BORIS FELDMAN, State Bar No. 128838 PERI NIELSEN, State...

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DECLARATION OF CHRISTINA L. COSTLEY ISO DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT CASE NO. C-03-5138 VRW

BORIS FELDMAN, State Bar No. 128838 PERI NIELSEN, State Bar No. 196781 CHRISTINA L. COSTLEY, State Bar No. 227134 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 Telephone: (650) 493-9300 Facsimile: (650) 565-5100 Email: [email protected] Email: [email protected] Email: [email protected] Attorneys for Defendants PORTAL SOFTWARE, INC., JOHN E. LITTLE, HOWARD A. BAIN, III, and ARTHUR C. PATTERSON DORIAN E. DALEY, State Bar No. 129049 JAMES C. MAROULIS, State Bar No. 208316 ORACLE CORPORATION 500 Oracle Parkway Mailstop 50P7 Redwood Shores, CA 94065 Telephone: (650) 506-5200 Facsimile: (650) 506-7114 Email: [email protected] Email: [email protected] Attorneys for Defendants PORTAL SOFTWARE, INC., JOHN E. LITTLE, HOWARD A. BAIN, III, and ARTHUR C. PATTERSON

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

In re PORTAL SOFTWARE, INC. SECURITIES LITIGATION,

This Document Relates To: ALL ACTIONS.

)))))))))))))

CASE NO.: C-03-5138 VRW DECLARATION OF CHRISTINA L. COSTLEY IN SUPPORT OF DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT Date: Feb. 22, 2007 Time: 2:00 p.m. Dept.: Courtroom 6 Judge: Hon. Vaughn R. Walker

Case 3:03-cv-05138-VRW Document 159 Filed 01/11/2007 of 2

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DECLARATION OF CHRISTINA L. COSTLEY ISO DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT CASE NO. C-03-5138 VRW

-1- 3030433

I, Christina L. Costley, declare as follows:

1. I am an associate at the law firm of Wilson Sonsini Goodrich & Rosati, P.C.

(“WSGR”). I am admitted to practice law in the State of California. I have been engaged to

represent Defendants Portal Software, Inc. (“Portal”), John E. Little, Howard A. Bain, III and

Arthur C. Patterson in the above-entitled action. I have personal knowledge of the facts set forth

herein and, if called as a witness, I could and would testify competently thereto.

2. Attached hereto as Exhibit A are true and correct copies of excerpts from Portal’s

2003 Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 1, 2003.

3. Attached hereto as Exhibit B are true and correct copies of excerpts from Portal’s

Form 10-Q filed with the SEC on June 16, 2003.

4. Attached hereto as Exhibit C are true and correct copies of excerpts from Portal’s

Form 10-Q filed with the SEC on September 12, 2003.

5. Attached hereto as Exhibit D is a true and correct copy of a Portal’s Form S-3

Registration Statement filed with the SEC on September 12, 2003.

6. Attached hereto as Exhibit E is a true and correct copy of a Form 8-K and

attached press release, filed by Portal with the SEC on September 12, 2003.

7. Attached hereto as Exhibit F is a true and correct copy of Form 8-K and attached

press release, filed by Portal with the SEC on May 20, 2003.

8. Attached hereto as Exhibit G is a true and correct copy of a Form 8-K and

attached press release, filed by Portal with the SEC on August 19, 2003.

9. Attached hereto as Exhibit H are true and correct copies of excerpts from the

Second Consolidated Amended Complaint in In re Dura Pharmaceuticals, Inc. Sec. Litig., No.

99cv0151-L (S.D. Cal. Sept. 25, 2000).

I declare under penalty of perjury that the foregoing is true and correct. Executed at Palo

Alto, California on this 11th day of January 2007.

/s/ Christina L. Costley Christina L. Costley

Case 3:03-cv-05138-VRW Document 159 Filed 01/11/2007 of 2

EXHIBIT A

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SECURITIES AND EXCHANGE COMMISSIO NWashington, D .C . 2054 9

FORM 10-KFOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4

(Mark One )

❑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4

For the fiscal year ended Janua ry 311, 2003

O R

❑ 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 Cha rter)

Delaware(State or Other Jurisdiction of

Incorporation or Organization)

77-0369737(I .R.S. Employer

Identification No. )

10200 South The Anza Boulevard, Cupertino, California 95014(Address of principal executive offices and Zip Code)

Registrant' s telephone number, including area code : (408) 572-200 0

Securities registered pursuant to Section 12 (b) of the Act:

None

Securities registered pursuant to Section 12 (g) of the Act :

Common Stock, $0.001 par valu e

Rights to Purchase Series A Junior Participating Preferred Stoc k

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 El NO ❑

Indicate by check mark if disclosure of delinquent fi lers pursuant to Item 405 of Regulation S-K is not contained herein , and will not be conta ined, to the best ofRegistrant ' s knowledge, in definitive proxy or information statements incorporated by reference in Pa rt III of this Form 10-K or any amendment to thisForm 10-K. (1

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule I2b-2). YES ❑ N O

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the common stock on July 31, 2002as reported on the Nasdaq National Market System, was approximately $52,462,000. Shares of common stock held by each officer, director and holder of 5% ormore of the outstanding common stock have been excluded from this calculation in that such persons may be deemed to be affiliates . This determination ofaffiliate status is not necessarily a conclusive determination for other purposes. As of March 31, 2003, Registrant had outstanding 178,658,661 shares of commonstock.

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PORTAL SOFTWARE, INC .

FORM 10-K

FISCAL YEAR 2003

INDEX

Page

PART I

Item I : BusinessItem 2 : Properties 9

Item 3 : Le2al Proceedings 10

Item 4 : Submission of Matters to a Vote of Security Holders 10

PART II

Item 5 : Market for R eeistrant's Common Equity and Related Stockholder Matters 13

Item 6: Selected Consolidated Financial Data 14Item 7 : Manaeement's Discussion and Analysis of Financial Condition and Results of Operations 15

Item 7A : Ouantitative and Oualitative Disclosures About Market Risk 43

Item 8: Financial Statements and Surmlementary Data 44

Item 9: Chances in and Disaereements with Accountants on Accounting and Financial Disclosure 78PART III

Item 10: Directors and Executive Officers of the Reeistrant 78

Item 11 : Executive Compensation 80

Item 12 : Security Ownership of Certain Beneficial Owners and Manaeement and Related Stockholder Matters 83

Item 13 : Certain Relationships and Related Transactions 86

Item 14 : Controls and Procedures 87PART IV

Item 15 : Exhibits. Financial Statement Schedules and Reports on Form 8-K 88

Sienatures 90

Certifications 91Exhibit Index 93

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PART I

ITEM 1 . BUSINES S

General Information

This report contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates, projections, beliefs andassumptions about our industry, our company, our business and prospects . 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 numerous risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and couldcause actual results to differ materially from those expressed or forecasted in the forward-looking statements . These risks and uncertainties include those

described in "Risks Associated With Our Business and Future Operating Results"; "Management's Discussion and Analysis of Financial Condition and Results

of Operations" and elsewhere in this report . Readers are cautioned not to place undue reliance on these 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 .

References in this document to "Portal", "we", "our" and "us' refer to Portal Software, Inc ., a Delaware corporation, its predecessors and each of its subsidiaries.

Portal, Infranet, Infranet Interconnect, Content Connector, the Portal logo, Infranet IPT, Infranet Cable and Real Time-No Limits are trademarks of Portal . Each

trademark, trade name or service mark of any other company appearing in this report belongs to its holder .

Business Overview

Portal develops, markets and supports billing and customer management solutions for communications and content service providers . Our products and servicesare used by communications providers to support voice, data, video and content services across wireless, wireline, cable and satellite networks . Ourproduct-centric, convergent Infranet® platform enables our customers to rapidly define, deploy and bill for services with flexible business models. Infranetenables the real time provisioning and reporting of services, including such functions as account creation, user authentication and authorization, activity tracking,pricing and rating, billing and customer service, including self-service, all on a scale of up to tens of millions of users . Service offerings supported by Infranetinclude wireless services ; cable and satellite services ; broadband and Internet services, such as DSL; and next generation services, such as unified messaging,gaming, electronic content delivery and mobile commerce. Infranet is the foundation for our comprehensive product-centric solutions . It is a standard softwareplatform built on an open architecture that can be easily integrated with other business system components . While Infranet is designed to meet the needs of nextgeneration communications markets and services, it can be enhanced with a full suite of prebuilt modules for specific industry segments, including wireless,wireline, cable, ISP and Internet telephony . Portal believes that this product-based solution provides customers with significant time to market advantages aswell as superior total cost of ongoing operations . Our customers range from emerging small companies offering innovative services to a small number ofsubscribers to large global telecommunications carriers with millions of subscribers .

Industry Backgroun d

The communications industry is dramatically changing due to rapid advancements in Internet, broadband and wireless technologies and an increasinglycompetitive and uncertain business environment . Wireless devices transmit voice and text messages between users around the globe. Satellite networks broadcasttelevision and Internet access to previously unreachable geographies. Broadband providers deliver videoconferencing to enterprises wanting to keep keypersonnel close to home . Today, voice, data, commerce and content are flowing simultaneously over multiple networks, giving users access to the most relevantservices and content on the most appropriate device . As many network-based services become more mature or commoditized, the providers of

Table of Contentsthese services are focusing on developing premium and value added services in order to increase revenue from their customers . To differentiate themselves and

create new revenue opportunities, service providers are experimenting with a multitude of new services, price plans and business models . To do this quickly and

efficiently, they need a fully convergent business system, such as Infranet, that is easy to modify and maintain, is technology independent and can scale tosupport millions of customers . Furthermore, service providers must increasingly seek to reduce their operating expenses, including the costs of implementing andoperating their systems and services .

The traditional customer management and billing ("CM&B") systems of communications companies were typically designed and built to service one particulartype and size of service provider-such as a large, traditional national or regional carrier, or a small competitive cellular telephone provider-and to interfacewith and process data from the specific equipment and technologies used in a single network or for a particular service, such as circuit switched wirelinetelephone, cellular telephones or cable television networks . These traditional highly customized CM&B solutions can generally be characterized as (1) inflexible,

(2) proprietary and (3) difficult to evolve to meet the complex requirements of providers of new wireless and Internet-based services . As a result, such CM&Bsolutions are often not able to address one of the most fundamental requirements facing providers of communication and content services : minimizing the time to

market for new products and services . Moreover, because such traditional systems have generally been highly customized, their support costs are high andchanges to increase the functionality or features of the system or to introduce new services typically require extensive programming using either internal orexternal professional services, resulting in additional ongoing expenses, significant time delays and therefore a very high total cost of ownership .

The Portal Strateg y

Our strategy is to establish ourselves as providing the most flexible, scalable and cost-effective solutions for communication and content service providers . Keyelements of this solutions strategy are :

All Portal Solutions are Based on the Some Extensible Software Platform . Portal has focused on the development of an integrated, off-the-shelf softwareplatform that can address the rapidly changing, highly flexible and complex requirements of evolving communications networks and service offerings and canprovide a superior total cost of ownership . Our extensible platform provides a framework for integration with a wide variety of other business systems and afoundation for the development of market-specific solutions. Although there are unique aspects to every service, most share the same underlying businessinfrastructure requirements, such as transactional security, financial security and ability to be rapidly deployed . Rather than provide a highly customized solution

to every customer, our platform strategy enables Portal to provide every customer with the same basic product, which, in contrast to customized "one off"solutions, creates a future support and upgrade path to all its customers . Moreover, this approach enables Portal to translate its experience across a wide variety ofmarkets and leverage its research and development efforts into improvements to the platform that can in turn benefit a broad range of our existing and potentialcustomers . To meet the unique requirements of specific markets and industries, our platform has been designed to enable Portal and its partners to developspecific solutions that integrate with the core platform to address those unique and evolving requirements. For example, there are modules for our Infranetplatform specifically designed for providers of wireless voice and data services, Internet telephony and cable broadband, to name a few . Portal believes that thisapproach facilitates the rapid development and deployment of unique solutions to address new services without the need for Portal, its system integration partnersor customers to build an entirely new infrastructure to support each service .

Leverage Partnerships and Alliances with Systems Integrators and with Platform . Software and Network Equipment Providers. Portal has established a seriesof partnerships and alliances with systems integrators, such as Accenture, Cap Gemini Ernst & Young, BearingPoint and Deloitte Consulting, and platform,software and services providers, such as Cisco, Hewlett-Packard, IBM, Microsoft, Nokia, Oracle, SAP, Siebel, Siemens, Sun Microsystems, and others . Portalworks with these industry leading partners to offer customers an extensive set of complete market-specific solutions using third-party components andtechnology that perform

Table of Contentscomplementary functions such as taxation or payment processing . In addition, more than 4,000 system integrator professionals have been trained to implement

Infranet and integrate Infranet with customers' existing legacy systems . These partners and alliances also provide a global extension of Portal's direct sales force

and are a significant source of leads and referrals.

Grow with Customers and the Markets. While initial sales to customers are often significant, Portal's strategy is to maximize its available opportunities for

long-term revenue growth by targeting service providers it believes have excellent growth potential and building long-term relationships by continuously

providing solutions which will require additional software licenses and professional services . Portal's subsequent revenue growth can then occur through the

addition of subscribers, additional infranet modules, additional sales for other users by or to other divisions of an existing customer, performance of a wide

variety of professional services as well as maintenance and support agreements . In turn, Portal intends to continue to evolve and refine its business to track the

growth of evolving communication and content services, so that as these services proliferate, Portal's market and growth opportunities can also increase .

Infranet Software Platfor m

Portal's core product, Infranet, is specifically designed to meet the complex, mission-critical provisioning, accounting, reporting and marketing needs ofproviders of a wide range of communication and content services. Portal's Infranet software is an integrated extensible platform that enables service providers toswiftly define, price, and bill for an any number of convergent services. Because Infranet can be deployed in a modular fashion, it enables co-existence betweenlegacy billing systems and new next generation services . In this way, enterprises can protect their existing technology investments while making a well-plannedshift to Infranet to support new market critical services .

In fiscal 2003 Portal introduced the latest version of its product, Infranet 6 .5, with significantly enhanced functionality and performance . Infranet 6.5 is the first

fully convergent billing platform supporting the voice, data, video and content services requirements for multinational service providers . Infranet 6 .5 supports a

wide range of innovative billing options, including postpaid, prepaid, pre-billed and other models . The Infranet platform's rating technology allows providers to

choose either transactional real time or high-speed batch processing .

In addition to the basic Infranet platform, we offer a number of optional modules that extend the platform for specific customer needs . Such options include

modules for supporting multiple databases, maintaining high availability and fault tolerance, managing multiple brands, and connecting to various standardenterprise applications and payment processing and tax packages.

We provide localized versions of Infranet in a number of languages, including English, traditional Chinese, simplified Chinese, French, German, Italian,Japanese, Korean, Brazilian Portuguese and Spanish .

Business Benefits

infranet is designed to enable service providers to capture the business benefits of increased revenues, reduced costs of operations and improved customer servicethrough its ability to enable providers to more effectively and efficiently manage customers and the rating and billing of services .

Increased Revenues . By helping to accelerate the time to market for new services, Infmnet enables service providers to offer a variety of services quickly and tobundle and price these services in an optimal manner. Infranet enables services to be activated immediately when ordered by a subscriber, so that the serviceprovider can immediately begin to collect revenue . Subscriber activity can then be monitored in real time, which allows the service provider to promote theconsumption of more services through such means as targeted offers or increased credit limits . In addition, Infranet enables a service provider to analyze and"mine" subscribers' service

Table of Contentsusage data in real time, which can in turn be used to measure the success of marketing and targeting efforts and to identify new opportunities for subscriber

revenue . Using Infranet' s data analysis features, a se rv ice provider can quickly determine which offerings are not successful and easily make approp ri ate

adjustments . For example, an unsuccessful pricing offer can quickly be terminated or tuned for better subscriber response . Finally, increased billing accuracy

reduces the incidence of uncollected revenue and fraud .

Reduced Ongoing Total Cost of Operations. Infranet is designed to enable product- centric solutions that minimize the service provider's software

implementation, and ongoing maintenance and subsc ri ber serv icing costs . We believe that our Portal solutions provide Total Cost of Operations ("TCO")

advantages over competitive approaches , including custom solutions or product solutions which require significant ongoing customization to meet evolving

customer requirements. The flexibility, functionality and extensibility of the Infranet platform enables serv ice providers to cost-effectively add new

functionality , integrate with other legacy applications or scale their operations without custom programming or extensive systems integration .

Improved Customer Serv ice. Infran et enables service providers to offer improved billing accuracy , enhanced customer se rvice quality and responsiveness to

their subscribers . Using Infranet, se rv ice providers can easily tailor their offe ri ngs on a bundled or unbundled basis, substantially increasing customer choice

without incur ring additional costs . Up-to-the-minute account balances and status information can be made available to users on a 24x7 basis, either over the

Internet or via customer se rv ice representatives . Potential customer account issues can be identified and resolved quickly, since the re is no need to wait for

regular billing cycles to expose these issues . Infranet's real time capabili ty enhances re sponsiveness to subsc ri bers ' needs, which can help reduce subscriber

"chum" . or tu rnover .

Infranet Technology

Portal's software architecture consists of the Infranet platform, upon which market-specific functionality is layered using documented open application program

interfaces . This approach, designed from the start to use object-oriented programming techniques, enables new processes and services to be readily incorporated,thus allowing an evolving multi-service model to be built without the need to change the underlying software foundations . Similarly, changes can be made in the

object-based platform without affecting the market-specific functions . Portal designed Infranet to meet the critical functional requirements sought by service

providers . These requirements include scalability, enterprise integration and interoperability, comprehensive functionality and ease of use, flexibility and

improved time to market-all operating on a real time basis .

Scalability and Reliability. Infranet runs on a wide range of systems, from a laptop computer to a large cluster of UNIX-based servers . Infranet has been

designed to scale from hundreds to millions of users through the .incremental addition of servers . This capability allows a service provider to grow its business

operating system infrastructure incrementally as its level of business grows without the need for architecture redesign or large-scale system replacements . For

example, new servers can be added without taking the system offline, eliminating costly downtime . By running Infranet on multiple servers, a service provider

can reduce exposure to various types of failures, including individual server failure, power failure and loss of physical facilities . Automatic load balancing

features smooth out usage spikes and ensure high availability . Infranet's object-to-relational data model is optimized for high performance on-line transaction

processing and high reliability .

Enterprise Integration and Interoperability . Infranet has been designed with documented, open APIs that allow Portal, its customers, partners and third-partysoftware developers to integrate Infranet with existing applications and services requiring minimal effort and programming overhead . This capability enables

new services to be deployed quickly and efficiently while maintaining smooth interoperability with pre-established services . For example, a telecommunications

carrier might use Infranet to add Internet-related services, which then appear on a subscriber's monthly telephone bill . Infranet runs on server operating systems

from Hewlett-Packard, IBM, Microsoft and Sun Microsystems and utilizes database software from Microsoft and Oracle . Infranet also can be readily integratedwith a variety of packaged software applications, such as help desk, accounting, taxation and payment systems .

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ITEM 7 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION S

The following Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements within the

meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements relating to future sales, gross margins,

product development, operating expense levels and the sufficiency offinancial resources to support our future operations, and are subject to the Safe Harbor

provisions created by that statute . Such statements are based on current expectations that involve inherent risks and uncertainties, including those discussed

below and under the heading "Risks Associated with Our Business and Future Operating Results " that could cause actual results to differ materially from those

expressed. Readers are cautioned not to place undue reliance on these forward-looking statements. which speak as of the date hereof We undertake no

obligation to update any .forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events .

Overview

Portal develops, markets and supports customer management and billing ("CM&B") solutions for communications and content service providers . Our convergent

platform enables service providers to deliver voice, data, video and content services with multiple networks, payment models, pricing plans and value chains .

