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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended July 31, 2004

For the transition period from              to             

Commission File number 000-25829

PORTAL SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

(408) 572-2000

(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 Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

On August 27, 2004, 42,611,616 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.

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PORTAL SOFTWARE, INC.

FORM 10-Q

QUARTER ENDED JULY 31, 2004

EXPLANATORY NOTE

This Form 10-Q incorporates restated financial information for the Company’s fiscal quarter ended April 30, 2004. The Company has restated its consolidated financial statements for the fiscal quarter ended April 30, 2004 in a Form 10-Q/A as filed with the SEC on September 13, 2004. The Form 10-Q/A included amendments to:

These adjustments have been reflected in the financial statements and other information for the six months ended July 31, 2004 included in this report on Form 10-Q and such financial statements and other information should be read in conjunction with information contained in the Company’s Form 10-Q/A for the quarter ended April 30, 2004 as filed with the SEC on September 13, 2004.

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Item 1. Financial Statements

PORTAL SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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PORTAL SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts; unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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PORTAL SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands; unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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PORTAL SOFTWARE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies:

Nature of Business and Basis of Presentation

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

The accompanying condensed consolidated financial statements include the accounts of Portal and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet at July 31, 2004, the condensed consolidated statements of operations for the three and six months ended July 31, 2004 and 2003 and the condensed consolidated statements of cash flows for the six months ended July 31, 2004 and 2003 are not audited. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments and non-recurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The condensed consolidated financial statement information as of January 31, 2004 is derived from audited financial statements as of that date. These financial statements should be read in conjunction with the financial statements and related notes included in Portal’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004 filed with the Securities and Exchange Commission.

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. Stockholders’ equity has been restated to give retroactive recognition to the reverse split for all periods presented by reclassifying the excess par value resulting from the reduced number of shares from common stock to paid-in capital. All references to common share and per common share amounts for all periods presented have been restated to reflect this reverse split.

Restatement

The Company has filed a Form 10-Q/A in order to restate its financial statements contained in its Quarterly Report on Form 10-Q for the first quarter ended April 30, 2004. In the Form 10-Q/A, the Company restated its Unaudited Condensed Consolidated Financial Statements for the first quarter ended April 30, 2004 for the Condensed Consolidated Balance Sheet, for the three month period ended April 30, 2004 for the Condensed Consolidated Statements of Operations, for the three month period ended April 30, 2004 for the Condensed Consolidated Statements of Cash Flows and the related Notes to Condensed Consolidated Financial Statements. Accordingly, the financial statements for the period ended April 30, 2004 that have been included in the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 9, 2004 or included in previous announcements should not be relied upon.

As part of the Company’s accounting activities during the Company’s second quarter of fiscal 2005, the Company identified certain errors in its financial statements for its first quarter of fiscal year 2005 ended April 30, 2004. These errors consisted of failures to:

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The effect of all of the restatement adjustments for the three months ended April 30, 2004 was to increase revenues by $5,000, increase costs and expenses by $1.2 million, decrease in the provision for income taxes by $0.2 million, increase net loss by $1.1 million, and increase net loss per share by $0.03 per share. In addition, certain amounts in the financial statements as of and for the three months ended April 30, 2004 have been reclassified with no net impact on current assets, current liabilities, revenues or net loss. These adjustments have been reflected in the financial statements and other information for the six months ended July 31, 2004 included in this report on Form 10-Q and such financial statements and other information should be read in conjunction with information contained in the Company’s Form 10-Q/A for the quarter ended April 30, 2004.

Fiscal year

Portal adopted a 52/53 week fiscal accounting year commencing with the 2004 fiscal year. Each quarter consists of 13 weeks ending on a Friday. Fiscal 2005 began on January 31, 2004, the day following the last day of the 2004 fiscal year, and will end on January 28, 2005. Accordingly, all references as of and for the period ended July 31, 2004 and 2003 reflect amounts as of and for the period ended July 30, 2004 and August 1, 2003, respectively. 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 quarters ended July 31, 2004 and 2003 are each comprised of 91 days.

