PORTAL SOFTWARE INC, 10-Q, 1999-06-14

PORTAL SOFTWARE INC
10-Q, 1999-06-14
COMPUTER PROGRAMMING SERVICES

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the Quarter Ended April 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________

Commission File number 000-25829

PORTAL SOFTWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

20883 Stevens Creek Boulevard
Cupertino, California 95014
----------------------------
(Address of Principal Executive Offices)

Registrant's Telephone Number, Including Area Code: (408) 343-4400

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 No X
--------- ---------

On June 1, 1999, 75,346,028 shares of the Registrant's Common Stock, $.001 par
value, were outstanding.
<PAGE>

PORTAL SOFTWARE, INC.
FORM 10-Q

QUARTER ENDED APRIL 30, 1999

INDEX

<TABLE>
<CAPTION>
Part I: Financial Information

Item 1: Financial Statements (Unaudited)
Page
----
<S> <C>
Condensed Consolidated Balance Sheets at April 30, 1999 and January 31, 1999 3

Condensed Consolidated Statements of Operations for the three months 4
ended April 30, 1999 and 1998

Condensed Consolidated Statements of Cash Flows 5
for the three months ended April 30, 1999 and 1998

Notes to Condensed Consolidated Financial Statements 6

Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12

Item 3: Quantitative and Qualitative Disclosures About Market Risk 27

Part II: Other Information

Item 2: Changes in Securities and Use of Proceeds 28

Item 6: Exhibits and Reports on Form 8-K 29

Signature 30

Exhibit Index 31
</TABLE>

2
<PAGE>

Item 1: Financial Statements

PORTAL SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
April 30, January 31,
------------ ------------
(in thousands) 1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ......................................................... $ 11,942 $ 11,809
Accounts receivable, net .......................................................... 14,184 14,474
Other current assets .............................................................. 4,566 1,440
-------- --------
Total current assets ............................................................. 30,692 27,723
Property and equipment, net ........................................................ 5,608 4,417
Other assets ....................................................................... 3,368 204
-------- --------
$ 39,668 $ 32,344
======== ========
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current liabilities:
Accounts payable .................................................................. $ 4,121 $ 2,567
Accrued compensation .............................................................. 2,321 1,147
Other accrued liabilities ......................................................... 8,026 5,214
Current portion of long-term debt ................................................. 2,124 4,122
Current portion of capital lease obligations ...................................... 479 479
Deferred revenue .................................................................. 29,493 23,344
-------- --------
Total current liabilities ........................................................ 46,564 36,873
Long-term portion of capital lease obligations ..................................... 2,236 2,022
Commitments
Stockholders' equity (net capital deficiency):
Convertible preferred stock ....................................................... 18,539 18,482
Common stock,....................................................................... 1,826 927
Additional paid-in capital ........................................................ 16,753 16,753
Notes receivable from stockholders ................................................ (359) (318)
Deferred stock compensation and other ............................................. (12,418) (14,456)
Accumulated deficit ............................................................... (33,473) (27,939)
-------- --------
Stockholders' equity (net capital deficiency) .................................... (9,132) (6,551)
-------- --------
$ 39,668 $ 32,344
======== ========
</TABLE>

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3
<PAGE>

PORTAL SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Three Months
------------------------------
(in thousands, except per share amounts; unaudited) Ended April 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Revenues:
License fees ....................................................................... $ 9,064 $ 2,185
Services ........................................................................... 6,101 1,881
------- -------
Total revenues .................................................................... 15,165 4,066
------- -------

Costs and expenses:
Cost of license fees ............................................................... 185 60
Cost of services ................................................................... 4,195 1,201
Research and development ........................................................... 4,285 2,207
Sales and marketing ................................................................ 7,329 2,000
General and administrative ......................................................... 2,235 714
Amortization of deferred stock compensation ........................................ 2,026 96
------- -------
Total costs and expenses .......................................................... 20,255 6,278
------- -------
Loss from operations ................................................................ (5,090) (2,212)
Interest and other income (expense), net ............................................ (28) 73
------- -------
Loss before income taxes ............................................................ (5,118) (2,139)
Provision for income taxes .......................................................... 416 2
------- -------
Net loss ............................................................................ $(5,534) $(2,141)
======= =======

Basic and diluted net loss per share ................................................ $(0.16) $(0.08)
======= =======
Shares used in computing basic and diluted net loss per share ....................... 33,543 25,993
======= =======
Pro forma basic and diluted net loss per share ...................................... $(0.09) $(0.04)
======= =======
Shares used in computing pro forma basic and diluted net loss per share ............. 62,195 54,352
======= =======
</TABLE>

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4
<PAGE>

PORTAL SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Three Months
--------------------------
(in thousands; unaudited) Ended April 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................................ $(5,534) $(2,141)
Adjustments to reconcile net loss to net cash from (used in) operating activities:
Depreciation and amortization ...................................................... 371 161
Amortization of deferred stock compensation ........................................ 2,026 96
Changes in operating assets and liabilities:
Accounts receivable, net ......................................................... 290 33
Other current assets .............................................................. (2,364) (65)
Other assets ...................................................................... 459 103
Accounts payable .................................................................. 1,554 (612)
Accrued compensation .............................................................. 1,174 16
Other accrued liabilities ......................................................... (986) 3,136
Deferred revenue .................................................................. 6,149 (1,316)
------- -------
Net cash from (used in) operating activities ..................................... 3,139 (589)
------- -------

INVESTING ACTIVITIES:
Purchases of property and equipment ................................................. (1,250) --
------- -------

FINANCING ACTIVITIES:
Repayment of long-term debt ......................................................... (2,998) --
Proceeds from line of credit ........................................................ 1,000 --
Principal payments under capital lease obligations, net of proceeds ................. (123) 171
Proceeds from issuance of common stock, net of repurchases .......................... 308 70
Proceeds from issuance of preferred stock ........................................... 57 50
------- -------
Net cash from (used in) financing activities ..................................... (1,756) 291
------- -------
Net increase (decrease) in cash and cash equivalents ................................. 133 (298)
Cash and cash equivalents at beginning of period ..................................... 11,809 14,646
------- -------
Cash and cash equivalents at end of period ........................................... $11,942 $14,348
======= =======
</TABLE>

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5
<PAGE>

PORTAL SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(1) Significant Accounting Policies:

Nature of Business and Basis of Presentation

Portal Software, Inc. or Portal, formerly Portal Information Network, Inc.,
was incorporated in 1994 as a California corporation and reincorporated in
Delaware in April 1999. Portal markets and supports real-time customer
management and billing software, or CM&B software, for providers of Internet-
based services. Portal's software is a comprehensive solution that is designed
to meet the complex, mission-critical provisioning, accounting, reporting and
marketing needs of providers of Internet-based services. Portal markets its
products worldwide through a combination of a direct sales force and
distribution partners. Substantially all of Portal's license revenues are
derived from sales of its Infranet product.

The accompanying unaudited condensed consolidated financial statements include
the accounts of Portal and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The balance sheet at April 30, 1999 and the statement of operations and cash
flows for the three months ended April 30, 1999 and 1998 have been prepared
without audit. In the opinion of management, these financial statements reflect
all adjustments that are necessary for a fair presentation of the results for
and as of the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any future period. The condensed consolidated financial statement information
as of January 31, 1999 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 the Company's final
prospectus filed with the Securities and Exchange Commission on May 6, 1999.

Revenue Recognition

License revenues are comprised of fees for multiyear or perpetual licenses
that are primarily derived from contracts with corporate customers and
resellers. Revenue from license fees is recognized when persuasive evidence of
an agreement exists, delivery of the product has occurred, no significant Portal
obligations with regard to implementation remain, the fee is fixed or
determinable and collectibility is probable. For electronic delivery, the
software is considered to have been delivered when Portal has provided the
customer with the access codes that allow for immediate possession of the
software. If the fee due from the customer is not fixed or determinable, revenue
is recognized as payments become due from the customer. If collectibility is not
considered probable, revenue is recognized when the fee is collected. Revenue on
arrangements with customers who are not the ultimate users (primarily resellers)
is not recognized until the product is delivered to the end user.

Services revenues are primarily comprised of revenue from systems integration
or other consulting fees, maintenance agreements and training. Arrangements that
include software services are evaluated to determine whether those services are
essential to the functionality of other elements of the arrangement. When
software services are considered essential, revenue under the arrangement is
recognized using contract accounting. When software services are not considered
essential, the revenue allocable to the software services is recognized as the
services are performed. Maintenance agreements provide technical support and
include the right to unspecified upgrades on an if-and-when-available basis.
Maintenance revenue is deferred and recognized on a straight-line basis as
services revenue over the life of the related agreement, which is typically one
year. Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.

