PORTAL SOFTWARE INC
10-Q, 2000-09-13
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 July 31, 2000

[_]  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)

                         10200 South De Anza Boulevard
                          Cupertino, California 95014
                          ---------------------------
                    (Address of Principal Executive Offices)

       Registrant's Telephone Number, Including Area Code: (408) 572-2000


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


On August 31, 2000, 162,701,723 shares of the Registrant's Common Stock, $0.001
par value, were outstanding.
<PAGE>

                             PORTAL SOFTWARE, INC.
                                   FORM 10-Q

                          QUARTER ENDED JULY 31, 2000


                                     INDEX

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C>
Part I:    Financial Information

   Item 1: Financial Statements

       Condensed Consolidated Balance Sheets at January 31, 2000 and July 31, 2000                                3

       Condensed Consolidated Statements of Operations for the three and six months                               4
        ended July 31, 1999 and 2000

       Condensed Consolidated Statements of Cash Flows                                                            5
        for the six months ended July 31, 1999 and 2000

       Notes to Condensed Consolidated Financial Statements                                                       6

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

   Item 3: Quantitative and Qualitative Disclosures About Market Risk                                            28

Part II:   Other Information

   Item 2: Changes in Securities and Use of Proceeds                                                             29

   Item 4: Submission of Matters to a Vote of Security Holders                                                   30

   Item 6: Exhibits and Reports on Form 8-K                                                                      31

Signature                                                                                                        32

Exhibit Index                                                                                                    33
</TABLE>

                                       2
<PAGE>

ITEM 1:  FINANCIAL STATEMENTS

                             PORTAL SOFTWARE, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                             January 31,           July 31,
                                                                                             -----------           --------
                                                                                                2000                 2000
                                                                                                ----                 ----
                                                                                                                 (Unaudited)
<S>                                                                                          <C>                 <C>
Assets
Current assets:
 Cash and cash equivalents..............................................................      $ 43,887             $ 31,148
 Accounts receivable, net...............................................................        28,546               46,843
 Short-term investments.................................................................       152,090              169,888
 Restricted short-term investments......................................................         5,312                  300
 Prepaids and other current assets......................................................         4,516                6,250
                                                                                              --------             --------
     Total current assets...............................................................       234,351              254,429
Property and equipment, net.............................................................        18,785               37,901
Restricted long-term investments........................................................         5,856                6,273
Other assets............................................................................         6,537               10,181
                                                                                              --------             --------
                                                                                              $265,529             $308,784
                                                                                              ========             ========
Liabilities and Stockholders' Equity
Current liabilities:
 Accounts payable.......................................................................      $  7,655             $  5,576
 Accrued compensation...................................................................         9,060               21,234
 Other accrued liabilities..............................................................         5,282                8,540
 Current portion of capital lease obligations...........................................           780                  876
 Deferred revenue.......................................................................        32,857               36,903
                                                                                              --------             --------
     Total current liabilities..........................................................        55,634               73,129
Long-term portion of capital lease obligations..........................................         1,525                1,066
Commitments.............................................................................            --                   --
Stockholders' equity:
 Common stock, $0.001 par value.........................................................           159                  163
 Additional paid-in capital.............................................................       251,047              266,363
 Accumulated other comprehensive loss...................................................          (639)                (656)
 Notes receivable from stockholders.....................................................          (259)                (135)
 Deferred stock compensation............................................................        (6,379)              (4,313)
 Accumulated deficit....................................................................       (35,559)             (26,833)
                                                                                              --------             --------
     Stockholders' equity...............................................................       208,370              234,589
                                                                                              --------             --------
                                                                                              $265,529             $308,784
                                                                                              ========             ========
</TABLE>

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                       3
<PAGE>

                             PORTAL SOFTWARE, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

              (in thousands, except per share amounts; unaudited)

<TABLE>
<CAPTION>
                                                                             Three Months                      Six Months
                                                                            Ended July 31,                   Ended July 31,
                                                                            --------------                   --------------
                                                                         1999            2000            1999            2000
                                                                         ----            ----            ----            ----
<S>                                                                    <C>             <C>             <C>             <C>
Revenues:
 License fees.....................................................     $ 12,651        $ 44,246        $ 21,715        $ 79,620
 Services.........................................................        8,159          20,295          14,260          35,539
                                                                       --------        --------        --------        --------
  Total revenues..................................................       20,810          64,541          35,975         115,159
                                                                       --------        --------        --------        --------

Costs and expenses:
 Cost of license fees.............................................          321             625             506           1,262
 Cost of services.................................................        4,795          12,286           8,990          22,292
 Research and development.........................................        6,171          13,724          10,456          25,100
 Sales and marketing..............................................        8,828          25,449          16,157          45,752
 General and administrative.......................................        2,919           8,019           5,154          14,624
 Amortization of deferred stock compensation......................        2,985           1,011           5,011           2,066
                                                                       --------        --------        --------        --------
  Total costs and expenses........................................       26,019          61,114          46,274         111,096
                                                                       --------        --------        --------        --------
Income (loss) from operations.....................................       (5,209)          3,427         (10,299)          4,063
Interest and other income (expense), net..........................        1,023           3,187             995           6,202
One-time gain upon expiration of put option on common stock.......        3,810              --           3,810              --
                                                                       --------        --------        --------        --------
Income (loss) before income taxes.................................         (376)          6,614          (5,494)         10,265
Provision for income taxes........................................         (400)           (965)           (816)         (1,539)
                                                                       --------        --------        --------        --------
Net income (loss).................................................     $   (776)       $  5,649        $ (6,310)       $  8,726
                                                                       ========        ========        ========        ========
Basic net income (loss) per share.................................     $  (0.01)       $   0.04        $  (0.06)       $   0.06
                                                                       ========        ========        ========        ========
Shares used in computing basic net income (loss) per share........      133,808         157,255         100,447         155,919
                                                                       ========        ========        ========        ========
Diluted net income (loss) per share...............................     $  (0.01)       $   0.03        $  (0.06)       $   0.05
                                                                       ========        ========        ========        ========
Shares used in computing diluted net income (loss) per share......      133,808         173,867         100,447         173,310
                                                                       ========        ========        ========        ========
</TABLE>