Beginning with fiscal 1997, substantially all of our revenues have come from the license of one product line, Infranet, and from related services . Revenues

consist of Infranet licenses, professional services, support and maintenance fees . License revenues are comprised of perpetual or multiyear license fees, which are

primarily derived from contracts with communications and content service providers . Professional services consist of a broad range of implementation services,

training, business consulting and operational support services . These services are provided throughout the customer lifecycle . We believe that future revenues

will be generated primarily from the following sources :

license fees from new customers ; for new products or new Infranet modules to existing customers ; and growth in the subscriber base of existing

customers, which will lead to increased revenue from subscriber-based licenses ;

consulting services for the deployment of licenses and follow-on solutions related to our customers ' end to end billing needs; an d

annual maintenance fees for the support of existing deployments and rights to access when-and-if available upgrade enhancements to our platform .

We have established a series of relationships with systems integrators and hardware platform, software and service providers . We have derived, and anticipatethat we will continue to derive, a substantial portion of our revenues from customers that have significant relationships with our integration and platform partners .

As a result of continuing consolidation in the communications and content delivery industries and the reduction in capital available for emerging companies, weexpect to derive an increasing portion of our total revenues from large communications and content service providers . In this regard, we anticipate that asubstantial majority of our revenues will be derived from a fewer number of customers than in prior years . We also plan to structure more of our transactions toprovide for payments over a period of one year or more and to increase the number of arrangements where license and service fees are combined . One of theimpacts of this change in license structuring could be that license revenue would be recognized ratably over the term of the license arrangement or as paymentsfrom customers become due, or services are completed rather than being recorded as revenue upon delivery . The portion of our total revenues that is derivedfrom international operations has increased in recent years . As a result, we will face greater exposure to the risks associated with international operations. With

respect to our services revenues, most of our professional services fees have been paid pursuant

Table of Contentsto time and materials arrangements. We believe that in the future a larger portion of our services revenues will be based on fixed price contracts . This could result

in the deferral of revenue until contract completion, in the event that we were unable to reliably budget and estimate our obligations under these contracts ordetermine the fair value of the services being performed . For a description of factors that may affect our future results see "Risks Associated with Our Business

and Future Operating Results. "

Critical Accounting Policies and Estimate s

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared

in accordance with accounting principles generally accepted in the United States . The preparation of these financial statements requires us to make estimates and

judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities . On a regular basis, we

evaluate and may revise our estimates, including those related to the allowance for doubtful accounts, non-marketable investments, long-lived assets and

goodwill and accrued restructuring expenses . We base our estimates on historical experience and various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent .

Actual results could differ materially from these estimates under different assumptions or conditions .

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of ourconsolidated financial statements .

Revenue Recognitio n

We recognize revenue in accordance with current generally accepted accounting principles that have been prescribed for the software industry . Revenuerecognition requirements are very complex and are affected by interpretations of the rules and an understanding of industry practices, both of which are subject tochange . Our revenue recognition policy is significant because our revenue is a key component of our results of operations . We follow very specific and detailedguidelines in measuring revenue; however, certain judgments affect the application of our revenue recognition policy .

Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed ordeterminable and collectibility is probable. Pursuant to the requirements of Statement of Position ("SOP") 97-2 "Software Revenue Recognition" and SOP 98-9"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions," Portal uses the residual method to recognize revenue when alicense agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence ("VSOE") of the fair value of allundelivered elements exists . VSOE for undelivered elements is based on normal pricing for those elements when sold separately and, for maintenance services, isadditionally measured by the renewal rate . The software is considered to have been delivered when we have provided the customer with the access codes thatallow for immediate possession of the software . Our revenue recognition policy takes into consideration the creditworthiness of the customer in determining theprobability of collection as a criterion forrevenue recognition . The determination of creditworthiness requires the exercise of judgment, which affects ourrevenue recognition. If a customer is deemed to not be creditworthy, all revenue under arrangements with that customer is recognized upon receipt of cash . Thecreditworthiness of customers is re-assessed on a regular basis and revenue is deferred until cash receipt, if appropriate . Additionally, when we enter intocontracts with industry-standard payment terms, it is Portal's policy to recognize such revenue when the customer is deemed to be creditworthy and collection ofthe receivable is probable. Revenue from arrangements with customers who are not the ultimate users, such as resellers, is not recognized until evidence of anarrangement with an end user has been received . Our policy should we enter into a transaction with a customer to purchase the customer's productscontemporaneously with the customer's purchase of software from Portal, is to recognize the amount of license fees paid to Portal net of the fees paid for thecustomer's products .

Table of Content s

Services revenues are primarily comprised of revenue from product deployment, follow-on enhancements and other consulting fees, maintenance agreements

and training. When licenses arrangements include services, the license fees are recognized upon delivery, provided that (1) the criteria set forth in the aboveparagraph have been met, (2) payment of the license fees is not dependent upon the performance of the services, and (3) the services are not essential to the

functionality of the software . When software services are not considered essential, which has been the case in the majority of our license arrangements, therevenue related to the time and materials services is recognized as the services are performed . Portal recognizes consulting revenue as services are performed . If a

services agreement includes milestones Portal does not recognize revenue until customer acceptance has occurred . To date, management has been successful in

estimating efforts required under its services contracts, including its fixed price contracts, and accordingly, has not incurred any losses on its fixed priced

contracts . In the event that cost estimates exceed revenues in the future, we will accrue for the estimated losses if and when the losses become evident .

For arrangements that do not meet the above criteria, both the license revenues and services revenues are recognized under the percentage-of-completioncontract method in accordance with the provisions of SOP 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts ."

Portal follows the percentage-of-completion method since reasonably dependable estimates of progress toward completion of a contract can be made . We

estimate the percentage-of-completion on contracts utilizing hours incurred to date as a percentage of the total estimated hours at project completion .

Recognized revenues and profit are subject to revisions as the contract progresses to completion . Revisions in profit estimates are charged to income in the period

in which the facts that give rise to the revision become known.

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 generally recorded as deferred revenue .

Portal periodically updates its revenue recognition policies to reflect changes in the marketplace, its business practices and experiences with its customers toensure compliance with revenue recognition rules and good business practices. During the quarter ended July 31, 2002 Portal revised its policy to better reflectindustry practices and the shift in Portal's customer base from Internet service providers to diversified telecommunications companies . The new policy continues

to ensure compliance with technical pronouncements associated with software revenue recognition . Previously, Portal's policy presumed that arrangements withpayment terms extending beyond 60 days did not meet the criteria for fixed and determinable fees . Under Portal's revised policy, arrangements with paymentterms extending beyond 60 days may meet the fixed and determinable fee criteria based upon Portal's evaluation of the risk of concession, subject to review andapproval by Portal's Chief Financial Officer . This change increased revenue recognized during the year ended January 31, 2003 by approximately $0 .5 million .

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Allowance for Doubtful Account s

The allowance for doubtful accounts is established through a charge to general and administrative expenses. This allowance is for estimated losses resulting from

our customers' failure or inability to make required payments . It is a significant estimate and is regularly evaluated by us for adequacy by taking intoconsideration factors such as past experience, credit quality of the customer, age of the receivable balance, individually and in the aggregate, and currenteconomic conditions that may affect a customer's ability to pay. The use of different estimates or assumptions could produce different allowance balances . Our

customer base is highly concentrated in the communications and content service provider industries . Several of the leading companies in these industries have

experienced financial difficulty . If collection is not probable at the time the transaction is consummated, we do not recognize revenue until cash is collected . If

the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required .

Non-Marketable Investment s

We review the net realizable value of the non-marketable investments on a quarterly basis, including reviewing the latest financial information available of ourinvestee companies for signs of financial deterioration and recent press releases relating to the companies . We also consider the impact of new stockholderpreferences, if any, upon our investment position. If we consider the net realizable value of our investments to be less than historical cost, then we determinewhether a decline in fair value below the cost basis is "other than temporary ." If the decline in fair value is judged to be other than temporary, we will reduce thecost basis of the individual security to fair value as a new cost basis and the amount of the write-down shall be included in earnings and accounted for as arealized loss . The new cost basis will not be changed for subsequent recoveries in fair value .

Long-Lived Assets and Goodwil l

Portal evaluates the carrying value of long-lived assets and intangibles, including goodwill, whenever certain events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable . On a regular basis, the estimated future net cash flows associated with the asset are compared to theasset's carrying amount to determine if impairment has occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which thecarrying amount exceeds the fair value of the assets is recognized . If quoted market prices for the assets are not available, the fair value is calculated using thepresent value of estimated expected future net cash flows . The cash flow calculations are based on management's best estimates, using appropriate assumptionsand projections at the time.

During the fiscal year ended January 31, 2002, we identified indicators of possible impairment of the intangible assets arising from our acquisitions . Theseindicators included deterioration in the business climate and prospects and intentions for these subsidiaries, implying that the downturn may be for a long periodof time .

As related to our acquisition of Solution42, the indicators of impairment included the other than temporary decline in market values of technology companies ingeneral and Portal specifically . Our stock price experienced a steady decline over the course of several quarters, with a slight rebound at the end of the firstquarter of fiscal 2002 . The slight rebound in stock prices appeared to indicate a temporary decline in market values, but the stock continued on a downward trendin the second quarter of fiscal 2002 . Had Solution42 been an independent company, we concluded that its valuation would have declined in a similar manner toPortal's based on the similarity of products, target markets and declining revenue . Additionally, in the second quarter of fiscal 2002 the forecasted revenue forSolution42 products deteriorated significantly from the forecasts made at the time of the acquisition . In connection with our restructuring plans (see RestructuringCosts below and Note 4 in Notes to Consolidated Financial Statements), we planned to reduce our headcount overseas which included many Solution42employees and cancelled research and development activities related to the Solution42 product, both of which were a result of an other than temporarydeterioration in business climate and a drastic reduction in forecasted revenue opportunities .

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The following table summarizes our other commitments as of January 31, 2003 and the effect such commitments could have on our liquidity and cash flows infuture periods if the letters of credit or the guarantees were drawn upon. Restricted investments represent the collateral for these commitments .

Less than Ove r

Total I year 1-3 years 4-5 years 5 years

(In thousands . )

Letters of credit $ 10,236 $ - $ 312 $ - $ 9,924

Guarantees 2,569 1,528 464 - 577

$ 12;805 $ 1,528 $ 776 $ - $ 10,501

Our capital requirements depend on numerous factors, including the timing of customer orders and engagements, and related obligations and payments, marketacceptance of our products, the resources we devote to developing, marketing, selling and supporting our products, the timing and extent of changes in the size of

our operations and other factors . Our planned expense levels for each of the fiscal quarters of fiscal 2004 exceed the revenues we generated in the fourth quarter

of fiscal 2003 . Asa result, we will need to generate increased revenues from licenses of our products and sale of our services to achieve and maintain operating

profitability . Although we believe that our current cash balances and cash generated from operations will be sufficient to fund our operations for at least the next12 months, we may require additional financing within this time frame . We may seek financing at any time that we determine market conditions are favorable .

Additional funding, if needed, may cause dilution to our stockholders or the incurrence of debt and such funding may not be available on terms acceptable to us,or at all .

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Table of ContentsRISKS ASSOCIATED WITH OUR BUSINESS AND FUTURE OPERATING RESULTS

Our 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 ourcommon 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 ourbusiness and industry, our beliefs and assumptions . Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates" and variations ofthese words and similar expressions are intended to identify forward-looking statements . These statements are not guarantees of future performance and aresubject to risks, uncertainties and other factors, many of which are beyond our control, and all of which are difficult to predict and could cause actual results todiffer materially from those expressed or forecasted in the forward-looking statements . These risks and uncertainties include those described in this sectionentitled "Risks Associated With Our Business and Future Operating Results" and elsewhere in this report . Forward-looking statements that were true at the timemade may ultimately prove to be incorrect or false . Readers are cautioned not to place undue reliance on forward-looking statements, which reflect ourmanagement'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 theforward-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 .

Our revenues will be adversely affected as a result of economic conditions affecting our target market s

We primarily market our products and services to providers of communications and content services . During the past few years, the telecommunications industryhas experienced a difficult economic environment. The substantial number of business failures and the decline in the market value of "dot-com" and othertechnology companies in the past few years has made it more difficult for emerging communication and electronic content companies to obtain financing fortheir operations . Moreover, the market value, financial results and prospects of many large and established companies, including many large telecommunicationscompanies, have also declined or degraded significantly . Many communications and content companies have significantly reduced their expenditures and havereduced or deferred their purchases of software and related products and the introduction of many new communication services has been delayed or cancelled .Cancellations of existing or planned services also adversely impact potential professional service, maintenance and support revenues. Any general decrease byour customers and potential customers in their rate of software and network investments results in a significant decrease in our revenues and operating income .These trends in technology and software spending dramatically adversely impacted our business in fiscal 2002 and 2003 and will continue to adversely affect ourbusiness until conditions improve .

Failure to collect accounts receivable in a timely manner has in the past and may in the future result in significant write-offs, higher accounts receivable reservesand lower cash balances that would adversely affect our financial results and available cash resources .

We expect to incur additional losses and cannot be certain that we will be pro fitable or generate positive cash flow

In order to be profitable or generate positive cash flow, we must significantly increase our revenues or further reduce our expenses . We may not be able toincrease or even maintain our revenues and we may not achieve sufficient revenues to attain profitability in any future period . Moreover, we have alreadysignificantly reduced our expenses through a series of restructurings and there may be a limit to our ability to further reduce expenses without significantlydamaging our operational capabilities . We incurred net losses of approximately $72 .2 million, $395.5 million and $2 .3 million for fiscal 2003, 2002 and 2001,respectively .

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If we do not generate increased revenues from sales of our products or reduce expenses, we will not be profitable or generate positive cash flow . The decrease in

capital expenditures by communications companies as well as the general economic slowdown has adversely affected our revenues and will make it difficult toincrease revenues until spending in our target markets increases . We also 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 have experienced and may continue to experience price competition that would lower ourgross margins and reduce our ability to become profitable . Furthermore, we may offer, in the future, some of our products and services for a "bundled" price,

such that a separate price would not be identified for the product and service components . Such a change may significantly delay the timing of our revenue

recognition . Another factor that would lower our gross margins is any increase in the percentage of our revenues that is derived from indirect channels and fromservices, both of which have lower margins than our license revenues . Failure to achieve the desired reductions in our expenses will further increase our losses .

We cannot be certain that we will achieve operating or net profitability on a quarterly or annual basis . Additionally, failure to achieve a positive cash flow will

continue to result in reductions in our existing cash resources .

Our quarterly revenue is generated from a limited number of customers and our customer base is concentrated; 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 ofcustomers with large financial commitments . For example, America Online accounted for more than 10% of our total revenues during each of the quarters offiscal 2002 . As a result, if a large contract is cancelled or deferred or an anticipated contract does not materialize, our business would be harmed . Our total

revenues could also be adversely affected if revenues from a significant customer in one period are not replaced with revenues from that customer or othercustomers in subsequent periods . The communication and content industries we have targeted are consolidating, which could reduce the number of potentialcustomers available to us . Moreover, many of our customers may have purchased sufficient quantities of our products to satisfy their current or anticipatedrequirements . For all of these reasons our business could suffer in the future .

It is difficult to predict the timing of individual orders because Intranet has a long and variable sales cycles and implementation period s

The sales cycle for Infranet varies greatly, generally ranging between 3 to 18 months . Sales cycles have recently lengthened as the competitive environment hasbecome more intense, the financial position of our potential customers has weakened and price discounting has further delayed customer decision processes, asthere is less business available from telecommunications companies. Along with systems integrators and our other distribution partners, we spend significanttime educating and providing information to our prospective customers regarding the use and benefits of Intranet . Customers increasingly require vendors toperform proof of concept projects and performance benchmarks as a part of the sales cycles . These tests can further lengthen sales cycles and increase our salescosts . The long sales and implementation cycles for Infranet make it more difficult to predict our future financial results and may cause license revenues andoperating results to vary significantly from period to period .

Even after purchase, our customers tend to deploy Infranet slowly and deliberately, depending on the specific technical .capabilities of the customer, the size ofthe deployment, the complexity of the customer's network environment and the quantity of hardware and the degree of hardware configuration necessary todeploy Infranet. The length of time to implement and deploy systems involving Infranet may have an impact on the timing and amount of revenues ultimatelyreceived from customers, particularly if payments are tied to implementation or production milestones . As a result, the revenues derived from a sale may not berecognized immediately and could be spread over an extended period . As a result, an increase in the period of time over which revenue is recognized may cause adecline in the amount of revenues in the short term .

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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 intensely competitive and rapidly changing . We face competition from providers of customer management and billing software,

such as Amdocs Ltd ., Convergys Corporation, CSG Systems International, Inc . and we also compete with systems integrators and with internal information

technology departments of larger communications providers . Most of our current principal competitors have significantly more personnel and greater financial,

technical, marketing and other resources than we have . Many of our competitors also have more diversified businesses, established reputations in particular

market segments, larger customer bases and are not as dependent on customers in our target market .

Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can . Intense competition

has recently been exemplified by deep price discounting by our competitors that has resulted in a lengthening of our sales cycles, price reductions and maythreaten our ability to close forecasted business . Additionally, our financial strength or that of a competitor is one factor considered by many potential customers

in their vendor selections . Because many ofour competitors have greater financial resources than we do, this can adversely affect our ability to be selected by

potential customers . Increased competition can result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of whichcould harm our business .

Our failure to develop and market products and services that compete successfully with those of other suppliers in the market would harm our business . We

anticipate that the market for our products and services will remain intensely competitive .

Our inability to sublease or reduce surplus office space would increase our use of cash and operating expenses and adversely effect operating resultsand our financial condition

We must periodically acquire and dispose of our office facilities in various locations as the number of existing and projected employees changes for thoselocations or as existing leases expire . Securing and building out facilities takes significant lead-time . Historically, because of the need to satisfy projected futureexpansion, the amount of space we have leased is generally more than the amount currently required . Our significant office leases have terms of between 5 and20 years . As a result, we frequently attempt to sublease the portions of leased facilities that we have leased to meet our future expansion plans but do notcurrently need . In addition, our reductions in our workforce undertaken over the past year have substantially reduced our facilities requirements in severallocations. As a result, we are attempting to sublease the facilities that we have previously leased but do not currently need or to negotiate reductions in our rentobligations relating to those facilities or cancellations of the applicable leases . We have leased approximately 290,000 square feet and 40,000 square feet for ourregional headquarters facilities in Cupertino, California and our regional headquarters facilities in Slough, United Kingdom, respectively, through 2010 and 2022,respectively . The amounts leased exceed our current requirements and we plan to sublease a majority of the facilities for a substantial portion, if not the entirebalance, of the lease term . There is currently a large amount of vacant commercial real estate in the San Francisco Bay Area and in other locations where we havefacilities . Moreover, currently prevailing rental rates in many locations are significantly lower than those that we are obligated to pay under the leases . We maytherefore continue to encounter significant difficulties or delays in subleasing our surplus space and may not be able to sublease it for rents equal to those that weare obligated to pay . In connection with our restructuring plan adopted in fiscal 2003, we have vacated additional facilities in the United States and in otherlocations .

To the extent that we are unable to renegotiate the terms or cancel the applicable leases or to sublease this and other surplus space at an amount equal to our rentobligations for that space or to the extent sublessees fail to perform their obligations to pay rent, we could incur greater operating expenses than we initiallyanticipated or included within accrued restructuring charges . Such increases in operating expenses in a period could cause us to exceed our planned expenselevels and adversely affect our financial results for that period. Cancellation of

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Table of Contentsleases will likely result in use of significant amounts of cash and additional restructuring charges . Furthermore, inability to sublease such space may adverselyaffect our planned uses of cash and our capital resources . Moreover, we have reduced the amount of the facilities restructuring charges we accrued in fiscal 2003and 2002 by the estimated amount of sublease income . The assumptions we have made were based on the then current market conditions in the various areas wehave vacant space . These market conditions can fluctuate greatly, thus causing our accrual to be inaccurate . If, in future periods, it is determined that we haveover accrued for restructuring charges as related to the consolidation of facilities, the reversal of such over-accrual would have a favorable impact on ourfinancial statements in the period this was determined . Conversely, if it is determined that our accrual is insufficient, an additional charge would have asignificant unfavorable impact on our financial statements in the period this was determined .