Portal adopted Statement of Position 97-2, Software Revenue Recognition, or
SOP 97-2, and Statement of Position 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition, or SOP 98-4, as of February
1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue on
software transactions and supersede SOP 91-1, Software Revenue Recognition. The
adoption of SOP 97-2 and SOP 98-4 did not have a material impact on Portal's
financial results. However, full implementation guidelines for this standard

6
<PAGE>

have not yet been issued. Once available, the current revenue accounting
practices may need to change and such changes could affect Portal's future
revenues and results of operations.

In December 1998, the American Institute of Certified Public Accountants or
AICPA issued Statement of Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions, or SOP 98-9. SOP 98-9
amends SOP 98-4 to extend the deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March
15, 1999. All other provisions of SOP 98-9 are effective for transactions
entered into in fiscal years beginning after March 15, 1999. Portal has not yet
determined the effect of the final adoption of SOP 98-9 on its future revenues
and results of operations.

Concentration of Credit Risk

Portal sells its software and services to customers consisting mainly of North
American and European Internet service providers and enhanced service
developers. Portal performs ongoing credit evaluations of its customers and does
not require collateral. Portal maintains an allowance for potential credit
losses and such losses have been within management's expectations.

One customer accounted for more than 15% of total revenues during the quarter
ended April 30, 1999 and two customers accounted for a combined 26% of total
revenues during the quarter ended April 30, 1998. No other customers accounted
for more than 10% of total revenue for the quarters ended April 30, 1999 and
1998.

Segment Information

In June 1997, the Financial Accounting Standards Board or FASB issued
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," or FAS 131, effective for financial
statements for periods beginning after December 15, 1997. FAS 131 establishes
standards for the way that public business enterprises report financial and
descriptive information about reportable operating segments in annual financial
statements and interim financial reports issued to stockholders. Portal adopted
FAS 131 effective February 1, 1998. Portal operates solely in one segment, the
development and marketing of CM&B software, and therefore Portal is not impacted
by the adoption of FAS 131. Portal's foreign offices engage in sales, marketing
and support activities through its foreign subsidiaries and an overseas reseller
network. Operating losses generated by the foreign operations of Portal and
their corresponding identifiable assets were not material in any period
presented.

Cash and Cash Equivalents

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.
The carrying amount for cash and cash equivalents approximates their fair value
at January 31, 1999 and April 30, 1999. Portal generally invests its cash in
money market accounts with major financial institutions.

Portal classifies, at the date of acquisition, its marketable securities in
accordance with the provisions of the FASB's Statement of Financial Accounting
Standards No.115, "Accounting for Certain Investments in Debt and Equity
Securities". Currently, Portal classifies its securities as available-for-sale,
which are reported at fair market value, with the related unrealized gains and
losses included in stockholders' equity. Unrealized and realized gains and
losses were not material in the periods presented.

7
<PAGE>

Other Assets

Other assets consisted of the following:
<TABLE>
<CAPTION>
April 30, January 31,
1999 1999
---- ----
(in thousands)
<S> <C> <C>
Prepaid services - long term portion (see Note 4) ............................... $3,048 $ --
Deposits and other .............................................................. 320 204
------ ----

$3,368 $204
====== ====
</TABLE>

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 amounts reported in the financial statements and accompanying notes.
Actual results could differ materially from those estimates.

Net Loss Per Common Share

Basic net loss per common share and diluted net loss per common share are
presented in conformity with FAS 128, "Earnings Per Share", for all periods
presented. Following the guidance given by the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, common stock and convertible
preferred stock that has been issued or granted for nominal consideration prior
to the anticipated effective date of the initial public offering must be
included in the calculation of basic and diluted net loss per common share as if
these shares had been outstanding for all periods presented. To date, Portal has
not issued or granted shares for nominal consideration.

In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Pro forma basic and
diluted net loss per common share, as presented in the condensed consolidated
statements of operations, has been computed for the three months ended April 30,
1999 and 1998 as described above, and also gives effect, under Securities and
Exchange Commission guidance, to the conversion of the convertible preferred
stock (using the if-converted method) from the original date of issuance.

Portal has excluded all convertible preferred stock, warrants for convertible
preferred stock, outstanding stock options, and shares subject to repurchase
from the calculation of diluted loss per common share because all such
securities are antidilutive for all periods presented.

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

<TABLE>
<CAPTION>
Three Months ended
April 30,
---------
1999 1998
------------ ------------
<S> <C> <C>
Net loss ........................................................................ $(5,534) $ (2,141)
======= ========
Basic and diluted:
Weighted-average shares of common stock outstanding .......................... 39,294 38,144
Less: Weighted-average shares subject to repurchase .......................... (5,751) (12,151)
------- --------
Weighted-average shares used in computing basic and diluted net loss per share .. 33,543 25,993
======= ========
Basic and diluted net loss per share ............................................ $ (0.16) $ (0.08)
======= ========
</TABLE>

8
<PAGE>

<TABLE>
<S> <C> <C>
Pro forma:
Net loss ........................................................................ $(5,534) $ (2,141)
======= ========
Shares used above .............................................................. 33,543 25,993
Pro forma adjustment to reflect weighted effect of assumed conversion of
convertible preferred stock ................................................... 28,652 28,359
------- --------
Shares used in computing pro forma basic and diluted net loss per share ......... 62,195 54,352
======= ========
Pro forma basic and diluted net loss per share .................................. $ (0.09) $ (0.04)
======= ========
</TABLE>

Comprehensive Income (Loss)

Portal adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", or FAS 130, at January 31, 1999. Under FAS 130, Portal is
required to display comprehensive income and its components as part of the
financial statements. Other comprehensive income includes certain changes in
equity that are excluded from net income/loss. Specifically, FAS 130 requires
unrealized holding gains and losses on available-for-sale securities to be
included in accumulated other comprehensive income. Portal has no material
components of other comprehensive loss and, accordingly, the comprehensive loss
is the same as net loss for all periods presented.

(2) Long-Term Debt

In July 1997, Portal entered into a $3.0 million note payable agreement with a
financial institution to finance working capital. The agreement was subsequently
amended in February 1999 to change the installment payment dates. The note,
bearing an interest rate at 10.75% per annum, was payable in three installments
of $1.5 million, $0.5 million, and $1.0 million on February 19, 1999, March 31,
1999, and April 30, 1999. In connection with these notes, Portal issued warrants
to the lender to purchase 130,098 shares of Series B preferred stock at an
exercise price of $1.50 per share. As of April 30, 1999, the entire loan had
been repaid.

(3) Line of Credit

On April 15, 1999, Portal entered into a line of credit with a bank under
which Portal may borrow up to $5 million. Amounts borrowed under this line of
credit bear interest at a rate of the bank's prime rate plus 0.5% and mature on
April 13, 2000. On April 22, 1999, Portal borrowed $1.0 million under the line
of credit to repay the final installment of the term loan that matured in April
1999 (See Note 2). The entire balance on the line of credit was repaid in May
1999.

(4) Agreement with Andersen Consulting LLC

Under this agreement, Portal agreed to pay Andersen Consulting LLC for its
services a minimum services fee in cash of $2.8 million and a cash settled put
for 200,000 of the shares to be purchased by Andersen Consulting LLC. This put
guaranteed a closing value of $6.0 million at the end of the first day of
trading for these 200,000 shares and required Portal to pay Andersen Consulting
LLC in cash for any differences between the closing value of these shares and
$6.0 million. Upon the date of the arrangement, Portal recorded the fair value
of the put of approximately $3.8 million. The value of the put was determined
using the Black-Scholes model using a risk-free interest rate of 6.3%, an
expected life of one month and a volatility factor of 1.00. The final value of
the put was to be determined at the end of the first trading day of Portal's
common stock. Any change in fair value of the liability at

9
<PAGE>

balance sheet dates prior to the initial public offering and at the closing of
the first day of trading will be reported as a gain or loss in the respective
periods.

At April 30, 1999, the initial fair value of the put, approximately $3.8
million, has been classified as a prepaid service asset and will be amortized
systematically over the period of the service agreement, which is anticipated to
be between three and five years. Upon signing of the definitive agreement, the
service fee of $2.8 million will also be capitalized and amortized
systematically over the same period.

Subsequent to quarter end, Portal completed its initial public offering (see
Note 8). Based on the closing price of Portal's common stock at the end of the
first day of trading, the net cash settlement of the put was computed at a value
of zero. As a result, a gain upon remeasurement of the liability of
approximately $3.8 million will be recorded as other income in the quarter ended
July 31, 1999. The related asset will continue to be amortized over the period
of the service agreement.