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                       4
<PAGE>

                             PORTAL SOFTWARE, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                           (in thousands; unaudited)

<TABLE>
<CAPTION>
                                                                                                          Six Months
                                                                                                        Ended July 31,
                                                                                                        --------------
                                                                                                       1999       2000
                                                                                                       ----       ----
<S>                                                                                                 <C>        <C>
OPERATING ACTIVITIES:
 Net income (loss).............................................................................     $ (6,310)  $  8,726
 Adjustments to reconcile net income (loss) to net cash provided by operating activities:
  Depreciation and amortization................................................................        1,029      3,339
  Amortization of deferred stock compensation..................................................        5,011      2,066
  One-time gain upon expiration of put option on common stock..................................       (3,810)        --
  Changes in operating assets and liabilities:
   Accounts receivable, net....................................................................        1,769    (18,297)
   Prepaids and other current assets...........................................................       (1,921)    (2,346)
   Other assets................................................................................         (211)    (1,651)
   Accounts payable............................................................................        1,810        (42)
   Accrued compensation........................................................................        3,849     12,226
   Other accrued liabilities...................................................................          (90)     3,276
   Deferred revenue............................................................................        3,959      4,045
                                                                                                    --------   --------
    Net cash provided by operating activities..................................................        5,085     11,342
                                                                                                    --------   --------

INVESTING ACTIVITIES:
 Purchases of short-term investments...........................................................      (38,732)   (68,486)
 Maturity of short-term investments............................................................           --     56,223
 Purchases of long-term investments............................................................       (2,299)    (1,540)
 Maturity of long-term investments.............................................................           --      1,135
 Purchases of property and equipment...........................................................       (3,354)   (23,225)
 Purchase of equity investments................................................................           --     (3,000)
                                                                                                    --------   --------
       Net cash used in investing activities...................................................      (44,385)   (38,893)
                                                                                                    --------   --------

FINANCING ACTIVITIES:
 Payments received on stockholder notes receivable.............................................           --        124
 Repayment of long-term debt...................................................................       (4,122)        --
 Proceeds from line of credit..................................................................        1,000         --
 Repayment of line of credit...................................................................       (1,000)        --
 Principal payments under capital lease obligations, net of proceeds...........................         (239)      (352)
 Proceeds from issuance of common stock, net of repurchases and issuance costs.................      102,850     15,320
                                                                                                    --------   --------
    Net cash provided by financing activities..................................................       98,489     15,092
                                                                                                    --------   --------
 Effect of exchange rate on cash and cash equivalents..........................................           46       (280)
                                                                                                    --------   --------
Net increase (decrease) in cash and cash equivalents...........................................       59,235    (12,739)
Cash and cash equivalents at beginning of period...............................................       11,809     43,887
                                                                                                    --------   --------
Cash and cash equivalents at end of period.....................................................     $ 71,044   $ 31,148
                                                                                                    ========   ========
</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 July 31, 2000 and the statement of operations for the three
and six months ended July 31, 2000 and cash flows for the six months ended July
31, 1999 and 2000 are not audited.  In the opinion of management, these
financial statements reflect all adjustments that are necessary for a fair
presentation of the results for and as of the periods shown.  The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period.  The condensed
consolidated financial statement information as of January 31, 2000 is derived
from audited financial statements as of that date.  These financial statements
should be read in conjunction with the financial statements and related notes
included in Portal's Annual Report on Form 10-K for the year ended January 31,
2000, filed with the Securities and Exchange Commission on April 28, 2000.

 Revenue Recognition

  License revenues are comprised of fees for multi-year or perpetual licenses,
which are primarily derived from contracts with corporate customers and
resellers. Revenue from license fees is recognized when persuasive evidence of
an 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 evidence of sell through to an end user has been
received.

   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 related 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.

                                       6
<PAGE>

  In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101").  SAB 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition. We will be
required to adopt SAB 101 in our fiscal quarter beginning November 1, 2000.
Portal believes that its revenue recognition policies are compliant with SAB
101.

 Concentration of Credit Risk

  Portal sells its software and services to customers consisting mainly of North
American, European and Asia-Pacific 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.

  No individual customer accounted for more than 10% of total revenues during
the three and six months ended July 31, 2000 and six months ended July 31, 1999.
Two customers accounted for a total of 28% of total revenues during the three
months ended July 31, 1999.

 Segment Information

  Portal operates solely in one segment, the development and marketing of CM&B
software. Portal's foreign offices consist of 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.
Portal's chief operating decision maker reviews financial information presented
on a consolidated basis, accompanied by disaggregated information about revenues
by geographic region for purposes of making operating decisions and assessing
financial performance. Portal does not assess the performance of its geographic
regions on other measures of income or expense, such as depreciation and
amortization, gross margin or net income. In addition, as Portal's assets are
primarily located in its corporate office in the United States and not allocated
to any specific region, Portal does not produce reports for, or measure the
performance of its geographic regions based on any asset-based metrics.
Therefore, geographic information is presented only for revenues.

  Portal's export revenue represented 37% of total revenues in the three and six
months ended July 31, 2000, compared with approximately 31% in the comparable
periods ended July 31, 1999. All of the export sales to date have been
denominated in U.S. dollars and were derived from sales to Europe, Latin America
and Asia-Pacific. Total export revenues for the three months ended July 31, 1999
and 2000 were $4.7 million and $14.1 million to customers in Europe and $1.7
million and $10.0 million to customers in the Asia-Pacific and Latin America
regions. Total export revenues for the six months ended July 31, 1999 and 2000
were $8.5 million and $27.2 million to customers in Europe and $2.5 million and
$15.9 million to customers in the Asia-Pacific and Latin America regions.

