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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

Commission file number 000-25661

TenFold Corporation

(Exact name of registrant as specified in its charter)

698 West 10000 South

South Jordan, Utah 84095

(Address of principal executive offices, including zip code)

(801) 495-1010

(Registrant’s telephone number, including area code)

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

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

As of March 31, 2004, there were 46,070,294 shares of the registrant’s Common Stock outstanding.

INDEX

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FORWARD-LOOKING STATEMENTS

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

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

TENFOLD CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

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

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TENFOLD CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

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

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TENFOLD CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

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TENFOLD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

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

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

2. Revenue Recognition

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

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

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

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

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

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

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

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

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

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

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

We record billings and cash received in excess of revenue earned as deferred revenue. Our deferred revenue balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned, and from application of the “zero profit” margin methodology described above. Our unbilled accounts receivable represents revenue that we have earned but which we have not yet billed. We bill customers as payments become due under the terms of the customer’s contract. We consider current information and events regarding our customers and their contracts and establish allowances for doubtful accounts when it is probable that we will be unable to collect amounts due under the terms of existing contracts.

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3. Earnings (Loss) Per Share

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

Employee stock options of 19,901,145 and 11,022,757 outstanding during the three months ended March 31, 2004 and 2003, respectively, that have a weighted average exercise price of $2.17 and $2.24 per share, respectively, and that could potentially dilute earnings per share in the future, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the period.

4. Restricted Cash

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

5. Comprehensive Income (Loss)

Comprehensive income (loss) for the three months ended March 31, 2004 and 2003, ignoring the insignificant impact of taxes on foreign currency translation, was as follows (in thousands):

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6. Stock-Based Compensation

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

Had compensation expense for our stock option plan and the employee stock purchase plan been determined based on the fair value at the grant date for awards or purchase rights under these plans consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock Based Compensation, our net income (loss) for the three months ended March 31, 2004 and 2003 would have been as follows (in thousands except per share information):

The effect of SFAS No. 123 on pro forma net income (loss) and net income (loss) per share for the three months ended March 31, 2004 and 2003 may not be representative of the effects on pro forma results in future periods.

7. Income Taxes

There was no provision for income taxes for the three months ended March 31, 2004, as no provision was necessary based upon results for the period. The provision for income taxes for the three months ended March 31, 2003 relates primarily to foreign taxes and reversing a portion of our valuation allowance attributable to the current operating income.

The valuation allowance as of March 31, 2004 was recorded in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of deferred tax assets.

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8. Commitments

We have commitments under long-term operating leases for office space. Future minimum lease payments under non-cancelable operating lease obligations, in excess of one year and excluding obligations accrued as part of restructurings, at March 31, 2004 are as follows (in thousands):

Operating lease commitments for properties that have been restructured are included in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheet at March 31, 2004. See Note 10 for more information.

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

9. Legal Proceedings and Contingencies

Coufal Lawsuit

On December 1, 2003, we were served with a complaint in the matter of Coufal v. Cedars Sinai Medical Center, et. al. The compliant was filed in the Superior Court of the State of California, County of Los Angeles by the parents of a deceased individual who died on December 15, 2002 while in the care of Cedars Sinai Medical Center. The complaint lists a number of defendants including, Cedars Sinai Medical Center, Perot Systems Healthcare Services Group, Perot Systems Corporation, PCX Systems, LLC, TenFold Corporation, Steve Chen M.D., Charles Louy M.D., Steven Fowler M.D., Sunshine Aviva Weiss M.D., and Does 1-100, inclusive. The complaint generally alleges that plaintiff’s daughter died following surgery as the result of an overdose of prescription medications. The complaint alleges that the medications were prescribed, ordered and/or administered in excess of the levels acceptable to physicians acting within the standard of care of physicians in the community, and that the computerized physician order entry system (“PCX”), initially developed by us, failed to detect the overdose. The complaint acknowledges that in April 2001, and pursuant to separate agreements, which are described in reports that we have filed with the SEC, responsibility for and ownership of PCX was assumed by PCX Systems, LLC (a wholly owned subsidiary of Cedars Sinai Medical Center), and that in October 2002, Cedars Sinai Medical Center installed PCX for hospital use. At this point, we do not believe that this lawsuit will have a material adverse impact on our business, results of operations, financial position, or liquidity.

