001 as a result of a continued general economic slowdown affecting the primary markets for our products and services, and in particular, capital spending by communications service providers. No customer accounted for more than 10% of revenues during the three and six months ended July 31, 2002. Two customers accounted for 28% of total revenues during the three months ended July 31, 2001. One customer accounted for 16% of total revenues for the six months ended July 31, 2001.

Services revenue decreased slightly in the three and six months ended July 31, 2002 from the comparable periods ended July 31, 2001. The decrease in services revenue is due to less consulting services and support revenue. Fewer new customer implementations have resulted from the general decline in license sales over the past year and driven the decrease in consulting revenue. Support revenue has declined as a result of customer terminations that have not been fully replaced by new customer contracts.

	Three Months Ended July 31,						Percent Change		Six Months Ended July 31,						Percent Change
(in millions; unaudited)	2002			2001			Percent Change		2002			2001			Percent Change
Geographical Revenues:
North America	$	11.6		$	22.9		(49	)%	$	22.8		$	46.6		(51	)%
Percentage of total revenues		40	%		51	%				38	%		52	%
International
Europe		14.2			15.1		(6	)%		26.4			27.9		(5	)%
Percentage of total revenues		49	%		34	%				44	%		31	%
Intercontinental		3.0			6.7		(55	)%		10.7			14.8		(28	)%
Percentage of total revenues		11	%		15	%				18	%		17	%

Total international		17.2			21.8		(21	)%		37.1			42.7		(13	)%
Percentage of total revenues		60	%		49	%				62	%		48	%

Total revenues	$	28.8		$	44.7		(36	)%	$	59.9		$	89.3		(33	)%

	Three Months Ended July 31,						Percent Change		Six Months Ended July 31,						Percent Change
(in millions; unaudited)	2002			2001			Percent Change		2002			2001			Percent Change
Cost of license fees	$	0.1		$	0.4		(75	)%	$	0.2		$	0.7		(71	)%
Percentage of total revenues		—			1	%				—			1	%
Cost of services		11.8			16.0		(26	)%		22.7			36.6		(38	)%
Percentage of total revenues		41	%		36	%				38	%		41	%
Amortization of purchased developed technology		0.7			1.2		(42	)%		1.3			2.1		(38	)%
Percentage of total revenues		2	%		3	%				2	%		2	%
Research and development		9.7			14.8		(34	)%		21.3			32.3		(34	)%
Percentage of total revenues		34	%		33	%				36	%		36	%
Sales and marketing		14.1			22.9		(38	)%		29.0			50.3		(42	)%
Percentage of total revenues		49	%		51	%				48	%		56	%
General and administrative		4.2			9.8		(57	)%		8.6			20.3		(58	)%
Percentage of total revenues		15	%		22	%				14	%		23	%

Cost of services primarily consists of maintenance, consulting and training expenses. The decrease in cost of services for the three and six months ended July 31, 2002 from the comparable periods ended July 31, 2001 is primarily due to a reduction in our services workforce as a result of a reduced number of professional consulting projects. Gross margin for services was approximately 39% for the three and six months ended July 31, 2002 compared to approximately 24% and 18% in the comparable periods ended July 31, 2001. The increase in gross margin for services was due to fewer employees in our service workforce.

In fiscal year 2001, we recorded an asset of $17.9 million for purchased developed technology as a result of acquiring Solution42 and BayGate. Purchased developed technology was being amortized, on a straight-line basis, over the estimated useful life of the respective assets of three to four years. During fiscal 2002, we recorded charges of $2.5 million and $2.2 million to reflect the impairment of purchased developed technology related to our investments in BayGate and Solution42, respectively. As of January 31, 2002, we no longer have purchased developed technology related to our investment in BayGate due to a combination of impairment charges and amortization during fiscal 2002. Amortization of purchased developed technology will continue to negatively impact our operating results in the future. Future amortization expense of the remaining purchased developed technology related to our investment in Solution42 is currently estimated to be $2.7 million in fiscal year 2003, $2.7 million in fiscal year 2004 and $1.9 million in fiscal year 2005.

During the quarter ended July 31, 2002, we reviewed our accruals to ascertain whether adjustments were needed as a result of the various measures included in our restructuring activities begun during the quarter. This review resulted in provisions and reversals of accruals with a net decrease of expenditures during the quarter of less than $1.4 million. These changes were due to cost cutting measures, settlement of disputed balances with various payees, finalization and settlement of commission payments and miscellaneous other amounts and did not impact any operating line item disproportionately.

Research and development expenses consist primarily of personnel and related costs for our development and technical support efforts. The decrease in research and development expenses for the three and six months ended July 31, 2002 from the comparable periods ended July 31, 2001 is primarily due to a reduction in Portal’s workforce and facilities costs as a result of cost reduction programs. Additionally, research and development expenses were reduced by approximately $0.9 million from customers in expense reimbursements during the quarter ended July 31, 2002. These types of expense reimbursements are not expected to recur in future quarters. Portal has not capitalized any software development costs to date.

Sales and marketing expenses consist of personnel and related costs for our direct sales force, marketing staff and marketing programs, including trade shows, advertising and costs associated with the recruitment of new and maintenance of existing strategic partnerships The decrease in sales and marketing expenses for the three and six months ended July 31, 2002 from the comparable periods ended July 31, 2001 is primarily due to a decrease in the number of sales and marketing personnel as a result of our restructuring plans initiated in fiscal 2002.