 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.
Through July 31, 2000, Portal maintained cash and cash equivalents in money
market accounts with major financial institutions for which the carrying amount
approximated its fair value. Upon completion of the initial public offering in
May 1999 and secondary stock offering in October 1999, Portal received
additional cash that was available for investment. At July 31, 2000, cash
equivalents and short-term investments consist primarily of commercial paper,
corporate notes, money market funds and government securities. All short-term
investments mature within 24 months.

                                       7
<PAGE>

  Portal classifies, at the date of acquisition, its cash equivalents and short-
term investments as available-for-sale in accordance with the provisions of the
FASB's Statement of Financial Accounting Standards No.115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115").  Securities are
reported at fair market value, with the related unrealized gains and losses
included within stockholders' equity.  At July 31, 2000, unrealized losses were
$518,000 due primarily to the effects of increasing interest rates on longer-
term securities. It is not expected that a significant amount of the unrealized
loss will be realized.  Debt and discount securities are adjusted for straight-
line amortization of premiums and accretion of discounts to maturity, both of
which are included in interest income. Realized gains and losses are recorded
using the specific identification method.

  The following schedule summarizes the estimated fair value of Portal's cash,
cash equivalents and short-term investments (in thousands):

<TABLE>
<CAPTION>
                                                                                                January 31,   July 31,
                                                                                                -----------   --------
                                                                                                   2000         2000
                                                                                                   ----         ----
                                                                                                           (unaudited)
<S>                                                                                               <C>         <C>
Cash and cash equivalents:
  Cash......................................................................................      $11,570     $ 5,564
  Money market funds........................................................................       12,142      21,788
  Commercial paper..........................................................................       14,977       3,796
  U.S. Government securities................................................................        5,198          --
                                                                                                  -------     -------
                                                                                                  $43,887     $31,148
                                                                                                  =======     =======
</TABLE>

Short-term investments at July 31, 2000 (in thousands, unaudited):

<TABLE>
<CAPTION>
                                                                                      Gross Unrealized
                                                                                      ----------------
                                                                       Cost         Gain         Loss       Fair Value
                                                                       ----         ----         ----       ----------
  <S>                                                                <C>           <C>          <C>         <C>
  Corporate notes........................................            $115,299      $   --       $(402)       $114,897
  U.S. Government securities.............................              54,317          --        (109)         54,208
  Commercial paper.......................................               1,090          --          (7)          1,083
  Restricted investments.................................                (300)         --          --            (300)
                                                                     --------      ------       -----        --------
                                                                     $170,406      $   --       $(518)       $169,888
                                                                     ========      ======       =====        ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                               January 31,     July 31,
                                                                                               -----------     --------
                                                                                                   2000          2000
                                                                                                   ----          ----
                                                                                                             (unaudited)
  <S>                                                                                          <C>           <C>
  Due within one year.......................................................................      $125,467     $152,617
  Due within two years......................................................................        75,822       48,719
  Restricted short-term investments.........................................................        (5,312)        (300)
                                                                                                  --------     --------
                                                                                                  $195,977     $201,036
                                                                                                  ========     ========
</TABLE>

  Restricted short-term investments at July 31, 2000 represent collateral for
a $200,000 surety bond required by a customer contract that expires on October
31, 2000.  On February 29, 2000, a $3 million letter of credit issued to
Portal's landlord to guarantee payment of tenant improvements and a $750,000
surety bond required by a customer contract expired. The restricted short-term
investments are not available to support current operations and, consequently,
are classified as held-to-maturity. As a result, and in accordance with FAS 115,
unrealized gains and losses are not recorded. At July 31, 2000, amortized cost
approximated fair value.


  Restricted long-term investments represent collateral for two letters of
credit issued in lieu of security deposits for two new facility leases and
consist of corporate bonds maturing over a period of one to three years. The two

                                       8
<PAGE>

letters of credit for $2,250,000 and $3,000,000 are renewable annually until
they expire on December 31, 2010.  The restricted long-term investments are
classified as held-to-maturity and, consequently, unrealized gains and losses
are not recorded. At July 31, 2000, amortized cost approximated fair value.

  Realized gains and losses from sales of each type of security were immaterial
for all periods presented.

 Other Assets

 Other assets consisted of the following:

<TABLE>
<CAPTION>
                                                                              January 31,     July 31,
                                                                                  2000          2000
                                                                                  ----          ----
(in thousands)                                                                              (Unaudited)
  <S>                                                                         <C>            <C>
  Prepaid services - long term portion (see Note 2).........................     $3,048        $ 4,615
  Deposits and other........................................................      3,489          5,566
                                                                                 ------        -------
                                                                                 $6,537        $10,181
                                                                                 ======        =======
</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 Income (Loss) Per Common Share

  Basic net income (loss) per share and diluted net income (loss) per share are
presented in conformity with the FASB's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"), for all periods presented.
In accordance with FAS 128, basic and diluted net income (loss) per share have
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. The diluted
calculation also includes common equivalent shares, when dilutive.

  For the three and six months ended July 31, 1999, 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 were antidilutive.

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

<TABLE>
<CAPTION>
                                                                   Three Months ended              Six Months ended
                                                                         July 31,                       July 31,
                                                                         --------                       --------
                                                                   1999           2000           1999            2000
                                                                   ----           ----           ----            ----
<S>                                                              <C>            <C>            <C>             <C>
Basic:
Net income (loss)..........................................      $   (776)      $  5,649       $ (6,310)       $  8,726
                                                                 ========       ========       ========        ========
   Weighted-average shares of common stock outstanding.....       142,158        161,835        110,374         160,893
   Less: Weighted-average shares subject to repurchase.....        (8,350)        (4,580)        (9,927)         (4,974)
                                                                 --------       --------       --------        --------
Weighted-average shares used in computing basic net
   income (loss) per share.................................       133,808        157,255        100,447         155,919
                                                                 ========       ========       ========        ========
Basic net income (loss) per share..........................      $  (0.01)      $   0.04       $  (0.06)       $   0.06
                                                                 ========       ========       ========        ========
</TABLE>