Our operating plans rely on our ability to successfully increase the size and scope of our operations in India and a failure to manage that process andorganization could affect our operations

In fiscal 2003 we opened an engineering center in Bangalore, India . In fiscal 2004 we plan to significantly increase the size of this organization and expand itsscope . The expansion of this organization is an important component of our strategy to address the business needs of our customers, increase our revenues andachieve profitability . A portion of the personnel in this organization is our employees and the balance are provided through an independent contractor. Thesuccess of this operation will depend on our ability to attract, train, assimilate or retain sufficient highly qualified personnel in the required periods . A disruptionof our relationship with the independent contractor would adversely impact the effectiveness of the India organization and could adversely affect our operationsand financial results. Failure to effectively manage and integrate these operations will harm our business and financial results .

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

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 bebelow the expectations of one or more public market analysts and investors and the price of our common stock may fall . Failure by technology companies tomeet or exceed analyst expectations or any resulting changes in analyst recommendations or ratings frequently results in substantial decreases in the market valueof the stock of such companies . Factors that could cause quarterly fluctuations include :

• variations in demand for our products and services, including decreases caused by reductions in technology spending within our target markets ;

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

• large contracts with extensive consulting services may require the use of contract accounting for revenue recognition purposes thereby extending theperiod of time over which revenue is recognized;

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

• market acceptance of new communications services that our products are intended to support ;

• delays in introducing new products and services ;

• new product introductions by our competitors ;

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

• announcements of new versions of our products that cause customers to postpone purchases of our current products ;

• the mix of products and services sold;

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EXHIBIT B

Table of Contents

SECURITIES AND EXCHANGE COMMISSIONWashington, D .C . 20549

FORM 10-Q(Mark One )

❑X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quart erly period ended May 2, 200 3

❑ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4

For the transition period from to _

Commission File number 000-2582 9

PORTAL SOFTWARE, INC .(Exact name of registrant as speci fi ed in Its charter)

Delaware(State or other jurisdi ct ion ofincorporation or organization)

77-0369737(I.R.S. Employer Iden tification No .)

10200 South De Anza BoulevardCupertino, California

(Address of principal executive offices)

(408) 572-2000(Registrant ' s telephone number, including area code)

95014(Zip code)

Indicate by check mark whether the re gistrant : ( 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe 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 forthe past 90 days . Yes X No

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) . Yes _ No X

On May 30, 2003, 180,470,060 shares of the Registrant's Common Stock, $0 .001 par value, were outstanding .

Table of ContentsPORTAL SOFTWARE, INC.

FORM 10- Q

QUARTER ENDED May 2, 2003

INDEX

Part 1 : Financial Informatio nItem 1 : Financial Statements (Unaudited )Condensed Consolidated Balance Sheets at April 30 . 2003 and January 31 . 2003Condensed Consolidated Statements of Operations for the Quarters ended April 30, 2003 and 2002Condensed Consolidated Statements of Cash Flows for the quarters ended April 30, 2003 and 2002

Item 4 : Controls and Procedure s

Part II : Other Informatio nItem 6 : Exhibits and Reports on Form 8-K

SignaturesCertifications

Pag e

272 7

28

2930

Table of ContentsItem 1 . Financial Statements


CONDENSED CONSOLIDATED BALANCE SHEET S(in thousands, except par value)

April 30, January 31 ,

2003 2003

(unaudited)

Asset sCurrent assets :Cash and cash equivalents $ 22,531 $ 21,502Short-term investments 21,271 30,64 1Accounts receivable, net of allowance for doubtful accounts of $1,910 and $2,458 at April 30, 2003 and January 31, 2003 ,respectively 34,644 22,46 7Restricted short-term investments 1,968 1,60 9Prepaid expenses and other current assets 5,877 4,02 6

Total current assets 86,291 80,24 5Property and equipment, net 22,026 22,79 8Purchased developed technology, net 3,990 4,65 5Restricted long--term investments 12,033 13,41 2Other assets 2,606 2,624

S 126,946 $ 123,73 4

Liabilities and Stockholders' EquityCurrent liabilities :Accounts payable $ 8,979 $ 4,699Accrued employee benefits 9,608 8,82 1Current portion accrued restructuring costs 12,588 13,41 8Other accrued liabilities 8,479 8,42 9Current portion of capital lease obligations - I IDeferred revenue 28,064 23,95 5

Total current liabilities 67,718 59 ;33 3Long-term notes payable 1,674 1,679Long-term accrued restructuring costs 24,009 26 ;903Commitments and contingencie sStockholders' equity:Convertible preferred stock, $0 .001 par value, issuable in series :5,000 shares authorized, none issued and outstandin gCommon stock, $0 .001 par value ; 1,000,000 shares authorized ; 178,876 and 178,303 shares issued and outstanding at April 30 ,2003 and January 31, 2003, respectively 179 178Additional paid-in capital 548 422 540 ;994Accumulated other comprehensive income 353 294Notes receivable from stockholders (67) (69 )Accumulated deficit (515,342) (505,578 )

Stockholders' equity 33,545 35,819

$ 126,946 $ 123,73 4

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements .

3

Table of ContentsPORTAL SOFTWARE, INC .

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts ; unaudited)

Quarter Ended

April 30,

2003 2002

Revenues:License feesServices

Total revenue s

Costs and expenses :Cost of license feesCost of servicesAmortization of purchased developed technologyResearch and developmentSales and marketingGeneral and administrativeStock compensation charges (1)

Total costs and expense s

Loss from operationsInterest and other income, net

Loss before income taxesProvision for income taxes

S 13,570 $ 12,70 8

18,523 18,40 4

32,093 31,11 2

88 11 511,613 10,949

665 84 97,167 11,43 4

11,388 14,9003,333 4,394 .7,090 11 0

41,344 42,75 1

(9,251) (11,639)123 69 8

(9,128) (10,941 )(636) (1,068 )

Net los s

Basic and diluted net loss per share

Shares used in computing basic and diluted net loss per share

(1) Stock compensation charges relate to the following expense categories :

Cost of servicesResearch and developmentSales and marketingGeneral and administrative

Total

S (9,764) $ (12,009)

S (0 .05) $ (0.07)

178,568 174,892

$ 1,534 $ 172,616 381,979 31961 24

$ 7,090 $ 110


4


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands ; unaudited)

Quarter Ended

April 30 ,

2003 2002

OPERATING ACTIVITIES :Net loss S (9,764) $ (12,009)Adjustments to reconcile net loss to net cash provided by (used in ) operati ng activities :Depreciation and amo rt ization 1,938 3,49 5Stock compensation charges 7,090 11 0Amo rt ization of purchased intangibles 665 849Ch an ges in operating assets and liabilities :Accounts receivable , net (11,857) 343Prepaid expenses and other current assets (1,822) (550)Other assets 18 890Accounts payable 4,280 99 3Accrued employee benefits 787 1,40 8Other accrued liabilities (3,674) (4,743 )Deferred revenue 4,109 (7,655 )

Net cash used in operating activities (8,230 ) ( 16,869 )

INVESTING ACTIVITIES :Purchases of sho rt-term investments (22,415) (57,455 )Sales of short-term investments 18,502 45,663Maturity of sho rt- term investments 12,805 12,59 1Sales and matu ri ties of long-term investments 1,400. -Purchases of property and equipment (1,428) (2,322 )

Net cash provided by (used in) investing activities 8,864 ( 1,523 )

FINANCING ACTIVITIES :Payments received from stockholder notes receivable 2 -Repayments of notes payable (5) (6)Principal payments under capital lease obligations (11) (214)Proceeds fr om issuance of common stock, net of repurchases 339 17 6

Net cash provided (used in) by financing activities 325 (44)

Effect of exchange rate on cash and cash equivalents 70 40 3

Net decre as e in cash and cash equivalents 1,029 (18,033)Cash and cash equivalents at beginning of period . 21,502 36,31 8

Cash and cash equivalents at end of period $ 22,531 $ 18,28 5

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

5


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 . Significant Accounting Policies :

Nature of Business and Basis of Presentation

Portal Software, Inc ., or Portal, develops, markets, and supports product-based customer management and billing software solutions for communications and

content service providers. Portal's convergent platform enables service providers to deliver voice, data, video and content services with multiple networks,

payment models, pricing plans and value chains . Portal markets its products worldwide through a combination of a direct sales force and distribution partners .

Substantially all of Portal's license revenues are derived from sales of its Infranet product line .

The accompanying condensed consolidated financial statements include the accounts of Portal and its wholly owned subsidiaries . All significant intercompany

balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet at April 30, 2003 and the condensed consolidated

statements of operations and the condensed consolidated statements of cash flows for the quarters ended April 30, 2003 and 2002 are not audited . In the opinion

of management, these financial statements reflect all adjustments (consisting of normal recurring items) 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, 2003 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 thefiscal year ended January 31, 2003 filed with the Securities and Exchange Commission .

Fiscal year

We have adopted a 4-4-5 week fiscal accounting year commencing with our 2004 fiscal year . Each quarter will consist of 13 weeks ending on a Friday . Our

2004 fiscal year began on February 1, 2003, the day following the last day of our 2003 fiscal year, and will end on January 30, 2004 . Accordingly, all references

as of and for the period ended April 30, 2003 reflect amounts as of and for the period ended May 2, 2003 . The quarter ended April 30, 2003 was comprised of 9l

days while the quarter ended April 30, 2002 was comprised of 89 days .

Foreign Currency

Portal considers the functional currency of its foreign subsidiaries to be the local currency . Assets and liabilities recorded in foreign currencies are translated at

the exchange rate on the balance sheet date and revenue, costs and expenses are translated at average rates of exchange in effect during the period . Translation

gains and losses are reported within accumulated other comprehensive loss . Net gains and losses resulting from foreign exchange transactions were immaterial in

all periods presented .

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period . These estimates are based upon information available as of the date of the financial statements .

Actual results could differ materially from those estimates .

Revenue Recognitio n

Portal recognizes revenue in accordance with current generally accepted accounting principles that have been prescribed for the software industry . Revenue

recognition requirements are very complex and are affected by interpretations of the rules and an understanding of industry practices, both of which are subject to

change . Portal's revenue recognition policy is significant because revenue is a key component of its results of operations . Portal follows very specific and

detailed guidelines in measuring revenue ; however, certain judgments affect the application of its revenue recognition policy.

Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed ordeterminable and collectibility is probable . Pursuant to the requirements of Statement of Position ("SOP") 97-2 "Software Revenue Recognition" and SOP 98-9"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions," Portal uses the residual method to recognize revenue when alicense agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence of the fair value ("VSOE") of al l

undelivered elements exists . VSOE for undelivered elements is based on normal pricing for those elements when sold separately

Table of Contentsand, for maintenance services, is additionally measured by the renewal rate . The software is considered to have been delivered when Portal has provided thecustomer with the access codes that allow for immediate possession of the software . Its revenue recognition policy takes into consideration the creditworthinessof the customer in determining the probability of collection as a criterion for revenue recognition. The determination of creditworthiness requires the exercise ofjudgment, which affects the Company's revenue recognition . If a customer is deemed to not be creditworthy, all revenue under arrangements with that customeris recognized upon receipt of cash . The creditworthiness of customers is re-assessed on a regular basis and revenue is deferred until cash receipt, if appropriate .Additionally, when the Company enters into contracts with industry-standard payment terms, it is Portal's policy to recognize such revenue when the customer isdeemed to be creditworthy and collection of the receivable is probable . Revenue from arrangements with customers who are not the ultimate users, such asresellers, is not recognized until evidence of an arrangement with an end user has been received . Should we enter into a transaction with a customer to purchasethe customer's products contemporaneously with the customer's purchase of software from Portal, the Company's policy is to recognize the amount of licensefees paid to Portal net of the fees paid for the customer's products .

Services revenues are primarily comprised of revenue from product deployment, follow-on enhancements and other consulting fees, maintenance agreementsand training. When licenses arrangements include services, the license fees are recognized upon delivery, provided that (1) the criteria set forth in the aboveparagraph have been met, (2) payment of the license fees is not dependent upon the performance of the services, and (3) the services are not essential to thefunctionality of the software . When software services are not considered essential, which has been the case in the majority of the Company's licensearrangements, the revenue related to the time and materials services is recognized as the services are performed . Portal recognizes consulting revenue as servicesare performed . If a services agreement includes milestones, Portal does not recognize revenue until customer acceptance has occurred . To date, the company hasbeen successful in estimating efforts required under its services contracts, including its fixed price contracts, and accordingly, has not incurred any losses on itsfixed priced contracts . In the event that cost estimates exceed revenues in the future, the Company will accrue for the estimated losses if and when the lossesbecome evident .

For arrangements that do not meet the above criteria, both the license revenues and services revenues are recognized under the percentage-of-completioncontract method in accordance with the provisions of SOP 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts ."Portal follows the percentage-of-completion method since reasonably dependable estimates of progress toward completion of a contract can be made . TheCompany estimates the percentage-of-completion on contracts utilizing hours incurred to date as a percentage of the total estimated hours at project completion .Recognized revenues and profit are subject to revisions as the contract progresses to completion . Revisions in profit estimates are charged to income in the periodin which the facts that give rise to the revision become known. .

Maintenance agreements provide technical support and include the right to unspecified upgrades on an if-and-when-available basis . Maintenance revenue isdeferred and recognized on a straight-line basis as services revenue over the life of the related agreement, which is typically one year . Customer advances andbilled amounts due from customers in excess of revenue recognized are generally recorded as deferred revenue .

Concentration of Credit Risk

Substantially all of Portal's software and services have been sold to North American, European and Asia-Pacific communication and content service providers,including mobile wireless companies, broadband, electronic content and Internet access companies, as well as other Internet and e-commerce companies .Accordingly, adverse economic trends affecting the communications industry may increase our credit risk . Portal performs ongoing credit evaluations of itscustomers and does not require collateral .

One customer, Vodafone Omnitel, accounted for 22% of revenues during the quarter ended April 30, 2003 . No individual customer accounted for more than 10%of total revenues during the quarter ended April 30, 2002 .

Guarantees

Our license agreements include indemnification for infringements of third-party intellectual property rights and also include certain warranties . No amounts havebeen accrued relating to those indemnities and warranties, as we do not believe any losses are probable . We have also issued letters of credit totaling $9 .6 millionrelated to our leased facilities, $2 .0 million related to bank guarantees securing bank loans to the former shareholders of Solution42 and $0.5 million of otherbank guarantees. In the event Portal or the former Solution42 shareholders default on the terms of the underlying lease or loan agreements, the beneficiaries maydraw on these letters of credit . The requirements to maintain the letters of credit correspond to the terms of the underlying agreements which expire at variousdates through 2021 . We do not have any other guarantees .

Table of ContentsSegment Information

Portal operates solely in one segment, the development and marketing of business infrastructure software . Portal's foreign operations consist of sales, marketing

and support activities through its foreign subsidiaries and an overseas reseller network as well as an engineering and development center in India . Portal's chief

operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and certaindirect expenses by geographic region for purposes of making operating decisions and assessing financial performance . Portal's assets are primarily located in its

corporate office in the United States and are not allocated to any specific region, therefore Portal does not produce reports for, or measure the performance of, its

geographic regions based on any asset-based metrics . Therefore, geographic information is presented only for revenues .

Portal's revenue outside of North America represented 78% and 64% of total revenues for the quarters ended April 30, 2003 and April 30, 2002, respectively,and were derived from sales to Europe (which is defined by Portal as Europe, Middle East and Africa) and Intercontinental (which is defined by Portal as

Asia-Pacific, Japan and Latin America) . European revenues for these quarters were $20 .6 million and $12 .2 million and Intercontinental revenues were $4 .4

million and $7.6 million, respectively . Revenues from Italy and the United Kingdom were $8 .3 and $5 .3 million, respectively, for the quarter ended April 30,

2003, and revenues from Japan were $3 .8 million in the quarter ended April 30, 2002 .

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

Portal considers all highly liquid, low-risk debt instruments with an original maturity, at the date of purchase, of three months or less to be cash equivalents . At

April 30, 2003 and January 31, 2003, cash equivalents and short-term investments consisted primarily of commercial paper, corporate notes, money market

funds and government securities . All short-term investments mature within 24 months .

Po rtal classifies , at the date of acquisition , its cash equivalents and sho rt-term investments as available-for-sale in accordance with the provisions of the

Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards Number 115, "Accounting for Certain Investments in Debt andEquity Securities" ("SFAS 115") . Securities are report ed at fair market value, with the related unrealized gains and losses included within stockholders ' equity.

Debt and discount securities are adjusted for straight -line amo rtization of premiums and accretion of discounts to maturity , both of which are included in interestincome . Realized gains and losses are recorded using the speci fi c identification method and are immaterial for all periods presented .

Table of ContentsThe following table shows the amounts of stock compensation charges that would have been recorded under the following categories had stock compensationcharges not been separately stated on the statements of operations .

Quarter Ended

April 30,

2003 2002

(in thousands ;unaudited)

Cost of services $1534 S 1 7Research and development 2,616 3 8Sales and marketing 1,979 3 1General and administrative 961 24

$7,090 $110

Pro vision, for Income Taxes

Our taxes totaled $0.6 million and $1 . 1 million for the quarters ended April 30, 2003 and 2002, respectively, primarily as a result of foreign withholding taxes onrevenue and tax on earnings generated from our foreign operations . Although we recorded net losses of $9.8 million and $12 .0 million for the quarters endedApril 30, 2003 and 2002, respectively, our foreign operations were profitable for tax purposes primarily due to the intercompany charge back arrangementsnecessary under the local tax laws .

Liquidity and Capital Resources

Cash, cash equivalents and investments (including restricted investments of $14 .0 million) totaled $57.8 million at April 30, 2003, compared with a balance of$67 .2 million at January 31, 2003 .

We used cash totaling $8 .2 million in operations in the quarter ended April 30, 2003, a decrease of $8 .7 million from the $16 .9 million used in the quarter endedApril 30, 2002 . Net cash used in operations for the quarter ended Apri l 30, 2003 was primarily comprised of an increase in accounts receivable of $11 .9 millionand a decrease in other accrued liabilities of $3 .7 million, offset by an increase in accounts payable of $4 .3 million and an increase in deferred revenue of $4 .1million . Adjustments made for non-cash expenses, such as depreciation and amortization, stock compensation charges and amortization of purchased intangiblesamounted to $9 .7 million for the quarter ended April 30, 2003 .

The increases in accounts receivable and deferred revenue were primarily due to billings and associated revenue deferrals related to the signing of a significantcontract with Vodafone Omnitel at the end of the first quarter of fiscal 2004 . The increase in accounts payable was primarily related to the increased utilization ofthird party consultants for customer implementations and to the timing of certain facility related payments . The decrease in other accrued liabilities was primarilydue to lease payments for facilities included in accrued restructuring costs .

Net cash provided by investing activities was $8 .9 million for the quarter ended April 30, 2003, an increase of $10 .4 million from the $1 .5 million used in thequarter ended April 30, 2002 . Net cash provided by investing activities in the quarter ended April 30, 2003 primarily reflected net activity in short and long terminvestments . During the quarter ended April 30, 2003 and 2002, purchases of property and equipment amounted $1 .4 million and $2 .3 million, respectively .

The total future cash outlay for the restructuring plans enacted in fiscal 2003 and 2002 is currently estimated to be approximately $36 .6 million, which includesseverance related costs as well as lease liabilities related to the consolidation of facilities and is expected to be funded by available cash . Lease payments forimpacted facilities, net of expected sublease income, are expected to be $33 .9 million and will be paid out through 2006 .

Our capital requirements depend on numerous factors, including the timing of customer orders and engagements, and related obligations and payments, marketacceptance of our products, the resources we devote to developing, marketing, selling and supporting our products, the timing and extent of changes in the size ofour operations and other factors. We expect to incur significant operating expenses, particularly research and development and sales and marketing expenses, forthe foreseeable future in order to execute our business plan . We anticipate that such operating expenses will comprise a material expenditure of our cas hresources . As a result, our net cash flows will depend on the level of future revenues and our ability to effectively manage infrastructure costs . Although webelieve that our current cash, cash equivalents and investment balances and cash generated from operations will be sufficient to fund our operations for at leastthe next 12 months, we may require additional financing within this time frame or we may elect to raise additional capital through a public or private offering ofdebt or equity securities . We may seek financing at any time that we determine market conditions are favorable . Additional funding, if needed, may causedilution to our stockholders or the incurrence of debt and such funding may not be available on terms acceptable to us, or at all .