Insurance

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

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costs of legal defense and types of alleged damages claimed in the Coufal dispute noted above, subject to the policy’s total limit, and the insurance carrier’s standard reservation of rights regarding conditions or findings that might exclude coverage for a particular matter.

Stockholder Matters

On November 6, 2001, a class action complaint alleging violations of the federal securities laws was filed in the United States District Court for the Southern District of New York naming as defendants TenFold, certain of its officers and directors, and certain underwriters of our initial public offering. An amended complaint was filed on April 24, 2002. TenFold and its officers and directors are named in the suit pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act 1934 on the basis of an alleged failure to disclose the underwriters’ alleged compensation and manipulative practices. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998. The individual officer and director defendants entered into tolling agreements and, pursuant to a Court Order dated October 9, 2002, were dismissed from the litigation without prejudice. On February 19, 2003, the Court granted a Motion to Dismiss the Rule 10b-5 claims against 116 defendants, including TenFold. On June 27, 2003, our Board of Directors ratified its committee’s conditional approval of a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of TenFold and of the individual defendants for the conduct alleged in the action to be wrongful in the Amended Complaint. We would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims we may have against our underwriters. Any direct financial impact of the proposed settlement is expected to be borne by our insurers. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of our insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the Court overseeing the litigation. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. If there is an unfavorable outcome, there may be a material adverse impact on our business, results of operations, financial position, or liquidity.

Indemnifications and Warranties

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

Our agreements with customers generally require us to indemnify the customer against claims that our software infringes third party patent, copyright, or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including a right to replace an infringing product or cancel the software license and return the fees paid by the customer. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements, and no such claims were outstanding at March 31, 2004. As a result, we have not recorded a liability for infringement costs as of March 31, 2004.

Our agreements with customers also generally provide a warranty that for so long as the customer is paying for support services, our software will materially conform to the related documentation, and that our software has been developed in a workmanlike manner. To date, we have not incurred significant warranty costs. As a result, we have not recorded a liability for warranty costs as of March 31, 2004.

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10. Special Charges

We incurred no special charges during the three months ended March 31, 2004, and the three months ended March 31, 2003.

Restructuring reserves are included in accounts payable and accrued liabilities at March 31, 2004. Detail of the restructuring charges as of and for the three months ended March 31, 2004 are summarized below (in thousands):

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

11. Operating Segments

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

Revenues from customers outside of North America were approximately 47 percent of total revenues for the three months ended March 31, 2004 as compared to 21 percent of total revenues for the same period in 2003. Our long-lived assets are deployed in the United States.

Two customers accounted for 42 percent and 39 percent of our total revenues for the three months ended March 31, 2004, compared to three customers accounting for 63 percent, 13 percent, and 11 percent of our total revenues for the same period in 2003. No other single customer accounted for more than 10 percent of our total revenues for the three months ended March 31, 2004 or the same periods in 2003.

12. Recent Accounting Pronouncements

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

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

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

Business Overview

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

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

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

Business History

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

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

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

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

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

Year-to-Date 2004 Highlights

During Q1 2004, we focused principally on three initiatives intended to position TenFold as a growth software infrastructure company.

Tuning our marketing and sales engine

We are steadily tuning our marketing and sales engine to begin momentum and leverage our experiences to convince people that our technology does what we claim and help them realize the implications of our value proposition. We are defining and validating a leverageable and replicable process for introducing new customers to TenFold and closing software license business. Currently, we have two standard ways of introducing customers to TenFold. The first is through a VersionOne, which is a one to two week consulting engagement during which one or two TenFold SpeedTeam staff build an application alongside one or two customer staff. The second is through a RequirementsNow! project, which is a one week consulting engagement in which we provide an initial project road map that the customer can then use to accelerate its application development project.