(5) Stockholder's Equity

Stock Split

On April 29, 1999, Portal reincorporated in Delaware through a merger of
Portal Software, Inc., a California corporation (the "Californian Company") into
Portal Software, Inc., a Delaware Corporation, the surviving corporation.
Pursuant to this reincorporation, each share of common stock of Portal
California became three shares of common stock of Portal and each share of
Series A and Series B Preferred Stock of Portal California became three shares
of Series A and Series B Preferred Stock of Portal. All share and per share
amounts in the accompanying condensed consolidated financial statements have
been adjusted retroactively.

1995 Stock Option/Stock Issuance Plan

In February 1999, the Board of Directors approved an amendment to the 1995
Stock Option/Stock Issuance Plan to increase the number of shares authorized for
issuance by 6,000,000 shares. This increase was approved by the stockholders in
April 1999.

1999 Stock Incentive Plan

In February 1999, the Board of Directors approved the adoption of the 1999
Stock Incentive Plan. This was approved by the stockholders in April 1999. A
total of 16,122,042 shares of common stock have been reserved for issuance under
the 1999 Stock Incentive Plan based on the number of shares of common stock
available for grant under the 1995 Stock Option/Stock Issuance Plan at January
31, 1999; the number of options outstanding under the 1995 Stock Option/Stock
Issuance Plan as of January 31, 1999; and an additional 3,600,000 shares of
common stock available for future issuance. The price at which the options to
purchase common stock may be issued is the fair market value of Portal's common
stock at the close of the previous business day.

1999 Employee Stock Purchase Plan

In February 1999, the Board of Directors approved the adoption of Portal's
1999 Employee Stock Purchase Plan. This was approved by the stockholders in
April 1999. A total of 1,800,000 shares of common stock have been reserved for
issuance under the 1999 Purchase Plan. The 1999 Purchase Plan permits eligible
employees to acquire shares of Portal's common stock through periodic payroll
deductions of up to 15% of total compensation. No more than 1,250 shares may be
purchased on any purchase date per employee. Each offering period will have a
maximum duration of 24 months. The price at which the common stock may be
purchased is 85% of the lesser of the fair market value of Portal's common stock
on the first day of the applicable offering period or on the last day of the
respective purchase period. The initial offering period commenced on May 6, 1999
and will end on the last business day of May 2001.

10
<PAGE>

(6) Reincorporation and Amendment to the Certificate of Incorporation

In February 1999, Portal's Board of Directors authorized the reincorporation
of the Company in the state of Delaware. This reincorporation was subsequently
approved by the stockholders and became effective on April 29, 1999. Upon
reincorporation, Portal was authorized to issue 250,000,000 shares of common
stock, $0.001 par value and 5,000,000 shares of undesignated preferred stock,
$0.001 par value. The Board of Directors have the authority to determine the
price, rights, preferences, privileges and restrictions of the preferred stock.

(7) Income Taxes

Portal computes the provision (benefit) for income taxes by applying the
estimated annual effective tax rate to recurring operations and other taxable
items. The $0.4 million income tax provision for the quarter ended April 30,
1999 is the result of alternative minimum taxes, foreign withholding taxes on
revenue, and tax on earnings generated from operations in certain foreign
jurisdictions.

(8) Subsequent Event

Initial Public Offering

On May 11, 1999, Portal completed an initial public offering of its Common
Stock. All 4.6 million shares covered by Portal's Registration Statement on
Form S-1, including shares covered by an overallotment option that was
exercised, were sold by Portal at a price of $14.00 per share, less an
underwriting discount of $0.98 per share. In addition, on May 11, 1999, the
Company issued 380,184 shares of Common Stock to Anderson Consulting LLC and 3.0
million shares of Common Stock to Cisco Systems, Inc. for $13.02 per share or an
aggregate purchase price of approximately $44.0 million. Net proceeds to the
Company from all shares sold were approximately $104 million. Upon the
consummation of Portal's initial public offering on May 11, 1999, all of the
then outstanding Series A Preferred Stock and Series B Preferred Stock
automatically converted into Common Stock.

11
<PAGE>

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

Portal Software, Inc. develops, markets and supports real-time customer
management and billing software, known as CM&B software, for providers of
Internet-based services. In late 1993, Portal began focusing on developing and
marketing real-time CM&B software for the Internet. The first generally
available version of the product, named Infranet, was shipped in May 1996.

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

. license fees from new customers;

. license fees for new products to existing customers; and

. growth in the subscriber base of its existing customers, which will lead to
increased revenue from subscriber-based licenses.

Portal has generated a substantial portion of its historical Infranet revenues
from approximately 80 customers. Portal has established a series of partnerships
with systems integrators and hardware platform, software and service providers.
Portal has derived, and anticipates that it will continue to derive, a
substantial portion of its revenues from customers that have significant
relationships with its market and platform partners.

RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three months
ended April 30, 1999 and 1998 expressed as a percentage of total revenues.

<TABLE>
<CAPTION>
Three Months
Ended April 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
License fees ........................................................ 59.8 % 53.7 %
Services ............................................................ 40.2 46.3
----- -----
Total revenues ................................................... 100.0 100.0
----- -----

Costs and expenses:
Cost of license fees ................................................ 1.2 1.5
Cost of services .................................................... 27.7 29.5
Research and development ............................................ 28.3 54.3
Sales and marketing ................................................. 48.3 49.2
General and administrative .......................................... 14.7 17.5
Amortization of deferred stock compensation ......................... 13.4 2.4
----- -----

Total costs and expenses ......................................... 133.6 154.4
----- -----

Loss from operations .................................................. (33.6) (54.4)
Interest income (expense) and other income, net ....................... (0.2) 1.8
----- -----
Loss before income taxes .............................................. (33.8) (52.6)
Provision for income taxes ............................................ 2.7 0.1
----- -----
Net loss .............................................................. (36.5) (52.7)
===== =====
</TABLE>

12
<PAGE>

Revenues

Total revenues were $15.2 million in the quarter ended April 30, 1999, an
increase of approximately $11.1 million or 273% over the comparable period in
1998. License fees revenues increased as a percentage of total revenues in the
quarter ended April 30, 1999 compared to the quarter ended April 30, 1998
primarily because license fees revenue growth exceeded service revenue growth.
One customer accounted for more than 15% of total revenues during the quarter
ended April 30, 1999 and two customers accounted for a combined 26% of total
revenues during the quarter ended April 30, 1998. No other customers accounted
for more than 10% of total revenue for the quarters ended April 30, 1999 and
1998.

License fees totaled $9.1 million in the quarter ended April 30, 1999, an
increase of approximately $6.9 million or 315% over the comparable period ended
April 30, 1998. The increase in license fees was primarily due to expanded
marketing activities, growth in Portal's sales force and greater demand for and
the acceptance of Infranet.

Services revenues were $6.1 million in the quarter ended April 30, 1999, an
increase of approximately $4.2 million or 224% over the comparable period ended
April 30, 1998. The increase in services revenues resulted, in part, from the
increase in support and maintenance service fees related to Portal's growing
customer base, both in terms of new directly supported sites and additional
users at existing sites, and the renewal of maintenance contracts. In addition,
the increase in services revenues resulted from increased demand for Portal's
consulting, maintenance and training services to meet the increasingly complex
demands of Portal's customers.

<TABLE>
<CAPTION>
Three Months
Ended April 30,
--------------- Percent
(in thousands) 1999 1998 Change
-------------- -------------- --------------
<S> <C> <C> <C>
Geographical Revenues:
North America ................................................... $10.5 $ 3.3 218%
Percentage of total revenues .................................. 69% 80%
International
Europe ......................................................... 3.9 0.6 550%
Percentage of total revenues ................................. 26% 15%
Intercontinental ............................................... 0.8 0.2 300%
Percentage of total revenues .................................. 5% 5%
----- ----- ---
Total international ............................................ 4.7 0.8 488%
Percentage of total revenues .................................. 31% 20%
----- ----- ---
Total revenues ................................................... $15.2 $ 4.1 273%
===== ===== ===
</TABLE>

North American revenues, which are defined by Portal as revenues from the
United States and Canada, were $10.5 million in the quarter ended April 30,
1999, an increase of approximately $7.2 million or 218%, over the comparable
period ended April 30, 1998. The increase in North American revenues was
primarily due to expanded marketing activities, greater acceptance of Infranet
and growth in Portal's sales force in the North American market.

International revenues for Europe and Intercontinental, which are defined by
Portal as Asia-Pacific, Japan and Latin America, totaled $4.7 million in the
quarter ended April 30, 1999, an increase of approximately $3.9 million or 488%
over the comparable period ended April 30, 1998. European revenues were $3.9
million in the quarter ended April 30, 1999, an increase of approximately $3.3
million or 550% over the comparable period ended April 30, 1998.
Intercontinental revenues were $0.8 million in the quarter ended April 30, 1999,
an increase of approximately $0.6 million or 300% over the comparable period
ended April 30, 1998. The increase in international revenues was primarily due
to growth in Portal's direct sales force and increased marketing efforts
worldwide including the opening of an international sales office in Hong Kong in
July 1998, the establishment of Portal's European headquarters in the United
Kingdom in April 1999 and expansion of operations in Europe.

