PORTAL SOFTWARE INC, 10-Q, 2000-06-14

PORTAL SOFTWARE INC
10-Q, 2000-06-14
COMPUTER PROGRAMMING SERVICES

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarter Ended April 30, 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 May 31, 2000 161,596,355 shares of the Registrant's Common Stock, $0.001 par
value, were outstanding.
<PAGE>

PORTAL SOFTWARE, INC.
FORM 10-Q

QUARTER ENDED APRIL 30, 2000

INDEX

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

Item 1: Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at January 31, 2000 and April 30, 2000 3

Condensed Consolidated Statements of Operations for the three months 4
ended April 30, 1999 and 2000

Condensed Consolidated Statements of Cash Flows 5
for the three months ended April 30, 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 25

Part II: Other Information

Item 2: Changes in Securities and Use of Proceeds 27

Item 6: Exhibits and Reports on Form 8-K 28

Signature 29

Exhibit Index 30
</TABLE>

2
<PAGE>

ITEM 1: FINANCIAL STATEMENTS

PORTAL SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

<TABLE>
<CAPTION>
January 31, April 30,
----------- ---------
2000 2000
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................................................. $ 43,887 $ 41,595
Accounts receivable, net .................................................. 28,546 37,912
Short-term investments ..................................................... 152,090 153,923
Restricted short-term investments .......................................... 5,312 299
Prepaids and other current assets .......................................... 4,516 5,684
--------- ---------
Total current assets ..................................................... 234,351 239,413
Property and equipment, net ................................................... 18,785 28,613
Restricted long-term investments .............................................. 5,856 6,452
Other assets .................................................................. 6,537 8,533
--------- ---------
$ 265,529 $ 283,011
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................................................... $ 7,655 $ 5,285
Accrued compensation ....................................................... 9,060 14,473
Other accrued liabilities .................................................. 5,282 7,716
Current portion of capital lease obligations ............................... 780 833
Deferred revenue ........................................................... 32,857 36,870
--------- ---------
Total current liabilities ................................................ 55,634 65,177
Long-term portion of capital lease obligations ................................ 1,525 1,292
Commitments.................................................................... -- --
Stockholders' equity (net capital deficiency):
Common stock, $0.001 par value ............................................ 159 161
Additional paid-in capital ................................................. 251,047 255,113
Accumulated other comprehensive loss........................................ (639) (791)
Notes receivable from stockholders.......................................... (259) (135)
Deferred stock compensation................................................. (6,379) (5,324)
Accumulated deficit......................................................... (35,559) (32,482)
--------- ---------
Stockholders' equity...................................................... 208,370 216,542
--------- ---------
$ 265,529 $ 283,011
========= =========
</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
Ended April 30,
------------------
1999 2000
---- ----
<S> <C> <C>
Revenues:
License fees ........................................................................... $ 9,064 $ 35,374
Services ............................................................................... 6,101 15,244
--------- ---------
Total revenues ....................................................................... 15,165 50,618
--------- ---------

Costs and expenses:
Cost of license fees ................................................................... 185 637
Cost of services ....................................................................... 4,195 10,006
Research and development ............................................................... 4,285 11,376
Sales and marketing .................................................................... 7,329 20,303
General and administrative ............................................................. 2,235 6,605
Amortization of deferred stock compensation ............................................ 2,026 1,055
--------- ---------
Total costs and expenses ............................................................. 20,255 49,982
--------- ---------
Income (loss) from operations ............................................................. (5,090) 636
Interest and other income (expense), net .................................................. (28) 3,015
--------- ---------
Income (loss) before income taxes ......................................................... (5,118) 3,651
Provision for income taxes................................................................. (416) (574)
--------- ---------
Net income (loss) ......................................................................... $ (5,534) $ 3,077
========= =========

Basic net income (loss) per share ......................................................... $ (0.08) $ 0.02
========= =========
Shares used in computing basic net income (loss) per share ................................ 67,086 154,582
========= =========
Diluted net income (loss) per share ....................................................... $ (0.08) $ 0.02
========= =========
Shares used in computing diluted net income (loss) per share .............................. 67,086 172,753
========= =========
</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>
Three Months
Ended April 30,
----------------
1999 2000
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................................................... $ (5,534) $ 3,077
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization........................................................... 371 1,502
Amortization of deferred stock compensation............................................. 2,026 1,055
Changes in operating assets and liabilities:
Accounts receivable, net.............................................................. 290 (9,366)
Prepaids and other current assets..................................................... (2,364) (3,681)
Other assets.......................................................................... 459 (62)
Accounts payable...................................................................... 1,554 (347)
Accrued compensation.................................................................. 1,174 5,453
Other accrued liabilities............................................................. (986) 2,449
Deferred revenue...................................................................... 6,149 4,012
-------- --------
Net cash provided by operating activities........................................... 3,139 4,092
-------- --------