During Q1, we completed two VersionOne projects and also initiated a RequirementsNow! project. With growing confidence that we can sell, manage, and deliver successful VersionOne and RequirementsNow! projects, we have begun to recruit, train, and deploy additional sales and delivery resources. We increased our SpeedTeam staffing; recruited a Vice President of Product Marketing with substantial experience building, testing, deploying and maintaining a complex TenFold-powered enterprise application; recruited a Vice President of Sales; and, began recruiting additional direct sales staff.

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Broadening awareness of and interest in TenFold technology

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

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

Tsunami has broadened interest in TenFold technology more generally. TenFold was invited to present at the Sixth Annual Needham Growth Conference in January after a senior Needham software analyst tried out Tsunami. TenFold has been selected as a finalist for the Software and Information Industry Association (SIIA) Codie Awards in two categories – Best Business Software Product or Service and Best Distributed Computing Solution. Tsunami has been nominated for the Stoel Rives Utah Innovation awards. Tsunami is also nominated for a Best of Utah technology award.

We are testing various other approaches to move TenFold toward the Tipping Point. For example, during Q1, we produced and published a print ad that highlights TenFold technology as a viable alternative to the “hell” of outsourcing that many companies have felt forced to adopt. Additionally, we have aggressive telemarketing activities underway and frequently publish press releases to spread the word about TenFold.

We expect that achieving the Tipping Point will launch TenFold as a high-growth software infrastructure company because we believe broad recognition of our value proposition will generate demand for our products and services.

Identifying and establishing business practices and resources for handling future growth

We are identifying and establishing business practices and resources to enable TenFold to manage the high future growth we seek to achieve. We believe that most TenFold operational areas can achieve better-than-industry-standard productivity, lower cost per deliverable, and consequently higher margin contribution, if we use TenFold-powered applications to automate them. During Q1, our Support organization designed, built, and took into stable production a custom CRM application, CustomerManager, tailored to our business, able to use customer-related information from other TenFold systems, and incorporating advanced application features such as compliance management and proactive tracking of assignments. During Q1, we began updating the educational programs provided by TenFold University, our education division, to incorporate the important lessons we have learned during our VersionOne projects, including how best to introduce first time users to our technology. TenFold University developed new training materials, designed new curriculum and piloted a brand new TenFold Paradigm class – the basic introductory course we recommend to all our users. TenFold University also identified and began preparing the next tier of new courses – Maximizing Your Data, Testing Strategies, Managing Areas, Managing Production – intended to accelerate and deepen customer understanding of how to most effectively use EnterpriseTenFold for building and managing their own TenFold-powered applications.

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Customers using TenFold-powered applications in production today include, among others, Abbey National Bank, Allstate Insurance, Barclays Global Investors, Cedars-Sinai Medical Center, Deutsche Bank, Dresdner Bank, Franklin Templeton, iplan networks, JP Morgan Chase, MedCath, Rand Technology, Trinity, and Vertex (a subsidiary of United Utilities). Customer progress during Q1 toward full deployment of new or continuing applications development projects includes:

During Q1, our development organization released an all Open Source EnterpriseTenFold platform consisting of the RedHat Linux operating system, MySQL database, and Apache web server.

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Results of Operations

We had first quarter 2004 revenues of $3.6 million, an operating loss of $313,000, and a net loss of $206,000. This compares to revenues of $9.4 million, operating income of $4.7 million, and net income of $7.0 million for the same period of 2003.

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

Revenues

Total revenues decreased $5.8 million, or 62 percent, to $3.6 million for the three months ended March 31, 2004, as compared to $9.4 million for the same period in 2003. The decrease in revenues is primarily due to the completion of the amortization of our deferred subscription revenues during the second quarter of 2003, when our existing subscription contracts reached the end of their subscription periods.

License revenues increased $149,000 to $152,000 for the three months ended March 31, 2004, as compared to $3,000 for the same period in 2003.