13
<PAGE>

International revenues represented 31% of total revenues in the quarter ended
April 30, 1999, compared with approximately 20% in the comparable period ended
April 30, 1998. In the quarter ended April 30, 1999, revenues from Europe were
26% of total revenues and revenues from Intercontinental were 5% of total
revenues.

Expenses

Cost of License Fees

Cost of license fees consists of resellers' commission payments to systems
integrators and third-party royalty obligations with respect to third-party
technology included in Infranet. Cost of license fees was $0.2 million in the
quarter ended April 30, 1999, an increase of approximately $0.1 million or 208%
from the comparable period ended April 30, 1998. The increase in cost of license
fees is primarily due to increased resellers' commissions resulting from Portal
expanding its base of systems integrator partners. Gross margin for license fees
was approximately 98% in the quarter ended April 30, 1999 compared to
approximately 97% in the comparable period ended April 30, 1998. For the three
months ended April 30, 1999 and 1998, Portal did not incur any shipping,
packaging or documentation costs, as its product was delivered electronically
over the Internet.

Cost of Services

Cost of services primarily consists of maintenance, consulting and training
expenses. Cost of services was $4.2 million in the quarter ended April 30, 1999,
an increase of approximately $3.0 million or 249% over the comparable period
ended April 30, 1998. Gross margin for services was approximately 31% in the
quarter ended April 30, 1999 compared to approximately 36% in the comparable
period ended April 30, 1998. The increase in cost of services and the resultant
decrease in gross margin was primarily due to an increase in the number of
consulting and support personnel necessary to support both the expansion of
Portal's installed base of customers and new installations. Portal expects cost
of services to increase substantially in the next few quarters as a result of
increased demand for services.

Research and Development Expenses

Research and development expenses consist primarily of personnel and related
costs for Portal's development and technical support efforts. Research and
development expenses were $4.3 million in the quarter ended April 30, 1999, an
increase of approximately $2.1 million or 94% over the comparable period ended
April 30, 1998. The increase was primarily due to an increase in the number of
research and development personnel necessary to support both expanded
functionality of Infranet and increases in Portal's quality assurance, technical
support and technical publications operations. Portal currently believes its
investment in research and development will increase substantially during the
remainder of the fiscal year. Portal has not capitalized any software
development costs to date.

Sales and Marketing Expenses

Sales and marketing expenses consist of personnel and related costs for
Portal's direct sales force, marketing staff and marketing programs, including
trade shows, advertising and costs associated with Portal's recruitment of new
and maintenance of existing strategic partnerships. Sales and marketing expenses
were $7.3 million in the quarter ended April 30, 1999, an increase of
approximately $5.3 million or 266% over the comparable period ended April 30,
1998. The increase was due to a number of factors including an increase in the
number of sales and marketing personnel, the opening of new sales offices in the
United States and Hong Kong, the establishment of a European headquarters in the
United Kingdom, the costs of establishing sales capabilities in China and
expenses incurred in connection with trade shows and additional marketing
programs. Portal expects that sales and marketing expenses will increase
substantially over the next year as Portal hires additional sales and marketing
personnel, increases spending on advertising and marketing programs and
establishes sales offices in additional domestic and international locations.

14
<PAGE>

General and Administrative Expenses

General and administrative expenses consist primarily of personnel and related
costs for general corporate functions, including finance, accounting, legal,
human resources and facilities as well as information system expenses not
allocated to other departments. General and administrative expenses were $2.2
million in the quarter ended April 30, 1999, an increase of approximately $1.5
million or 211% over the comparable period ended April 30, 1998. The increase
was primarily due to an increase in the number of general and administrative
personnel and to increased legal and accounting costs incurred in connection
with business activities. Portal expects that general and administrative
expenses will increase substantially over the current fiscal year as Portal
hires additional general and administrative personnel.

Amortization of Deferred Stock Compensation

Portal recorded deferred stock compensation of approximately $16.8 million in
fiscal year 1999, representing the difference between the exercise prices of
options granted to acquire certain shares of common stock during fiscal year
1999 and the deemed fair value for financial reporting purposes of Portal's
common stock on their respective grant dates. Portal amortized deferred
compensation expense of approximately $2.0 million during the quarter ended
April 30, 1999. This compensation expense relates to options awarded to
individuals in all operating expense categories. Total deferred compensation at
April 30, 1999 of approximately $12.4 million is being amortized over the
vesting periods of the options on a graded vesting method. The amortization of
deferred compensation currently recorded is estimated to be $8.2 million in
fiscal year 2000, $3.7 million in fiscal year 2001, $1.9 million in fiscal year
2002 and $0.6 million in fiscal year 2003.

Provision for Income Taxes

The $0.4 million income tax provision shown for this period is the result of
alternative minimum taxes, foreign withholding taxes on revenue and tax on
earnings generated from operations in certain foreign jurisdictions. Under
Statement of Financial Accounting Standards No. 109 (FAS 109), deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. FAS 109 provides for the recognition of deferred tax
assets if realization of such assets are more likely than not. Based on the
weight of available evidence, the Company has provided a valuation allowance
against certain deferred tax assets. The Company will continue to evaluate the
realizability of the deferred tax assets on a quarterly basis.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $11.9 million at April 30, 1999, compared to
a balance of $11.8 million at January 31, 1999.

Portal generated $3.1 million in cash from operations in the quarter ended
April 30, 1999, an increase of $3.7 million over the $0.6 million used in the
comparable period ended April 30, 1998. Amortization of deferred stock
compensation, which is included in the results of operations, but does not
require the use of cash, amounted to $2.0 million for the three months ended
April 30, 1999 compared to $0.1 million for the three months ended April 30,
1998. Net cash from operations in the current quarter was primarily comprised
of a $5.5 million loss and a $2.4 million increase in other assets, offset by a
$6.1 million increase in deferred revenue and a combined increase in accounts
payable and accrued compensation of $2.7 million.

Portal has continued to make significant investments in equipment. During the
quarter ended April 30, 1999, Portal purchased computer servers, workstations,
networking equipment and other capital equipment amounting to approximately $1.6
million, primarily to further expand its product capability, increase internal
network communication, product demonstration and service capability. Of this
amount, $0.3 million was funded from Portal's equipment lease line facility.

15
<PAGE>

Portal has raised equity capital from outside investors to fund its
operations. In fiscal year 1997, Portal raised approximately $2.4 million from
the sale of preferred stock. In fiscal year 1998, Portal raised approximately
$15.0 million from the sale of preferred stock. In fiscal year 1999, Portal
raised $0.4 million from the exercise of warrants for preferred stock issued in
connection with its capital lease line facility and its term loan, and raised an
additional $0.4 million from sales of common stock, primarily upon exercise of
stock options by employees. In fiscal year 1998, Portal also raised an
additional $0.1 million from sales of common stock, primarily upon exercise of
stock options by employees.

Historically, Portal has used debt and leases to partially finance its
operations and capital purchases. Portal has a $3.0 million capital lease line
facility with an equipment lessor, which it established in fiscal year 1998. The
lease line has a term of 48 months and bears interest at a rate of 8.5% per
annum. During the three months ended April 30, 1999, Portal repaid an
outstanding $3.0 million term loan with a finance company. The term loan was
collateralized by substantially all of Portal's assets, with the exception of
new equipment purchased using funds provided by the capital lease line facility.
On April 15, 1999, Portal entered into a line of credit with a bank under which
Portal may borrow up to $5.0 million. Amounts borrowed under this line of credit
bear interest at a rate of the bank's prime rate plus 0.5% and mature on April
13, 2000. As of April 30, 1999, Portal had borrowed $1.0 million under the line
of credit, which it used to repay the remaining $1.0 million installment of the
term loan which matured in April 1999. The outstanding balance on the line of
credit was repaid in May 1999 from the proceeds of Portal's initial public
offering. Portal also converted a customer deposit for prepaid services into a
$1.1 million short-term liability in fiscal year 1999. This liability matures on
November 30, 1999 and bears interest at a rate of 10% per annum. The balance due
in November may decline as services rendered for this customer are deducted from
the outstanding principal.