General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal and human resources as well as facilities and information system expenses not allocated to other departments. The decrease in general and administrative expenses for the three and six months ended July 31, 2002 from the comparable periods ended July 31, 2001 was primarily due to a lower rate of increase in bad debt reserves and a reduction in general and administrative personnel as a result of our restructuring plans initiated in fiscal 2002.

We recorded deferred stock compensation of approximately $16.8 million in fiscal year 1999 in connection with stock options and restricted stock issued in and prior to 1999 and $0.2 million in fiscal year 2002, in connection with the acquisition of BayGate. The deferred stock compensation reflects the difference between the exercise prices of options granted to acquire certain shares of common stock and the deemed fair value for financial reporting purposes

Long-lived assets and intangibles, including goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. On an annual basis, the estimated future net cash flows associated with the asset are compared to the asset’s carrying amount to determine if impairment has occurred. If such assets were deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets is recognized. If quoted market prices for the assets are not available, the fair value is calculated using the present value of estimated expected future net cash flows. The cash flow calculations are based on management’s best estimates, using appropriate assumptions and projections at the time. During the quarter ended July 31, 2001, Portal recorded a charge of $193.4 million to reflect the impairment of goodwill related to Portal’s investment in Solution42. Goodwill was further reduced in fiscal 2002 and as of January 31, 2002 there was no remaining balance in goodwill.

In fiscal 2002, Portal’s Board of Directors approved two plans to reduce its cost structure. The plans were a combination of a reduction in workforce, consolidations of facilities and asset write-offs. As a result of the first restructuring plan, Portal incurred charges of $41.3 million in the period ended July 31, 2001. Portal incurred further restructuring charges related to its second plan in the third and fourth quarters of fiscal 2002. The estimated costs of abandoning leased facilities, including estimated costs to sublease were determined through assessment of market information trend analyses.

In July 2002, Portal’s Board of Directors approved and Portal began implementation of a third plan to further reduce its cost structure in response to the continued global deferral of capital expenditures by telecommunication companies and the deterioration in the long term outlook for a telecommunications market recovery. The plan includes a reduction in workforce of approximately 250 employees, facilities reductions and asset write-offs. Portal recorded a restructuring charge of $6.1 million for the quarter ended July 31, 2002 and will incur additional restructuring charges in the third quarter of fiscal 2003. The restructuring charge included approximately $5.2 million of severance related amounts and $0.6 million in asset write-offs. We plan to continue to make changes in our business and strategy to address changes in our target markets and the overall economy and to implement additional cost reduction and efficiency programs. Such changes are likely to result in further restructuring charges in the future.

We invest in equity instruments of privately held companies for business and strategic purposes. These investments are included in other assets, in the amount of $1.5 million, net of allowance of $0.5 million, as of July 31, 2002 and 2001. The investments are accounted for using the cost method as we do not have the ability to exercise significant influence over the operations of these companies and our investment is less than 20% of the outstanding voting shares in each entity.

We review the net realizable value of the non-marketable investments on a quarterly basis, including reviewing the latest financial information available for signs of financial deterioration and recent press releases relating to the companies. We also consider the impact of new stockholder preferences, if any, upon our investment position. If we consider the net realizable value of our investments to be less than historical cost, then we determine whether a decline in fair value below the cost basis is “other than temporary.” If the decline in fair value is judged to be other than temporary, we will write down the cost basis of the individual security to fair value as a new cost basis and the amount of the write-down shall be included in earnings and accounted for as a realized loss. The new cost basis shall not be changed for subsequent recoveries in fair value. During the quarter ended July 31, 2001, we recorded a write-down of $4.0 million related to other than temporary impairment of investments in privately held companies.

Our taxes totaled $0.4 million and $1.5 million in the three and six months ended July 31, 2002, primarily as a result of foreign withholding taxes on revenue and tax on earnings generated from our foreign operations. Although the Company recorded a net loss of $18.0 million and $30.1 million for the three and six months ended July 31, 2002, the foreign operations were profitable for tax purposes primarily due to the intercompany charge back arrangements necessary under the local tax laws.

We used cash totaling $42.4 million in operations during the six months ended July 31, 2002, a decrease of $7.6 million from the $50.0 million used during the six months ended July 31, 2001. Net cash used in operations during the six months ended July 31, 2002 was primarily comprised of a net loss of $30.1 million, a decrease in other accrued liabilities of $12.1 million and a decrease in deferred revenue of $11.0 million. Adjustments made for non-cash expenses, such as depreciation, amortization and amortization of deferred stock compensation, purchased developed technology and restructuring charges amounted to $12.8 million for the six months ended July 31, 2002.

The total future cash outlay, for the restructuring plans, is currently estimated to be approximately $30.9 million that includes severance related costs as well as lease liabilities related to the consolidation of facilities and is expected to be funded by available cash. Of the $30.9 million, lease payments for impacted facilities, net of expected sublease income, are expected to be $26.1 million over the next nine years. Actual future cash requirements may differ materially from the accrual at July 31, 2002, particularly if actual sublease income is significantly different from current estimates or if the company is successful in its efforts to renegotiate its facility leases. We will re-assess the total future cash outlay for the restructuring plans in the third quarter of fiscal 2003 as the third restructuring plan is further defined and as a result could be required to take additional restructuring charges related to our facilities. The foregoing constitutes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements for the reasons described below under the caption “Risks Associated With Portal’s Business And Future Operating Results.”