We had no subscription revenues for the three months ended March 31, 2004, as compared to $6.0 million for the same period in 2003. Subscription revenues represent revenue from contracts that include a subscription to new product releases on a “when and if available” basis. For certain contracts, including a subscription to future software products when and if they become available, we recognize the fees for the software products ratably over the subscription term beginning with delivery of the first software product. For contracts that include a service element for which the fair value is undeterminable, and the contract includes a subscription to new product releases on a “when and if available basis,” we recognize the entire contract fee ratably over the subscription period as subscription revenue. During the quarter ended June 30, 2003, our existing subscription contracts reached the end of their subscription periods, and we recognized the final remaining subscription revenue for these contracts.

Services and other revenues increased $126,000, or 4 percent, to $3.4 million for the three months ended March 31, 2004 as compared to $3.3 million for the same period in 2003.

Revenues from customers outside of North America were approximately 47 percent of total revenues for the three months ended March 31, 2004 as compared to 21 percent of total revenues for the same period in 2003. Our long-lived assets are deployed in the United States.

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Two customers accounted for 42 percent and 39 percent of our total revenues for the three months ended March 31, 2004, compared to three customers accounting for 63 percent, 13 percent, and 11 percent of our total revenues for the same period in 2003. No other single customer accounted for more than 10 percent of our total revenues for the three months ended March 31, 2004 or the same periods in 2003. We expect the customers accounting for 42 and 39 percent of our total revenues for the three months ended March 31, 2004 to account for a significant percentage of our revenues for 2004. Our time-and-materials consulting services revenue from these customer projects will decrease over time during the remainder of 2004 as these customers complete their current application development projects and become more self-sufficient. We expect our staff levels on these two projects to decline over time and for the projects to be completed during the third and fourth quarters of 2004, respectively. We staff the first project using subcontractor staff. We expect to reassign our employees working on the second project to various billable and non-billable activities as our business needs warrant.

We continue to actively seek sales to new customers. However, we continue to face a challenging sales environment, and it is unclear when we can expect to achieve significant sales to new customers.

Operating Expenses

Cost of Revenues. Cost of revenues consists primarily of compensation and other related costs of personnel to provide applications development and implementation, support, and training services. Cost of revenues decreased $88,000, or 4 percent, to $2.2 million for the three months ended March 31, 2004 compared to $2.3 million for the same period in 2003.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation, travel, and other related expenses for sales and marketing personnel, as well as advertising and other marketing expenses. Sales and marketing expenses increased $90,000, or 40 percent, to $315,000 for the three months ended March 31, 2004 as compared to $225,000 for the same period in 2003. The increase in sales and marketing expenses was primarily due to expanding sales and marketing efforts and staffing.

Research and Development. Research and development expenses consist primarily of compensation and other related costs of personnel dedicated to research and development activities. Research and development expenses decreased $91,000, or 10 percent, to $824,000 for the three months ended March 31, 2004, as compared to $915,000 for the same period in 2003.

General and Administrative. General and administrative expenses consist primarily of the costs of executive management, finance and administrative staff, recruiting, business insurance, and professional fees. General and administrative expenses decreased $663,000, or 53 percent, to $578,000 for the three months ended March 31, 2004 as compared to $1.2 million for the same period in 2003. General and administrative expenses decreased due to lower variable compensation accruals, and lower legal expenses.

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

Total Other Income, net

Net total other income was $107,000 for the three months ended March 31, 2004, as compared to $2.3 million for the same period in 2003. Net total other income for the three months ended March 31, 2003 included a gain of approximately $2.2 million that we recognized on the retirement of capital lease obligations at a significant discount to their carrying value.

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Provision for Income Taxes

No provision for income taxes was required for the three months ended March 31, 2004. The $12,000 provision for the three months ended March 31, 2003 relates primarily to foreign taxes and reversing a portion of our valuation allowance attributable to the current operating income.

At March 31, 2004, management has recognized a valuation allowance for the net deferred tax assets related to temporary differences, foreign tax credit carryforwards and net operating loss carryforwards. The valuation allowance was recorded in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more likely than not that the net deferred tax assets will not be realized.