                                       9
<PAGE>

<TABLE>
<CAPTION>
Diluted:
<S>                                                              <C>            <C>            <C>             <C>
Net income (loss)..........................................      $   (776)      $  5,649       $ (6,310)       $  8,726
                                                                 ========       ========       ========        ========
   Shares used above.......................................       133,808        157,255        100,447         155,919
   Common equivalent shares................................            --         16,612             --          17,391
                                                                 --------       --------       --------        --------
Shares used in computing diluted net income (loss) per
 share.....................................................       133,808        173,867        100,447         173,310
                                                                 ========       ========       ========        ========
Diluted net income (loss) per share........................      $  (0.01)      $   0.03       $  (0.06)       $   0.05
                                                                 ========       ========       ========        ========
</TABLE>

 Comprehensive Income (Loss)

  Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss), which includes certain changes in equity of the
company that are excluded from net income (loss).  Specifically, FAS 130
requires foreign currency translation adjustments and changes in the fair value
of available-for-sale securities to be included in accumulated other
comprehensive income (loss).  Comprehensive income (loss) for the six months
ended July 31, 1999 and 2000 is as follows (in thousands; unaudited):

<TABLE>
<CAPTION>
                                                                                                Six months ended
                                                                                                     July 31,
                                                                                                     --------
                                                                                                  1999      2000
                                                                                                  ----      ----
<S>                                                                                             <C>        <C>
Net income (loss)............................................................................   $(6,310)   $8,726
Unrealized gain (loss) on marketable securities..............................................      (105)      185
Change in cumulative translation adjustment..................................................        39      (201)
                                                                                                -------    ------
Comprehensive net income (loss)..............................................................   $(6,376)   $8,710
                                                                                                =======    ======
</TABLE>

(2)  Agreement with Andersen Consulting LLC

  On April 12, 1999, Portal agreed to enter into a strategic alliance with
Andersen Consulting LLC under which Andersen Consulting LLC agreed to provide
services to Portal and the parties agreed to expand their existing marketing
alliance and work closely together to expand their customer service and
marketing relationship. Under this arrangement, Andersen Consulting LLC agreed
to purchase up to 800,000 shares of common stock from Portal in a private
placement concurrent with Portal's initial public offering at the initial public
offering price, less the underwriting discount.

  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 400,000 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 400,000 common shares sold to Andersen 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 pricing model using a risk-free interest
rate of 6.3%, an expected life of one month and a volatility factor of 100%.

  Upon completion of the initial public offering, the put option was settled.
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 $3.8 million was
recorded as other income in the year ended January 31, 2000 and the initial fair
value of the put, approximately $3.8 million, was classified as a prepaid
service asset.

  Upon signing of the definitive agreement in March 2000, the services fee of
$2.8 million was paid and capitalized.  The entire prepaid service asset of $6.6
million was allocated between current and long-term assets as

                                       10
<PAGE>

appropriate and is being amortized on a straight-line basis over the term of the
agreement of approximately four and one half years.

(3)  Income Taxes

  During the three and six months ended July 31, 2000, Portal recognized tax
expense of $1.0 and $1.5 million, respectively, primarily related to tax on
earnings generated from domestic and foreign operations.  Due to Portal's
positive earnings for the three and six-month periods, Portal reversed a portion
of its valuation allowance against the previously established deferred tax
assets for which realization is considered more likely than not.  The effective
tax rate for the three and six months ended July 31, 2000 is based on earnings
estimates, which if revised, could result in an increased future effective tax
rate.

                                       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 319 customers through July 31, 2000. Portal has established a
series of relationships 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 and six
months ended July 31, 1999 and 2000 expressed as a percentage of total revenues.

<TABLE>
<CAPTION>
                                                                               Three Months             Six Months
                                                                              Ended July 31,          Ended July 31,
                                                                              --------------          --------------
                                                                             1999        2000        1999        2000
                                                                             ----        ----       -----        ----
<S>                                                                          <C>         <C>        <C>          <C>
Revenues:
  License fees.........................................................        61 %        69 %        60 %        69 %
  Services.............................................................        39          31          40          31
                                                                             ----        ----       -----        ----
     Total revenues....................................................       100         100         100         100
                                                                             ----        ----       -----        ----
Costs and expenses:
  Cost of license fees.................................................         2           1           1           1
  Cost of services.....................................................        23          19          25          19
  Research and development.............................................        30          21          29          22
  Sales and marketing..................................................        42          40          45          40
  General and administrative...........................................        14          12          15          12
  Amortization of deferred stock compensation..........................        14           2          14           2
                                                                             ----        ----       -----        ----
     Total costs and expenses..........................................       125          95         129          96
                                                                             ----        ----       -----        ----

Income (loss) from operations..........................................       (25)          5         (29)          4
Interest income (expense) and other income, net........................        23           5          13           5
                                                                             ----        ----       -----        ----
Income (loss) before income taxes......................................        (2)         10         (16)          9
Provision for income taxes.............................................        (2)         (1)         (2)         (1)
                                                                             ----        ----       -----        ----
Net income (loss)......................................................        (4)%         9 %       (18)%         8 %
                                                                             ====        ====       =====        ====
</TABLE>

                                       12
<PAGE>

               Three and Six Months Ended July 31, 1999 and 2000

                                    Revenues

  Total revenues were $64.5 million in the three months ended July 31, 2000, an
increase of approximately $43.7 million or 210% and $115.2 million in the six
months ended July 31, 2000, an increase of approximately $79.2 million or 220%
over the comparable periods in 1999.  License fees revenues increased as a
percentage of total revenues in the three and six months ended July 31, 2000
compared to the three and six months ended July 31, 1999 primarily because
license fees revenue growth exceeded service revenue growth.  No individual
customer accounted for more than 10% of total revenues during the three and six
months ended July 31, 2000 and six months ended July 31, 1999.  Two customers
accounted for 28% of total revenues during the three months ended July 31, 1999.