Net cash provided by investing activities was $21.5 million for the six months ended July 31, 2002, a decrease of $6.1 million from the $27.7 million provided in the six months ended July 31, 2001. Net cash provided by investing activities in the six months ended July 31, 2002 was primarily comprised of the maturities of short-term investments. During the six months ended July 31, 2002, we also purchased computer equipment and software, made leasehold improvements and purchased other capital equipment amounting to approximately $2.7 million, primarily to support our ongoing operations and information systems.

In November 2000, we acquired Solution42. The liabilities assumed as part of the acquisition include four mortgages for two facilities located in Germany. Two of the mortgages accrue interest at 4.45% per annum. Principal and interest are due in December 2010 and June 2011 on these two mortgages. As of July 31, 2002, the balances due on these loans were $0.6 million each. The other two mortgages accrue interest at 5.10% and 4.88% per annum. Principal and interest payments are made on a monthly basis. These two mortgages are due in October 2015 and November 2024. As of July 31, 2002, the balances due were $0.2 million each.

In the normal course of business, we enter into leases for new or expanded facilities in both domestic and international locations. These leases are for terms expiring September 2002 through March 2021. In connection with our facility leases, we issued five letters of credit in lieu of a security deposit for the facilities (see Note 1 in Notes to Unaudited Condensed Consolidated Financial Statements). Under all our facilities lease agreements, net of sublease income of $9.1 million, we are obligated to make payments of approximately $13.6 million, $13.2 million, $13.3 million, $13.3 million and $13.0 million in the years ending January 31, 2003, 2004, 2005, 2006 and 2007, respectively and a total of $75.3 million thereafter until expiration of the leases.

Due to the restructuring activities that occurred during fiscal 2002, several facilities were vacated or are under utilized. Some of these facilities have been subleased. We are also attempting to sublease additional surplus facilities, in various locations, comprising a total of approximately 180,000 square feet. We are currently in the process of vacating additional facilities and attempting to negotiate the cancellations of leases or rent reductions wherever possible.

Our capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing, selling and supporting our products, our ability to sublease surplus facilities and other factors. Our currently planned expense levels for the third quarter of fiscal year 2003 will exceed the revenues we generated in the second quarter of fiscal year 2003.Although we believe that our current cash balances and cash generated from operations will be sufficient to fund our operations for at least the next 12 months, we may require additional financing within this time frame. We may seek financing at any time that we determine market conditions are favorable. Additional funding, if needed, may cause dilution to our stockholders or the incurrence of debt and such funding may not be available on terms acceptable to us, or at all.

Our future operating results may vary substantially from period to period. The price of our common stock will fluctuate in the future and an investment in our common stock is subject to a variety of risks, including but not limited to the specific risks identified below. Inevitably, some investors in our securities will experience gains while others will experience losses depending on the prices at which they purchase and sell securities. Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this report.

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

Our results of operations for the three and six months ended July 31, 2002 contained in this report are not necessarily indicative of results for our fiscal year ending January 31, 2003 or any other future period. In late 1993, we changed our strategic focus from operating as an Internet service provider to developing customer management and billing software for Internet-based businesses. Therefore, we have a relatively brief operating history as a provider of customer management and billing software and had no meaningful license revenue until 1996. Accordingly, we will experience the risks and difficulties frequently encountered by companies in new and rapidly evolving markets, including those discussed in this report. Our business strategy may not prove successful and we may not successfully address these risks.

We primarily market our products and services to providers of communications and content services. The substantial number of business failures and the decline in the market value of “dot-com” and other technology companies in the past few years has made it more difficult for emerging communication and electronic content companies to obtain financing for their operations. Moreover, the market value, financial results and prospects of many large and established companies, including many large telecommunications companies, have also declined or degraded significantly. Emerging growth and established communications and content companies have continued to reduce or defer their purchases of software and related products and the introduction of many new communication services has been delayed or cancelled. Cancellation of existing or planned services also adversely impact potential professional service, maintenance and support revenues. Any general decrease by our customers and potential customers in their rate of software and network investments results in a significant decrease in our revenues and operating income. These trends in technology and software spending dramatically hurt our business in fiscal year 2002 and will continue to seriously harm our business until conditions improve.

The current economic and capital spending downturn affecting our markets has made it increasingly difficult for us to collect accounts receivable and increased the time required to collect them. A number of customers have ceased to operate or have become insolvent. Failure to collect accounts receivable in a timely manner has in the past and may continue to result in increased write-offs, higher accounts receivable reserves and lower cash reserves that would adversely affect our financial results and available cash resources.

In order to be profitable, we must increase our revenues or reduce our expenses. We may not be able to increase or even maintain our revenues and we may not achieve sufficient revenues for profitability in any future period. We incurred net losses of approximately $395.5 million, $2.3 million and $7.6 million for fiscal year 2002, 2001 and 2000, respectively. We expect to experience a net loss for the third quarter of fiscal year 2003 and fiscal 2003. We recorded substantial restructuring charges in fiscal year 2002 and in the second quarter ended July 31, 2002 in connection with a reduction in force and other expense reduction efforts initiated during the year.