Foreign Currency

Portal considers the functional currency of its foreign subsidiaries to be the local currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date and revenue, costs and expenses are translated at average rates of exchange in effect during the year. Translation gains and losses are reported within accumulated other comprehensive loss. For the six months ended July 31, 2004, Portal recorded $0.8 million in net foreign exchange losses primarily as a result of remeasuring foreign denominated accounts to the functional currency. Net foreign exchange losses resulting from the remeasurement of foreign denominated accounts to the functional currency were immaterial for the six months ended July 31, 2003.

Use of Estimates

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

Revenue Recognition

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

Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. Pursuant to the requirements of Statement of Position (“SOP”) 97-2 “Software Revenue Recognition” and SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions,” Portal uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence of the fair value (“VSOE”) of all undelivered elements exists. VSOE for undelivered elements is based on normal pricing for those elements when sold separately. The software is considered to have been delivered when Portal has provided the customer with the access codes that allow for immediate possession of the software and customer acceptance criteria, if any, has been met. The Company’s assessment of a customer’s creditworthiness is a factor in the determination of whether or not collectibility is probable. The determination of creditworthiness requires the exercise of judgment, which affects Portal’s revenue recognition. If a customer is deemed to not be creditworthy, all revenue under arrangements with that customer is recognized upon receipt of cash. Additionally, if Portal enters into contracts with extended payment terms, the underlying revenue is deferred until such payments are due assuming all other conditions for recognition have been met. Revenue from arrangements with resellers who are not the ultimate users is not recognized until evidence of an arrangement with an end user has been received by Portal. Should Portal enter into a transaction with a customer to purchase the customer’s products contemporaneously with the customer’s purchase of software from Portal, Portal’s policy is to recognize the amount of license fees paid to Portal net of the fees paid for the customer’s products.

Custom software development arrangements which do not include license arrangements are generally recognized as follows except when the Company determines that the custom developed software will be made available to other customers. The Company recognizes time and materials service contracts as the services are performed. Fixed price services contracts are recognized on a proportional performance basis as determined by the relationship of contract costs incurred to date and the

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estimated total contract costs, which are regularly reviewed during the life of the contract, subject to meeting agreed upon milestones which have been formally accepted by the customer. In instances where the Company has determined that it intends to make the custom developed software available to other customers, the Company defers revenue recognition until delivery and acceptance of the software by the customer. Costs incurred to develop the software to be made available to other customers are expensed as incurred to research and development expense.

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

To date, Portal has been able to estimate efforts required under its services contracts for revenue recognition purposes, including its fixed price contracts. In the event Portal becomes aware that its estimates will result in a loss on a contract, Portal immediately accrues the entire estimated loss.

For arrangements that do not meet the above criteria, both the license revenues and services revenues are recognized under a contract accounting method in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts.” Portal follows the percentage-of-completion method where reasonably dependable estimates of progress toward completion of a contract can be made. The Company estimates the percentage-of-completion on contracts utilizing costs incurred to date as a percentage of the total costs at project completion, subject to meeting agreed milestones which have been formally accepted by the customer. In the event that a milestone has not been reached and accepted by the customer, the associated direct costs are deferred and revenue is not recognized until the milestone has been accepted by the customer. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Total accrued losses for contracts estimated to incur a loss at July 31, 2004 was $3.7 million.

Maintenance agreements provide technical support and include the right to unspecified upgrades on an when-and-if available basis. For those customers that have purchased maintenance, Portal offers timely access to new product versions and software updates. Maintenance revenue is deferred and recognized on a straight-line basis as services revenue over the life of the related agreement, which is typically one year. Customer advances and amounts invoiced to customers in excess of revenue recognized are generally recorded as deferred revenue.

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Deferred revenue was comprised of the following (in thousands, unaudited):

Concentration of Credit Risk

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

Substantially all of Portal’s software and services have been sold to global communications and media markets, including mobile wireless companies, broadband, electronic content and Internet access companies, as well as other Internet and e-commerce companies. Accordingly, adverse economic trends affecting the communications industry and media markets may increase credit risk in trade accounts receivable. Portal has adopted credit policies and standards intended to accommodate industry growth and inherent risk. Portal performs ongoing credit evaluations of the financial condition of its customers. Portal does not require collateral.