  License fees totaled $44.2 million in the three months ended July 31, 2000, an
increase of approximately $31.5 million or 248%, and $79.6 million in the six
months ended July 31, 2000, an increase of approximately $57.9 million or 267%
over the comparable periods in 1999.  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 $20.3 million in the three months ended July 31, 2000,
an increase of approximately $12.1 million or 148%, and $35.5 million in the six
months ended July 31, 2000, an increase of approximately $21.2 million or 148%
over the comparable periods in 1999. 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 increased number of Portal's customers.

<TABLE>
<CAPTION>
                                                   Three Months                                Six Months
                                                   Ended July 31,          Percent            Ended July 31,          Percent
                                                   --------------                             --------------
(in millions)                                   1999           2000         Change         1999         2000           Change
                                               -----          -----         ------         ----         ----           ------
<S>                                            <C>            <C>          <C>             <C>         <C>            <C>
Geographical Revenues:
 North America.............................    $14.4          $40.4          181%         $25.0        $ 72.1           188%
    Percentage of total revenues...........       69%            63%                         69%           63%
 International
  Europe...................................      4.7           14.1          200%           8.5          27.2           220%
    Percentage of total revenues...........       23%            22%                         24%           23%
  Intercontinental.........................      1.7           10.0          488%           2.5          15.9           536%
    Percentage of total revenues...........        8%            15%                          7%           14%
                                               -----          -----          ---          -----        ------           ---
  Total international......................      6.4           24.1          277%          11.0          43.1           292%
    Percentage of total revenues...........       31%            37%                         31%           37%
                                               -----          -----          ---          -----        ------           ---
Total revenues.............................    $20.8          $64.5          210%         $36.0        $115.2           220%
                                               =====          =====          ===          =====        ======           ===
</TABLE>

  North American revenues, which are defined by Portal as revenues from the
United States and Canada, were $40.4 million in the three months ended July 31,
2000, an increase of approximately $26.0 million or 181%, and $72.1 million in
the six months ended July 31, 2000, an increase of approximately $47.1 million
or 188%, over the comparable periods ended July 31, 1999.  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 for Intercontinental, which is defined
by Portal as Asia-Pacific, Japan and Latin America, totaled $24.1 million in the
three months ended July 31, 2000, an increase of approximately $17.7 million or
277% and $43.1 million in the six months ended July 31, 2000, an increase of
approximately $32.1 million or 292% over the comparable periods ended July 31,
1999. European revenues were $14.1 million in the three months ended July 31,
2000, an increase of approximately $9.4 million or 200% and $27.2 million in the
six

                                       13
<PAGE>

months ended July 31, 2000 an increase of approximately $18.7 million or 220%
over the comparable periods ended July 31, 1999. Intercontinental revenues were
$10.0 million in the three months ended July 31, 2000, an increase of
approximately $8.3 million or 488% and $15.9 million in the six months ended
July 31, 2000, an increase of $13.4 million or 536% over the comparable periods
ended July 31, 1999. The increase in international revenues was primarily due to
growth in Portal's direct sales force and increased marketing efforts worldwide.

  International revenues represented 37% of total revenues in the three and six
months ended July 31, 2000, compared with approximately 31% in the comparable
periods ended July 31, 1999. In the three and six months ended July 31, 2000,
revenues from Europe were 22% and 23% of total revenues, respectively, and
revenues from Intercontinental were 15% and 14% of total revenues, respectively.

                                    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 $0.6 million in the
three months ended July 31, 2000, an increase of approximately $0.3 million or
100%, and $1.3 million for the six months ended July 31, 2000, an increase of
approximately $0.8 million or 160%, from the comparable periods ended July 31,
1999. The increase in cost of license fees is primarily due to increased license
revenue and resellers' commissions resulting from Portal expanding its base of
systems integrator partners. Gross margin for license fees was approximately 99%
and 98% in the three and six months ended July 31, 2000 compared to
approximately 97% and 98% in the comparable periods in 1999.  For the three and
six months ended July 31, 1999 and 2000, 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 $12.3 million in the three months ended July 31,
2000, an increase of approximately $7.5 million or 156%, and $22.3 million in
the six months ended July 31, 2000, an increase of approximately $13.3 million
or 148%, over the comparable periods ended July 31, 1999. The increase in cost
of services is primarily due to an increase in the number of consulting and
technical support personnel necessary to support both the expansion of Portal's
installed base of customers and new implementations.  Gross margin for services
was approximately 39% and 37% for the three and six months ended July 31, 2000
compared to approximately 41% and 37% in the comparable periods ended July 31,
1999. Portal expects cost of services to increase substantially during the
remainder of the fiscal year 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 $13.7 million in the three months ended July 31, 2000,
an increase of approximately $7.5 million or 121%, and $25.1 million in the six
months ended July 31, 2000, an increase of approximately $14.6 million or 139%,
over the comparable periods ended July 31, 1999. 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 as Portal hires
additional research and development employees. Portal has not capitalized any
software development costs to date.

                                       14
<PAGE>

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 $25.4 million in the three months ended July 31, 2000, an increase of
approximately $16.6 million or 189%, and $45.8 million in the six months ended
July 31, 2000, an increase of approximately $29.6 million or 183%, over the
comparable periods ended July 31, 1999. 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, Europe and Asia-Pacific,
and expenses incurred in connection with trade shows and additional marketing
programs. Portal expects that sales and marketing expenses will increase
substantially during the remainder of the fiscal 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.

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 $8.0
million in the three months ended July 31, 2000, an increase of approximately
$5.1 million or 176%, and $14.6 million in the six months ended July 31, 2000,
an increase of approximately $9.4 million or 181%, over the comparable periods
ended July 31, 1999. The increase was primarily due to a higher number of
general and administrative personnel and additional legal and accounting costs
incurred in connection with business activities. Portal expects that general and
administrative expenses will increase substantially during the remainder of the
fiscal year as Portal hires additional general and administrative personnel, and
continues to incur greater legal and accounting costs in connection with
expanding business activities.

