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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

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

(Mark One)

For the fiscal year ended January 30, 2004

OR

For the transition period from                      to                     

Commission file number: 000-25829

PORTAL SOFTWARE, INC.

(Exact name of registrant as specified in its Charter)

10200 South De Anza Boulevard, Cupertino, California 95014

(Address of principal executive offices and Zip Code)

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

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

None

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

Common Stock, $0.001 par value

Rights to Purchase Series A Junior Participating Preferred Stock

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

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

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

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

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PORTAL SOFTWARE, INC.

FORM 10-K

FISCAL YEAR 2004

INDEX

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PART I

ITEM 1.    BUSINESS

General Information

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

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

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

Business Overview

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

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Industry Background

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

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

The Portal Strategy

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

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

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

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

Portal Software Platform

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

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

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

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

Business Benefits

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

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

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

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

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

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

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

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

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

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

Portal Services

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

Portal Consulting

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

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Portal Maintenance

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

Portal Education

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

Pricing

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

Sales and Marketing

Sales

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

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

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

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

Marketing

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

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

Customers

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

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

Research and Development

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

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

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

Competition

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

Intellectual Property

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

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

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

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

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

Additional Information

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

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

Employees

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

ITEM 2.    PROPERTIES

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

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

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

ITEM 3.    LEGAL PROCEEDINGS

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

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

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

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

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

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

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

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

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

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

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

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PART II

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

Dividend Policy

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

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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

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

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

OVERVIEW

Business

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

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

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

Financial

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

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

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

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

Allowance for Doubtful Accounts

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

Long-Lived Assets

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

Accrued Restructuring Expenses

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

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

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

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

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

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

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

Income Taxes

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

The following table shows our revenues by region:

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

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

Cost of License Fees

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

Cost of Services

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

Amortization and Impairment of Purchased Developed Technology

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

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

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

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Research and Development Expenses

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

Sales and Marketing Expenses

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

General and Administrative Expenses

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

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

Stock Compensation Charges

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

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

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

Amortization of Goodwill

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

Reduction in Intangibles Due to Impairment

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

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

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

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

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

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

Restructuring Costs

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

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

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

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

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

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

Interest and Other Income

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

Write-down of Impaired Investments

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

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Provision for Income Taxes

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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RISKS ASSOCIATED WITH OUR BUSINESS AND FUTURE OPERATING RESULTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Short-Term Investment Portfolio

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

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

Impact of Foreign Currency Rate Changes

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

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

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1.    Index to Consolidated Financial Statements

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

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Portal Software, Inc.

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

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

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

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

/s/ ERNST & YOUNG LLP

San Jose, California

February 24, 2004

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PORTAL SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)