Table of ContentsRISKS ASSOCIATED WITH OUR BUSINESS AND FUTURE OPERATING RESULT S

Our 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, many of which are beyond our control, and all of which are difficult to predict and could cause actual results todiffer materially from those expressed or forecasted in the forward-looking statements . These risks and uncertainties include those described in this section

entitled "Risks Associated With Our 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 ourmanagement'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 theforward-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 .

OUR REVENUES WILL BE ADVERSEL P AFFECTED AS A RESULT OF ECONOMIC AND POLITICAL CONDITIONS AFFECTING OUR TARGET

MARKETS

We primarily market our products and services to providers of communications and content services . During the past few years, the telecommunications industry

has experienced a difficult economic environment. The substantial number of business failures and the decline in the market value of "dot-com" and othertechnology companies in the past few years has made it more difficult for emerging communication and electronic content companies to obtain financing fortheir operations . Moreover, the market value, financial results and prospects of many large and established companies, including many large telecommunicationscompanies, have also declined or degraded significantly . Many communications and content companies have significantly reduced their expenditures and havereduced or deferred their purchases of software and related products and the introduction of many new communication services has been delayed or cancelled.Cancellations of existing or planned services also adversely impact potential professional service, maintenance and support revenues . Any general decrease byour customers and potential customers in their rate of software and network investments results in a significant decrease in our revenues and operating income .These trends in technology and software spending dramatically adversely impacted our business in fiscal 2002 and 2003 and will continue to adversely affect ourbusiness until conditions improve .

in addition, political instability in various geographic areas has resulted in companies reducing spending for technology projects generally and the delay orreconsideration of potential purchases of our products and related services. The war on terrorism and in Iraq and the potential for war or other hostilities invarious parts of the world continues to contribute to a climate of economic and political uncertainty and decreasing consumer confidence that has and maycontinue to adversely affect our revenue growth and results of operations .

Failure to collect accounts receivable in a timely manner has in the past and may in the future result in significant write-offs, higher accounts receivable reservesand lower cash balances that would adversely affect our financial results and available cash resources .

WE EXPECT TO INCUR ADDITIONAL LOSSES AND CANNOT BE CERTAIN THAT WE WILL BE PROFITABLE OR GENERATE POSITIVE CASHFLO W

In order to be profitable or generate positive cash flow, we must significantly increase our revenues or further reduce our expenses . We may not be able toincrease or even maintain our revenues and we may not achieve sufficient revenues to attain profitability in any future period . Moreover, we have alreadysignificantly reduced our expenses through a series of restructurings and there may be a limit to our ability to further reduce expenses without significantlydamaging our operational capabilities. We incurred net losses of approximately $9 .8 million for the quarter ended April 30, 2003 and $72 .2 million, $395 .5million and $2 .3 million for fiscal 2003, 2002 and 2001, respectively .

The decrease in capital expenditures by communications companies as well as the general economic slowdown has adversely affected our revenues and willmake it difficult to increase revenues until spending in our target markets increases . We also expect that we will face increased competition that may make itmore difficult to increase our revenues. Even if we are able to increase revenues, we have experienced and may continue to experience price competition thatwould lower our gross margins and reduce our ability to become profitable . Furthermore, we may offer, in the future, some of our products and services for a

Table of Contents"bundled" price, such that a separate price would not be identified for the product and service components . Such a change may significantly delay the timing of

our revenue recognition . Another factor that would 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 than our license revenues . Failure to achieve the desired reductions in our expenses will further

increase our losses. We cannot be certain that we will achieve operating or net profitability on a quarterly or annual basis . Additionally, failure to achieve a

positive cash flow will continue to result in reductions in our existing cash resources .

OUR QUARTERLY RE VENUE IS GENERATED FROM A LIMITED NUMBER OF CUSTOMERS AND OUR CUSTOMER BASE IS

CONCENTRA TED ; THE LOSS OF ONE OR MORE OF OUR CUSTOMERS OR PROSPECTIVE CUSTOMERS COULD CA USE 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 ofcustomers with large financial, commitments . For example, in the quarter ended April 30, 2003, one customer, Vodafone Omnitel, accounted for 22% of our

revenues . As a result, if a large contract is cancelled or deferred or an anticipated contract does not materialize, our business would be harmed . Our total revenues

could also be adversely affected if revenues from a significant customer in one period are not replaced with revenues from that customer or other customers insubsequent periods . The communication and content industries we have targeted are consolidating, which could reduce the number of potential customers

available to us . Moreover, many of our customers may have purchased sufficient quantities of our products to satisfy their current or anticipated requirements .

For all of these reasons our business could suffer in the future .

DISRUPTION OF TRA VEL DUE TO DISEASE, TERRORISM OR CIVIL UNREST COULD CAUSE OUR BUSINESS TO SUFFE R

Because a substantial portion of our revenues are generated from a limited number of customers each quarter, widespread disruption of travel to a region orcountry in which we have large customers, prospective customers or services engagements could disrupt our ability to win or perform contracts . Such disruption

could occur as a result of terrorism, such as the decline in travel following the September 11, 2001 attacks, or of disease, such as the decline in travel to Chinaand Hong Kong due to the outbreak of SARS disease, or as a result of political unrest or war . Inability or unwillingness by our employees to travel to an affectedregion, could adversely affect our efforts to obtain or perform contracts, which could result in the loss of revenue and cause our business to suffer .

RAPID CHANGES IN DEMAND FOR OUR SERVICES CAN INCREASE OUR COSTS AND AD VERSEL YA FFECT OUR MARGINS ANDPROFITABILIT Y

Services contracts can require that we rapidly provide qualified consulting personnel in particular locations . In addition, such personnel may be required to haveparticular language speaking abilities and technical skills . Recruitment and training of qualified personnel can take significant time and expense . To meet rapidlychanging requirements for personnel, we may need to relocate personnel from one geographic area to another that can result in increased costs . In some cases, wemay choose to satisfy resource requirements by retaining subcontractors that in some cases, the cost may exceed the cost of using our employees . All thesefactors may increase the costs of performing services and reduce margins for services . Failure to provide adequate consulting services to our customers couldresult in loss of revenue, damaged customer relationships or financial penalties . As a result, if we experience difficulties in managing the size, location andavailability of our services workforce, our revenues, profitability or business will suffer .

IT IS DIFFICULT TO PREDICT THE TIMING OF INDIVIDUAL ORDERS BECAUSE INFRANET HAS A LONG AND VARIABLE SALES CYCLESAND IMPLEMENTATION PERIODS

The sales cycle for Infranet varies greatly, generally ranging between 3 to 18 months . Sales cycles have recently lengthened as the competitive environment hasbecome more intense, the financial position of our potential customers has weakened and price discounting has further delayed customer decision processes .Along with systems integrators and our other distribution partners, we spend significant time educating and providing information to our prospective customersregarding the use and benefits of Infranet . Customers increasingly require vendors to perform proof of concept projects and performance benchmarks as a part ofthe sales cycles . These tests can further lengthen sales cycles and increase our sales costs . The long sales and implementation cycles for Infranet make it moredifficult to predict our future financial results and may cause license revenues and operating results to vary significantly from period to period .

Even after purchase, our customers tend to deploy Infranet slowly and deliberately, depending on the specific technical capabilities of the customer, the size ofthe deployment . the complexity of the customer's network environment and the quantity of hardware and the degree of hardware configuration necessary todeploy Infranet. The length of time to implement and deploy systems involving Infranet may have an impact on the timing and amount of revenues ultimatelyreceived from customers, particularly if payments are tied to implementation or production milestones . As a result, the revenues derived from a sale may

Table of Content snot be recognized immediately and could be spread over an extended period . As a result, an increase in the period of time over which revenue is recognized maycause a decline in the amount of revenues in the short term .

THE MARKETS IN WHICH WE SELL OUR PRODUCT ARE HIGHLY COMPETITIVE AND WE MA YNOT BE ABLE TO COMPETE EFFECTIVELY

We compete in markets that are intensely competitive and rapidly changing . We face competition from providers of customer management and billing software,

such as Amdocs Ltd ., Convergys Corporation, and CSG Systems International, Inc . and we also compete with systems integrators and with internal information

technology departments of larger communications providers . Most of our current principal competitors have significantly more personnel and greater financial,technical, marketing and other resources than we have . Many of our competitors also have more diversified businesses, established reputations in particularmarket segments, larger customer bases and are not as dependent on customers in our target market .

Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can . Intense competitionhas recently been exemplified by deep price discounting by our competitors that has resulted in a lengthening of our sales cycles, price reductions and maythreaten our ability to close forecasted business . Additionally, our financial strength or that of a competitor is a significant factor considered by many potentialcustomers in their vendor selections . Because many of our competitors have greater financial resources than we do, this can adversely affect our selection bypotential customers . Increased competition can result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of whichcould harm our business.

Our failure to develop and market products and services that compete successfully with those of other suppliers in the market would harm our business . Weanticipate that the market for our products and services will remain intensely competitive .

OUR INABILITY TO SUBLEASE OR REDUCE SURPLUS OFFICE SPACE WOULD INCREASE OUR USE OF CASH AND OPERATING EXPENSESAND ADVERSELYEFFECT OPERA TING RESULTS AND OUR FINANCIAL CONDITION

We must periodically acquire and dispose of our office facilities in various locations as the number of existing and projected employees changes for thoselocations or as existing leases expire . Securing and building out facilities takes significant lead-time. Historically, because of the need to satisfy projected futureexpansion, the amount of space we have leased is generally more than the amount currently required . Our significant office leases have terms of between 5 and20 years . As a result, we frequently attempt to sublease the portions of leased facilities that we have leased to meet our future expansion plans but do notcurrently need . In addition, our reductions in our workforce undertaken over the past year have substantially reduced our facilities requirements in severallocations . As a result, we are attempting to sublease the facilities that we have previously leased but do not currently need or to negotiate reductions in our rentobligations relating to those facilities or cancellations of the applicable leases . We have leased approximately 290,000 square feet and 40,000 square feet for ourheadquarters facilities in Cupertino, California and our regional headquarters facilities in Slough, United Kingdom, respectively, through 2010 and 2022,respectively . The amounts leased exceed our current requirements and we plan to sublease a majority of the facilities for a substantial portion, if not the entirebalance, of the lease term . There is currently a large amount of vacant commercial real estate in the San Francisco Bay Area and in other locations where we havefacilities. Moreover, currently prevailing rental rates in many locations are significantly lower than those that we are obligated to pay under the leases . We maytherefore continue to encounter significant difficulties or delays in subleasing our surplus space and may not be able to sublease it for rents equal to those that weare obligated to pay . In connection with our restructuring plan adopted in fiscal 2003, we have vacated additional facilities in the United States and in otherlocations .

To the extent that we are unable to renegotiate the terms or cancel the applicable leases or to sublease this and other surplus space at an amount equal to our rentobligations for that space or to the extent sublessees fail to perform their obligations to pay rent, we could incur greater operating expenses than we initiallyanticipated or included within accrued restructuring charges . Such increases in operating expenses in a period could cause us to exceed our planned expenselevels and significantly adversely affect our financial results for that period . Cancellation of leases will likely result in use of significant amounts of cash andadditional restructuring charges . Furthermore, inability to sublease such space may adversely affect our planned uses of cash and our capital resources . Moreover,we have reduced the amount of the facilities restructuring charges we accrued in fiscal 2003 and 2002 by the estimated amount of sublease income . Theassumptions we have made were based on the then current market conditions, as of each reporting period, in the various areas we have vacant space . Thesemarket conditions can fluctuate greatly, thus causing our accrual to be inaccurate . If, in future periods, it is determined that we have over accrued forrestructuring charges as related to the consolidation of facilities, the reversal of such over-accrual would have a favorable impact on our financial statements inthe period this was determined. Conversely, if it is determined that our accrual is insufficient, an additional charge would have a significant unfavorable impacton our financial statements in the period this was determined .

19

Table of ContentsOUR OPERATING PLANS RELY ON OUR ABILITY TO SUCCESSFULLY INCREASE THE SIZE AND SCOPE OF OUR OPERATIONS IN INDIAAND A FAILURE TO MANAGE THAT PROCESS AND ORGANIZATION COULD ADVERSELYAFFECT OUR OPERATION S

In fiscal 2003 we opened an engineering center in Bangalore, India . In fiscal 2004 we plan to significantly increase the size of this organization and expand its

scope. The expansion of this organization is an important component of our strategy to address the business needs of our customers, increase our revenues and

achieve profitability . A portion of the personnel in this organization is employees and the balance are provided through an independent contractor . The success of

this operation will depend on our ability to attract, train, assimilate or retain sufficient highly qualified personnel in the required periods . A disruption of our

relationship with the independent contractor would adversely impact the effectiveness of the India organization and could adversely affect our operations and

financial results. Failure to effectively manage and integrate these operations will harm our business and financial results .

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND WE MAY FAIL TO MEET EXPECTATION S

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors . In future quarters, our operating results may be

below the expectations of one or more 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 changes 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 :


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

• large contracts with extensive consulting services may require the use of contract accounting for revenue recognition purposes thereby extending theperiod of time over which revenue is recognized;

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

• market acceptance of new communications services that our products are intended to support ;

• delays in introducing new products and services ;

• new product introductions by our competitors ;

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

• announcements of new versions of our products that cause customers to postpone purchases of our current products ;

• the mix of products and services sold ;

• our ability to sublease our excess real estate or renegotiate our leases ;

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 supportandother management personnel with the needed competencies ;

• the variability of future stock-based compensation charges or credits as a result of our stock option repricing during fiscal year 2003 ; and

• global economic conditions generally, as well as those specific to providers of communications and content services .

We have difficulty predicting the volume and timing of orders for new license transactions . In any given quarter, our sales have involved, and we expect willcontinue to involve, large financial commitments from a relatively small number of customers . As a result, the cancellation or deferral of even a small number oflicenses of Infranet would reduce our revenues, which would adversely affect our quarterly financial performance . Also, we have often booked a large amount ofour 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 causequarterly revenue to fall substantially short of anticipated levels . Furthermore, delays in the closing of license transactions may result in a consequential delay orloss of services revenues relating to the projects for which the software would be licensed .

While a portion of our revenues each quarter is recognized from deferred revenue relating to previously signed contracts, our quarterly performance will dependprimarily upon entering into new contracts to generate revenues for that quarter . We may not be successful in entering into contracts with new or existingcustomers . New contracts that we enter into may not result in revenue in the quarter in which the contract is signed and we may not be able to predict accurately

when revenues from these contracts will be recognized .

20

EXHIBIT C

Table of Contents

SECURITIES AND EXCHANGE COMMISSIONWashington , D .C . 20549

FORM 10-Q

(Mark One )

0 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 193 4

For the quarterly, period ended August 1, 2003

❑ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 193 4

For the transition period from to

Commission File number 000-2582 9

PORTAL SOFTWARE, INC.(Exa ct name of registrant as specified in Its charter )

Delaware 77-0369737(State or other jurisdiction of (I .R.S. Employer

incorporation or organization) Identification No. )

10200 South De Anza BoulevardCupertino, California 95014

(Address of principal executive offices) (Zip code)

(408)572-2000(Registrant' s telephone number, including area code )

Indicate by check mark whether the registrant : (1) has riled 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 forthe past 90 days. Yes O No ❑

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule I2b-2 of the Exchange Act) . Yes ❑ No ❑

On August 31, 2003 183,180,677 shares of the Registrant ' s Common Stock , $ 0.001 par value , were outstanding.


FORM 10- Q

QUARTER ENDED AUGUST 1, 2003

INDEX

Page

Part I : Financial Informatio nItem I : Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at July 31, and January 31- 2003 3Condensed Consolidated Statements of Onerations for the three and six months ended July 31 2003 and 2002 4Condensed Consolidated Statements of Cash Flows for the six months ended July 31 2003 and 2002 5Notes to Unaudited Condensed Consolidated Financial Statements 6Item 2 : Manazement's Discussion and Analysis of Financial Condition and Results of Operations 14

Item 3 : Quantitative and Oualitative Disclosures About Market Risk 31Item 4 : Controls and Procedures 31

Part IL: Other Informatio nItem 1 : Legal Proceedings 32Item 6 : Exhibits and Reports on Form 8-K 32

Signatures 33

Table of Content sITEM 1 . FINANCIAL STATEMENTS


CONDENSED CONSOLIDATED BALANCE SHEET S(in thousands, except par value)

July 31, January 31 ,

2003 2003

(unaudited )

Asset sCurrent assets :

Cash and cash equivalents $ 25,682 S 21,502

Short-term investments 16,038 30,64 1Accounts receivable, net of allowance for doubtful accounts of $1,760 and $2,458 at July 31, 2003 and January 31, 2003 ,respectively 26,421 22 ;46 7

Restricted short-term investments 3,060 1,609

Prepaid expenses and other current assets 7,637 4;026

Total current assets 78,838 80,24 5

Property and equipment, net 21,892 22,79 8Purchased developed technology, net 3,325 4,65 5Restricted long-term investments 12,033 13,41 2

Other assets 2,507 2,624

$ 118,595 $ 123,73 4

Liabilities and Stockholders' Equity

Current liabilities :Accounts payable $ 6,793 $ 4,699

Accrued employee benefits 8,492 8,82 1

Current portion accrued restructuring costs 11,985 13 ;41 8Other accrued liabilities 10,252 8,42 9

Current portion of capital lease obligations - A lDeferred revenue 24,796 23,95 5

Total current liabilities 62,318 59,33 3Long-term notes payable 1,669 1,67 9Long-term accrued restructuring costs 21,615 26,90 3Commitments and contingencie sStockholders' equity:Convertible preferred stock, $0.001 par value, issuable in series : 5,000 shares authorized, none issued and outstanding - -

Common stock, $0 .001 par value; 200,000 shares authorized ; 36,430 and 35,661 shares issued and outstanding at July 31, 200 3and January 31, 2003, respectively 36 3 6Additional paid- in capital 574,922 541,13 6

Accumulated other comprehensive income 335 294Notes receivable from stockholders (67) (69 )Accumulated deficit (542,233) (505,578 )

Stockholders' equity 32,993 35,819

$ 118,595 $ 123,73 4


3


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts ; unaudited)

Three Months Ended

July 31 ,

Revenues :

License feesServices

Total revenue s

Costs and expenses :Cost of license feesCost of servicesAmortization of purchased developed technologyResearch and developmen tSales and marketingGeneral and administrativeStock compensation charges (1)Restructuring costs

Total costs and expenses

Loss from operationsInterest and other income, net

Six Months EndedJuly 31 ,

2003 2002 2003 2002

$ 11,321 $ 9,378 $ 24,891 $ 22,08621,880 19,384 40,403 37,788

33,201 28,762 65,294 59,874

22 54 109 16913,195 11,788 24,808 22,737

665 665 1,330 1,3306,981 10,130 14,148 21,74 8

11,633 13,667 23,022 28,5673,095 4,209 6,42 8,603

23,749 99 30,839 20 9- 6,053 6,05 3

59 340 46 665 100 68 4, 89 .41 6

Loss before income taxesProvision for income taxe s

Net los s

Basic and diluted net loss per share

Shares used in computing basic and diluted net loss per .shar c

Stock compensation charges relate to the following expense categories :

Cost of serv ice sResearch and developmentSales and marketingGeneral and administrativ e

Total

(26,139) (17,903) (35,390) (29,542 )(152) 270 (29) 968

(26,291) (17,633) (35,419) (28,574)(600) (413) (1,236) (1,481 )

$(26,891)--, $(18,046) $(36,655) $(30,055)

$` (0 .74) : $ (0 .31) $ (1 .02) $ (0 .86 )

36,102 35,205 35,908 35,09 1

$ 5,161 $ 16 $ 6,701 $ 338,745 33 11,356 7 16,633 28 8,614 5 93,210 22 4,168 46

$23,749 $ 99 $ 30,839 $ 209


4


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands ; unaudited)

OPERATING ACTIVITIES :Net lossAdjustments to reconcile net loss to net cash used in operating activities :Depreciation and amort izationStock compensation chargesNoncash restructuring costsAmort ization of purchased intangiblesGain on sale of investmentsChanges in operating assets and liabilities :Accounts receivable, netPrepaid expenses and other current assetsOther assetsAccounts payableAccrued employee benefitsOther accrued liabilitiesDeferred revenu e