Our projected expenses for the third quarter of fiscal 2003 are targeted to exceed the amount of our anticipated third quarter revenues. As a result, if we do not generate increased revenues from sales of our products or reduce expenses, we will not be profitable. The decrease in capital expenditures by communications companies as well as the general economic slowdown has adversely affected our revenues and will make it difficult to increase revenues until spending in our target markets increases. We also expect that we will face increased competition that may make it more difficult to increase our revenues. Even if we are able to increase revenues, we may experience price competition that would lower our gross margins and our profitability. Another factor that would lower our gross margins is any increase in the percentage of our revenues that is derived from indirect channels and from services, both of which have lower margins. We have also undertaken a number of cost reduction efforts. Failure to achieve the desired reductions in our expenses will further increase our losses. We cannot be certain that we will again achieve operating or net profitability on a quarterly or annual basis.

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. For example, we achieved profitability in each of the first three quarters of fiscal year 2001 and reported net losses in the last seven quarters. In future quarters, our operating results may be below the expectations of one or more public market analysts and investors and the price of our common stock may fall. Failure by technology companies to meet or exceed analyst expectations or any resulting changes in analyst recommendations or ratings frequently results in substantial decreases in the market value of the stock of such companies. For example, the market value of our stock decreased significantly after the release of our financial results for the quarters ended October 31, 2000 and April 30, 2001. Factors that could cause quarterly fluctuations include:

relatively small number of customers. As a result, the cancellation or deferral of even a small number of licenses of Infranet would reduce our revenues, which would adversely affect our quarterly financial performance. Also, we have often booked a large amount of our sales in the last month of the quarter and often in the last week of that month. Accordingly, delays in the closing of sales near the end of a quarter could cause quarterly revenue to fall substantially short of anticipated levels. Furthermore, delays in the closing of license transactions may result in a consequential delay or loss of services revenues relating to the projects for which the software would be licensed.

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

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

To date, the sales cycle for Infranet generally has been three to nine months or more. Sales cycles have recently lengthened as the competitive environment has become more intense and price discounting has further delayed customer decision processes, as there is less business available from telecommunications companies. The long sales and implementation cycles for Infranet may cause license revenues and operating results to vary significantly from period to period. Furthermore, the revenues derived from a sale may not be recognized immediately and could be spread over an extended period. Along with systems integrators and our other distribution partners, we spend significant time educating and providing information to our prospective customers regarding the use and benefits of Infranet. Even after purchase, our customers tend to deploy Infranet slowly and deliberately, depending on the specific technical capabilities of the customer, the size of the deployment, the complexity of the customer’s network environment and the quantity of hardware and the degree of hardware configuration necessary to deploy Infranet.

Our future growth depends on the commercial success of our Infranet family of products. Substantially all of our license fees revenues are derived from our Infranet product family. Our business will be harmed if our target customers do not adopt and purchase Infranet. Prospective customers may base their purchasing decisions based on a vendor’s ability to support their customer management and billing needs for both their new services and their other existing service offerings, such as fixed wire or mobile voice telephony or cable television. Our ability to address these current and future service requirements with our current version of Infranet and planned future enhancements

may affect the market acceptance of Infranet by prospective customers who desire an integrated customer management and billing solution for their different services. Our future financial performance will also depend on the successful development, introduction and customer acceptance of new and enhanced versions of our products. We are not certain that our target customers will widely adopt and deploy Infranet as their customer management and billing solution. In the future we may not be successful in marketing Infranet or any new or enhanced products or services. Our future revenues will also depend on our customers licensing software for additional applications or for additional subscribers. Their failure to do so could harm our business.

Our customers deploy Infranet across a variety of computer hardware platforms and integrate it with a number of legacy systems, third-party software applications and programming tools. Customers frequently use professional services from Portal, third party system integrators or their own internal information technology organizations, or a combination thereof. Our ability to generate and increase our professional services revenues will depend in large part on the number of new license transactions and on our ability to gain a significant portion of the services associated with the implementation of Infranet-related projects. We are not certain that our target customers will widely adopt and use our professional services. In the future we may not be successful in marketing our services our failure to do so could harm our business.

A substantial portion of our license and services revenues in any given quarter has been, and is expected to continue to be, generated from a limited number of customers with large financial commitments. For example, America Online accounted for more than 10% of our total revenues during each of the quarters of fiscal year 2002. As a result, if a large contract is cancelled or deferred or an anticipated contract does not materialize, our business would be harmed. Our total revenues could also be adversely affected if revenues from a significant customer in one period are not replaced with revenues from that customer or other customers in subsequent periods. For example, America Online did not account for 10% or more of our total revenues in the first two quarters of fiscal year 2003 because they have completed payment of the license fees for their initial order. The communication and content industries we have targeted are consolidating, which could reduce the number of potential customers available to us. In addition, several large telecommunications companies have announced decreases in their anticipated capital spending, which could have the effect of reducing future orders of our products. Moreover, many of our customers may have purchased sufficient quantities of our products to satisfy their current or anticipated requirements. For all of these reasons our business could suffer in the future.