On April 12, 1999, Portal agreed to enter into a strategic alliance with
Andersen Consulting LLC under which Andersen Consulting LLC will provide
services to Portal, the parties will expand their existing marketing alliance
and will work closely together to expand their customer service and marketing
relationship. Under this agreement, Portal will pay Andersen Consulting LLC for
its services a minimum services fee in cash of $2.8 million and a cash settled
put for 200,000 of the shares to be purchased by Andersen Consulting LLC in a
private placement concurrent with Portal's initial public offering. This put
guaranteed a closing value of $6.0 million at the end of the first day of
trading for these 200,000 shares and required Portal to pay Andersen Consulting
LLC in cash for any difference between the closing value of these shares and
$6.0 million. Because the closing value exceeded $6.0 million, Portal will not
be required to make any payment with respect to this put.

The capital lease line facility, the borrowings under the line of credit and
the customer debt comprised the entire amount of the debt obligations on
Portal's balance sheet as of April 30, 1999. The capital lease line facility
includes certain covenants requiring minimum liquidity, tangible net worth and
profitability over time and becomes due immediately if Portal fails to meet
these covenants. Portal is currently, and has always been, in compliance with
these covenants.

On May 11, 1999, Portal completed an initial public offering of its Common
Stock. All 4.6 million shares covered by the Company's Registration Statement
on Form S-1, including shares covered by an overallotment option that was
exercised, were sold at a price of $14.00 per share, less an underwriting
discount of $0.98 per share. In addition, on May 11, 1999, the Company issued
380,184 shares of Common Stock to Anderson Consulting LLC and 3.0 million shares
of Common Stock to Cisco Systems, Inc. for $13.02 per share or an aggregate
purchase price of approximately $44.0 million. Net proceeds to Portal from all
shares sold were approximately $104 million.

Portal's capital requirements depend on numerous factors, including market
acceptance of Portal's products, the resources Portal devotes to developing,
marketing, selling and supporting its products, the timing and extent of
establishing international operations, and other factors. Portal expects to
devote substantial capital resources to hire and expand its sales, support,
marketing and product development organizations, to expand marketing programs,
to establish additional facilities worldwide and for other general corporate
activities. Portal believes that its current cash balances and the net proceeds
from the initial public offering and the concurrent placement will be sufficient
to fund its operations for at least the next 12 months.

16
<PAGE>

Year 2000 Readiness Disclosure

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.

Portal has conducted a limited review of the current version of Infranet and
the two immediately preceding releases. This review included a search of the
software code, and Portal believes that it has identified all instances where
date specific information is required. Based on this limited review, Portal
believes these Infranet releases, when configured, maintained (including the
installation of all maintenance releases and bug fixes) and used in accordance
with its documentation, correctly recognize and properly process Year 2000 date
code. Portal has no plans to conduct a review of other releases of Infranet and
products that are scheduled for obsolescence prior to the end of calendar year
1999.

Portal's software runs on several hardware platforms and operating systems,
including those provided by Compaq Computer Corporation, Hewlett-Packard
Company, Microsoft Corporation and Sun Microsystems, Inc. In addition, Portal's
software interfaces with third-party systems, such as credit card processing
services and customer-specific modifications that Portal service providers,
third-party integrators and customers have created to be used with Infranet.
Portal's software is, therefore, dependent upon the correct processing of dates
by these systems, interfaces and modifications.

Portal plans to contact all partners for which Portal provides integration as
part of Infranet's standard product configuration. In contacting these partners,
Portal has attempted to ascertain what release or releases of their products are
Year 2000 compliant. To date, Portal has received compliance information from
most of its material partners and will continue to pursue obtaining such
information from all remaining partners. Portal may be unable to obtain
compliance information from all of these partners. Moreover, Portal's partners
may detect errors in their products after previously indicating that their
products are Year 2000 compliant. Such revelations by Portal's partners have
occurred in the past and may occur in the future; and these revelations have
caused and could cause Portal to make changes in its products in response. In a
newly created test environment, Portal will review Infranet and interfaces to
partner products. Portal may not identify all Year 2000 failures in partner
products because not all failures are within the scope of these tests. Testing
of these interfaces is currently underway, and Portal expects to complete these
tests by September 1999.

Certain of Portal's customers elect to integrate Infranet with interfaces not
ordinarily supported by Portal. This integration, whether performed by Portal,
the customer or a third-party systems integrator, is not within the scope of
Portal's in-house testing efforts. Portal has advised all customers that they
must independently test these integrations for Year 2000 compliance.

Portal uses multiple software systems for its internal business purposes,
including accounting, human resources, e-mail, engineering development and
testing tools, customer service and support, professional services and sales
tracking applications. Portal has adopted a formal plan for determining the Year
2000 compliance of its major internal systems. Portal plans to obtain
verification of Year 2000 compliance for its major internal hardware equipment
and software systems by October 1999.

Portal is in the early stages of assessing its Year 2000 readiness. To date,
the costs for conducting this assessment have not been material. Portal
currently estimates that the costs of ensuring that its products and internal
systems are Year 2000 compliant will be approximately $500,000 to $750,000.
Portal is unable to predict to what extent its business may be affected if its
software or the systems that operate in conjunction with its software or its
internal systems experience a material Year 2000 failure. Known or unknown
errors or defects that affect the operation of Portal's software could result in
delay or loss of revenue, interruption of customer management and billing
services, cancellation of customer contracts, diversion of development
resources, damage to Portal's reputation, increased service and warranty costs
and litigation costs, any of which could adversely affect Portal's business,
financial condition and results of operations. Year 2000 compliance is complex
and is subject to various uncertainties, including those described in this
section and under the caption "Risks Associated With Portal's Business and
Future Operating Results."

17
<PAGE>

Portal does not have a contingency plan to remediate any Year 2000 problems
that may arise and affect its products or internal systems in the future. If
such problems arise, Portal will need to make the necessary expenditures to
assess and remedy such problems. The nature, timing and extent of such
expenditures cannot be estimated. Such expenditures, if required, may have a
material adverse effect on its business, financial condition and results of
operations.

Portal believes that the following consequences are possible in a "worst case"
Year 2000 scenario:

. a significant number of operational inconveniences and inefficiencies for
Portal and its customers that will divert management's time and attention;
and

. costly business disputes, litigation and claims for pricing adjustments,
product returns and warranty obligations.

RECENT ACCOUNTING PRONOUNCEMENTS

During the quarter ended April 30, 1999, Portal adopted the provisions of the
AICPA's Statement of Position No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP No. 98-1 requires entities
to capitalize certain costs related to internal-use software once certain
criteria have been met. The adoption of this standard did not have a material
impact on Portal's financial position or results of operations.

During the quarter ended April 30, 1999, Portal adopted the provisions of the
AICPA's SOP No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-
5 requires that all start-up costs related to new operations must be expensed as
incurred. In addition, all start-up costs that were capitalized in the past must
be written off when SOP No. 98-5 is adopted. The adoption of this standard did
not have a material impact on Portal's financial position or results of
operations.

In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because
Portal does not currently hold any derivative instruments and does not engage in
hedging activities, Portal expects that the adoption of FAS No. 133 will not
have a material impact on its financial position or results of operations.
Portal will be required to implement FAS No. 133 for fiscal year 2001.

In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions, or SOP 98-9.
SOP 98-9 amends SOP 98-4 to extend the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. Portal
has not yet determined the effect of the final adoption of SOP 98-9 on its
future revenues and results of operations.

RISKS ASSOCIATED WITH PORTAL'S BUSINESS AND FUTURE OPERATING RESULTS

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

This report contains forward-looking statements that are not historical facts
but rather are based on current expectations, estimates and projections about
our business and industry, our beliefs and assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates"
and variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of
which are beyond our control,

18
<PAGE>

are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. These
risks and uncertainties include those described in this "Risks Associated With
Portal's Business and Future Operating Results" and elsewhere in this report.
Forward-looking statements that were true at the time made may ultimately prove
to be incorrect or false. Readers are cautioned not to place undue reliance on
forward-looking statements, which reflect our management's view only as of the
date of this report. We undertake no obligation to update these statements or
publicly release the results of any revisions to the forward-looking statements
that we may make to reflect events or circumstances after the date of this
report or to reflect the occurrence of unanticipated events.

It is difficult to predict our business because we have a limited history
operating as a provider of CM&B software

The results of operations for the three months ended April 30, 1999 and 1998
contained in this report are not necessarily indicative of results for fiscal
year ending January 31, 2000 or any other future period. Moreover, Portal has a
relatively brief operating history as a provider of CM&B software and had no
meaningful license revenue until 1996. Therefore, Portal will experience the
risks and difficulties frequently encountered by early stage companies in new
and rapidly evolving markets, including those discussed in this report. Our
business strategy may not prove successful, and we may not successfully address
these risks.

We have not achieved profitability and expect to continue to incur net losses
for at least the next several quarters

In order to become profitable, we must increase our revenues. We may not be
able to increase or even maintain our revenues, and we may not achieve
sufficient revenues or profitability in any future period. We incurred net
losses of approximately $5.5 million for the quarter ended April 30, 1999 and
$17.4 million for fiscal year 1999, $7.6 million for fiscal year 1998 and $2.3
million for fiscal year 1997. We have not achieved profitability and expect to
continue to incur net losses for at least the next several quarters even if
sales of our CM&B software continue to grow.