Net cash used in operating activities

INVESTING ACTIVITIES:Purchases of sho rt- term investmentsSales of sho rt- term investmentsMaturity of short- term investmentsSales and maturi ties of long-term investmentsPurchases of property and equipmen t

Net cash provided by investing activities

Six Months EndedJuly 31 ,

2003 2002

$ (36,655) S(30,055 )

3,845 8,15 930,839 209

-- 5621 ;330 1,330- (285)

(3,630) (597 )(3,532) (2,259 )

117 1,2752,094 31 6

(328) (416)(4,900) (8,546 )

841 (10,976 )

(9,979) (41,283 )

(50,025) (97,521 )33,031 24,59 129,860 97,1581,400 -(3,136) (3,764 )

11,130 20,464

FINANCING ACTIVITIES :Payments received from stockholder notes receivable 2 -Repayments of notes payable ( 10) (10 )Principal payments under capital lease obligations (11) (383 )Proceeds from issuance of common stock, net of repurchases 2,947 1,41 6

Net cash provided by fi nancing activities 2,928 1,02 3

Effect of exchange rate on cash and cash equivalents 101 1,45 2

Net increase (decrease ) in cash an d cash equivalents 4 ;180 (18 ;344)Cash and cash equivalents at beginning of period 21 ,502 36,31 8

Cash and cash equivalents at end of period $ 25,682 $ 17,97 4

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

5

Table of ContentsThe following table summarizes our contractual obligations, including related interest charges, as of July 31, 2003, and the effect such obligations are expected tohave on our liquidity and cash flows in future periods (In thousands) :

Non-cancelabl eLong-term notes opera ting leases ,

Year ending January 31 , payable net of sublease Total

2004 (remaining six months) $ 4 $ 6,372 $' 61420

2005 96 10,824 10,920

2006 96 10,219 10 ;31 52007 96 9,809 9,905

2008 96 9,878 9,974Thereafter 1,859 45,753 47,612

Total minimum payments 2,291 92,855 95,146

Less amount representing interest (622) - (622 )

Present value of future payments $ 1,669 92,855 $94 ;524

RISKS ASSOCIATED WITH OUR BUSINESS AND FUTURE OPERATING RESULTS

Our 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 ourcommon stock is subject to a variety of risks, including but not limited to the specific risks identified below . Inevitably, some investors in our securities willexperience gains while others will experience losses depending on the prices at which they purchase and sell securities . Prospective and existing investors arestrongly 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 ourbusiness and industry, our beliefs and assumptions . Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates" and variations ofthese words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and aresubject to risks, uncertainties and other factors, many of which are beyond our control, and all of which are difficult to predict and could cause actual results todiffer materially from those expressed or forecasted in the forward-looking statements . These risks and uncertainties include those described in this sectionentitled "Risks Associated With Our Business and Future Operating Results" and elsewhere in this report . Forward-looking statements that were true at the timemade may ultimately prove to be incorrect or false . Readers are cautioned not to place undue reliance on forward-looking statements, which reflect ourmanagement'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 theforward-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 .

On September 3, 2003, the Company's Board of Directors approved a reverse stock split of the Company's common stock at a ratio of one-for-five, causingeach outstanding share of common stock to convert automatically into one-fifth of a share of common stock . The reverse split will become effective at the closeof business on September 26, 2003 . In lieu of fractional shares, stockholders will receive a cash payment based on an average trading price of the common stockprior to the effectiveness of the reverse split. All references to common share and per common share amounts have been restated to reflect this reverse split .

OUR REVENUES WILL BE ADVERSELY AFFECTED AS A RESULT OF ECONOMIC AND POLITICAL CONDITIONS AFFECTING OUR TARGETMARKETS

We primarily market our products and services to providers of communications and content services. During the past few years, the telecommunications industryhas experienced a difficult economic environment . The substantial number of business failures and the decline in the market value of"dot-com" and othertechnology companies in the past few years has made it more difficult for emerging communication and electronic content companies to obtain financing fortheir operations. Moreover, the market value, financial results and prospects of many large and established companies, including many large telecommunicationscompanies, have also declined or degraded significantly . Many communications and content companies have significantly reduced their expenditures and havereduced or deferred their purchases of software and related products and the introduction of many new communication services has been delayed or cancelled .Cancellations of existing or planned services also adversely impact potential professional service, maintenance and support revenues. Reductions in spending bythese companies has resulted in intense competition for their available spending and increased price competition and reductions for products and professionalservices . Any general decrease by our customers and potential customers in their rate of software and network investments results in a significant decrease in ourrevenues and operating income . These trends in technology and software spending dramatically adversely impacted our business in fiscal 2002 and 2003 and willcontinue to adversely affect our business until conditions improve .

20

Table of Content sIn addition, political instability in various geographic areas has resulted in companies reducing spending for technology projects generally and the delay or

reconsideration of potential purchases of our products and related services . The war on terrorism and in Iraq and the potential for war or other hostilities in

various parts of the world continues to contribute to a climate of economic and political uncertainty and decreasing consumer confidence that has and maycontinue to adversely affect our revenue growth and results of operations .

Failure to collect accounts receivable in a timely manner has in the past and may in the future result in significant write-offs, higher accounts receivable reservesand lower cash balances that would adversely affect our financial results and available cash resources.

WE EXPECT TO INCUR ADDITIONAL LOSSES AND CANNOT BE CERTAIN THAT WE WILL BE PROFITABLE OR GENERATE POSITIVE CASH

FLO W

In order to be profitable or generate positive cash flow, we must significantly increase our revenues or further reduce our expenses . We may not be able to

increase or even maintain our revenues and we may not achieve sufficient revenues to attain profitability in any future period . Moreover, we have already

significantly reduced our expenses through a series of restructurings and there may be a limit to our ability to further reduce expenses without significantly

damaging our operational capabilities . We incurred net losses of approximately $36 .7 million for the six months ended July 31, 2003 and $72 .2 million, $395 .5

million and $2 .3 million for fiscal years 2003, 2002 and 2001, respectively .

The decrease in capital expenditures by communications companies as well as the general economic slowdown has adversely affected our revenues and willmake it difficult to increase revenues until spending in our target markets increases . We also 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 have experienced and may continue to experience price competition that

would lower our gross margins and reduce our ability to become profitable . Furthermore, we plan to structure more of our transactions to provide for paymentsover a period of one year or more and to increase the number of arrangements where we offer some of our products and services for a "bundled" price, such thata separate price would not be identified for the product and service components . One of the impacts of this change in license structuring could be that licenserevenue would be recognized ratably over the term of the license arrangement or as payments from customers become due, or services are completed rather than

being recorded as revenue upon delivery . Such a change may significantly delay the timing of our revenue recognition and could decrease our revenues in the

short term . Another factor that would lower our gross margins is any increase in the percentage of our revenues that is derived from indirect channels and fromservices, both of which have lower margins than our license revenues . Failure to achieve the desired reductions in our expenses will further increase our losses.

We cannot be certain that we will achieve operating or net profitability on a quarterly or annual basis . Additionally, failure to achieve a positive cash flow will

continue to result in reductions in our existing cash resources .

OUR QUARTERLY REVENUE IS GENERA TED FROM A LIMITED NUMBER OF CUSTOMERS AND OUR CUSTOMER BASE IS

CONCENTRA TED; THE LOSS OF ONE OR MORE OF OUR CUSTOMERS OR PROSPECTIVE CUSTOMERS COULD CA USE 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, in the six months ended July 31, 2003, one customer, Vodafone Omnitel, accounted for 13 .4% of our

revenues . As a result, if a large contract is cancelled or deferred or an anticipated contract does not materialize, our business would be harmed. Our total revenues

could also be adversely affected if revenues from a significant customer in one period are not replaced with revenues from that customer or other customers in

subsequent periods . The communication and content industries we have targeted are consolidating, which could reduce the number of potential customers

available to us . Moreover, many of our customers may have purchased sufficient quantities of our products to satisfy their current or anticipated requirements .

Because there are a limited number of customers and competition for them is intense, these customers have substantial bargaining power to negotiate terms and

conditions favorable to the customer . For all of these reasons our business could suffer in the future .

IT IS DIFFICULT TO PREDICT THE TIMING OF INDIVIDUAL ORDERS BECAUSE PORTAL INFRANET HAS A LONG AND VARIABLE SALES

CYCLES AND IMPLEMENTA TION PERIODS

The sales cycle for Portal Intranet varies greatly, generally ranging between 3 to 18 months . Sales cycles have recently lengthened as the competitiveenvironment has become more intense, the financial position of our potential customers has weakened and price discounting has further delayed customer

decision processes. Our sales cycles are also typically longer with larger customers such as national and international telecommunications companies . Along withsystems integrators and our other distribution partners, we spend significant time educating and providing information to our prospective customers regarding the

use and benefits of Portal Infranet. Customers increasingly require vendors to perform proof of concept projects and performance benchmarks as a part of the

sales cycles . These tests can further lengthen sales cycles and increase our sales costs . The long sales and implementation cycles for Portal Infranet make it moredifficult to predict our future financial results and may cause license revenues and operating results to vary significantly from period to period .

Table of ContentsEven after purchase, our customers tend to deploy Portal Infranet slowly and deliberately, depending on the specific technical capabilities of the customer, thesize 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 Portal Intranet . The length of time to implement and deploy systems involving Portal Infranet may have an impact on the timing and amount ofrevenues ultimately received from customers, particularly if payments are tied to implementation or production milestones . As a result, the revenues derived from

a sale may not be recognized immediately and could be spread over an extended period. As a result, an increase in the period of time over which revenue is

recognized may cause a decline in the amount of revenues in the short term .

IF THE MARKET FOR OUR PRODUCTS DOES NOT IMPROVE, WE MAY BE FORCED TO INCUR ADDITIONAL RESTRUCTURING CHARGES

During the fiscal year ended January 31, 2002 and the quarters ended July 31, 2002 and October 31, 2002 we incurred charges of $71 .0 million, $6 .1 million and

530 .7 million, respectively, in connection with restructuring plans implemented to reduce our cost structure . These restructuring plans were implemented in

response to the continued global deferral of capital expenditures by telecommunications companies, as well as the general downturn in the economy . If the poor

market environment for telecommunications and content service providers continues and capital expenditures continue to be deferred or our business otherwisecontinues to suffer, we may implement additional restructuring plans to further reduce our cost structure and incur additional restructuring charges . These

restructuring plans may not achieve the desired benefits . Any additional restructuring charges could have a material adverse effect on our financial results .

THE MARKETS IN WHICH WE SELL OUR PRODUCT ARE HIGHLY COMPETITIVE AND WE MA YNOTBE ABLE TO COMPETE EFFECTIVELY

We compete in markets that are intensely competitive and rapidly changing. We face competition from providers of customer management and billing software,

such as Amdocs Ltd., Convergys Corporation, and CSG Systems International, Inc . and we also compete with systems integrators and with internal information

technology departments of larger communications providers. Most of our current principal competitors have significantly more personnel and greater financial,

technical, marketing and other resources than we have . Many of our competitors also have more diversified businesses, established reputations in particular

market segments, larger customer bases and are not as dependent on customers in our target market .

Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can . Intense competition

has recently been exemplified by deep price discounting by our competitors that has resulted in a lengthening of our sales cycles, price reductions and maythreaten our ability to close forecasted business . Additionally, our financial strength or that of a competitor is a significant factor considered by many potentialcustomers in their vendor selections . Because many of our competitors have greater financial resources than we do, this can adversely affect our selection by

potential customers. Increased competition can result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of whichcould harm our business ,

Our failure to develop and market products and services that compete successfully with those of other suppliers in the market would harm our business. We

anticipate that the market for our products and services will remain intensely competitive .

OUR INABILITY TO SUBLEASE OR REDUCE SURPLUS OFFICE SPACE WOULD INCREASE OUR USE OF CASH AND OPERATING EXPENSESAND ADVERSELYEFFECT OPERA TING RESULTS AND OUR FINANCIAL CONDITIO N

We must periodically acquire and dispose of our office facilities in various locations as the number of existing and projected employees changes for thoselocations or as existing leases expire. Securing and building out facilities takes significant lead-time . Historically, because of the need to satisfy projected futureexpansion, the amount of space we have leased is generally more than the amount currently required. Our significant office leases have terms of between 5 and

20 years. As a result, we frequently attempt to sublease the portions of leased facilities that we have leased to meet our future expansion plans but do notcurrently need . In addition, our reductions in our workforce undertaken over the past year have substantially reduced our facilities requirements in several

locations . As a result, we are attempting to sublease the facilities that we have previously leased but do not currently need or to negotiate reductions in our rentobligations relating to those facilities or cancellations of the applicable leases . We have leased approximately 290,000 square feet for our headquarters facilities

in Cupertino, California through 2010 . The amounts leased exceed our current requirements and we intend to sublease a majority of the facilities for a substantial

portion, if not the entire balance, of the lease term . There is currently a large amount of vacant commercial real estate in the San Francisco Bay Area and in other

locations where we have facilities . Moreover, currently prevailing rental rates in many locations are significantly lower than those that we are obligated to payunder the leases . We may therefore continue to encounter significant difficulties or delays in subleasing our surplus space and may not be able to sublease it for

rents equal to those that we are obligated to pay . In connection with our restructuring plan adopted in fiscal 2003, we have vacated additional facilities in theUnited States and in other locations .

22

Table of ContentsTo the extent that we are unable to renegotiate the terms or cancel the applicable leases or to sublease this and other surplus space at an amount equal to our rent

obligations for that space or to the extent sublessees fail to perform their obligations to pay rent, we could incur greater operating expenses than we initially

anticipated or included within accrued restructuring charges . Such increases in operating expenses in a period could cause us to exceed our planned expense

levels and significantly adversely affect our financial results for that period . Cancellation of leases will likely result in use of significant amounts of cash and

additional restructuring charges . Furthermore, inability to sublease such space may adversely affect our planned uses of cash and our capital resources . Moreover,

we have reduced the amount of the facilities restructuring charges we accrued in fiscal 2003 and 2002 by the estimated amount of sublease income . The

assumptions we have made were based on the then current market conditions, as of each reporting period, in the various areas we have vacant space . These

market conditions can fluctuate greatly, thus causing our accrual to be inaccurate. If, in future periods, it is determined that we have over-accrued for

restructuring charges related to the consolidation of facilities, the reversal of such over-accrual would have a favorable impact on our financial statements in the

period this was determined. Conversely, if it is determined that our accrual is insufficient, an additional charge would have a significant unfavorable impact on

our financial statements in the period this was determined .

RAPID CHANGES IN DEMAND FOR OUR SERVICES CAN INCREASE OUR COSTS AND ADVERSELY AFFECT OUR MARGINS ANDPROFITABILITY

Services contracts can require that we rapidly provide qualified consulting personnel in particular locations . In addition, such personnel may be required to have

particular language speaking abilities and technical skills . Recruitment and training of qualified personnel can take significant time and expense . To meet rapidly

changing requirements for personnel, we may need to relocate personnel from one geographic area to another that can result in increased costs . In some cases, we

may choose to satisfy resource requirements by retaining subcontractors that in some cases, the cost may exceed the cost of using our employees . All these

factors may increase the costs of performing services and reduce margins for services . Failure to provide adequate consulting services to our customers could

result in loss of revenue, damaged customer relationships or financial penalties . As a result, if we experience difficulties in managing the size, location andavailability of our services workforce, our revenues, profitability or business will suffer .

FIXED PRICE SERVICES ENGAGEMENTS CAN IMPACT OUR PROFITABILITY IF WE FAIL TO COMPLETE THEM WITHIN THE ESTIMATEDBUDGET

We perform some of our professional services engagements on a fixed price basis . If the project requires more labor or products than was estimated by us indetermining the fixed price agreed to with the customer, our margins and profitability could be adversely affected .

OUR OPERA TING PLANS RELY ON OUR ABILITY TO SUCCESSFULLY INCREASE THE SIZE AND SCOPE OF OUR OPERATIONS IN INDIAAND A FAILURE TO MANAGE THAT PROCESS AND ORGANIZATION COULD ADVERSELYAFFECT OUR OPERATIONS

In fiscal 2003 we opened an engineering center in Bangalore, India . In fiscal 2004 we plan to significantly increase the size of this organization and expand itsscope . The expansion of this organization is an important component of our strategy to address the business needs of our customers, increase our revenues and

achieve profitability . A portion of the personnel in this organization are our employees and the substantial majority provided through an independent contractor .The success of this operation will depend on our ability and our independent contractor's ability to attract, train, assimilate and retain sufficient highly qualified

personnel in the required periods . A disruption of our relationship with the independent contractor would adversely impact the effectiveness of the Indiaorganization and could adversely affect our operations and financial results . Failure to effectively manage and integrate these operations will harm our business

and financial results .

OUR QUARTERLY OPERA TING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND WE MAY FAIL TO MEET EXPECTATION S

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 bebelow the expectations of one or more public market analysts and investors and the price of our common stock may fall . Failure by technology companies tomeet or exceed analyst expectations or any resulting changes in analyst recommendations or ratings frequently results in substantial decreases in the market valueof the stock of such companies . Factors that could cause quarterly fluctuations include :


23

EXHIBIT D

Prepared by R.R. Donnelley Financial -- Registration Statement Filed Pursuant to Rule 462(b) Page 1 of 6

S-3MEF I ds3mef.htm REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B)As filed with the Securities and Exchange Commission on September 11, 2003

Registration No.333-

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form S-3REGISTRATION STATEMEN T

UNDERTHE SECURITIES ACT OF 1933

Portal Software, Inc .(Exact name of Registrant as specified in Its charter )

Delaware 77-0369737

(State or Other Jurisdictionof (I.R.S. Employer

Incorporation or Organization) Identification Number)

10200 South De Anza BoulevardCupertino, California 95014

(408) 572-2000(Address, including zip code , and telephone number , including area code, of Registrant 's principal executive offices)

Mitchell L. GaynorVice President, General Counsel and Secretary

Portal Software, Inc.10200 South De Anza Boulevard

Cupertino, California 95014(408) 572-2000

(Name, address, including zip code, and telephone number, including area code , of agent for serv ice)

Copies to :

Timothy R. Curry, Esq.O'Melveny & Myers LLP

2765 Sand Hill RoadMenlo Park, California 94025

(650) 473-2600Facsimile : (650) 473-260 1

Approximate date of commencement of proposed sale to the public : As soon as practicable after this Registration Statement becomes

effective .

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under theSecurities Act of 1933, check the following box . ❑

if this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following boxand list the Securities Act registration statement number of the earlier effective registration statement for the same offering . © Registration No .

333-85070

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list theSecurities Act registration statement number of the earlier effective registration statement for the same offering . ❑

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the

Securities Act registration statement number of the earlier effective registration statement for the same offering . ❑

if delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box . ❑

http://www.sec.gov/Archives/edgar/data/1080306/000119312503048608/ds3mef .htm 12/5/2005

Prepared by R .R. Donnelley Financial -- Registration Statement Filed Pursuant to Rule 462(b) Page 2 of '6

CALCULATION OF REGISTRATION FEE

ProposedMaximum

Title of Each Classof Aggregate Amount ofSecurities to be Registered Offering Amount Registration Fee(2 )

Common Stock, par value $0 .001 per share (3) $ 10,000,000 $ 809 .0 0

(1) Does not include $50,000,000 of common stock previously registered pursuant to the Registrant's Registration Statement on Form S-3 (FileNo . 333-85070) declared effective September 13, 2002, for which the registration fee has previously been paid .

(2) Calculated pursuant to Rule 457(o) .(3) Includes rights to purchase Registrant's junior participating preferred stock associated with the common stock .