We must periodically change our office facilities in various locations as the number of existing and projected employees changes for those locations or as existing leases expire. Securing and building out facilities takes significant lead-time. Furthermore, because of the need to satisfy projected future expansion, the amount of space we have leased is generally more than the amount currently required. Significant office leases have terms of between 5 and 20 years. As a result, we frequently sublease the portions of leased facilities that we have leased to meet our future expansion plans but do not currently need. In addition, our reductions in our workforce undertaken over the past year have substantially reduced our facilities requirements in several locations. As a result, we are attempting to sublease the facilities that we have previously leased but do not currently need or to negotiate reductions in our rent obligations relating to those facilities or cancellations of the applicable leases. Portal has leased approximately 73,120 square feet and 38,140 square feet for its regional headquarters facilities in Herndon, Virginia and Slough, United Kingdom, respectively, for terms of ten and twenty years, respectively. The amounts leased exceed our current requirements and we plan to sublease a majority of the facilities for a substantial portion, if not

the entire balance, of the lease term. Moreover, we also plan to sublease a facility in Cupertino that Portal vacated earlier this year and that comprises approximately 93,200 square feet and is leased through December 2010. There is currently a large amount of vacant commercial real estate in the San Francisco Bay Area. Moreover, currently prevailing rental rates in many locations are lower than those that we are obligated to pay under the leases. We may therefore encounter significant difficulties or delays in subleasing such surplus space and may not be able to sublease it for rents equal to those that we are obligated to pay. In connection with our restructuring plan adopted in July 2002 we plan to vacate additional facilities in the United States and in other locations.

To the extent that we are unable to renegotiate the terms or cancel the applicable leases or to sublease this and other surplus space at an amount equal to our rent obligations for that space or to the extent sublessees fail to perform their obligations to pay rent, we could incur greater operating expenses than we initially planned or included within accrued restructuring charges. Such increases in operating expenses in a period could cause us to exceed our planned expense levels and adversely affect our financial results for that period. Cancellation of leases will likely result in use of significant amounts of cash and additional restructuring charges. Furthermore, inability to sublease such space may adversely affect our planned uses of cash and our capital resources. Moreover, we have reduced the amount of the facilities restructuring charges we accrued in fiscal year 2002 by the estimated amount of sublease income. The assumptions we have made are based on the current market conditions in the various areas we have vacant space. These market conditions can fluctuate greatly, thus causing our accrual to be inaccurate. If, in future periods, it is determined that we have over accrued for restructuring charges as related to the consolidation of facilities, the reversal of such over accrual would have a favorable impact on our financial statements in the period this was determined. Conversely, if it is determined that our accrual is insufficient, an additional charge would have an unfavorable impact on our financial statements in the period this was determined.

Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning and management process. We have experienced rapid changes in our number of employees in recent years. On July 31, 2002, we had 705 employees compared to 1,168 employees on July 31, 2001 and 1,515 employees on January 31, 2001. These changes have placed, and our anticipated future operations will continue to place, a significant strain on our management resources and our ability to train and allocate sufficient personnel resources to achieve our many objectives. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures and will need to continue to recruit, train and manage our worldwide work force. We expect that we will have to change our facilities in certain locations and we may face difficulties and significant expenses identifying and moving into suitable office space and subleasing or assigning any surplus space.

In addition, reduction in the number of employees can result in significant severance, administrative and legal expenses. Reductions in the number of personnel may also adversely affect, or delay, various sales, marketing and product development programs and activities. This may increase the potential likelihood of other risks, such as delays in product introductions and reduce the effectiveness of general administrative services. Our business will suffer dramatically if we fail to effectively manage changes in the size and scope of our operations.

Our financial success and our ability to increase revenues in the future depend considerably upon the productivity of our direct sales force that has historically generated a majority of our license revenues. This productivity will depend to a large degree on our success in recruiting, training and retaining qualified direct salespeople. There is strong competition for direct sales personnel with the skills and expertise necessary to sell our products. Our business will be harmed if we fail to hire or retain qualified sales personnel, or if newly hired salespeople fail to develop the necessary sales skills or develop these skills more slowly than we anticipate.

We have entered into relationships with third-party systems integrators, as well as with hardware platform and software applications developers and service providers. We have derived, and anticipate that we will continue to derive, a significant portion of our market opportunities and revenues from these relationships. We could lose sales opportunities if we fail to work effectively with these parties or fail to grow our base of market and platform

partners. We may also be at a serious competitive disadvantage if we fail to maintain and enhance these indirect sales channels. Many of these partners also work with competing software companies and our success will depend on their willingness and ability to devote sufficient resources and efforts to marketing and resale of our products versus the products of others. We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms, or at all. Our agreements with these parties typically are in the form of nonexclusive referral fee or reseller agreements that are effective for a limited period of time and may be renewed only by mutual agreement of both parties. Therefore, there is no guarantee that any single party will continue to market our products. If these relationships fail, we will have to devote substantially more resources to the distribution, sales and marketing, implementation and support of our products than we would otherwise which would substantially increase our costs, and our efforts may not be as effective as those of our partners, either of which would harm our business.

We currently have offices in a number of foreign locations including Australia, Canada, China, France, Germany, Italy, Japan, Malaysia, Mexico, Poland, Singapore, Spain, South Korea, Sweden, Taiwan and the United Kingdom and may establish additional facilities in other parts of the world. Expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. We cannot be certain that our investments in establishing facilities in other countries will produce desired levels of revenue. In addition, we have sold Infranet internationally for only a few years and we have limited experience in developing localized versions of Infranet and marketing and distributing them internationally.