In addition, we expect to significantly increase our sales and marketing,
product development and administrative expenses. As a result, we will need to
generate significant revenues from sales of Infranet to achieve and maintain
profitability. We expect that we will face increased competition which may make
it more difficult to increase our revenues. In addition, we may experience price
competition which would lower our gross margins and our profitability. Another
factor that will lower our gross margins is the percentage of our revenues that
is derived from indirect channels and from services, both of which generally
have lower margins. If we do achieve profitability, we cannot be certain that we
can sustain or increase profitability on a quarterly or annual basis.

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

Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. In future quarters, our operating results
may be below the expectations of public market analysts and investors, and the
price of our common stock may fall. Factors that could cause quarterly
fluctuations include:

. variations in demand for our products and services;

. the timing and execution of individual contracts, particularly large
contracts that would materially affect our operating results in a given
quarter;

. the timing of sales of our products and services;

. our ability to develop and attain market acceptance of enhancements to
Infranet and new products and services;

. delays in introducing new products and services;

. new product introductions by competitors;

. changes in our pricing policies or the pricing policies of our competitors;

. the mix of products and services sold;

19
<PAGE>

. the mix of sales channels through which our products and services are sold;

. the mix of domestic and international sales;

. costs related to acquisitions of technologies or businesses;

. the timing of releases of new versions of third-party software and hardware
products that work with our products;

. our ability to attract, integrate, train, retain and motivate a substantial
number of sales and marketing, research and development, technical support
and other management personnel;

. our ability to expand our operations;

. the amount and timing of expenditures related to expansion of our
operations; and

. global economic conditions as well as those specific to ISPs and other
providers of Internet-based services.

We have difficulty predicting the volume and timing of orders. For example,
substantially all of our future revenues will come from licenses of Infranet and
related services, and the market for this product is in its early stages of
development and is therefore unpredictable. In any given quarter, our sales have
involved, and we expect will continue to involve, large financial commitments
from a relatively small number of customers. As a result, the cancellation or
deferral of even a small number of licenses of Infranet would reduce our
revenues, which would adversely affect our quarterly financial performance.
Also, we have often booked a large amount of our sales in the last month of the
quarter and often in the last week of that month. Accordingly, delays in the
closing of sales near the end of a quarter could cause quarterly revenue to fall
substantially short of anticipated levels. Significant sales may also occur
earlier than expected, which could cause operating results for later quarters to
compare unfavorably with operating results from earlier quarters.

We record as deferred revenue fees from contracts that do not meet our revenue
recognition policy requirements. While a portion of our revenues each quarter is
recognized from deferred revenue, our quarterly performance will depend
primarily upon entering into new contracts to generate revenues for that
quarter. New contracts that we enter into may not result in revenue in the
quarter in which the contract was signed, and we may not be able to predict
accurately when revenues from these contracts will be recognized.

We plan to significantly increase our operating expenses to expand our sales
and marketing operations, broaden our customer support capabilities, develop new
distribution channels and fund greater levels of research and development. We
determine our operating expenses largely on the basis of anticipated revenue
trends and a high percentage of our expenses are fixed in the short term. As a
result, a delay in generating or recognizing revenue could cause significant
variations in our operating results from quarter-to-quarter and could result in
substantial operating losses.

It is difficult to predict the timing of individual orders because Infranet has
a long and variable sales cycle

To date, the sales cycle for Infranet has been three to six months or more.
The long sales and implementation cycles for Infranet may cause license revenues
and operating results to vary significantly from period to period. Along with
systems integrators and our other distribution partners, we spend significant
time educating and providing information to our prospective customers regarding
the use and benefits of Infranet. Even after purchase, our customers tend to
deploy Infranet slowly and deliberately, depending on the specific technical
capabilities of the customer, the size of the deployment, the complexity of the
customer's network environment, and the quantity of hardware and the degree of
hardware configuration necessary to deploy Infranet.

Our business depends on the commercial acceptance of Infranet, and it is
uncertain to what extent the market will accept this product

Our future growth depends on the commercial success of Infranet. Substantially
all of our licensing revenues are derived from Infranet. Our business will be
harmed if our target customers do not adopt and purchase Infranet. The market
for Internet-based CM&B software is in its early stages of development. Our
future financial performance will also depend on the successful development,
introduction and customer acceptance of new and

20
<PAGE>

enhanced versions of Infranet. We are not certain that our target customers will
widely adopt and deploy Infranet as their CM&B solution. In the future we may
not be successful in marketing Infranet or any new or enhanced products or
services.

Significant technical challenges arise in our business because many of our
customers purchase and implement Infranet in phases, deploy Infranet across a
variety of computer hardware platforms and integrate it with a number of legacy
systems, third-party software applications and programming tools. Implementation
currently requires participation by our professional services group, which has
significantly limited resources. Some customers may also require us to develop
costly customized features or capabilities, which increase our costs and consume
our limited customer service and support resources. Also, revenues we derive
from our services business have a significantly lower margin than revenues
derived from licensing Infranet. If new or existing customers have difficulty
deploying our products or require significant amounts of our professional
services support, our operating margins could be harmed.

We must hire and retain qualified sales personnel to sell Infranet

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

We also use systems integrators and other strategic relationships to implement
and sell Infranet

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

Many of these partners also work with competing software companies, and our
success will depend on their willingness and ability to devote sufficient
resources and efforts to marketing our products versus the products of others.
We may not be able to enter into additional, or maintain our existing, strategic
relationships on commercially reasonable terms, or at all. Our agreements with
these parties typically are in the form of nonexclusive referral fee or reseller
agreements that may be terminated by either party without cause or penalty and
with limited notice. Therefore, there is no guarantee that any single party will
continue to market our products. If these relationships fail, we will have to
devote substantially more resources to the distribution, sales and marketing,
implementation and support of Infranet than we would otherwise, and our efforts
may not be as effective as those of our partners, either of which would harm our
business.

Our customer base is concentrated and the loss of one or more of our customers
could cause our business to suffer

A substantial portion of our license and services revenues in any given
quarter has been, and is expected to continue to be, generated from a limited
number of customers with large financial commitments. For example, one customer
in the quarter ended April 30, 1999 accounted for more than 15% of license
revenues. As a result, if a large contract is cancelled or deferred or an
anticipated contract does not materialize, our business would be harmed. We have
initially targeted large ISPs, including on-line divisions of telecommunications
carriers and other providers of Internet-based services. Some of the industries
we have targeted are consolidating, which could reduce the number of potential
customers available to us.

Our business will suffer dramatically if we fail to successfully manage our
growth

Our ability to successfully offer Infranet and new products and services in a
rapidly evolving market requires an effective planning and management process.
We continue to increase the scope of our operations domestically

21
<PAGE>

and internationally and have grown our headcount substantially. Our business
will suffer dramatically if we fail to effectively manage this growth. On June
1, 1999, we had more than 370 employees, compared to a total of 119 employees on
January 31, 1998. We expect to continue to hire new employees at a rapid pace.
This growth has placed, and our anticipated future operations will continue to
place, a significant strain on our management systems and resources and on our
internal training capabilities. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures, and will need to continue to expand, train and manage our work force
worldwide. We expect that we will also have to expand our facilities, and we may
face difficulties and significant expenses identifying and moving into suitable
office space.

Our significant international operations and our planned expansion of our
international operations make us much more susceptible to risks from
international operations

For first quarter ended April 30, 1999 and the year ended January 31, 1999, we
derived approximately 31% and 27% of our revenue, respectively, from sales
outside North America. As a result, we face risks from doing business on an
international basis, including, among others:

. reduced protection for intellectual property rights in some countries;

. licenses, tariffs and other trade barriers;

. difficulties in staffing and managing foreign operations;

. longer sales and payment cycles;

. greater difficulties in collecting accounts receivable;

. political and economic instability;

. seasonal reductions in business activity;

. potentially adverse tax consequences;

. compliance with a wide variety of complex foreign laws and treaties; and

. variance and unexpected changes in local laws and regulations.

We currently have offices in a number of foreign locations including the
United Kingdom, Hong Kong and Australia and plan to establish additional
facilities in other parts of the world. The expansion of our existing
international operations and entry into additional international markets will
require significant management attention and financial resources. We cannot be
certain that our investments in establishing facilities in other countries will
produce desired levels of revenue. In addition, we have sold Infranet
internationally for only a few years and we have limited experience in
developing localized versions of Infranet and marketing and distributing them
internationally.