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 $1.0 and $2.1 million during the three and
six months ended July 31, 2000. This compensation expense relates to options
awarded to individuals in all operating expense categories. Total deferred
compensation at July 31, 2000 of approximately $4.3 million is being amortized
over the vesting periods of the options on a graded vesting method.
Amortization of deferred compensation is estimated to be $3.7 million in fiscal
year 2001, $1.9 million in fiscal year 2002 and $0.7 million in fiscal year
2003.

Provision for Income Taxes

  The $1.0 and $1.5 million income tax provision shown for three and six months
ended July 31, 2000 is primarily the result of tax on earnings generated from
domestic and foreign operations.  Due to Portal's positive earnings for the
three and six-month periods, Portal reversed a portion of its valuation
allowance against the previously established deferred tax assets for which
realization is considered more likely than not.  Under Statement of Financial
Accounting Standards No. 109 (FAS 109), deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.  FAS 109
provides for the recognition of deferred tax assets if realization of such
assets are more likely than not.  Based on the weight of available evidence,
Portal has provided a valuation allowance against certain deferred tax assets.
Portal will continue to evaluate the realizability of the deferred tax assets on
a quarterly basis.

                                       15
<PAGE>

                        Liquidity and Capital Resources

  Cash, cash equivalents and short-term investments (including restricted short-
term investments) totaled $201.3 million at July 31, 2000 and January 31, 2000.

  Portal generated $11.3 million in cash from operations in the six months ended
July 31, 2000, an increase of $6.2 million over the $5.1 million generated in
the six months ended July 31, 1999. Net cash provided by operations in the six
months ended July 31, 2000 was primarily comprised of net income of $8.7
million, a $4.0 million increase in deferred revenue, a $3.3 million increase in
other accrued liabilities and an increase in accrued compensation of $12.2
million.  Also, amortization of deferred stock compensation, which is included
in the results of operations, but does not require the use of cash, amounted to
$2.1 million for the six months ended July 31, 2000.  These increases were
offset by a $18.3 million increase in accounts receivable and a $2.3 million
increase in prepaids and other current assets.

  Portal has continued to make significant investments in software, equipment
and facilities.  During the six months ended July 31, 2000, Portal purchased
computer equipment and software, made leasehold improvements and purchased other
capital equipment amounting to approximately $23.2 million, primarily to support
its ongoing and expanding operations and information systems.  None of the
equipment was funded from Portal's equipment lease line facility.

  Portal has raised equity capital from investors to fund its operations. In
fiscal 2000, Portal completed an initial public offering and concurrent private
sales of stock to Cisco Systems, Inc. and Andersen Consulting LLC that
collectively raised $102.4 million. Portal also completed a follow-on offering
in October 1999, which raised approximately $106.0 million, net of underwriting
commissions and estimated expenses.  During the same period, Portal raised an
additional $6.6 million from sales of common stock issued from Portal's employee
stock purchase plan and upon the exercise of stock options by employees and
warrants by third parties, net of repurchases.  During the six months ended July
31, 2000, Portal raised an additional $15.3 million from sales of common stock
issued from Portal's employee stock purchase plan and upon the exercise of stock
options by employees, net of repurchases.

  On April 12, 1999, Portal agreed to enter into a strategic alliance with
Andersen Consulting LLC under which Andersen Consulting LLC agreed to provide
services to Portal and the parties will expand their existing marketing alliance
and work closely together to expand their customer service and marketing
relationship. 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 400,000 of the shares, which were 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.  Because the closing value exceeded $6.0 million, Portal
was not required to make any payment related to this put.  The definitive
agreement was entered into, and the $2.8 million payment was made in March 2000.
The resulting intangible asset will be amortized over a period of approximately
four and one half years, the term of the alliance, beginning in April 2000.


  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. Although Portal believes that its current cash balances and cash
generated from operations will be sufficient to fund its operations for at least
the next 12 months, Portal may require additional financing within this time
frame. Additional funding, if needed, may not be available on terms acceptable
to Portal, or at all

                                       16
<PAGE>

                        RECENT ACCOUNTING PRONOUNCEMENTS

  In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
FAS 133 establishes methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities. In
June 1999, the FASB delayed implementation of FAS 133, so that implementation is
now required for fiscal years beginning after June 15, 2000.  As Portal does not
currently engage in hedging activities, Portal expects that the adoption of FAS
133 will not have a material impact on its financial position or results of
operations. Due to the delayed effective date, Portal will be required to
implement FAS 133 for fiscal 2002.

      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, 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 quarter ended July 31, 2000 contained in
this report are not necessarily indicative of results for the fiscal year ending
January 31, 2001 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 a short history of profitability and cannot be certain that we will
sustain or increase profitability

  In order to continue to be 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 $7.6 million for fiscal year 2000, $17.4 million for
fiscal year 1999, $7.6 million for fiscal year 1998 and $2.3 million for fiscal
year 1997. We had a slight net profit in the fourth quarter of fiscal year 2000
and we had operating profits in the quarters ending April 30, 2000 and July 31,
2000.

                                       17
<PAGE>

  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 maintain profitability.
We expect that we will face increased competition that may make it more
difficult to increase our revenues. Even if we are able to increase revenues, we
may experience price competition which would lower our gross margins and our
profitability. Another factor that will lower our gross margins is any increase
in the percentage of our revenues that is derived from indirect channels and
from services, both of which have lower margins. We cannot be certain that we
can sustain or increase operating and net 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 one or more of the expectations of public market analysts and
investors, and the price of our common stock may fall.  Failure by technology
companies to meet or exceed analyst expectations or any resulting change in
analyst recommendations or ratings frequently results in substantial decreases
in the market value of the stock of such companies.  Factors that could cause
quarterly fluctuations include:

  .  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;

  .  announcements of new versions of products that cause customers to postpone
     purchases of Portal's current products;

  .  the mix of products and services sold;

  .  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 generally, as well as those specific to ISPs and
     other providers of Internet-based services.