To date we have typically denominated nearly all of our international license revenues in U.S. dollars. Therefore, a strengthening of the dollar versus other currencies could make our products less competitive in foreign markets or collection of receivables more difficult. Because our foreign denominated revenues have been minimal, we have not engaged in currency hedging activities. Commencing in fiscal year 2003, we plan to denominate a larger number of international transactions in euros and certain other currencies (see also “Impact of Foreign Currency Rate Changes” in Item 3 below). In such event, we will face greater exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial position and results of operations. In order to reduce the effect of foreign currency fluctuations, we may hedge our exposure on certain transactional balances that are denominated in

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

We face possible claims and higher costs as a result of the complexity of our products and the potential for undetected errors. Due to the “mission critical” nature of Infranet, undetected errors are of particular concern. Complex software, such as ours, always contains undetected errors. The implementation of Infranet, which we accomplish through our services division and with our partners, typically involves working with sophisticated software, computing and communications systems. If we experience difficulties with an implementation or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project and to provide these services at reduced or no cost. If our software contains significant undetected errors or we fail to meet our customers’ expectations or project milestones in a timely manner we could experience:

incidental damages. In addition, our license agreements generally cap the amounts recoverable for damages to the amounts paid by the licensee to us for the product or service giving rise to the damages. However, these contractual limitations on liability may not be enforceable, in certain jurisdictions and under certain circumstances, and we may be subject to claims based on errors in our software or mistakes in performing our services including claims relating to damages to our customers’ internal systems. A product liability claim, whether or not successful, could harm our business by increasing our costs, damaging our reputation and distracting our management.

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

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

We compete in markets that are intensely competitive and rapidly changing. We face competition from providers of customer management and billing software, such as Amdocs Ltd., Convergys Corporation, CSG Systems International, Inc. and ADC Telecommunications Inc. We also compete with systems integrators and with internal information technology departments of larger communications providers. Many of our current and future competitors have significantly more personnel and greater financial, technical, marketing and other resources than us. We are aware of other companies that are focusing significant resources on developing and marketing products and services that will compete with us. Furthermore, in recent years a number of our competitors have been acquired by companies larger than us who have sought to expand their CM&B solutions capabilities. The failure of Portal to develop and market products and services that compete successfully with those of other suppliers in the market would harm our business. Portal anticipates that the market for its products and services will remain intensely competitive.

Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. Also, current and potential competitors have greater name recognition and more extensive customer bases that they can use to compete more effectively. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which could harm our business. Intense competition has recently been exemplified by deep price discounting by our competitors which has resulted in a lengthening of our sales cycles and may threaten our ability to close forecasted business.

We sell our products to organizations providing new and emerging communications and content services provided over a variety of communication networks including Internet, fixed line, wireless and satellite networks. Consequently, our future revenues and profits, if any, substantially depend upon the market acceptance and expanded use of services provided through the Internet and other communication methods. A broad base of regular users of such services may not develop and the market may not accept recently introduced services and products that rely upon the adoption of such services, such as Infranet.

Many of the companies that are marketing broadband access to the Internet or are offering new services over the Internet, wireless networks and other communication mediums are relatively new businesses. In the past several years, many so called “dot.com” companies have failed and financing for emerging Internet businesses has been increasingly more difficult to obtain. We believe that the decline experienced in our North American operations since the third quarter of fiscal year 2001 is attributable in part to the difficulty experienced by several potential customers in receiving financing and a consequential impact on their decisions to make investments in customer management and billing products and services. Moreover, the market value, financial results and prospects of many large and established companies, including many large telecommunications companies, have also declined or degraded significantly. Emerging growth and established communications companies recently have been reducing

or deferring their purchases of software and related products and the introduction of many new communication services has been delayed or cancelled. This trend in technology and software spending has hurt and will continue to seriously harm our business until conditions improve. Any general decrease by our customers and potential customers in their rate of software and network investments would result in a significant decrease in our revenues and operating income. To the extent that our customers and potential customers fail to achieve sustained profitability or obtain adequate funding, we could experience greater risk and difficulty collecting receivables from those customers that do purchase our products and services which would in turn harm our business and financial results. The outlook for a recovery of the telecommunications market has recently deteriorated such that a general recovery is now not expected for at least 18-24 months.

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

Despite overall reductions in our total headcount, we will continue to hire sales, support, marketing, administrative and research and development personnel in fiscal year 2003 and beyond. Competition for these individuals is intense and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Our business cannot succeed if we cannot attract qualified personnel. Our future success also depends upon the continued service of our executive officers and other key sales, marketing and support personnel in general.

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

class actions were also filed in July and August 2001 based on essentially the same facts and allegations. Specifically, the complaints allege the underwriters charged certain of their customers fees in excess of those disclosed in the prospectus and engaged in certain allegedly improper activities in connection with the distribution of the IPO shares. The complaint was subsequently amended to allege similar claims with respect our secondary public offering in September 1999.

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

During the fiscal year ended January 31, 2002 and the quarter ended July 31, 2002 we incurred charges of $71.0 million and $6.1 million, respectively, in connection with restructuring plans implemented to reduce our cost structure. These restructuring plans were implemented in response to the continued global deferral of capital expenditures by telecommunications companies, as well as the general downturn in the economy. We will incur additional restructuring charges in the quarter ending October 31, 2002. If the deterioration in the telecommunications and Internet industries continues and capital expenditures continue to be deferred or our business otherwise continues to suffer, we may implement additional restructuring plans to further reduce our cost structure and incur additional restructuring charges. Any additional restructuring charges would have a material adverse effect on our financial results.