Further, our international revenues are denominated in U.S. dollars.
Therefore, a strengthening of the dollar versus other currencies could make our
products less competitive in foreign markets. We do not currently engage in
currency hedging activities.

To the extent that we are unable to successfully manage expansion of our
business into international markets due to any of the foregoing factors, our
business could be adversely affected.

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

Our success and ability to compete depend substantially upon our internally
developed technology, which we protect through a combination of patent,
copyright, trade secret and trademark law. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
and use our products or technology or to develop products with the same
functionality as our products. Policing unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
Others may develop technologies that are similar or superior to our technology.
Moreover, as the number of

22
<PAGE>

competitors in our industry segments grow and the functionality of products in
different industry segments overlaps, we expect that our software products may
in the future become subject to third-party infringement claims. Some of our
competitors in the market for CM&B software may have filed or may intend to file
patent applications covering aspects of their technology upon which they may
claim our technology infringes. Any litigation, brought by us or by others,
could be time-consuming, result in costly litigation and diversion of technical
and management personnel, cause product shipment delays or require us to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on acceptable
terms, or at all, and could have a material and adverse impact on our gross
margins and profitability. If a successful claim of product infringement were
made against us, our business could be significantly harmed.

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

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

. loss of or delay in revenues and loss of market share;

. loss of customers;

. failure to achieve market acceptance;

. diversion of development resources;

. injury to our reputation;

. increased service and warranty costs;

. legal actions by customers against us; and

. increased insurance costs.

Our licenses with customers generally contain provisions designed to limit our
exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to us for
the product or service giving rise to the damages. However, these contractual
limitations on liability may not be enforceable, particularly if the damages
relate to a Year 2000 problem, and we may be subject to claims based on errors
in our software or mistakes in performing our services including claims relating
to damages to our customers' internal systems. A product liability claim,
whether or not successful, could harm our business by increasing our costs,
damaging our reputation and distracting our management.

In the past we have failed to release certain new products and upgrades on
time. These delays may result in:

. customer dissatisfaction;

. cancellation of orders and license agreements;

. negative publicity;

. loss of revenues;

. slower market acceptance; or

. legal action by customers against us.

23
<PAGE>

Our business may be harmed if we are unable to develop, license or acquire new
products or enhancements to Infranet on a timely and cost-effective basis, or if
these products or enhancements are not accepted by the market.

Year 2000 issues present technological risks, could cause disruption to our
business and could harm sales of Infranet

Concern over, and problems associated with, the impact of the ocurrance of the
year 2000 on Portal's software products, internal systems, customers, suppliers
and the overall software industry could affect our future operating results in
several ways. Errors or defects that affect the operation of our software could
result in:

. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; and
. litigation costs.

We are still in the process of completing our Year 2000 readiness plans, tests
and analyses and face uncertainty as a result. Infranet operates in complex
network environments and directly and indirectly interacts with a number of
other hardware and software systems. Our software also interfaces with third-
party systems, such as credit card processing services and customer-specific
modifications that our service providers, third-party integrators and customers
have created to be used with Infranet. Despite preliminary investigation and
testing by us and our partners, Infranet and the underlying systems and
protocols running it may contain previously undetected errors or defects
associated with Year 2000 date functions. Furthermore, our testing to date has
been limited to the current version of Infranet and two prior releases of
Infranet. Several of our customers may continue to use versions of Infranet
that predate the versions of the product that are being tested or supported by
us. We may not be able to identify all Year 2000 failures in our partners'
products. We have attempted to ascertain what release or releases of our
partners' products are Year 2000 compliant. To date, Portal has received
compliance information from most of its material partners. However, Portal may
be unable to obtain compliance information from all of these partners.
Moreover, our partners may detect errors in their products after previously
indicating that their products are Year 2000 compliant. Such revelations by our
partners, have occurred in the past and may occur in the future; and these
revelations have and could cause us to make changes in our products in response.
In addition, some of our customers elect to integrate Infranet with interfaces
not ordinarily supported by Portal. This integration, whether performed by
Portal, the customer or a third party systems integrator, is also not within the
scope of Portal's in-house testing efforts. Portal has advised all customers
that they must independently test these integrations for year 2000 compliance.

We also are in the process of evaluating and assessing the Year 2000
compliance of many of our internal systems. Accordingly, we are unable to
predict to what extent our business may be affected if our software, the systems
that operate in conjunction with our software or our internal systems experience
a material Year 2000 failure.

The purchasing patterns of our customers and potential customers based on Year
2000 issues may make it difficult to predict future sales of Infranet. Many
companies are deferring software purchases until after January 1, 2000. Other
companies are accelerating purchases of software products prior to 2000, causing
an increase in short-term demand and a consequent decrease in long-term demand
for software products.

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

Portions of Infranet incorporate software developed and maintained by third-
party software vendors, such as operating systems, tools and database vendors.
We expect that we may have to incorporate software from third party vendors and
developers to a larger degree in our future products. Any significant
interruption in the availability of

24
<PAGE>

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

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

The market for CM&B software and services and Internet applications is
characterized by:

. rapid technological change;

. frequent new product introductions;

. changes in customer requirements; and

. evolving industry standards.

Future versions of hardware and software platforms embodying new technologies
and the emergence of new industry standards could render our products obsolete.
Our future success will depend upon our ability to develop and introduce a
variety of new products and product enhancements to address the increasingly
sophisticated needs of our customers.

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

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

We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We face competition from providers of traditional CM&B
software such as Amdocs Limited, Kenan Systems Corporation, which was recently
acquired by Lucent Technologies, Inc., LHS Group Inc. and Saville Systems PLC;
emerging providers of Internet-specific billing software, such as Belle Systems
S/A, Solect Technology Group and TAI Corporation; and proprietary systems
developed by providers of Internet-based services. We also compete with systems
integrators and with internal MIS departments of larger telecommunications
carriers. We are aware of numerous other major ISPs, software developers and
smaller entrepreneurial companies that are focusing significant resources on
developing and marketing products and services that will compete with Infranet.
We anticipate continued growth and competition in the on-line services and
telecommunications industries and the entrance of new competitors into the CM&B
software market, and that the market for our products and services will remain
intensely competitive. We expect that competition will increase in the near term
and that our primary long-term competitors may have not yet entered the market.
Many of our current and future competitors have significantly more personnel and
greater financial, technical, marketing and other resources than we do.

Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, current and
potential competitors have greater name recognition and more extensive customer
bases that they can leverage. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share, any of which could harm our business.

Our business substantially depends upon the continued growth of the Internet and
Internet-based services

We sell Infranet to organizations providing Internet-based services.
Consequently, our future revenues and profits, if any, substantially depend upon
the continued acceptance and use of the Internet as an effective medium of

25
<PAGE>

commerce and communication. Rapid growth in the use of the Internet and on-line
services is a recent phenomenon and it may not continue. As a result, a broad
base of regular Internet users may not develop, and the market may not accept
recently introduced services and products that rely upon the Internet, such as
Infranet.

Future regulation of the Internet may slow its growth, resulting in decreased
demand for our products and services and increased costs of doing business

The growth and development of the market for Internet-based services may
prompt calls for more stringent consumer protection laws. The adoption of any
additional laws or regulations may decrease the expansion of the Internet or
impose additional burdens on those companies conducting business on-line. A
decline in the growth of the Internet could decrease demand for our products and
services and increase our cost of doing business, or otherwise harm our
business. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our costs
could increase and our growth could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other on-line services.

Our future success depends on our ability to attract and retain additional
personnel, particularly qualified sales persons

We intend to hire a significant number of additional sales, support,
marketing, administrative and research and development personnel in 1999 and
beyond. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel in the future. Our
business cannot continue to grow if we cannot attract qualified personnel. We
currently have a small customer service and support organization and will need
to increase our staff to support new customers and the expanding needs of our
existing customers. Hiring qualified customer service and support personnel, as
well as sales, marketing, administrative and research and development personnel,
is very competitive in our industry, particularly in the San Francisco Bay Area,
where Portal is headquartered, due to the limited number of people available
with the necessary technical skills and understanding of the Internet. We expect
to face greater difficulty attracting these personnel with equity incentives as
a public company than we did as a privately held company. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel in general, and on the services of John
E. Little, our President and Chief Executive Officer, and David S. Labuda, our
Chief Technology Officer, in particular. None of our officers or key employees
is bound by an employment agreement for any specific term. Our relationships
with these officers and key employees are at will.

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

Although we have not done so in the past, we may make acquisitions or
investments in other companies, products or technologies in the future. If we
make any acquisitions, we will be required to assimilate the operations,
products and personnel of the acquired businesses and train, retain and motivate
key personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may cause disruptions in our operations and divert
management's attention from day-to-day operations, which could impair our
relationships with our current employees, customers and strategic partners. The
issuance of equity securities for any acquisition could be substantially
dilutive to our stockholders. In addition, our profitability may suffer because
of acquisition-related costs or amortization costs for acquired goodwill and
other intangible assets.