Critical Accounting Policies

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

Revenue Recognition and Project Profitability

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

Litigation Reserves

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

Restructuring Charges

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

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Liquidity and Capital Resources

As of March 31, 2004, our principal source of liquidity was our cash and cash equivalents of $11.3 million. During the three months ended March 31, 2004, we funded purchases of computer equipment of $40,000 with capital leases.

Net cash used by operating activities was $1.2 million for the three months ended March 31, 2004 as compared to net cash provided by operating activities of $318,000 for the same period in 2003. The decrease in cash flow provided by operating activities results primarily from payments we made to reduce some older accounts payable and accrued liability items accrued in earlier quarters, including amounts due to our United Kingdom subcontractor for its work on a large project.

Net cash provided by investing activities was $42,000 for the three months ended March 31, 2004 as compared to $34,000 for the same period in 2003.

Net cash provided by financing activities was $160,000 for the three months ended March 31, 2004 as compared to $79,000 for the same period in 2003. Net cash provided by financing activities for the three months ended March 31, 2004 included $100,000 of proceeds from employee stock purchase plan stock issuances, and $61,000 from employee stock option exercises. Net cash provided by financing activities for the three months ended March 31, 2003 included net cash proceeds of $666,000 from the sale of 3,888,889 shares of restricted common stock to a member of our Board of Directors. During the three months ended March 31, 2003 we made payments of approximately $588,000 to retire capital lease obligations at a significant discount.

Our deferred revenue balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned. We had deferred revenues balances of $7.2 million at March 31, 2004 and $7.6 million at December 31, 2003. When over time we recognize these deferred revenue balances as revenues in the statement of operations, we will not have corresponding increases in cash, as the related cash amounts have previously been received by us. Our unbilled accounts receivable represents revenue that we have earned but which we have not yet billed.

We believe we have solidly strengthened our financial foundation, and that our existing cash and expected continuing cash flows from existing customers will provide us with sufficient resources for this year. However, some challenges and risks remain:

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

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

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Disclosure about Contractual Obligations

The following table sets forth certain contractual obligations recorded in the condensed consolidated financial statements as of March 31, 2004 and summary information is presented in the following table (in thousands):

The real estate operating leases above include $800,000 of restructured real estate lease obligations which have not been reduced by sublease income of $344,000 due from sublease tenants. In the Condensed Consolidated Balance Sheet at March 31, 2004, these obligations are included in accounts payable and accrued liabilities, net of the related sublease income. See Note 10 of Notes to Condensed Consolidated Financial Statements for more information.

We have purchase obligations to our United Kingdom distributor, youDevise Limited (formerly TenFold Systems UK Limited), reflected in the table above, for the provision of consulting staff for a project we have underway in the United Kingdom. We can reduce or terminate our obligation if our customer, under certain circumstances, reduces its purchase of consulting staff for the project from us.

In addition to the items shown in the table above, we have at March 31, 2004, one remaining contract subject to a guarantee. We have received cash payments under this contract totaling $9.5 million that are subject to potential refund under the related guarantee. We have a deferred revenue balance of $5.7 million related to this contract, and $2.7 million in accrued liabilities under a related contract, included in the accompanying Condensed Consolidated Balance Sheet at March 31, 2004. We believe that the application and required deliveries under the contract will comply with the contractual terms of our customer agreement; however, this guarantee represents a risk to us.

In addition to the items shown in the table above, we have a potential $625,000 liability to a customer which we have included in deferred revenue in the accompanying Condensed Consolidated Balance Sheet at March 31, 2004. During the quarter ended March 31, 2004, we reached agreement with an existing customer on the key terms for our sale to them of the ownership rights to an application that we previously developed for them, and for the provision of consulting services over the remainder of 2004; and received an initial payment of $625,000. We subsequently completed the definitive agreements for this transaction. We recognized no revenue from this transaction during the quarter ended March 31, 2004.