This Registration Statement shall become effective upon filing with the Commission in accordance with Rule 462(b) under theSecurities Act of 1933 , as amended .

http ://www.sec.gov/Archives/edgar/data/1080306/000119312503048608/ds3mef.htm 12/5/2005


INCORPORATION OF CERTAIN INFORMATION BY REFERENC E

The Registration Statement is being filed with the Securities and Exchange Commission pursuan t to Rule 462(b) under the Securities Act of1933, as amended , for the sole purpose of registering additional securities of the same class as were included in our Registration Statement onForm S-3 File No . 333-85070, as amended, declared effective September 13, 2002 . The contents of such Registration Statement , including theexhibits thereto, are hereby incorporated by reference .

http://www.sec.gov/Archives/edgar/data/1080306/000119312503048608/ds3mefhtm 12/5/2005

Prepared by R.R . Donnelley Financial -- Registration Statement Filed Pursu ant to Rule 462(b) Page 4 of 6

SIGNATURE S

Pursuant to the requirements of the Securities Act of 1933 th e Registrant has duly caused this Registra tion Statement to be signed on its

behalf by the undersigned, thereunto duly authorized, in the City of Cupertino, California on this 11 th day of September, 2003 .


By /s/ JOHN E. LITTL E

John E. LittleChief Executive Officer and Chairman of the Board

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints John E.

Little, Howard A . Bain III and Mitchell L. Gaynor, and each of them, his true and lawful attorneys - in-fact and agents , with full power ofsubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective

amendments ) to this registration statement, and to sign any registration statement for the same offering covered by this registration statement thatis to be effective upon filing pursu ant to Rule 462 ( b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, andto file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting untosaid attorneys - in-fact and agents full power and autho rity to do and perform each and every act and thing requisite and necessary to be done in andabout the premises , as fully to all intents and purposes as he might or could do in person , hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substi tutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933 this Registration Statement on Form S-3 has been signed by the following personsin the capacities indicated on September 11, 2003 :

Name

/s/ Jolnv E . LITTLE

John E. Little

Howard A. Bain II I

Arthur C . Patterson

Robert P. Wayman

Edward J . Zander

/s/ I . DAVID MARTIN

1 . David Martin

/s/ GEORGE J . GOLDSMITH

George J . Goldsmith

Richard A. Moran

/S/ JENNIFER TAYLOR

Jennifer Taylor

*By: /s/ JOHN E . LITTLE

Title

Chief Executive Officer and Chairman of the Board(Principal Executive Officer)

Senior Vice President and Chief Financial Officer(Principal Financial Officer and PrincipalAccounting Officer)

Director

Director

Director

Director

Director

Director

Director

Date

September 11, 200 3

September 11, 200 3

September 11, 2003

September 11, 2003

September 11, 200 3

September 11, 200 3

September 11, 200 3

September 11, 200 3

September 11, 2003

September 11, 2003

http ://www.sec.gov/Archives/edgar/data/1080306/000119312503048608/ds3mefhtm 12/5/2005


John E . Little

Attorney-in-Fact

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Prepared by R .R. Donnelley Financial -- Registration Statement Filed Pursuant to Rule 462(b) Page 6 of 6

EXHIBIT INDEX

ExhibitNumber Descriptio n

5 .1 Opinion of O'Melveny & Myers LLP

23.1 Consent of Independent Auditors

23 .2 Consent of O'Melveny & Myers LLP (included in Exhibit 5 .1)

*24 .1 Power of Attorney (included on signature page)

* Previously filed with the Registrant ' s registration statement on Form S-3 (File No. 333-85070)

http ://www.sec.gov/Archives/edgar/data/1080306/000119312503048608/ds3mef htm 12/5/2005

EXHIBIT E

Prepared by R.R. Donnelley Financial -- Current Repo rt on Form S-K Page 1 of 4

8-K 1 d8k.htm CURRENT REPORT ON FORM 8-K

SECURITIES AND EXCHANGE COMMISSIONWashington , D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934

Date of Report (Date of earliest event reported) September 11, 200 3

PORTAL SOFTWARE, INC .(Exact name of registrant as specified in charter)

Delaware 000-25829 77-0369737(State of incorporation ( Commission File Number) ( IRS Employer

or organization) Identification No .)

10200 South De Anza Boulevard,Cupertino, CA

(Address of principal executive offices)95014

(Zip Code )

Registrant's telephone number, including area code (408) 572-200 0

None(Former name or former address, if changed since last report)

http://www.sec.gov/Archives/edgar/data/1080306/000119312503048754/d8k .htm 1/10/2007

Prepared by R.R. Donnelley Financial -- Current Report on Form 8-K Page 2 of 4

Item 5. Other Events .

On September 11, 2003, Registrant entered into a Placement Agency Agreement with Raymond James & Associates, Inc .

and Kaufman Bros ., L.P . in connection with a registered direct offering of 22,641,509 shares of its common stock at anoffering price of $2 .65 per share . The common stock will be issued pursuant to a prospectus supplement filed with theSecurities and Exchange Commission pursuant to Rule 424(b)(2) of the Securities Act of 1933, as amended, the SecuritiesAct, in connection with a shelf takedown from the Company's registration statement on Form S-3 (333-85070), as amended,which became effective on September 13, 2002, and registration statement on Form S-3 (333-108731 pursuant to Rule 462(b)of the Securities Act, filed September 11, 2003 .

The Placement Agency Agreement is being filed as Exhibit 1 .1 to this Current Report on Form 8-K and incorporated hereinand incorporated by reference into the shelf registration statement .

On September 12, 2003, Registrant issued a press release announcing the execution of the Placement Agency Agreement anda registered direct offering of its shares of common stock . The press release is being filed as Exhibit 99 .1 to this CurrentReport on Form 8-K and incorporated herein and incorporated by reference into the shelf registration statement .

Neither the filing of any press release as an exhibit to this Current Report on Form 8-K nor the inclusion in such press releaseof a reference to Registrant's Internet address shall, under any circumstances, be deemed to incorporate the informationavailable at such Internet address into this Current Report on Form 8-K. The information available at Registrant's Internetaddress is not part of this Current Report on Form 8-K or any other report filed by Registrant with the Securities andExchange Commission .

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits .

Exhibit 1 .1 Placement Agency Agreement, dated as of September 11, 2003, by and among Portal Software, Inc .,Raymond James & Associates , Inc . and Kaufman Bros ., L .P .

Exhibit 99 . 1 Press Release dated September 12, 200 3

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Prepared by R.R. Donnelley Financial -- Current Report on Form 8-K Page 3 of 4

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized .


Date : September 11, 2003 By: /S/ MITCHELL L. GAYNO R

Name: Mitchell L. Gaynor

Title : Vice President, General Counsel and Secretar y

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rrepareu Dy rc.tc. Lululelley rnialle;tal -- k-ullelrt i~epult on rUiul o-i1 1 a~C Y Ul -r

EXHIBIT INDE X

ExhibitNumber Document Descriptio n

1 .1 Placement Agency Agreement, dated as of September 11, 2003, by and among Portal Software, Inc ., Raymond

James & Associates, Inc . and Kaufman Bros ., L .P .

99.1 Press Release dated September 12, 2003 .

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Prepared by R .R. Donnelley Financial -- Press Release dated 09/12/2003 Page 1 of 1

EX-99.1 4 dex991 .htm PRESS RELEASE DATED 09/12/2003Exhibit 99. 1

PRESS RELEASE ` ... ..T . L.

10200 South De Anza Blvd Cupertino, CA 95014 www .portal.com Tel: 408 .572.200 0

Portal to Raise Approximately $60 MillionThrough Sale of Common Stoc k

CUPERTINO, CA (September 12, 2003)-Portal Software, Inc . (Nasdaq : PRSF) today announced that it haspriced a registered direct offering for the sale of 22,641,509 shares of its common stock at a price of $2 .65 per shareto institutional investors . Raymond James & Associates, Inc . served as placement agent for the transaction . KaufmanBros ., L .P . served as co-placement agent. The company expects this transaction to close on Wednesday, September17, 2003 .

The offered shares are registered pursuant to Portal's $50 million shelf registration statement that was declaredeffective by the Securities and Exchange Commission on September 13, 2002 and a related registration statementregistering an additional $10 million of Portal's common stock.

Registration Statements relating to these securities have been filed with and declared effective by the Securities andExchange Commission. This press release does not constitute an offer to sell or the solicitation of an offer to buy,and these securities cannot be sold in any state which this offer, solicitation, or sale would be unlawful prior toregistration or qualification under the securities laws of any such state .

A Prospectus may be obtained from Raymond James & Associates , Inc . at 880 Carillon Parkway, St . Petersburg FL,33716, Prospectus Department .

About Portal Software, Inc .Portal Software provides flexible billing and subscriber management solutions to enable organizations to monetizetheir voice and digital transactions . Portal 's convergent billing platform enables se rvice providers to charge, bill, andmanage a wide range of services via multiple networks, payment models, p ricing plans, and value chains . Po rtal'sflexible and scalable product-based solutions enable customers to introduce new value added se rvices quickly,providing maximum business value and lower total cost of ownership . Portal's customers include thi rty -five of thetop fifty wireless carriers as well as organizations such as Vodafone , AOL Time Warner, Deutsche Telekom,TELUS, NTT, China Telecom, Reuters, Telstra , China Mobile, Telenor Mobil, and France Telecom . For moreinformation, please visit www.portal .com .

This press release contains forward-looking statements regarding the expected timing of the closing of the offeringdescribed herein . This statement is based on Portal's current expectations and is subject to risks and uncertainties,including the risk that the financing does not close due to the failure of one or more conditions to closing or thetriggering of a termination event set forth in the Placement Agency Agreement entered into among Portal and theplacement agents, a copy of which is filed with the SEC under a Form 8-K . Conditions include, among other things,the absence of any material adverse change in Portal, its business or financial condition, the absence of any loss dueto force majeure and the absence of any stop order relating to the registration statements issued by the SEC .Termination events include, among other things, any suspension in trading on the New York Stock Exchange ordeclaration of a general banking moratorium by federal or New York State authorities or outbreak or escalation ofhostilities involving the United States .

Copyright ©2003 Portal Software, Inc . All rights reserved. Infranet and the Portal logo are U .S . registered trademarks, and Portal is a trademark of PortalSoftware, Inc . All other trademarks are the property of their respective owners . All statements made in this press release are made only as of the date setforth at the beginning of this release. Portal undertakes no obligation to update the information in the event facts or circumstances subsequently change .

Financial Contacts :Portal Software :

Corporate : Kathy Cotten, kcottenr@portal .com, 408 .572 .382 3

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EXHIBIT F

rage i 0 1

<DOCUMENT>

<TYPE>8-K

<SEQUENCE>1

<FILENAME>a4400290 .txt

<DESCRIPTION>PORTAL SOFTWARE, INC . 8-K

<TEXT>

SECURITIES AND EXCHANGE COMMISSIO N

Washington, D .C . 2054 9

FORM 8- K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 193 4

Date of Report (Date of earliest event reported) May 20, 2003

-------------------------------


--------------------------------------------------------------------------------

(Exact name of registrant as specified in charter)

Delaware 000-25829 77-0369737

--------------------------------------------------------------------------------

(State of incorporation (Commission File Number) (IRS Employe r

or organization) Identification No .)

10200 South De Anza Boulevard, Cupertino, CA 95014

--------------------------------------------------------------------------------

(Address of principal executive offices) (Zip Code )

Registrant's telephone number, including area code (408) 572-2000

------------------------------

None

--------------------------------------------------------------------------------

(Former name or former address, if changed since last report )

<PAGE >

Item 7 . Financial Statements, Pro Forma Financial Information and Exhibits .

(c) Exhibits

99 .1 Press Release, dated May 20, 2003, reporting the results of

operations of Portal Software, Inc . (the "Registrant") for

its first fiscal quarter ended May 2, 2003 (furnished and

not filed herewith solely pursuant to Item 12) .99 .2 Financial Statements, dated May 20, 2003 reporting the

results of operations of the Registrant for its first

fiscal quarter ended May 2, 2003 (furnished and not filed

herewith solely pursuant to Item 12) .

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rage Z or S

Item 9 . Regulation FD Disclosure . (Information furnished pursuant to Item 12 .

Results of Operations and Financial Condition )

On May 20, 2003, the Registrant reported its results of operations for itsfirst fiscal quarter ended May 2, 2003 . A copy of the press release issued by

the Registrant concerning the foregoing results is furnished herewith as Exhibit99 .1 and the Registrant's financial statements are furnished herewith as Exhibit

99 .2 . Each are incorporated herein by reference .

The information contained herein and in the accompanying exhibits is being

furnished pursuant to "Item 12 . Results of Operations and Financial Condition"

in accordance with interim guidance issued by the Securities and Exchange

Commission in Release No . 33-8216 . The information contained herein and in the

accompanying exhibits shall not be incorporated by reference into any filing of

the Registrant, whether made before or after the date hereof, regardless of any

general incorporation language in such filing, unless expressly incorporated by

specific reference to such filing . The information in this report, including the

exhibits hereto, shall not be deemed to be "filed" for purposes of Section 18 of

the Securities Exchange Act of 1934, as amended, or otherwise subject to the

liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of

1933, as amended .

In addition to reporting financial results in accordance with generally

accepted accounting principles in the United States, or GAAP, the Registrant

provides pro forma loss from operations, pro forma net loss and pro forma net

loss per share in the financial statements and press release and pro forma loss

before income taxes in the financial statements as additional information for

its operating results . Pro forma net loss has been adjusted to exclude the

effects of non-operating expenses and non-cash charges, such as stock option

compensation charges and amortization and impairment of acquired intangibles .

These measures are not in accordance with, or an alternative for, GAAP and may

be different from non-GAAP measures used by other companies . The Registrant's

management believes that this presentation of non-GAAP measures provides useful

information to management and investors regarding certain additional financial

and business trends relating to its financial condition and results of

operations . In addition, management uses these measures for reviewing the

financial results of the Registrant and for planning and forecasting of future

periods . The Registrant has provided non-GAAP measurements in previous press

releases and believes that it is important to provide investors and other

interested persons with a consistent basis for comparison between quarters .

Results of operations excluding special items for the periods presented are

provided for illustrative purposes only and should be read in conjunction with

the comparable information presented in accordance with GAAP . The Registrant has

reconciled these measures to GAAP net loss and GAAP earnings per share in its

press release and has included both GAAP and non-GAAP measures in its financial

statements, each included as Exhibit 99 .2 to this report .

<PAGE>

SIGNATURE

Pursuant to the requirements of Section 12 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 .

PORTAL SOFTWARE,-INC .

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iarL, ✓ vl ✓

Date : May 20, 2003 By : /s/ Mitchell L . Gaynor

Name : Mitchell L . Gaynor

Title : Vice President, General Counsel

and Secretary

</TEXT>

</DOCUMENT>

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rage i 01 14

<DOCUMENT>

<TYPE>EX-99

<SEQUENCE>3<FILENAME>a4400290_ex991 .txt

<DESCRIPTION>PORTAL SOFTWARE, INC . EXHIBIT 99 .1

<TEXT>

INVESTOR CONTACT : Kathy Cotten investor-relations@portal .com Tel : 408 .572 .234 5

MEDIA CONTACT : Amanda Klinger aklinger@portal .com Tel : 408 .572 .2985

Portal Software Reports First Quarter Results for Fiscal Year 200 4

Third Consecutive Quarter of Revenue and Business Growt h

CUPERTINO, CA (May 20, 2003) -- Portal Software, Inc . (Nasdaq : PRSF), a leading

provider of billing and customer management software, today reported financial

results for the first quarter of fiscal year 2004, period ended May 2, 2003 .

First Quarter Result s

Revenues for the quarter totaled $32 .1 million, compared to revenues of $31 .1

million in the prior quarter, and $31 .1 million for the same period last year .

Pro forma net loss for the first quarter of fiscal 2004 was $2 .0 million, or

$0 .01 per diluted share . This compares to a pro forma net profit of $0 . 5

million, or $0 .00 per diluted share in the prior quarter and a pro forma net

loss of $11 .2 million, or $0 .06 per share in the first quarter of fiscal 2003 .

Pro forma amounts in the first quarter of fiscal year 2004 exclude amortization

of acquisition-related costs of $0 .7 million and stock option compensation

expense of approximately $7 .1 million . Net loss for the quarter ended May 2,

2003 was $9 .8 million or $0 .05 per share, in accordance with generally accepted

accounting principles (GAAP) .

Strategic Business Momentum

Key global customer and partner transactions in the quarter highlight Portal'scontinued momentum and validation as the leading product platform billing

company in the market .

Vodafone Omnite l

A leading Italian mobile operator and one of the largest organizations

within the Vodafone Group, Vodafone Omnitel extended its relationship with

Portal to include billing for voice solutions for its 19 million subscriber

customer base . This builds on Vodafone's use of Infranet to support pre-

and postpaid data and content billing, proving Infranet's ability to scale

and deliver complete converged solutions .

T-Mobile USA

Portal extended its technology leadership in the Wi-Fi market, announcing

that T-Mobile USA is using Infranet to serve as the charging and rating

system for its Wi-Fi broadband wireless Internet service . T-Mobile operates

the largest carrier-owned Wi-Fi network in the country, available in more

than 2,300 public access locations .

SAP

Portal announced it has entered into a strategic alliance with SAP to

provide a pre-packaged integrated solution for revenue management . This

joint solution combines Portal's Infranet(R) with SAP's SAP for

Telecommunications(R) .

Global service providers continue to embrace Portal's Infranet product-centric

solutions because they deliver the business agility needed to better-serve end

customers . The Portal platform is designed to accelerate time to revenue while

providing lower total cost of ownership and improved margins .

"Our product business model is working, and we are executing effectivel y

http://www.sec.gov/Archives/edgar/data/ 1 080306/000115752303002085/a4400290_ex991 . . . 1/10/2007

delivering product-based solutions," said John Little, chief executive officer

at Portal Software . "We are the only company in our market reporting increasing

revenues and quarter-to-quarter product license growth . "

Business Outloo k

The following statements are based on current expectations and are

forward-looking . They are subject to a number of uncertainties and risks,

including those discussed below, and actual results may differ materially . We

undertake no obligation to update these forward-looking statements .

While Portal's business appears to be strengthening, communications serviceproviders continue to be very deliberate in their software purchasing decisions .

There is a high probability that our customers will continue to constrain theircapital spending for an extended period of time due to continued softness in

their markets .

Further, the significant transactions Portal has recently closed and expects to

complete in the future are larger, multi-year deals, which may add to long-termpredictability, but may dampen near-term growth . These larger transactions mayalso significantly impact the quarter in which they close, thereby adding to thevolatility of license revenues .

While economic uncertainty and intense market competition remainunchanged, we expect Q2 revenues to be about equivalent with Q1 . We

also expect to show total fiscal year 2004 revenue 10-12% higher thanthe $121 million seen in fiscal 2003 . While we see good opportunitiesin Asia, there is some risk the concerns around SARS and the war on

terrorism could negatively impact our revenue there during the fiscalyear .

Second quarter gross margins are expected to be about flat with Q1,

but there is some risk of their being slightly lower as we ramp up ourconsulting services capability to meet higher demand .

We expect pro forma operating expenses for Q2 to be about the same as

Q1 .

Given the large increase in receivables at the end of Q1, we expect

collections and operating results to produce total cash break-even or

better results for Q2 .

Given our current outlook, we expect Portal to return to pro forma

profitability and positive cash flow operations within the currentfiscal year .

Pro forma operating expenses and net income in Q2 are expected toexclude amortization and write-off of acquisition-related costs andstock option compensation expense . Portal is unable to provideguidance on a GAAP basis because information relating to stock optioncompensation expense is currently not quantifiable on a

forward-looking basis as it depends on various factors, including thefuture market price of our common stock .

Information About Pro Forma Presentation

To supplement Portal's consolidated financial statements presented on a GAAP

basis, Portal uses additional non-GAAP or "pro forma" measures of operating

results, net profit/loss and net profit/loss per diluted share adjusted to

exclude certain costs, expenses and losses Portal believes appropriate to

enhance an overall understanding of its past financial performance and also its

prospects for the future . These adjustments to Portal's GAAP results are made

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rage s 01 4

with the intent of providing both management and investors a more complete

understanding of the underlying operational results and trends and Portal's

marketplace performance . For example, the non-GAAP results are an indication o f

our baseline performance before losses or other charges that are considered by

management to be outside of Portal's core operational results . In addition,

these adjusted non-GAAP results are among the primary indicators management uses

as a basis for planning and forecasting of future periods . Because there are no

generally accepted industry standards for presenting non-GAAP results, the

methods used by Portal may differ from the methods used by other companies . The

presentation of this additional information is not meant to be considered in

isolation or as a substitute for measures prepared in accordance with GAAP .