INVESTING ACTIVITIES:
Purchases of short-term investments....................................................... -- (35,475)
Maturity of short-term investments........................................................ -- 38,993
Purchases of long-term investments........................................................ -- (601)
Maturity of long-term investments......................................................... -- 13
Purchases of property and equipment....................................................... (1,250) (12,218)
Equity investments........................................................................ -- (1,000)
-------- --------
Net cash used in investing activities............................................... (1,250) (10,288)
-------- --------

FINANCING ACTIVITIES:
Payments received on stockholder notes receivable......................................... -- 124
Repayment of long-term debt............................................................... (2,998) --
Proceeds from line of credit.............................................................. 1,000 --
Principal payments under capital lease obligations, net of proceeds....................... (123) (168)
Proceeds from issuance of common stock, net of repurchases................................ 308 4,068
Proceeds from issuance of preferred stock................................................. 57 --
-------- --------
Net cash provided by (used in) financing activities................................. (1,756) 4,024
-------- --------
Effect of exchange rate on cash and cash equivalents...................................... -- (120)
-------- --------
Net increase (decrease) in cash and cash equivalents........................................ 133 (2,292)
Cash and cash equivalents at beginning of period............................................ 11,809 43,887
-------- --------
Cash and cash equivalents at end of period.................................................. $ 11,942 $ 41,595
======== ========
</TABLE>

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5
<PAGE>

PORTAL SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(1) Significant Accounting Policies:

Nature of Business and Basis of Presentation

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

The accompanying unaudited condensed consolidated financial statements
include the accounts of Portal and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. The balance sheet at April 30, 2000 and the statement of
operations and cash flows for the three months ended April 30, 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 the product is delivered to the end user.

Services revenues are primarily comprised of revenue from systems
integration or other consulting fees, maintenance agreements and training.
Arrangements that include software services are evaluated to determine whether
those services are essential to the functionality of other elements of the
arrangement. When software services are considered essential, revenue under the
arrangement is recognized using contract accounting. When software services are
not considered essential, the revenue 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 February 1998, Portal adopted Statement of Position 97-2 ("SOP 97-2"),
as amended by SOP 98-4 and SOP 98-9, "Software Revenue Recognition." These
statements provide guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions. SOP 98-9 amends SOP 97-2 and
98-4, extending the deferral of the application of certain provisions of SOP 97-
2 amended by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. Portal does not expect the
final adoption of SOP 98-9 to have a material impact on its future revenues or
results of operations.

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. 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. One customer accounted for more than 15% of total revenues during
the quarter ended April 30, 1999 and no individual customer accounted for more
than 10% of revenues during the quarter ended April 30, 2000.

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 and gross
margin.

Portal's export revenue represented 31% and 37% of total revenues in the
quarters ending April 30, 1999 and 2000. 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 quarters ending April
30, 1999 and 2000 were $3.9 million and $13.1 million to customers in Europe and
$0.8 million and $5.8 million to customers in the Asia-Pacific and Latin
American 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 April 30, 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 April 30, 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.

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 April 30, 2000, unrealized

7
<PAGE>

losses were $791,000 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, April 30,
----------- ---------
2000 2000
---- ----
(unaudited)
<S> <C> <C>
Cash and cash equivalents:
Cash ............................................................................ $ 11,570 $ 7,533
Money market funds............................................................... 12,142 16,232
Commercial paper................................................................. 14,977 16,932
U.S. Government securities....................................................... 5,198 898
-------- --------
$ 43,887 $ 41,595
======== ========
</TABLE>

Short-term investments at April 30, 2000 (in thousands, unaudited):

<TABLE>
<CAPTION>
Gross Unrealized
----------------
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Corporate notes................................. $ 104,073 $ -- $ (632) $ 103,441
Municipal bonds................................. 50,921 -- (140) 50,781
Restricted investments.......................... (299) -- -- (299)
---------- --------- -------- ---------
$ 154,695 $ -- $ (772) $ 153,923
========== ========= ======== =========
</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, April 30,
----------- ---------
2000 2000
---- ----
(unaudited)
<S> <C> <C>
Due within one year.............................................................. $ 125,467 $ 137,829
Due within two years............................................................. 75,822 57,988
Restricted short-term investments................................................ (5,312) (299)
--------- ---------
$ 195,977 $ 195,518
========= =========
</TABLE>

Restricted short-term investments at April 30, 2000 represent collateral
for a $200,000 surety bond required by a customer contract which 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 April 30, 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
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 April 30, 2000, amortized cost approximated fair value.