During the fiscal year ended January 31, 2002, we recorded charges of $199.2 million in connection with the impairment of goodwill and developed technology related to our acquisitions of Solution42 and BayGate. During the fiscal 2002, we identified indications of impairment of the intangible assets arising from these acquisitions, including the deterioration of the business climate and the prospects and our intentions for Solution42 and BayGate as wholly-owned subsidiaries. If the indications of impairment continue, we could be forced to write-down some or all of the $7.3 million of remaining developed technology from the Solution42 acquisition and, potentially, goodwill and developed technology from future acquisitions, which would have a material adverse effect on our financial condition and results of operations.

We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have adopted a stockholder rights plan that would cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. This could prevent us from being acquired or reduce the price paid by any potential acquirer. In addition, our certificate of incorporation grants the board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without stockholder action. Although we have no present intention to issue shares of preferred stock, such an issuance could have the effect of making it more difficult and less attractive for a third party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our common stock that could have a material adverse effect on the market value of our common stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. This section provides that except in certain limited circumstances a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder. This provision could have the effect of delaying or preventing a change of control of Portal.

We received a letter dated August 6, 2002, from the staff of the Nasdaq Stock Market, or Nasdaq, which notified us that the bid price for our common stock had been below $1.00 per share for a period of thirty consecutive days. Nasdaq advised us that we would be given a period of ninety days within which to comply with the minimum bid price requirement in order to maintain the listing of our common stock on the Nasdaq National Market. If we are unable to demonstrate compliance with the minimum bid requirement for ten consecutive days on or before November 4, 2002, Nasdaq will provide us with written notification that our common stock will be delisted. At that time we may appeal the staff’s decision to a Nasdaq Listing Qualification Panel. In the alternative, we may apply to transfer our securities to the Nasdaq SmallCap Market. If we submit a transfer application and pay the applicable listing fees by November 4, 20002, initiation of de-listing proceedings will be stayed pending Nasdaq’s review of our transfer application. If the transfer application is approved, we will have a 180 day grace period ending on February 3, 2003 from meeting the Nasdaq SmallCap listing requirements and will be eligible for an additional 180 day grace period if we meet the initial listing requirements for the Nasdaq SmallCap Market. We intend to pursue all available options to meet the Nasdaq listing requirements. If our common stock is delisted from the Nasdaq National Market, sales of our common stock would likely be conducted on the SmallCap Market or in the over-the-counter market or potentially in regional exchanges. This may have a negative impact on the liquidity and price of our common stock and investors may find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, our common stock. See Item 5 below.

We have made investments in several companies and may make investments in others in the future. If at any time our investment in a company were deemed impaired, we may be required to reduce the book value of that investment, which would in turn reduce our earnings in that period. Such investments could be deemed impaired, for example, if the financial condition of those companies deteriorates. As of July 31, 2002 and 2001, respectively, we had approximately $1.5 million (total investment of $2.0 million net of a valuation allowance of $0.5 million) invested in other companies. During fiscal 2002, we recorded a write-down of $4.0 million related to other than temporary impairment of these investments. Because the financial condition of these companies is outside our control, we cannot predict if, or when, the value of such investments would be required to be reduced.

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

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

The following table presents the amounts of cash equivalents and investments that are subject to market risk and the weighted average interest rates, by year of expected maturity for Portals’ investment portfolios as of July 31, 2002. This table does not include cash because cash is not subject to market risk. It also does not include long-term investments as they are held to maturity. Therefore, near-term changes in market rates will not result in losses. (In thousands, except weighted average yields):

	Maturing Within 1 Year			Maturing Within 2 Years			Thereafter		Total
Cash Equivalents	$	4,603		$	—		$	—	$	4,603
Weighted Average Yield		1.76	%		—			—		1.76	%
Investments		29,309			23,190			—		52,499
Weighted Average Yield		2.63	%		2.74	%		—		2.68	%

Total Portfolio	$	33,912		$	23,190		$	—	$	57,102

Weighted Average Yield		2.54	%		2.74	%		—		2.62	%

During fiscal year 2002, most local currencies of our international subsidiaries weakened against the U.S. dollar. Because we translate foreign currencies into U.S. dollars for reporting purposes, currency fluctuations can have an impact, though generally immaterial, on our results. We believe that our exposure to currency exchange fluctuation risk has been insignificant primarily due to the denomination of nearly all of our sales transactions in U.S. dollars. To date, we have not engaged in foreign currency hedging.

Our common stock must gain and then maintain a minimum bid price of $1.00 per share in order to remain eligible for continued listing on the Nasdaq National Market. We received a letter dated August 6, 2002, from the staff of Nasdaq which notified us that the bid price for our common stock had been below $1.00 per share for a period of thirty consecutive days. Nasdaq advised us that we would be given a period of ninety days within which to comply with the minimum bid price requirement for at least ten consecutive trading days in order to maintain listing on the Nasdaq National Market.

If we are unable to comply with the minimum bid requirement on or before November 4, 2002, Nasdaq will provide us with written notification that our common stock will be delisted. At that time we may appeal Nasdaq’s decision to a Nasdaq Listing Qualification Panel. In the alternative, we may apply to transfer our securities to the Nasdaq SmallCap Market. If we submit a transfer application and pay the applicable listing fees by November 4, 2002, initiation of delisting proceedings will be stayed pending Nasdaq’s review of our transfer application. If the transfer application is approved, we will have a 180 day grace period ending on February 3, 2003 from meeting the Nasdaq SmallCap listing requirements and will be eligible for an additional 180 day grace period if we meet the initial listing requirements for the Nasdaq SmallCap Market. We intend to pursue all available options to meet the Nasdaq listing requirements.