In accordance with GAAP, net loss for the quarter ended May 2, 2003 was $9 .8

million or $0 .05 per share . This compares to a GAAP net loss of $2 .6 million, or

$0 .01 per share in the prior quarter and a GAAP net loss of $12 .0 million, or

$0 .07 per share in the first quarter of fiscal 2003 . Pro forma amounts in the

fourth quarter of fiscal year 2003 exclude amortization of acquisition-related

costs of $1 .2 million and stock option compensation expense of approximately

$2 .0 million . Pro forma amounts in the first quarter of fiscal year 2003 exclude

amortization of acquisition-related costs of $0 .8 million .

Conference Call Information

Portal will discuss its first quarter fiscal year 2004 results and other

financial and business information in a conference call and an audio web cast on

May 20, 2003, beginning at 2 :00 p .m . Pacific time . The web cast is available to

all interested parties and can be accessed at WWW .COMPANYBOARDROOM .COM . For

those unable to listen to the live web cast, a replay will be available .

This press release and full company balance sheet and consolidated operationsdetails will be filed as an exhibit to a current report on Form 8-K and will be

posted on our web site prior to the conference call described above . For a copyof this press release and the company balance sheet and consolidated operationsdetails, please visit the Investor Relations site a tWWW .PORTAL .COM/ABOUT PORTAL/INVESTOR RELATIONS .

About Portal Software, Inc .

Portal Software provides flexible billing and subscriber management solutions to

enable organizations to monetize their voice and digital transactions . Portal's

convergent billing platform enables service providers to charge, bill and manage

a wide range of services via multiple networks, payment models, pricing plans,

and value chains . Portal's flexible and scalable product-based solutions enable

customers to introduce new value added services quickly, providing maximum

business value and lower total cost of ownership . Portal's customers include

thirty-five of the top fifty wireless carriers as well as organizations such as

Vodafone, AOL Time Warner, Deutsche Telekom, TELUS, NTT, China Telecom, Reuters,

Telstra, China Mobile, Telenor Mobil, and France Telecom .

Statements in this release concerning Portal Software, Inc .'s business outlook,

future financial and operating results, future expense reductions, and Portal's

overall future prospects are forward looking statements that involve a number of

uncertainties and risks . Factors that could cause actual events or results todiffer materially include the following : General business and economic

conditions and changes in the amount of technology spending by our customers andprospects ; market acceptance of Portal's products and services ; customer and

industry analyst perceptions of Portal and its technology vision and futureprospects ; fluctuations in the market price of Portal stock that can result i n

http://www.sec.gov/Archives/edgar/data/1080306/000115752303002085/a4400290 ex991 . . . 1/10/2007

ragu'+ 01 -1

unpredictable compensation expense charges ; difficulties in implementing or

realizing the benefits of cost reduction efforts, such as our ability to

sublease excess office facilities in a timely and cost effective manner and to

effectively renegotiate or terminate real estate leases to reduce lease

obligations ; sales force training and productivity ; challenges associated with

recruiting, training, and retaining skilled management and other personnel ;ability to establish, maintain, and effectively implement relationships with

system integrators and other strategic resellers and vendors ; rapidtechnological changes ; competitive factors ; and unanticipated delays inscheduled product availability . These and other factors are described in detail

in our Annual Report on Form 10-K for the fiscal year ended January 31, 2003 .All statements made in this press release are made only as of the date set forth

at the beginning of this release . Portal undertakes no obligation to update the

information in this release in the event facts or circumstances subsequently

change after the date of this press release .

Copyright (C) 2003 Portal Software, Inc . All rights reserved . Infranet and thePortal logo are U .S . registered trademarks, and Portal and TelcoOne aretrademarks of Portal Software, Inc .

</TEXT>

</DOCUMENT>


EXHIBIT G

of _3

<DOCUMENT>

<TYPE>8-K

<SEQUENCE>1

<FILENAME>a4457279 .txt

<DESCRIPTION>PORTAL SOFTWARE 8-K

<TEXT>SECURITIES AND EXCHANGE COMMISSION

Washington, D .C . 2054 9

FORM 8- K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 193 4

Date of Report (Date of earliest event reported) August 19, 200 3- --------------------------


--------------------------------------------------------------------------------

(Exact name of registrant as specified in charter )

Delaware 000-25829 77-0369737

--------------------------------------------------------------------------------

(State of incorporation (Commission File Number) (IRS Employe r

or organization) Identification No . )

10200 South De Anza Boulevard, Cupertino, CA 95014

--------------------------------------------------------------------------------

(Address of principal executive offices) (Zip Code )

Registrant's telephone number, including area code (408) 572-2000

-----------------------------

None

---------------------------------------------------------------------------------

(Former name or former address, if changed since last report )

<PAGE>

Item 7 . Financial Statements, Pro Forma Financial Information and Exhibits .

(c) Exhibit s

99 .1 Press Release, dated August 19, 2003 reporting the results of

operations of Portal Software, Inc . (the "Registrant") for its second

fiscal quarter ended August 1, 2003 (furnished and not filed herewith

solely pursuant to Item 12) .

99 .2 Financial Statements, dated August 19, 2003, reporting the results

of operations of the Registrant for its second fiscal quarter ended

August 1, 2003 (furnished and not filed herewith solely pursuant to

Item 12) .

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rugc c vi 3

Item 12 . Results of Operations and Financial Conditio n

On August 19, 2003, the Registrant reported its results of

operations for its second fiscal quarter ended August 1, 2003 . A copy

of the press release issued by the Registrant concerning the foregoing

results is furnished herewith as Exhibit 99 .1 and the .Registrant's

financial statements are furnished herewith as Exhibit 99 .2 . Each is

incorporated herein by reference .

As previously announced, Registrant's management intends to

hold a conference call to discuss the quarterly results and its

business outlook . The conference call is scheduled to begin at 2 :00

p .m . Pacific time on Tuesday, August 19, 2003 . A live web cast of the

conference call will be available to all interested parties and can be

accessed at www .companyboardroom .com . The web cast will also be

archived for a limited time on the Registrant's web site starting one

hour after completion of the call .

The information contained herein and in the accompanying

exhibits shall not be incorporated by reference into any filing of the

Registrant, whether made before or after the date hereof, regardless of

any general incorporation language in such filing, unless expressly

incorporated by specific reference to such filing . The information in

this report, including the exhibits hereto, shall not be deemed to be

"filed" for purposes of Section 18 of the Securities Exchange Act of

1934, as amended, or otherwise subject to the liabilities of that

section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as

amended .

In addition to reporting financial results in accordance with

generally accepted accounting principles in the United States, or GAAP,

the Registrant provides pro forma net profit/loss and pro forma net

profit/loss per diluted share in the press release as additional

information for its operating results . Pro forma net profit has been

adjusted to exclude the effects of non-operating expenses and non-cash

charges, such as amortization of acquisition-related costs and stock

option compensation expense . These measures are not in accordance with,

or an alternative for, GAAP and may be different from non-GAAP measures

used by other companies . The Registrant's management believes that this

presentation of non-GAAP measures provides useful information to

management and investors regarding certain additional financial and

business trends relating to its financial condition and results of

operations . In addition, management uses these measures for reviewing

the financial results of the Registrant and for planning and

forecasting of future periods . The Registrant has consistently provided

these non-GAAP measurements in previous press releases and believes

that it is important to provide investors and other interested persons

with a consistent basis for comparison between quarters .

Results of operations excluding special items for the periods

presented are provided for illustrative purposes only and should be

read in conjunction with the comparable information presented in

accordance with GAAP . The Registrant has reconciled these measures to

GAAP net loss and GAAP earnings per share in its press release and has

included both GAAP and non-GAAP measures in its financial statements,

each included as Exhibit 99 .2 to this report .

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of 3

<PAGE>

1

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on its

behalf by the undersigned thereunto duly authorized .


Date : August 19, 2003 By : /s/ Howard A . Bain III

-------------------------------------------

Name : Howard A . Bain III

Title : Executive Vice President, Chief

Financial Office r

</TEXT>

</DOCUMENT >

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of4

<DOCUMENT>

<TYPE>EX--99

<SEQUENCE>3

<FILENAME>a4457279_ex991 .txt

<DESCRIPTION>PORTAL SOFTWARE EXHIBIT 99 .1

<TEXT>Exhibit 99 . 1

Portal Software Reports Results for Second Quarter of Fiscal Year

2004 ; Fourth Consecutive Quarter of Revenue and Business Growt h

CUPERTINO, Calif .--(BUSINESS WIRE)--Aug . 19, 2003--Portal

Software, Inc . (Nasdaq :PRSF), a leading provider of billing and

subscriber management solutions, today reported financial results for

the second quarter of fiscal year 2004 .

Second Quarter Result s

Revenues for the quarter totaled $33 .2 million, compared to

revenues of $32 .1 million in the prior quarter, and $28 .8 million for

the same period last year . Pro forma net loss for the second quarter

of fiscal 2004 was $2 .5 million, or $0 .01 per share . This compares to

a pro forma net loss of $2 .0 million, or $0 .01 per share in the prior

quarter and a pro forma net loss of $11 .1 million, or $0 .06 per share

in the second quarter of fiscal 2003 . Pro forma amounts in the second

quarter of fiscal year 2004 exclude amortization of

acquisition-related costs of $0 .7 million and stock option

compensation expense of approximately $23 .7 million . Net loss in

accordance with generally accepted accounting principles (GAAP) for

the second quarter fiscal 2004 was $26 .9 million or $0 .15 per share .

Global Customer Momentum

Portal continues to gain traction within Vodafone Group for a widerange of converged voice, data and content services . This quarter sawthe addition of J-Phone Vodafone Ltd ., a leading mobile servic e

provider in Japan with over 14 million subscribers . This is the 15th

Vodafone Group operating company to join the growing list of Portal

customers, including Vodafone Australia, France, Germany, Greece,

Hungary, Italy, The Netherlands, New Zealand, Poland, Portugal, Spain,

Sweden, Switzerland, and UK .

Portal's global customer momentum continued in the communications,

media, broadband, cable, and WiFi sectors . Billing Plus reported that

Portal led all competitors in billing and customer care contract wins

for the period from July 2002 to June 2003 .

Market Expansion with Partner Solution s

During the quarter, Portal continued to develop and deliver

end-to-end solutions with leading enterprise software companies .

-- Microsoft/Portal - BillingAgility

Portal and Microsoft announced BillingAgility, integrating

Portal's enterprise class billing and subscriber managementsolutions with Microsoft NET technologies . BillingAgilitywill provide the communications industry with a NET-connected

solution that is designed to enable service providers to

quickly and successfully roll out new voice, data, and contentservices, as well as offer superior support for legacy an d


.-b. - 1

business-to-business integrations, minimizing time and cost .

-- Siebel/Portal - TelcoOne(TM )

Portal is now shipping TelcoOne , the integrated end-to-end

billing and customer relationship management solution based on

Portal Infranet (R) and Siebel Communications . TelcoOne is

designed to enable service providers to dramatically increase

operational efficiency and introduce new services at a

fraction of the cost of traditional custom-developed

applications . Market acceptance for the TelcoOne solution is

strong, having been embraced by Telecom Italia Mobile and

multiple Vodafone Group companies .

"Global service providers need best-in-class solutions that

deliver faster time to revenue at a lower total cost of ownership,"

said John Little, founder and chief executive officer at Portal

Software . "Our product-based approach, combined with Portal services

and strategic partnerships, has allowed Portal to increase solutions

breadth and grow revenues for the fourth consecutive quarter . "

Business Outlook

The following statements are based on our current expectations and

are forward-looking . They are subject to a number of uncertainties and

risks, including those discussed below, and actual results may differ

materially . We undertake no obligation to update these forward-looking

statements .While Portal's business appears to be strengthening and growing,

indications are that communications service providers continue to be

very deliberate in their software purchasing decisions . We continue to

be concerned that our customers will continue to constrain their

capital spending due to their on-going soft market outlook for an

extended period of time . We continue to focus on building Portal's

capabilities to ensure long-term success .

While general economic conditions recently appear to be

improving, uncertainty and intense market competition remain

unchanged . As a result, we expect Q3 revenues to remain

consistent with Q2 while continuing to expect to show total

fiscal year 2004 revenue 10-12% higher than the $121 million

achieved in fiscal 2003 .

- Third quarter gross margins are expected to be about flat with

Q2 .

We expect pro forma operating expenses for Q3 to be about the

same as Q2 .

Given our current outlook, we continue to expect Portal to

return to pro forma profitability and positive cash flow

operations within the current fiscal year .

Pro forma operating expenses and net income in Q3 are expected

to exclude amortization and write-off of acquisition-related

costs and stock option compensation expense . Portal is unable

to provide guidance on a GAAP basis because informationrelating to stock option compensation expense is currently not

quantifiable on a forward-looking basis as it depends on

various factors, including the number of stock option s

http://www. sec .gov/Archives/edgar/data/ 1080306/0001157523030043 88/a4457279_ex991 . . . 1/10/2007

of4

exercised or terminated during the period and the future

market price of our common stock .

Information About Pro Forma Presentatio n

To supplement Portal's consolidated financial statements presented

on a GAAP basis, Portal uses additional non-GAAP or "pro forma"

measures of operating results, net profit/loss and net profit/loss per

diluted share adjusted to exclude certain costs, expenses and losses

Portal believes appropriate to enhance an overall understanding of its

past financial performance and also its prospects for the future .

These adjustments to Portal's GAAP results are made with the intent of

providing both management and investors a more complete understanding

of Portal's underlying operational results and trends and Portal's

marketplace performance . For example, the non-GAAP results are an

indication of our baseline performance before losses or other charges

that are considered by management to be outside of Portal's core

operational results . In addition, these adjusted non-GAAP results are

among the primary indicators management uses as a basis for planning

and forecasting of future periods . Because there are no generally

accepted industry standards for presenting non-GAAP results, the

methods used by Portal may differ from the methods used by other

companies . The presentation of this additional information is not

meant to be considered in isolation or as a substitute for measures

prepared in accordance with GAAP .

In accordance with GAAP, net loss for the second quarter of fiscal

year 2004 was $26 .9 or $0 .15 per share . This compares to a GAAP net

loss of $9 .8 million, or $0 .05 per share in the prior quarter and a

GAAP net loss of $18 .0 million, or $0 .10 per share in the second

quarter of fiscal 2003 . Pro forma amounts in the first quarter of

fiscal year 2004 exclude amortization of acquisition-related costs of

$0 .7 million and stock option compensation expense of approximately

$7 .1 million . Pro forma amounts in the second quarter of fiscal year

2003 exclude amortization of acquisition-related costs of $0 .8

million, and restructuring costs of approximately $6 .1 million .

Conference Call Information

Portal will discuss its second quarter fiscal year 2004 results

and other financial and business information in a conference call and

an audio web cast on August 19, 2003, beginning at 2 :00 p .m . Pacific

time . The web cast is available to all interested parties and can be

accessed at www .companyboardroom .com . For those unable to listen to

the live web cast, a replay will be available .

This press release and full company balance sheet and consolidated

operations details will be filed as an exhibit to a current report on

Form 8-K and will be posted on our web site prior to the conference

call described above . For a copy of this press release and the company

balance sheet and consolidated operations details, please visit the

Investor Relations site a t

www .portal .com/about-portal/investor-relations .

About Portal Software, Inc .

Portal Software provides flexible billing and subscriber

management solutions to enable organizations to monetize their voice

and digital transactions . Portal's convergent billing platform enables

service providers to charge, bill, and manage a wide range of services

via multiple networks, payment models, pricing plans, and value

chains . Portal's flexible and scalable product-based solutions ar e

http ://www.sec.gov/Archives/edgar/data/1080306/000115752303004388/a4457279 ex991 . . . 1/10/2007

designed to enable customers to introduce new value added services

quickly, providing maximum business value and lower total cost of

ownership . Portal's customers include thirty-five of the top fifty

wireless carriers as well as organizations such as Vodafone, AOL Time

Warner, Deutsche Telekom, TELUS, NTT, China Telecom, Reuters, Telstra,

China Mobile, Telenor Mobil, and France Telecom .

Statements in this release concerning Portal Software, Inc .'s

business outlook, future financial and operating results, future

expenses and Portal's overall future prospects are forward looking

statements that involve a number of uncertainties and risks . Factors

that could cause actual events or results to differ materially include

the following : General business and economic conditions and changes in

the amount of technology spending by our customers and prospects ;

market acceptance of Portal's products and services ; customer and

industry analyst perceptions of Portal and its technology vision and

future prospects ; fluctuations in the market price of Portal stock

that can result in unpredictable compensation expense charges ;

difficulties in implementing or realizing the benefits of cost

reduction efforts, such as our ability to sublease excess office

facilities in a timely and cost effective manner and to effectively

renegotiate or terminate real estate leases to reduce lease

obligations ; sales force training and productivity ; challenges

associated with recruiting, training, and retaining skilled management

and other personnel ; ability to establish, maintain, and effectively

implement relationships with system integrators and other strategic

resellers and vendors ; rapid technological changes ; competitive

factors ; and unanticipated delays in scheduled product availability .

These and other factors are described in detail in .our Annual Report

on Form 10-K for the fiscal year ended January 31, 2003 as well as in

our quarterly reports on Form 10Q . All statements made in this press

release are made only as of the date set forth at the beginning of

this release . Portal undertakes no obligation to update the

information in this release in the event facts or circumstances

subsequently change after the date of this press release .

Copyright (C) 2003 Portal Software, Inc . All rights reserved .

Infranet and the Portal logo are U .S . registered trademarks, and

Portal and TelcoOne are trademarks of Portal Software, Inc .

CONTACT : Portal Softwar e

Kathy Cotten, 408-572-2345 (Investor Contact)

investor_relations@portal .com

Scott Carter, 408-572-2435 (Media Contact)

scarter@portal .com

</TEXT>

</DOCUMENT>

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of 3

<DOCUMENT>

<TYPE>EX-99

<SEQUENCE>4

<FILENAME>a4457279_ex992 .txt

<DESCRIPTION>PORTAL SOFTWARE EXHIBIT 99 .2

<TEXT>Exhibit 99 . 2

Portal Software

Pro Forma Statement of Operations

(In thousands, except per share data, unaudited )

Revenues

License fees

Service s

Total revenues

Costs and expense s

Cost of license fees

Cost of services

Research and development

Sales and marketing

General and administrative

Amortization of deferred

stock compensation

Total costs and expense sPro forma loss from operations

Interest and other income

(expense), net

Pro forma loss before incometaxe s

Provision for income taxe s

Pro forma net los s

Items excluded from pro forma

net los s

Stock option compensation

charge s

Amortization of acquired

intangibles (A)

Amortization of purchased

license s

Restructuring cost s

GAAP net los s

Pro forma loss per share

Three Months Ended Six Months Ended

August 1, July 31, August 1, July 31 ,

2003 2002 2003 2002

--------- --------- --------- ---------

$11,321 $9,378 $24,891 $22,08 6

21,88 0

-------

19,384

---------

40,40 3

---------

37,78 8

-------- ---

33,201 28,762 65,294 59,874

22 54 109 16 9

13,195 11,788 24,808 22,73 7

6,981 9,946 14,148 21,38 0

11,633 13,667 23,022 28,56 7

3,095 4,209 6,428 8,60 3

-

-

99 1 20 9

---- --- -

34,926

-------- -

39,763

-------- -

68,516

-------- -

81,66 5

(1,725) (11,001) (3,222) (21,791 )

(152 )

---------

27 0

---------

(29 )

---------

96 8

-------- -

(1,877) (10,731) (3,251) (20,823 )

(600) (413) (1,236) (1,481 )

--------- -

$(2,477 )

-------- ----------

-------- -

$(11,144 )

-------- ----------

-------- -

$(4,487 )

------------------

----- -- -

$(22,304 )

-------- --------- -

(23,749) - (30,838) -

(665) (665) (1,330) (1,330 )

(184) - (368)

(6,053) - (6,053 )

--------- --------- --------- ---------

$(26,891) $(18,046) $(36,655) $(30,055)

--------- --------- --------- ------------------ --------- --------- ---------


of 3

Pro forma net loss per shar e

Shares used in computing

pro forma net loss per

share

GAAP loss per shar e

Basic and diluted net loss

per share

Shares used in computing

basic and diluted net loss

per share

$(0 .01) $(0 .06) $(0 .02) $ (0 .13 )

180,512 176,023 179,540 175,45 7

$ (o .15) $ (0 .10) $ (0 .20) $ (0 .17 )

180,512 176,023 179,540 175,45 7

Notes :A) Acquired intangibles include amortization for goodwill

and other purchased intangibles .