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

8
<PAGE>

Other Assets

Other assets consisted of the following:

<TABLE>
<CAPTION>
January 31, April 30,
2000 2000
---- ----
(in thousands) (Unaudited)
<S> <C> <C>
Prepaid services - long term portion (see Note 3).............. $ 3,048 $ 4,989
Deposits and other............................................. 3,489 3,544
-------- --------
$ 6,537 $ 8,533
======== ========
</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.

For the quarter ended April 30, 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
April 30,
---------
1999 2000
---- ----
<S> <C> <C>
Basic:
Net income (loss).................................................................. $ (5,534) $ 3,077
========= =========
Weighted-average shares of common stock outstanding............................. 78,588 159,951
Less: Weighted-average shares subject to repurchase............................. (11,502) (5,369)
--------- ---------
Weighted-average shares used in computing basic net income (loss) per share........ 67,086 154,582
========= =========
Basic net income (loss) per share.................................................. $ (0.08) $ 0.02
========= =========

Diluted:
Net income (loss).................................................................. $ (5,534) $ 3,077
========= =========
Shares used above.............................................................. 67,086 154,582
Common equivalent shares....................................................... -- 18,171
--------- ---------
Shares used in computing diluted net income (loss) per share....................... 67,086 172,753
========= =========
Diluted net income (loss) per share................................................ $ (0.08) $ 0.02
========= =========
</TABLE>

9
<PAGE>

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 other accumulated comprehensive
income (loss). Comprehensive income (loss) for the three months ended April 30,
1999 and 2000 is as follows:

<TABLE>
<CAPTION>
Three months ended April 30,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Net income (loss)................................................ $ (5,534) $ 3,077
Unrealized loss on marketable securities......................... --- (68)
Change in cumulative translation adjustment...................... 1 (64)
-------- --------
Comprehensive net income (loss).................................. $ (5,533) $ 2,945
======== ========
</TABLE>

(2) Line of Credit

On April 15, 1999, Portal entered into a line of credit with a bank
under which Portal may borrow up to $5 million. Amounts borrowed under this line
of credit bear interest at a rate of the bank's prime rate plus 0.5% and mature
on April 13, 2000. On April 22, 1999, Portal borrowed $1.0 million under the
line of credit to repay the final installment of the term loan that matured in
April 1999. The entire balance on the line of credit was repaid in May 1999. The
line of credit expired in April 2000 and was not renewed.

(3) Agreement with Andersen Consulting LLC

Under this agreement, Portal agreed to pay Andersen Consulting LLC for its
services a minimum services fee in cash of $2.8 million and a cash settled put
for 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 appropriate and
will be amortized on a straight-line basis over the term of the agreement of
approximately four and one half years.

10
<PAGE>

(4) Income Taxes

During the quarter ended April 30, 2000, Portal recognized tax expense of
$0.6 million primarily related to tax on earnings generated from domestic and
foreign operations. Due to Portal's positive earnings for the quarter, Portal
reversed a portion of its valuation allowance against the previously established
deferred tax assets for which realization is considered more likely than not. As
of January 31, 2000, Portal's federal and state net operating loss
carry-forwards, research and development tax credit carry-forwards and other
credits totaled $7.2 million and $4.0 million, respectively.

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 239 customers through April 30, 2000. Portal has
established a series of partnerships with systems integrators and hardware
platform, software and service providers. Portal has derived, and anticipates
that it will continue to derive, a substantial portion of its revenues from
customers that have significant relationships with its market and platform
partners.

RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three
months ended April 30, 1999 and 2000 expressed as a percentage of total
revenues.