We believe that maintaining the listing of our common stock on the Nasdaq National Market is in our best interest and in the best interest of our stockholders. Inclusion in the Nasdaq National Market increases liquidity and may potentially minimize the spread between the “bid” and “asked” prices quoted by market makers. Further, a Nasdaq National Market listing may enhance our access to capital and increase our flexibility in responding to anticipated capital requirements. We believe that prospective investors will view an investment in our common stock more favorably if our shares qualify for listing on the Nasdaq National Market.

We also believe that the current per share price level of our common stock has reduced the effective marketability of our shares of common stock because of the reluctance of many leading brokerage firms to recommend low-priced stock to their clients. Certain investors view low-priced stock as speculative and unattractive. In addition, a variety of brokerage house policies and practices tend to discourage individual brokers within those firms from dealing in low-priced stock. Such policies and practices pertain to the payment of brokers commissions and to time-consuming procedures that make the handling of low-priced stocks unattractive to brokers from an economic standpoint.

In addition, because brokerage commissions on low-priced stock generally represent a higher percentage of the stock price than commissions on higher-priced stock, the current share price of the common stock can result in individual stockholders paying transaction costs (commissions, markups or markdowns) that represent a higher percentage of their total share value than would be the case if the share price were substantially higher. This factor also may limit the willingness of institutions to purchase our common stock at its current low share price.

In addition, if our common stock is not listed on the Nasdaq National Market and the trading price of our common stock were to remain below $1.00 per share, trading in our common stock would also be subject to certain rules promulgated under the Exchange Act which require additional disclosures by broker-dealers in connection with any trades involving a stock defined as a “penny stock” (generally, a non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). In such event, the additional burdens imposed upon broker-dealers to effect transactions in our common stock could further limit the market liquidity of our common stock and the ability of investors to trade our common stock.

If our common stock is delisted from the Nasdaq National Market, we may not qualify for listing on the Nasdaq SmallCap Market. In such an event, sales of our common stock would likely be conducted only in the over-the-counter market or potentially in regional exchanges. This may have a negative impact on the liquidity and price of our common stock and investors may find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, our common stock. Furthermore, if our common stock is not listed on the Nasdaq

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

		Page

Part I: Financial Information

Item 1: Financial Statements

	Condensed Consolidated Balance Sheets at July 31, 2002 and January 31, 2002	3

	Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2002 and 2001	4

	Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2002 and 2001	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3: Quantitative and Qualitative Disclosures About Market Risk		36

Part II: Other Information

Item 1: Legal Proceedings		37

Item 5: Requirements for Continued Listing on the NASDAQ National Market		37

Item 6: Exhibits and Reports on Form 8-K		39

Signature		40

	July 31, 2002		January 31, 2002
	(unaudited)
Cash and cash equivalents:
Cash	$	13,371	$	7,895
Money market funds		4,403		16,435
U.S. Government securities		200		11,988

	$	17,974	$	36,318

				Gross Unrealized
	Cost			Gain		Loss		Fair Value
Corporate notes	$	12,396		$	133	$	—	$	12,529
U.S. Government securities		39,887			83		—		39,970
Restricted investments		(2,016	)		—		—		(2,016	)

	$	50,267		$	216	$	—	$	50,483

				Gross Unrealized
	Cost			Gain		Loss		Fair Value
Corporate notes	$	39,086		$	583	$	—	$	39,669
U.S. Government securities		35,485			33		—		35,518
Commercial paper		1,993			1		—		1,994
Restricted investments		(1,718	)		—		—		(1,718	)

	$	74,846		$	617	$	—	$	75,463

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

	July 31,			January 31,
	2002			2002
	(unaudited)
Due within one year	$	29,309		$	59,512
Due within two years		23,190			17,669
Restricted short-term investments		(2,016	)		(1,718	)

	$	50,483		$	75,463

	Balance remaining January 31, 2002	Restructuring Charges	Cash			Non-cash			Balance remaining July 31, 2002
Severance	$ 1,950	$5,191	$	(3,140	)	$	—		$ 4,001
Facilities	29,976	—		(3,859	)		—		26,117
Asset write-offs	2,381	562		—			(1,905	)	1,038
Other	674	300		(150	)		(61	)	763

	$34,981	$6,053	$	(7,149	)	$	(1,966	)	$31,919

	Three Months Ended July 31,		Six Months Ended July 31,
	2002	2001	2002	2001
(in thousands; unaudited)
Cost of services	16	86	33	177
Research and development	33	199	71	380
Sales and marketing	28	156	59	319
General and administrative	22	121	46	248

Total	99	562	209	1,124

	Total		Less than 1 year		1-3 years		4-5 years		Over 5 years
(in thousands; unaudited):
Long-term notes payable	$	2,410	$	72	$	192	$	192	$	1,954
Capital lease obligations		384		384		—		—		—
Non-cancelable operating leases, net of sublease income		141,638		13,561		26,512		26,312		75,253

	$	144,432	$	14,017	$	26,704	$	26,504	$	77,207

		PORTAL SOFTWARE, INC.

By		/S/ HOWARD A. BAIN III
		Howard A. Bain III
		Chief Financial Officer
		(On behalf of the Registrant and as the Principal Financial Officer)

By		/S/ BRET L. ENGLAND
		Bret L. England
		Vice President of Finance
		(Principal Accounting Officer)