                                       18
<PAGE>

  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 large 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.

  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.

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

  We may also experience seasonality in our business.  In many software
companies, rate of growth of license fees revenues tends to decline between the
fourth quarter of one year and the first quarter of the next year, due in part
to the structure of sales compensation plans. If we experience such seasonality
in the future, our rate of growth or absolute revenues could decline in the
first quarter of a fiscal year compared to the preceding fourth quarter. In
addition, the European operations of many companies experience some flatness in
the summer months.  Portal may also experience such a pattern in its European
operations.  For example, the rate of growth in our European operations in the
second quarter of fiscal year 2001 was significantly lower than the rate of
growth in our other regions. Such seasonality may cause our results of
operations to fluctuate or become more difficult to predict and could cause us
to fail to meet internal or analyst expected financial results.


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 generally has been three to nine 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.

                                       19
<PAGE>

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 still in its early stages of development. In
addition, some prospective customers may base their purchasing decisions based
on a vendor's ability to support their CM&B needs for both their Internet-based
services and their other existing or planned non-Internet service offerings,
such as fixed wire or mobile voice telephony or cable television.  For example,
in the wireless communication area, many providers are currently conducting or
planning trials to select the CM&B and other technologies to be used in their
next generation wireless communication networks that will support both voice and
data communications.  Our ability to address these current and future non-
Internet based service requirements with our current version of Infranet and
planned future enhancements may affect the market acceptance of Infranet by
prospective customers who desire an integrated CM&B solution for their different
services.  Our future financial performance will also depend on the successful
development, introduction and customer acceptance of new and enhanced versions
of 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.  Our future
revenues will also depend on our customers licensing software for additional
applications or for additional subscribers.  Their failure to do so could harm
our business.

  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
frequently involves participation by our professional services group, which has
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.

Unpredictable foreign payroll taxes may cause operating results to fluctuate in
future periods and we may fail to meet expectations

     We are generally subject to employer payroll taxes when our employees
exercise their stock options. The employer payroll taxes are assessed on each
employee's gain, which is the difference between the price of our common stock
on the date of exercise and the exercise price. During a particular period,
these payroll taxes could be material. These employer payroll taxes would be
recorded as an expense and are assessed at tax rates that varies depending upon
the employee's taxing jurisdiction in the period such options are exercised
based on actual gains realized by employees. However, because we are unable to
predict how many stock options will be exercised, at what price and in which
country during any particular period, we cannot predict, the amount, if any, of
employer payroll expense that will be recorded in a future period or the impact
on our future financial results.

We must hire and retain qualified sales personnel to sell Infranet

  Our financial success and our ability to increase revenues in the future
depend considerably upon the growth and productivity of our direct sales force
that 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.

                                       20
<PAGE>

  In addition, because we currently rely on indirect sales for a significant
portion of our market opportunities, we may miss sales opportunities that are
available through other sales distribution methods and other sources of leads,
such as domestic and foreign resellers. In the future, we intend to augment our
indirect sales distribution methods through additional third-party distribution
arrangements.  However, there is no guarantee that we will successfully augment
these arrangements or that the expansion of indirect sales distribution methods
will increase revenues.  We may be at a serious competitive disadvantage if we
fail to enhance these indirect sales channels.

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 joint marketing 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 quarterly revenue is generated from a limited number of customers and 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, two customers
accounted for a total of 27% of total revenues for the quarter ended October 31,
1999 and one customer accounted for 10% of total revenue during the year ended
January 31, 2000.  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,
including the wireless divisions of telecommunications carriers. 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 and
internationally and have grown our headcount substantially. Our business will
suffer dramatically if we fail to effectively manage this growth. On July 31,
2000, we had more than 1,000 employees, compared to a total of 634 employees on
January 31, 2000. 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. Although we have recently occupied one new building for our
headquarters in Cupertino, California and have entered into a lease for another
adjacent building, we expect that we will also have to continue to expand our
facilities in California and other locations, and we may face difficulties and
significant expenses identifying and moving into suitable office space.

                                       21
<PAGE>

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

  For the quarters ended July 31, 1999 and 2000, we derived approximately 31%
and 37% 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
Australia, Canada, China, France, Germany, Hong Kong, Japan, Malaysia,
Singapore, Spain and the United Kingdom 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 currently denominated in U.S. dollars.
Therefore, a strengthening of the dollar versus other currencies could make our
products less competitive in foreign markets or collection of receivables more
difficult. 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 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

                                       22
<PAGE>

file patent applications covering aspects of their technology upon which they
may claim our technology infringes. Several companies have very large patent
portfolios covering a wide variety of technologies and may attempt to use their
large portfolios to elicit license fees from our company. Any litigation,
brought by us or by others, could be time-consuming and costly and could divert
the attention of our technical and management personnel. In addition, litigation
could cause product shipment delays or require us to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on acceptable terms, or
at all, and could have a material and adverse impact on our gross margins and
profitability. If a successful claim of product infringement were made against
us, our business could be significantly harmed.

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 implementations
of Infranet that 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 in certain jurisdictions and
under certain circumstances, 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.

  Despite 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 or other date functions.  Several
customers, despite warnings regarding the use of non-Year 2000 certified
versions of Infranet, have continued to use non-certified versions, and decline
to upgrade to certified versions or implement maintenance fixes or bug releases
made available to them.  Portal integrates certain third party software into
Infranet. These third party vendors may detect errors in their products after
previously indicating that their products are Year 2000

                                       23
<PAGE>

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 the past we have failed to release certain new products and upgrades on
time. Future 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.

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
the market does not accept these products or enhancements.

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 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

                                       24
<PAGE>

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 (which has recently acquired Solect Technology) and the
Kenan Systems division of Lucent; emerging providers of Internet-specific
billing software, such as Belle Systems and Daleen Technologies, Inc.; and
providers of Internet-based services that develop proprietary systems. 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 use to compete more effectively. Increased competition could
result in price reductions, fewer customer orders, reduced gross margins and
loss of market share, any of which could harm our business.