<TABLE>
<CAPTION>
Three Months
Ended April 30,
---------------
1999 2000
---- ----
<S> <C> <C>
Revenues:
License fees............................................ 59.8 % 69.9 %
Services................................................ 40.2 30.1
----- -----
Total revenues..................................... 100.0 100.0
----- -----

Costs and expenses:
Cost of license fees.................................... 1.2 1.2
Cost of services........................................ 27.7 19.8
Research and development................................ 28.3 22.5
Sales and marketing..................................... 48.3 40.1
General and administrative.............................. 14.7 13.0
Amortization of deferred stock compensation............. 13.4 2.1
----- -----

Total costs and expenses........................... 133.6 98.7
----- -----

Income (loss) from operations................................ (33.6) 1.3
Interest income (expense) and other income, net.............. (0.2) 5.9
----- -----
Income (loss) before income taxes............................ (33.8) 7.2
Provision for income taxes................................... (2.7) (1.1)
----- -----
Net income (loss)............................................ (36.5) 6.1
===== =====
</TABLE>

12
<PAGE>

Revenues

Total revenues were $50.6 million in the quarter ended April 30, 2000, an
increase of approximately $35.5 million or 234% over the comparable period in
1999. License fees revenues increased as a percentage of total revenues in the
quarter ended April 30, 2000 compared to the quarter ended April 30, 1999
primarily because license fees revenue growth exceeded service revenue growth.
One customer accounted for more than 15% of total revenues during the quarter
ended April 30, 1999 and no individual customer accounted for more than 10% of
revenues during the quarter ended April 30, 2000. No other customers accounted
for more than 10% of total revenue for the quarters ended April 30, 2000 and
1999.

License fees totaled $35.4 million in the quarter ended April 30, 2000, an
increase of approximately $26.3 million or 290% over the comparable period ended
April 30, 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 $15.2 million in the quarter ended April 30, 2000,
an increase of approximately $9.1 million or 150% over the comparable period
ended April 30, 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 increasingly complex
demands of Portal's customers.

<TABLE>
<CAPTION>
Three Months
Ended April 30, Percent
---------------
(in thousands) 1999 2000 Change
---- ---- ------
<S> <C> <C> <C>
Geographical Revenues:
North America.................................................. $ 10.5 $ 31.7 202%
Percentage of total revenues.............................. 69% 63%
International
Europe....................................................... 3.9 13.1 236%
Percentage of total revenues.............................. 26% 26%
Intercontinental............................................. 0.8 5.8 625%
Percentage of total revenues.............................. 5% 11%
------ ------ ---
Total international.......................................... 4.7 18.9 302%
Percentage of total revenues.............................. 31% 37%
------ ------ ---
Total revenues.................................................... $ 15.2 $ 50.6 234%
====== ====== ===
</TABLE>

North American revenues, which are defined by Portal as revenues from the
United States and Canada, were $31.7 million in the quarter ended April 30,
2000, an increase of approximately $21.2 million or 202%, over the comparable
period ended April 30, 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 $18.9
million in the quarter ended April 30, 2000, an increase of approximately $14.2
million or 302% over the comparable period ended April 30, 1999. European
revenues were $13.1 million in the quarter ended April 30, 2000, an increase of
approximately $9.2 million or 236% over the comparable period ended April 30,
1999. Intercontinental revenues were $5.8 million in the quarter ended April 30,
2000, an increase of approximately $5.0 million or 625% over the comparable
period ended April 30, 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 quarter
ended April 30, 2000, compared with approximately 31% in the comparable period
ended April 30, 1999. In the quarter ended April 30, 2000, revenues from Europe
were 26% of total revenues and revenues from Intercontinental were 11% of total
revenues.

13
<PAGE>

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
quarter ended April 30, 2000, an increase of approximately $0.5 million or 244%
from the comparable period ended April 30, 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 98% in both the quarter ended April
30, 1999 and in the quarter ended April 30, 2000. For the three months ended
April 30, 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 $10.0 million in the quarter ended April 30,
2000, an increase of approximately $5.8 million or 139% over the comparable
period ended April 30, 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 34% in the
quarter ended April 30, 2000 compared to approximately 31% in the comparable
period ended April 30, 1999. Portal expects cost of services to increase
substantially in the next few quarters as a result of increased demand for
services.

Research and Development Expenses

Research and development expenses consist primarily of personnel and
related costs for Portal's development and technical support efforts. Research
and development expenses were $11.4 million in the quarter ended April 30, 2000,
an increase of approximately $7.1 million or 165% over the comparable period
ended April 30, 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.

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 $20.3 million in the quarter ended April 30, 2000, an increase of
approximately $13.0 million or 177% over the comparable period ended April 30,
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 over 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.