The price of our common stock will be volatile

The trading price of the common stock will fluctuate widely as a result of a
number of factors, many of which are outside our control. Some of these factors
include:

. quarter-to-quarter variations in our operating results;

. failure to meet the expectations of industry analysts;

26
<PAGE>

. changes in earnings estimates by analysts;

. announcements and technological innovations or new products by us or our
competitors;

. increased price competition;

. developments or disputes concerning intellectual property rights; and

. general conditions in the Internet industry.

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

Moreover, of the 75,346,028 currently outstanding shares, approximately
67,352,244 shares are currently subject to agreements that prohibit their sale
in the public market until November 1, 1999. If our stockholders sell
substantial amounts of our common stock, including shares issued upon the
exercise of outstanding options and warrants, in the public market following
November 1, 1999, the market price of our common stock could fall.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Portal develops products in the United States and sells them in North
America, South America, Asia and Europe. As a result, Portal's financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. As all sales are currently made
in U.S. dollars, a strengthening of the dollar could make Portal's products less
competitive in foreign markets. Portal's interest income is sensitive to changes
in the general level of U.S. interest rates, particularly since the majority of
its investments are in short-term instruments. Due to the nature of Portal's
short-term investments, Portal has concluded that there is no material market
risk exposure. Therefore, no quantitative tabular disclosures are required.

27
<PAGE>

PART II: OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(a) Change in Certificate of Incorporation.

Upon the consummation of Portal's initial public offering on May 11, 1999, all
of the then outstanding Series A Preferred Stock and Series B Preferred Stock
automatically converted into Common Stock. Following that conversion, Portal
filed an Amended and Restated Certificate of Incorporation that reflects the
deletion of provisions relating to those series of preferred stock.

During the three months ended April 30, 1999, following the exercise of options
to purchase shares of Common Stock that had been granted under the Company's
1995 Stock Option/ Stock Issuance Plan by 22 employees, the Company issued an
aggregate of 276,498 shares of Common Stock (adjusted for a three for one stock
split effected on April 29, 1999) for an aggregate purchase price of $185,696.
In addition, Portal issued to six individuals in lieu of cash payment for
services rendered, an aggregate of 72,957 shares of Common Stock of which 68,957
were valued at $30.00 per share and 4,000 were valued at $8.00 per share. All
sales of Common Stock made by the Company pursuant to the exercise of stock
options were made pursuant to the exemption from the registration requirements
of the Securities Act afforded by Section 4(2) of the Securities Act or Rule 701
promulgated under the Securities Act.

On May 11, 1999, concurrent with its initial public offering, the Company issued
380,184 shares of Common Stock to Anderson Consulting LLC and 3,000,000 shares
of Common Stock to Cisco Systems, Inc. for an aggregate purchase price of $
44,009,995. The sale of these shares was made pursuant to the exemption from
the registration requirements of the Securities Act afforded by Section 4(2) of
the Securities Act.

(d) Use of Proceeds from Sales of Registered Securities.

On May 11, 1999, the Company completed an initial public offering of its Common
Stock, $0.001 par value. The managing underwriters in the offering were Goldman,
Sachs & Co., Credit Suisse First Boston, BancBoston Robertson Stephens and
Hambrecht & Quist (the "Underwriters"). The shares of Common Stock sold in the
offering were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-
72999) that was declared effective by the SEC on May 5, 1999. The offering
commenced on May 6, 1999 after all 4,600,000 shares of Common Stock registered
under the Registration Statement, including shares covered by an overallotment
option that was exercised, were sold at a price to the public of $14.00 per
share. The aggregate offering amount registered was $64,400,000. In connection
with the offering, the Company paid an aggregate of $4,508,000 in underwriting
discounts to the Underwriters. In addition, the following table sets forth an
estimate of all expenses incurred in connection with the offering, other than
underwriting discounts. All amounts shown are estimated except for the
registration fees of the SEC and the National Association of Securities Dealers,
Inc. ("NASD").

SEC Registration Fee $ 19,600
NASD Filing Fee 7,500
Nasdaq National Market Listing Fee 17,500
Printing and Engraving Expenses 200,000
Legal Fees and Expenses 500,000
Accounting Fees and Expenses 350,000
Blue Sky Fees and Expenses 1,000
Transfer Agent Fees 12,000
Miscellaneous 142,400
----------
Total $1,250,000

28
<PAGE>

After deducting the underwriting discounts and the estimated offering expenses
described above, the Company received net proceeds from the offering of
approximately $58,642,000. As of May 30, 1999, the Company has used the net
proceeds from its initial public offering of Common Stock of the Company to
invest in short-term and long-term, interest bearing, investment grade
securities and has used its existing cash balances to fund the general
operations of the Company. The proceeds will be used for general corporate
purposes, including working capital, product development and repayment of
certain indebtedness. A portion of the net proceeds may also be used to acquire
or invest in complementary business or products or to obtain the right to use
complementary technologies. The Company has no agreements or commitments with
respect to any such acquisition or investments and the Company is not currently
engaged in any material negotiations with respect to any such transaction. None
of the Company's net proceeds of the offering were paid directly or indirectly
to any director, officer, general partner of the Company or their associates,
persons owning 10% or more of any class of equity securities of the Company, or
an affiliate of the Company.

Item 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 Amended and Restated Certificate of Incorporation

27 Financial Data Schedule

(b) Reports on Form 8-K:

None.

29
<PAGE>

SIGNATURE

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.

June 11, 1999 PORTAL SOFTWARE, INC.

By /s/ JACK L. ACOSTA
---------------------------
Jack L. Acosta
Vice President
and Chief Financial Officer
(Principal Financial Officer)

30
<PAGE>

EXHIBIT INDEX TO PORTAL SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1999

Exhibit Number Description
- -------------- -----------

3.1 Amended and Restated Certificate of Incorporation

27 Financial Data Schedule

<PAGE>

EXHIBIT 3.1

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

PORTAL SOFTWARE, INC.

The undersigned, John E. Little and Mitchell L. Gaynor, hereby certify
that:

ONE: They are the duly elected and acting President and Secretary,
---
respectively, of said corporation.

TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on March 26, 1999.

THREE: The Certificate of Incorporation of said corporation shall be
-----
amended and restated to read in full as follows:

ARTICLE I

The name of this corporation is Portal Software, Inc. (the
"Corporation").

ARTICLE II

The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is the
Corporation Trust Corporation.

ARTICLE III

The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").

ARTICLE IV

The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the Corporation is authorized to issue is Two Hundred
Fifty-Five Million (255,000,000). Two Hundred Fifty Million (250,000,000)
shares shall be Common Stock, par value $0.001 per share, and Five Million
(5,000,000) shares shall be Preferred Stock, par value $0.001 per share.
<PAGE>

The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon each series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or of any of them. The rights, privileges, preferences and
restrictions of any such additional series may be subordinated to, pari passu
----------
with (including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote), or senior to any of those of any present or future class or series of
Preferred Stock or Common Stock. The Board of Directors is also authorized to
increase or decrease the number of shares of any series prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.

ARTICLE V

In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.

ARTICLE VI

The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.

Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.

At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.

The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common Stock, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three (3) years. At the third annual meeting of stockholders following the
initial public offering of the Corporation's Common Stock, the term of office of
the Class III directors shall
<PAGE>

expire and Class III directors shall be elected for a full term of three (3)
years. At each succeeding annual meeting of stockholders, directors shall be
elected for a full term of three (3) years to succeed the directors of the
class whose terms expire at such annual meeting. If the number of directors is
hereafter changed, each director then serving as such shall nevertheless
continue as a director of the Class of which he is a member until the
expiration of his current term and any newly created directorships or decrease
in directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as is practicable.

Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.

ARTICLE VII

Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.

ARTICLE VIII

To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to action for breach of duty to the Corporation, its stockholders, and
others.

No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the
<PAGE>

Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (3) shall have derived an improper personal benefit. If
the GCL is hereafter amended to authorize the further elimination or
limitation of the liability of a director, the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the GCL, as so amended.

Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.

If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving that the claimant has not met the standards of
conduct for permissible indemnification set forth in the GCL.

If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such
<PAGE>

amendment, the indemnification rights conferred by this Article VIII shall be
broadened to the fullest extent permitted by the GCL, as so amended.

ARTICLE IX

The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.

FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.

FIFTH: The foregoing amendment and restatement was approved by the
-----
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, the undersigned have executed this certificate on
May 7, 1999.

/s/ John E. Little
________________________________________
John E. Little
President

/s/ Mitchell L. Gaynor
________________________________________
Mitchell L. Gaynor
Secretary

<PAGE>
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