Recent Accounting Pronouncements

In December 2003, the FASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“ARB 51”), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity though means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (“FIN 46”), which was issued

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in January 2003. Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (“VIE”). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after January 31, 2003 and no later than the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 had no effect on our results of operations and financial position.

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

Factors that May Affect Future Results and Market Price of Stock

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

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

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

Our future prospects are difficult to evaluate

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

We continue to experience difficulty in securing future customer revenue

There is no assurance that we will be able to convince prospective customers to purchase products or services from us or that any customer revenue that is achieved can be sustained. If we are unable to obtain future customer revenue, our operations, financial condition, liquidity, and prospects will be materially and adversely affected, and we will be required to pursue one or a combination of the following remedies: seek additional sources of financing, further reduce operating expenses, sell part or all of our assets, or terminate operations. There can be no assurance that additional financing sources will be available to us when needed or that we will be able to execute the other potential remedies sufficiently to continue operations.

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

We believe that a customer’s decision to purchase significant products or services from us involves a significant commitment of resources and is influenced by customer budget cycles. To successfully sell our products and services, we generally must educate our potential customers regarding the use and benefit of our products and services. Historically, this has required significant time and resources. Consequently, the period between initial contact and the purchase of our products or services can be long and subject to delays associated with the lengthy budgeting, approval, and competitive evaluation processes that typically accompany significant capital expenditures. Historically, our sales cycles have been lengthy and variable, typically ranging between three to twelve months from initial contact with a potential customer to the signing of a contract. In addition, the national economic downturn has caused current and potential customers to delay or change their purchasing decisions. Sales delays could cause our operating results to vary widely. There can be no assurance that we will not experience sales delays in the future. In addition, we face a challenging sales environment and there can be no assurance that we will have sales in the future.

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

We have derived, and over the near term we expect to continue to derive, a significant portion of our revenues and cash flow from a limited number of large customers. For example, for the three months ended March 31, 2004, one customer accounted for 42 percent, and another accounted for 39 percent. Significant reductions in the amount of business they conduct with us could materially and adversely affect our business, results of operations, financial position and liquidity. Replacing the loss of a large customer is unpredictable. In the future, revenues from a single customer or a few large customers may constitute a significant portion of our total revenues and cash inflows in a particular period. The volume of work performed for specific customers is likely to vary from period to period, and a major customer in one period may not continue to purchase licenses or services from us in a subsequent period. We expect the customers accounting for 42 and 39 percent of our total revenues for the three months ended March 31, 2004 to account for a significant percentage of our revenues for 2004. We expect that the revenues (and cash flow) from these customer projects will decrease over time during the remainder of 2004 as these projects are completed during the third and fourth quarters of 2004 and the customers become more self-sufficient. We staff the first project using subcontractor staff. We expect to reassign our employees working on the second project to various billable and non-billable activities as our business needs warrant.

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

Our deferred revenue balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned. We had deferred revenue balances of $7.6 million at December 31, 2003 and $20.3 million at December 31, 2002. The decrease in deferred revenues from December 31, 2002 to December 31, 2003 was primarily a result of our recognizing as revenues the remaining previously deferred subscription revenues from our existing subscription contracts as these contracts reached the end of their subscription periods during the quarter ended June 30, 2003. We had a deferred revenue balance of $7.2 million at March 31, 2004 that we expect to recognize as revenues in future periods, but the timing of recognition is uncertain. As a result, we do not expect to recognize revenues or profits from deferred revenues during 2004 at the same levels that we experienced during 2003, and may experience lower profitability or a loss if this decrease is not offset by revenue from other sources.

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

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

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

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

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

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

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

Our errors and omissions coverage may not cover contractual disputes

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

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

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

We have been recently involved in litigation with a former customer (in July 2003, the U.S. District Court dismissed the case without prejudice) and in a class action suit against more than 300 issuers involving the underwriters of those issuer’s initial public offerings. We were also recently named as one of many defendants in a lawsuit related to the death of a patient at Cedars-Sinai Medical Center, one of our customers. We may in the future face other litigation or disputes with customers, employees, business partners, stockholders, or other third parties. Such litigation or disputes could result in substantial costs and diversion of resources that would harm our business. An unfavorable outcome of these matters may have a material adverse impact on our business, results of operations, financial position, or liquidity. See “Legal Proceedings” generally for more information concerning our litigation and disputes.