14
<PAGE>

General and Administrative Expenses

General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
legal, human resources and facilities as well as information system expenses not
allocated to other departments. General and administrative expenses were $6.6
million in the quarter ended April 30, 2000, an increase of approximately $4.4
million or 196% over the comparable period ended April 30, 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 over the current 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 $1.1 million during the quarter ended
April 30, 2000. This compensation expense relates to options awarded to
individuals in all operating expense categories. Total deferred compensation at
April 30, 2000 of approximately $5.3 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 $0.6 million income tax provision shown for this period is primarily
the result of tax on earnings generated from domestic and foreign operations.
Due to Portal's positive earnings for the quarter, 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 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.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments (including restricted
investments) totaled $195.8 million at April 30, 2000, compared to a balance of
$201.3 million at January 31, 2000.

Portal generated $4.1 million in cash from operations in the quarter ended
April 30, 2000, an increase of $1.0 million over the $3.1 million generated in
the quarter ended April 30, 1999. Net cash provided by operations in the quarter
ended April 30, 2000 was primarily comprised of net income of $3.1 million, a
$4.0 million increase in deferred revenue and an increase in accrued
compensation of $5.5 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 $1.1 million for the quarter ended April 30, 2000. These
increases were offset by a $9.4 million increase in accounts receivable and a
$3.7 million increase in prepaids and other current assets.

Portal has continued to make significant investments in equipment. During
the quarter ended April 30, 2000, Portal purchased computer servers,
workstations, networking equipment and other capital equipment amounting to
approximately $12.2 million, primarily to further expand its product capability,
and increase its internal network communication, product demonstration and
service capability. None of the equipment was funded from Portal's equipment
lease line facility.

Portal has raised equity capital from outside 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

15
<PAGE>

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 quarter
ended April 30, 2000, Portal raised an additional $4.1 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.

Historically, Portal has also used debt and leases to partially finance its
operations and capital purchases. Portal has a $3.0 million capital lease line
facility with an equipment lessor, which it established in fiscal 1998. The
lease line has a term of 48 months and bears interest at a rate of 8.5% per
annum. The capital lease line facility comprised the entire amount of the debt
obligations on Portal's balance sheet as of April 30, 2000. The capital lease
line facility includes certain covenants requiring minimum liquidity, tangible
net worth and profitability over time and becomes due immediately if Portal
fails to meet these covenants. Portal is currently, and has always been, in
compliance with these covenants.

On 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.

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.

16
<PAGE>

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 April 30, 2000 contained in
this report are not necessarily indicative of results for 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 not achieved sustained 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 did achieve operating profitability in the quarter ending April 30, 2000.

In addition, we expect to significantly increase our sales and marketing,
product development and administrative expenses. As a result, we will need to
generate significant revenues from sales of Infranet to achieve and maintain
profitability. We expect that we will face increased competition 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;

17
<PAGE>

. 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.

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 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. Such seasonality may cause our results of operations to
fluctuate or become more difficult to predict.

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.

18
<PAGE>

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.

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. 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.

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.

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.

19
<PAGE>

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 April 30,
2000, we had 793 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.

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 April 30, 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;

20
<PAGE>

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

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

21
<PAGE>

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 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

22
<PAGE>

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 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.

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<PAGE>

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
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.

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.

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<PAGE>

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.

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.

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 summarizes Portal's short-term investments and the related
weighted average yields, as of April 30, 2000 (in thousands, except interest
rates):

<TABLE>
<CAPTION>
Year ending April 30,
---------------------------------------
2001 2002 Thereafter Total
---- ---- ---------- -----
<S> <C> <C> <C> <C>
Cash Equivalents....................... $ 34,062 $ -- -- $ 34,062
Weighted Average Yield.............. 5.91% -- -- 5.91%
Investments............................ 96,234 57,988 -- 154,222
Weighted Average Yield.............. 6.19% 6.62% -- 6.35%
--------- --------- --------- ---------
Total Portfolio........................ $ 130,296 $ 57,988 -- $ 188,284
Weighted Average Yield.............. 6.12% 6.62% -- 6.27%
</TABLE>

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<PAGE>

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 April 30, 2000, there was an immaterial currency exchange
impact from our intercompany transactions. As of April 30, 2000, we did not
engage in foreign currency hedging activities.

As a global concern, 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.

26
<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 $26,154,000 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
$541,000. 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.

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<PAGE>

Item 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27 Financial Data Schedule

(b) Reports on Form 8-K:

None.

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<PAGE>

SIGNATURE

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

June 13, 2000 PORTAL SOFTWARE, INC.

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

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<PAGE>

EXHIBIT INDEX TO PORTAL SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2000

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

27 Financial Data Schedule