Affiliates majority-owned by Vodafone Group Plc (“Vodafone”), as publicly reported by Vodafone, accounted for 23% and 26% of total revenue for the three months ended July 31, 2004 and July 31, 2003, respectively, and 33% of total revenue for the six months ended July 31, 2004 and July 31, 2003.

One majority owned Vodafone affiliate, Vodafone Group Services Limited, accounted for 12% of revenues for the six months ended July 31, 2004. One majority owned Vodafone affiliate, Vodafone Omnitel, accounted for 13% of revenues during the six months ended July 31, 2003. No other customer accounted for more than 10% of revenues during the three and six months ended July 31, 2004 and July 31, 2003. Net accounts receivable from affiliates majority-owned by Vodafone was $8.5 million as of July 31, 2004.

Guarantees

Portal’s license agreements include indemnification for infringement of third-party intellectual property rights and also include certain warranties. Portal’s software license agreements also generally include a warranty that its software products will substantially operate as described in the applicable program documentation for a period of 90 days after delivery. Portal also warrants that services it performs will be provided in a manner consistent with industry standards. To date, Portal has not incurred any material costs associated with its warranties and no amounts have been accrued relating to indemnification obligations or warranties, as Portal does not believe any losses are probable. Portal has also issued letters of credit totaling $10.3 million related to its leased facilities, two bank guarantees for $1.1 million to support outstanding loans secured by buildings owned by Portal and $0.8 million for a bank guarantee issued in support of Portal’s compliance with performance obligations to a customer. In the event Portal defaults on the terms of the underlying agreements, the beneficiaries may draw on these letters of credit. The requirements to maintain the letters of credit correspond to the terms of the underlying agreements which expire at various dates through 2021.

As permitted under Portal’s Restated Certificate of Incorporation, Bylaws and the Delaware General Corporation Law, Portal has entered into agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at Portal’s request in such capacity.

Segment Information

Portal operates solely in one business segment, the development and marketing of business software and related services. Portal’s foreign operations consist of sales, marketing and support activities through its foreign subsidiaries and an overseas reseller network as well as an engineering and development center in India. Portal’s Chief Executive Officer has responsibility as the chief operating decision maker (CODM) as defined by Statement of Financial Accounting Standards Number 131, “Disclosures about Segments of an Enterprise and Related Information”. The CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and certain direct expenses by geographic region for purposes of making operating decisions and assessing financial performance. Portal’s assets are primarily located in its corporate office in the United States and are not allocated to any specific region, therefore Portal does not produce reports for, or measure the performance of, its geographic regions based on any asset-based metrics. As a result, geographic information is presented only for revenues.

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The following table shows Portal’s revenues by region (dollars in millions, unaudited):

North American revenues are defined as revenues from the United States and Canada. Revenues for Europe are defined as revenue from Europe, Middle East and Africa. Intercontinental revenues are defined as revenue from Asia-Pacific, Japan and Central and South America (including Mexico).

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

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

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

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

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Available-For-Sale Securities

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

Restricted investments represent collateral for outstanding letters of credit and bank guarantees. The collateral amounts are typically in excess of the face value of the letters of credit and bank guarantees in order to account for potential fluctuations in the value of the investments and exchange rates. As of July 31, 2004, restricted short-term investments of $1.1 million combined with restricted long-term investments of $14.0 million represent collateral for five letters of credit and three bank guarantees. As of July 31, 2004, the five letters of credit requiring collateral of $12.8 million were issued in lieu of a cash security deposit and are renewable annually and expire on various dates from October 31, 2004 through March 5, 2021. Two bank guarantees requiring collateral of $1.3 million relate to outstanding loans secured by buildings owned by Portal and expire on January 1, 2011 and December 31, 2017. The other bank guarantee requiring collateral of $1.1 million was issued in support of Portal’s compliance with performance obligations to a customer and expires on April 15, 2005. Restricted investments consist of cash and U.S. Government securities maturing over a period of one to two years.