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

Although we have settled our disputes with Perot Systems and Cedars-Sinai, our settlements require that we perform and meet certain obligations. If we are unable to or do not perform or meet these obligations, Perot Systems and Cedars-Sinai may re-instate or re-assert their respective claims against us. If either Perot Systems or Cedars-Sinai were to re-instate or re-assert their respective claims, an unfavorable outcome of the matter may have a material adverse impact on our business, results of operations, financial position, or liquidity.

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

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

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

Our industry is competitive and we are substantially dependent upon the continued service of our existing executive personnel, especially Nancy M. Harvey, President, Chief Executive Officer and Chief Financial Officer. Furthermore, our products and technologies are complex and we are substantially dependent upon the continued service of our senior technical staff, including Jeffrey L. Walker, Chairman of the Board of Directors, Executive Vice President, and Chief Technology Officer. If a key employee resigns to join a competitor or to form a competing company, the loss of the employee and any resulting loss of existing or potential customers to the competing company would harm our business. We do not carry key-man life insurance on any of our key employees. We have entered into an employment agreement with our President, Chief Executive Officer, and Chief Financial Officer, Nancy M. Harvey. However, the agreement does not ensure continued service to TenFold. In the event of the loss of key personnel, there can be no assurance that we would be able to prevent their unauthorized disclosure or use of our technical knowledge, practices, or procedures.

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

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

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

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

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

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

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

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

Revenues from customers outside of North America were 47 percent of total revenues for the three months ended March 31, 2004. The international political and economic uncertainty caused by the ongoing war on terrorism may adversely impact our ability to continue existing relationships with our foreign customers and to develop new business abroad.

Our stock price may continue to be volatile

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

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

There has been ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. Although we are not currently required to record compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair market value at the grant date and for shares issued under our employee stock purchase plan, it is possible that future accounting pronouncements, including a recently proposed accounting pronouncement, will require us to treat all stock-based compensation as an expense using the fair value method. If we elected to or were required to record expenses for option awards under our option or employee stock purchase plans using the fair value method, we could have significant charges. For the quarter ended March 31, 2004, had we accounted for stock-based compensation plans using the fair-value method prescribed in FASB Statement No. 123 as amended by Statement 148, net loss would have been increased by $5.5 million. See Note 6 of Notes to Condensed Consolidated Financial Statements for more information.

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

The executive officers, directors, and entities affiliated with them, in the aggregate, beneficially own approximately 52 percent of our outstanding common stock. Jeffrey L. Walker, Chairman, Executive Vice President and Chief Technology Officer, and the Walker Children’s Trust, in the aggregate, currently beneficially own approximately 39 percent of our outstanding common stock. Mr. Walker, acting with others, would be able to decide or significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership may have the effect of delaying or preventing a merger or other business combination transaction, even if the transaction would be beneficial to our other stockholders.

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

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Reference is made to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” appearing on page 45 of TenFold’s 2003 Annual Report on Form 10-K for information relating to TenFold’s interest rate and currency rate risks. There have been no material changes in such risks through March 31, 2004.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including Nancy Harvey (Chief Executive Officer and Chief Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2004. Based on that evaluation, Ms. Harvey concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as specified in the rules and forms of the Securities and Exchange Commission. There have been no material changes in the Company’s internal controls over financial reporting or in other factors reasonably likely to affect the internal controls over financial reporting during the quarter ended March 31, 2004.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits and Reports on Form 8-K

On January 12, 2004, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission discussing in Item 12 the Company’s year-end 2003 cash balances and reaffirming the Company’s earnings guidance for Q4 2003.

On February 17, 2004, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission discussing in Item 12 the Company’s Q4 and year-end 2003 financial results.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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