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
commerce and communication. Rapid growth in the use of the Internet and on-line
wireless 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

  Due to the increasing popularity and use of the Internet, it is possible that
state and federal regulators could adopt laws and regulations that may impose
additional burdens on those companies conducting business on-line. The growth
and development of the market for Internet-based services may prompt calls for
more stringent consumer protection laws or for imposition of additional taxes.
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.

                                       25
<PAGE>

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 fiscal year
2001 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 may experience 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

  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 has been, and will be volatile

  The trading price of our common stock has fluctuated in the past and will
fluctuate in the future.  This future fluctuation could be 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;

  .  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.

                                       26
<PAGE>

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

                                       27
<PAGE>

ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Short-Term Investment Portfolio

  We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a maximum
of $5 million to any one issuer. Our policy also dictates that all short-term
investments mature in 24 months or less.

   The following table presents the amounts of cash equivalents and investments
that are subject to market risk and the weighted average interest rates, by year
of expected maturity for Portals' investment portfolios as of July 31, 2000.
This table does not include cash because cash is not subject to market risk.  It
also does not include long-term investments as they are held to maturity.
Therefore, near-term changes in market rates will not result in losses.  (In
thousands, except interest rates):

<TABLE>
<CAPTION>
                                           Maturing within      Maturing within
                                                1 Year              2 Years            Thereafter            Total
                                                ------              -------            ----------            -----
<S>                                        <C>                  <C>                    <C>                 <C>
As of July 31, 2000:
Cash Equivalents.......................         $ 25,584            $    --                 --             $ 25,584
   Weighted Average Yield..............             6.33%                --                 --                 6.33%
Investments............................          121,469             48,719                 --              170,188
   Weighted Average Yield..............             6.46%              6.73%                --                 6.54%
                                                --------            -------                ---             ---------
Total Portfolio........................         $147,053            $48,719                 --             $195,772
   Weighted Average Yield..............             6.43%              6.73%                --                 6.51%
</TABLE>


Impact of Foreign Currency Rate Changes

  During fiscal year 2000, most local currencies of our international
subsidiaries weakened against the U.S. dollar. Because we translate foreign
currencies into U.S. dollars for reporting purposes, currency fluctuations can
have an impact, though generally immaterial, on our results. Portal believes
that its exposure to currency exchange fluctuation risk has been insignificant
primarily due to the denomination of our sales transactions in U.S. dollars. For
the quarter ended July 31, 2000, there was an immaterial currency exchange
impact from our intercompany transactions. As of July 31, 2000, we did not
engage in foreign currency hedging activities.

   As a global corporation, Portal anticipates that its sales outside the United
States will increasingly be denominated in other currencies.  In such event,
Portal will face exposure to adverse movements in foreign currency exchange
rates.  These exposures may change over time as business practices evolve and
could have a material adverse impact on Portal's financial position and results
of operations.  In order to reduce the effect of foreign currency fluctuations,
Portal may hedge its exposure on certain transactional balances that are
denominated in foreign currencies through the use of foreign currency forward
exchange contracts.  The success of such activity will depend upon the
estimation of future transactions denominated in various currencies.  To the
extent that these estimates are overstated or understated during periods of
currency volatility, Portal could experience unanticipated currency gains or
losses.

                                       28
<PAGE>

PART II: OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

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

On May 11, 1999, Portal 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. After deducting
the underwriting discounts and offering expenses, Portal received net proceeds
from the offering of approximately $58,642,000. None of Portal's net proceeds of
the offering were paid directly or indirectly to any director, officer, general
partner of Portal or their associates, persons owning 10% or more of any class
of equity securities of Portal, or an affiliate of Portal.  Of the net proceeds,
Portal has used approximately $37,161,000 for capital expenditures.
Additionally, a portion of the net proceeds were used to repay long-term debt
and line of credit obligations of $5,122,000 and capital lease obligations of
$725,000. The remainder of the net proceeds is expected to be used for general
corporate purposes, including working capital, capital expenditures and product
development.  A portion of the net proceeds may also be used to acquire or
invest in complementary businesses, technologies or product offerings; however,
there are no current material agreements or commitments with respect to any such
activities.  The amounts actually expended for such purposes may vary
significantly and will depend on a number of factors, including Portal's future
revenues and cash generated by operations and the other factors described under
"Factors That May Affect Future Results".  Accordingly, Portal retains broad
discretion in the allocation of the net proceeds of the offering.

                                       29
<PAGE>

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

     The Annual Meeting of Stockholders of the Registrant was held on July 26,
2000.  At the Annual Meeting, the following matters were submitted to a vote of
stockholders and were approved, with the votes cast on each matter indicated
(there were no broker non-votes):

  1.  The election of one Class I Director. Mr. Arthur C. Patterson was the only
  nominee for election and the only director elected at the meeting. His
  election was approved with 133,057,184 shares voting for and 69,502 shares
  voting against.

  2.  An amendment of the Company's Restated Certificate of Incorporation to
  increase the authorized number of shares of Common Stock from 250,000,000 to
  1,000,000,000 shares was approved with 121,506,245 shares voting for,
  11,574,495 shares voting against and 45,947 shares abstaining.

  3.  The ratification of the appointment of Ernst & Young LLP as independent
  auditors for the Company for the year ending January 31, 2001 was approved
  with 133,048,438 shares voting for, 22,280 shares voting against and 54,968
  shares abstaining.

                                       30
<PAGE>

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

         27   Financial Data Schedule

         (b)  Reports on Form 8-K:

         None.

                                       31
<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.



September 13, 2000                 PORTAL SOFTWARE, INC.


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

                                       32
<PAGE>

                     EXHIBIT INDEX TO PORTAL SOFTWARE, INC.
                         QUARTERLY REPORT ON FORM 10-Q
                      FOR THE QUARTER ENDED JULY 31, 2000



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


27                  Financial Data Schedule

                                       33


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