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

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Impairment of Long-Lived Assets

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

Net Loss Per Share

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data; unaudited):

Portal has excluded outstanding stock options from the calculation of diluted loss per share because all such securities are antidilutive for all periods presented. The total number of shares excluded from the calculations of diluted net loss per share was 4,494,000 and 5,007,000 for the three months ended July 31, 2004 and July 31, 2003, respectively, and 4,156,000 and 5,927,000 for the six months ended July 31, 2004 and July 31, 2003, respectively. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share using the treasury stock method.

Stock-Based Compensation

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

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

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In November 2002, the Compensation Committee of Portal’s Board of Directors approved a plan to reprice stock options for employees. The plan excluded the Chief Executive Officer and members of the Board of Directors. Under this plan, 4,154,999 options were repriced. These options became subject to variable accounting prospectively whereby stock-based compensation for the options is re-measured quarterly and recorded as compensation expense in the Condensed Consolidated Statements of Operations for each reporting period until such options are exercised or expire.

The weighted average fair value, per share, of options granted for the three and six months ended July 31, 2004 was $3.01 and $4.97, respectively. The weighted average fair value, per share, of options granted for the three and six months ended July 31, 2003 was $9.00 and $7.75, respectively.

Summarized below are the pro forma effects on net loss and net loss per share as if Portal had elected to use the fair value approach prescribed by SFAS 123 for valuing options and shares granted under its employee stock purchase plan (in thousands, except per share amounts; unaudited):

Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss), which includes certain changes in the equity of the Company. Details of comprehensive loss are as follows (in thousands, unaudited):

Details of accumulated other comprehensive loss is as follows (in thousands, unaudited):

Note 2. Restructuring

        In fiscal 2003 and 2002 Portal’s Board of Directors approved the implementation of restructuring plans to effect a change in the Company’s operations and cost structure to more fully align with its revised business strategy requiring a greater focus on the needs of diversified telecommunications service providers. The plans included reductions in workforce of approximately 250 employees in fiscal 2003 and 620 employees in fiscal 2002, facilities reductions and asset write-offs. These workforce reductions affected substantially all of the Company’s organizations located in North America and Europe. The Company recorded restructuring charges of $36.5 million and $71.0 million for the fiscal years 2003 and 2002, respectively.

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The restructuring charges recorded in fiscal 2003 included $6.2 million of severance related amounts, $17.1 million of committed excess facilities, primarily related to lease expenses net of anticipated sublease income, $11.7 million in asset write-offs and $1.5 million for other costs. The restructuring charges recorded in fiscal 2002 included $17.3 million of severance related amounts, $36.4 million of committed excess facilities, primarily related to lease expenses net of anticipated sublease income, $15.8 million in asset write-offs, and $1.5 million for other costs.

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

During the three months ended July 31, 2004, the Company recorded a $0.4 million restructuring benefit and for the six months ended July 31, 2004 the Company recorded a $25,000 restructuring charge. The $0.4 million benefit was primarily the result of a facility expense refund due to a lessor’s year end expense allocation true-up from one of the Company’s vacant facilities. The $25,000 of restructuring charges in the six month period were due to expense in the first quarter of fiscal 2005 of $0.4 million which was largely offset by a $0.4 million benefit in the second quarter of fiscal 2005. The $0.4 million net restructuring charge in the first quarter of fiscal 2005 resulted from a $1.9 million increase in an accrual related to extending the time period the Company estimated one of its facilities would be vacant, primarily offset by a reduction of $1.5 million in an accrual the Company was relieved of in the quarter when a bank loan guarantee was paid by the borrower. The $1.9 million increase in the facility accrual became necessary when negotiations with the landlord to terminate this lease ended in the first quarter of fiscal 2005.

Severance payments are expected to be paid through the end of fiscal 2005. The long-term portion of the accrued restructuring costs is made up of lease payments for vacated facilities, net of expected sublease income, and is currently expected to be paid through 2013. Actual future cash requirements may differ materially from the accrual, particularly if actual sublease income is significantly different from current estimates, if the Company is successful or unsuccessful in its efforts to renegotiate facility leases, or if it is unsuccessful in its attempts to sublet the facilities within a timely manner.

A summary of accrued restructuring costs is as follows (in thousands, unaudited):