Portal SoftwareCondensed Consolidated Balance Sheets

(In thousands)

August 1, January 31 ,

2003 2003

Assets

---------- -

(Unaudited)

-------- -

Current assets

Cash and short-term investments $44,780 $53,752

Accounts receivable, net 26,421 22,46 7

Prepaid expenses and othe rcurrent assets 7,637 4,02 6

Total current assets

-------- -

78,838

--------- -

80,24 5Property and equipment, net 21,892 22,79 8

Purchased developed technology, net 3,325 4,65 5

Restricted long-term investments 12,033 13,412

Other assets 2,50 7

---------

2,624

-------- -

Total assets $118,595

------------------

$123,734

-------- -

Liabilities and Stockholders' Equit yCurrent liabilities

Accounts payable $6,793 $4,69 9Accrued employee benefits 8,492 8,82 1

Current portion restructuring costs 11,985 13,41 8

Other accrued liabilities 10,224 8,42 1

Current portion of capital leaseobligations - 11

Deferred revenue 24,796 23,95 5

Total current liabilities

-------- -

62,290

-------- -

59,32 5


of 3

Long-term accrued restructuring costs 21,615 26,90 3

Long-term notes payable and

other liabilities 1,69 7

---------

1,68 7

-------- -

Total liabilities 85,602 87,91 5

Stockholders' equityCommon stock 182 17 8

Additional paid-in capital 574,776 540,994

Accumulated other comprehensiv eincome (loss) 335 29 4

Notes receivable from stockholders (67) (69 )

Accumulated deficit (542,233) (505,578 )

Total stockholders' equity

--------- -

32,99 3

----------

-------- -

35,81 9

-------- -

Total liabilities andstockholders' equity $118,595

--------- -----------

$123,73 4

------------------

</TEXT>

</DOCUMENT>

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EXHIBIT H

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3e 3:99-cv-00151-L-WMC Document 72 Filed 09/25/2000 Page 2 of 102

ORIGINALMILBERG WEISS BERSHAD

HYNES & LERACH LLPWILLIAM S . LERACH (68581)JAN M . ADLER (105266)HENRY ROSEN (156963 )

TOR GRONBORG (179109 )600 West Broadway, Suite 1800

San Diego, CA 92101Telephone : 619/231-1058

BERNSTEIN LITOWITZ BERGER &GROSSMANN LL P

ALAN SCHULMAN (128661)BLAIR A . NICHOLAS (178428)

12730 High Bluff Drive

San Diego, CA 92130Telephone : 858-793-0070

COHEN, MILSTEIN, HAUSFELD& TOLL, P .L .L .C .

STEVEN J . TOLL999 Third Avenue, Suite 3600Seattle, WA 98104Telephone : 206/521-0080

Co-Lead Counsel for Plaintiff s

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNI A

In re DURA PHARMACEUTICALS, INC .SECURITIES LITIGATION

Master File No .99cv0151-L(NLS )

CLASS ACTION

SECOND CONSOLIDATED AMENDEDCOMPLAINT FOR VIOLATION OF THE

SECURITIES EXCHANGE ACT OF193 4

DEMAND FOR JURY TRIAL

This Document Relates To :

ALL ACTIONS .

~z

Case 3:99-cv-00151-L-WMC Document 72 Filed 09/25/2000 Page 3 of 102

I THE FRAUDULENT SCHEME

2 1 . Plaintiffs bring this action on behalf of purchasers of

3 Dura Pharmaceuticals, Inc . ("Dural or the "Company") securities

4 between 4/15/97 and 2/24/98 (the "Class Period") . Dura became a

5 publicly traded company in 1992, pursuing a business strategy of

6 marketing niche pharmaceutical drugs . Typically Dura purchased the

7 rights to market drugs developed by large pharmaceutical companies

8 that were approaching the end of their profitability to those

9 companies . Dura did not have the resources or capability t o

10 develop drugs on its own . By 1995, however, it became obvious to

11 Dura's management that, given the Company's size, it would be

12 increasingly difficult to achieve continued revenue and EPS growth

13 solely by acquiring marketing rights to niche drugs . Therefore,

14 Dura insiders decided to embark on a risky and expensive

15 diversification of its business, attempting to become a medical

16 device development company and develop its own proprietary drug

17 products .

18 2 . In 1995, Dura began development of the Spiros drug

19 delivery system for Albuterol ("Albuterol Spiros" or "Spiros drug

20 delivery system") , a method of aerosolizing powders so that asthma

21 medicines, including Albuterol, could be inhaled . According to

22 Dura, its Spiros drug delivery system would be utilized first to

23 deliver Albuterol and later other medications to persons with

24 respiratory problems such as asthma . The system purportedly would

25 have advantages over existing inhalers which were dependent upon

26 the ability of the user to successfully coordinate the use of the

27 inhaler and inhalation of the medication, something some persons

28 with respiratory distress (such as children) had difficulty doing .

- 1 - 99cv0151-L(NLS)

Case 3 :99-cv-00 151 -L-WMC Document 72 Filed 09/25/2000 Page 4 of 10 2

1 The Spiros drug delivery system supposedly utilized a mechanically

2 driven dosing mechanism that provided uniform dosing regardless of

3 the ability of the patient to coordinate the operation of the

4 inhaler .

5 3 . The Spiros drug delivery system was a software-driven

6 device with software programmed to turn on a motor that activated

7 an impeller inside the device . The impeller extracted the

8 Albuterol drug compound from the storage cassette that fit inside

9 the inhaler . The storage cassette contained 30 separate wells tha t

10 each contained one dose of Albuterol dry power compound . Each time

11 the inhaler opened and closed, one dose was released and the

12 cassette advanced to the next well . With the software, the inhaler

13 was programmed to allow the inhaler to dispense 1500 doses, which

14 was considered the optimal dose lifetime for each inhaler .

15 4 . The millions of dollars of necessary research and

16 development costs associated with developing, testing and obtaining

17 approval for the Spiros drug delivery system had to be immediately

18 expensed as a charge against current earnings under GAAP . To avoid

19 such a huge negative impact on its earnings, Dura's management

20 created Spiros Development Corp . ("Spiros I") to incur Dura's costs

21 of developing the Spiros drug delivery system . Dura performed the

22 development work under contract to Spiros I and billed the expenses

23 to Spiros I, plus a mark-up of 15% to 25% . Through this "off

24 balance sheet" arrangement with Spiros I, Dura recorded revenue and

25 profits on the "expenses" it incurred for research and development

26 of the Spiros drug delivery system .

27 5 . Although this arrangement protected Dura's positive

28 financial results, it exacerbated the pressure on Dura's insider s

- 2 - 99cv0151-L(NLS)

Case 3 :99-cv-00 151 -L-WMC Document 72 Filed 09/25/2000 Page 5 of 10 2

1 to keep Dura's stock at high levels . Dura ultimately would have to

2 use its stock to repurchase Spiros I when Spiros I ran out of

3 funds . Spiros I had been funded in 12/95 through a $28 million

4 private placement and $13 million from Dura . To induce investors

5 to finance Spiros I, they were given warrants to purchase 2 .2

6 million shares of Dura at $19 .47 and Dura reserved the right to

7 re-purchase Spiros I .

8 6 . By 1997, the pressure on Dura's insiders to maintain a

9 high stock price intensified . After reaching an all-time high of

10 $47-7/8 on 12/31/96, Dura's stock declined sharply, falling to $27-

11 7/8 on 4/14/97, due to concerns over the ability of Dura's existing

12 drug lines to continue to drive Dura's EPS growth and the ability

13 of Dura to successfully introduce the Spiros drug delivery system

14 by late 1998 or early 1999 . This decline created a dilemma for

15 Dura's executives . The perception of weakness in Dura's drug sales

16 was well-founded, as is described below .

17 7 . More troubling for Dura executives were the significant

18 problems plaguing the development of the Spiros drug delivery

19 system since the fall of 1996 . Because Dura executives desperately

20 wanted to transform Dura to a drug device development company, they

21 made the strategic decision to proceed to clinical trials in the

22 fall of 1996 for the Spiros drug delivery system despite the fact

23 that the system was merely a prototype that had not yet undergone

24 sufficient development . Dura's executives, including defendants,

25 put tremendous pressure on Dura's engineering department to develop

26 a prototype . Although Dura's Product Development Department

27 designed and manufactured the Spiros drug delivery system prototype

28 and the Albuterol cassette very fast and this prototype performe d

- 3 - 99cv0151-L(NLS)

Case 3 :99-cv-00151-L-WMC Document 72 Filed 09/25/2000 Page 6 of 10 2

1 well for a prototype, Dura executives decided to proceed to Phase

2 III clinical trials even though the Spiros drug delivery system was

3 not reliable and the Albuterol cassette system was not stable .

4 8 . In fact, Dura's top executives ignored the

5 recommendations of Dura's engineers to not proceed with Phase III

6 clinical trials and not proceed to file a New Drug Application

7 ("NDA") until these problems were remedied . In 10/96, in an

8 internal Dura engineering report, Robert Eisele, Dura's Vice

9 President of Product Development, included a list of problems wit h

10 the Spiros drug delivery system and the Albuterol cassette . This

11 list of problems, five to six pages long, compiled by Eisele who

12 was the lead project manager on Albuterol Spiros, detailed items

13 Dura's engineers considered critical before an NDA could be

14 submitted . The "Eisele List" was distributed to senior management

15 at Dura during the weekly executive management meeting held every

16 Monday from 8 :00-10 :00 a .m ., and attended by defendant Cam Garner,

17 Dura's President, Chief Executive and Operating Officer and

18 Chairman, defendant James Newman, Dura's Chief Financial officer

19 and Senior Vice President of Finance and Administration, defendant

20 Charles W . Prettyman, Senior Vice President of Development and

21 Regulatory Affairs, defendant Walter Spath, Senior Vice President

22 of Sales and Marketing, defendant Julia R . Brown, Senior Vice

23 President of Business Development and Planning, defendant Mitchell

24 Woodbury, Senior Vice President and General Counsel to Dura, David

25 Kabakoff, Chief Executive Officer of Spiros Development Corp .,

26 Robert Schultz, Senior Vice President of Product Development,

27 Robert Eisele, Malcolm Hill, Vice President of Clinical Development

28 and Chet Damecki, Vice President of Operations .

- 4 - 99cv0151-L(NLS)


1 9 . One big problem with the Spiros drug delivery system set

2 forth in the Eisele List was its reliability . Because it was a

3 mere prototype, the delivery system was incapable of consistently

4 delivering the required dose, was insufficiently robust in that it

5 could not withstand normal use conditions, and was subject to an

6 unacceptable rate of failure . Another huge problem with the device

7 set forth in the Eisele List was the stability of the Albuterol

8 cassette system . In the cassette system, doses of Albuterol were

9 stored in a vacuum-sealed foil pouch ready for insertion into th e

10 Spiros delivery device . After removal from the foil pouch, it was

11 unknown how long Albuterol would remain chemically stable under

12 realistic use conditions . For example, because a patient might use

13 the device erratically or under varying temperature and humidity

14 conditions, the Albuterol would have to remain stable .

15 10 . Because Albuterol stability was so important, before

16 Phase III clinical trials began, Dura devised in-house testing,

17 Respirable dose amounts of Albuterol were subject to aging

18 experiments at certain temperatures and humidity levels - 25

19 degrees centigrade and 75 percent relative humidity - for fixed

20 periods of time according to industry testing procedures and FDA

21 requirements . Following the temperature - humidity aging process,

22 the sample dose was dispensed from the Spiros delivery device into

23 a filter designed to simulate a human lung . FDA guidelines set

24 forth standards regarding acceptable levels of reduced drug

25 efficacy and changes in particle size not to exceed 10% in the

26 specified time frame . Dura's in-house aging tests showed

27 unacceptable levels of reduced efficacy . Basically, as the drug

28 aged at fixed temperatures and humidity, the Albuterol particles

- 5 - 99cv0151-L(NLS)


1 clumped together allowing less to be absorbed into a patient's

2 lungs . Senior management was kept apprised that Albuterol failed

3 Dura's in-house aging tests via chemical stability test results and

4 analytical reports that were circulated during weekly product

5 development meetings . Albuterol chemical stability issues were

6 also described in detail in minutes generated from the product

7 development meetings and circulated to senior management .

8 11 . By the time Dura commenced Phase III clinical trials for

9 the Spires delivery device with Albuterol, defendants were aware

10 that the device had serious reliability and Albuterol stability

11 problems that Dura's own engineering department recommended be

12 remedied before commencing clinical trials . Defendants, however,

13 who had predominately sales and marketing and not scientific

14 backgrounds, decided to pursue Phase III clinical trials, over the

15 objections of Dura's own engineers, without an adequate scientific

16 basis because they were desperate to transform Dura into a drug

17 development company .

18 12 . Not surprisingly, serious reliability problems manifested

19 themselves during the Phase III clinical trials . To ensure the

20 Spiros device's reliability, during clinical trials the Spires

21 device was subjected to "benign abuse conditions" designed to test

22 the device's reliability under ordinary types of abuse conditions .

23 One example is dropping the device from various heights . During

24 clinical trials, Dura experienced an over 30% failure rate of the

25 devices . Because of this high failure rate, Dura experienced an

26 extremely high early return rate, which measures the number of

27 inhalers removed from the clinical studies before the 1500 dose

28 lifetime marker as compared to the total number of inhalers

- 6 - 99cv0151-L(NLS)


1 dispensed for clinical trials . Dura experienced an early return

2 rate exceeding 30% due to the inhaler's unreliability . This early

3 return rate experienced during clinical trials was much higher than

4 the FDA would find acceptable . In fact, during the development of

5 medical devices, the industry standard is to try to achieve an

6 early return rate of 1% or less to avoid incurring expensive

7 repairs once the device is on the open market .

8 13. The unacceptably high early return rate Dura experienced

9 during the first study conducted in Phase III clinical trials (drug

10 efficacy) was caused by reliability problems that kept the inhaler

11 from functioning . The battery wires that powered the inhaler kept

12 disconnecting from the battery because of faulty welds connecting

13 the battery contacts to the wiring . Additionally, the routing and

14 gauging of certain wires running from the battery to the inhaler's

15 internal motor caused the inhaler to malfunction so that it would

16 not open and close each time when it was dispensing a dose of

17 Albuterol . When these failures occurred before the inhaler reached

18 the 1500 dose lifetime mark, an "end-of-life" response was

19 triggered in the inhaler and it just stopped functioning . When the

20 inhaler was functioning properly and ready to dispense a dose of

21 Albuterol, a green light indicator was activated . Once the end-of-

22 life response was triggered, or if the 1500 dose lifetime was

23 reached, a red-light indicator was activated . Once the red light

24 was on, the inhaler stopped working altogether .

25 14 . As a result of the inhaler's reliability problems during

26 Phase III clinical trials, Dura began making modifications to the

27 inhalers actually being used in the ongoing clinical trials to

28 improve reliability . Dura included multiple versions of th e

- 7 - 99cv0151-L(NLS)


1

2

3

4

5

6

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10

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13

14

15

16

17

18

19

20

21

22

23

24

25

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27

28

inhaler in the Phase III clinical trials . The modifications made

to the inhaler during trials included using different shaped

battery contacts that were welded to the battery to better secure

the battery wires, re-routing certain wiring and using stronger

gauge wire . Dura also modified the inhaler's lid to make it easier

to see the remaining doses of Albuterol and ribbing was added to

the outside of the device to make it easier to hold . Dura kept

very careful track of the different versions of the inhaler used in

clinical trials . The various configurations of the inhaler were

given different "Rev" designations . For example, the configuration

of the device first used in clinical trials was designated Rev D,

while Rev G was a modified version added halfway through clinical

trials to address reliability concerns . Rev H and Rev J were

designations given to still later versions of the inhaler .

15 . All modifications were well documented within the

clinical trial results and reliability reports and each test run on

each configurations was analyzed in a separate report . In each of

the reports, the configuration number and the test type were

referenced in the title of the report such as Rev G vibration or

Rev 3 impeller test . More importantly, senior management at Dura,

including defendant Prettyman as Senior Vice President of

Regulatory Affairs, had to sign off on proposed modifications

before they could be made . Other employees within the Regulatory

Affairs department, Kathleen Heffernan, Director of Regulatory

Affairs, and Darlene Rosario, Regulatory Affairs Manager, were also

intimately familiar with the modifications being made to the

inhaler and involved in approving the modifications .

- 8 - 99cv0151-L(NLS)

Case 3 :99-cv-00151-L-WMC Document 72 Filed 09/25/2000 Page 11 of 102

1 16 . Senior management at Dura, including defendants, were

2 kept constantly informed of the problems affecting the inhaler's

3 reliability via product reports prepared by Mike Ligotke, the

4 Senior Product Engineer for the Spiros device and Linda Gieschen,

5 the Spiros Project Leader, These same reports also constantly

6 informed senior management of the different configurations of the

7 inhaler, the different tests being performed and the results of

8 those tests . These reports were prepared for and circulated in

9 advance of and during weekly research and development meetings

10 attended by senior management . Research and development meeting

11 minutes, that also detailed the inhaler's reliability problems and

12 the different versions of the inhaler, were prepared and circulated

13 to senior management following the meetings .

14 17 . Making changes to a device in the middle of clinical

15 trials rendered the trials invalid because the modifications cast

16 doubt on whether the product tested would, in fact, be the final

17 product described in the NDA . Senior executives at Dura were so

18 concerned about the inhaler's reliability problems and the mid-

19 clinical-trial modifications that were made to the device, that the

20 decision was made to contract with an outside testing facility, El

21 Segundo, California-based Wyle Labs, to conduct highly accelerated

22 life tests ("HALT',) on the device . HALT are extreme condition

23 tests designed to identify potential operational failures in a

24 device . Dura contracted with Wyle Labs to conduct these tests

25 while Phase III clinical trials were still ongoing . Ed Dusel,

26 Senior Engineering Development Manager, managed the Wyle Lab

27 testing and Mike Ligotke, Senior Project Manager, analyzed the test

28 results . Dura gave Wyle Labs inhaler configurations Revs D, G, H ,

- 9 - 99cv0151-L(NLS)


1 and J of the device . Dura used the HALT results from Wyle Labs in

2 an 9/98 amendment to Dura's NDA to try to demonstrate that the

3 different inhaler configurations tested in Phase III clinical

4 trials as well as the concurrent HALT resulted in progressively

5 improved operational reliability .

6 18. At the same time, Phase III clinical trials were being

7 completed, defendants were already taking steps to complete a major

8 debt offering in the next several months for Dura to obtain

9 desperately needed working capital to acquire additional products .

10 They also knew that Spiros I would exhaust its financial resources

11 during 1997, and Dura would have to exercise its option to

12 repurchase Spiros I and finance a new follow-on Spiros Development

13 Corp . II entity ("Spiros II") to continue to pay for the ongoing

14 development of Albuterol Spiros .

15 19 . In addition, the value of Dura's insiders' existing stock

16 options to purchase thousands of shares of Dura stock at $29 .63-

17 $37 .63 per share had been completely wiped out by the early 1997

18 stock decline, while the value of their other lower priced options

19 had been severely diminished . Finally, the 1997 cash bonuses of

20 Dura's top executives - which could amount to 100% of their base

21 salaries - were dependent upon Dura meeting internally set 1997 EPS

22 targets and Dura's stock price performance during 1997 .

23 20 . For all of these reasons, it was imperative to Dura's

24 insiders that they drive Dura's stock higher during 1997 to enable

25 Dura to accomplish a huge debt offering to raise desperately needed

26 capital, to exercise its option to purchase Spiros I stock by

27 issuing as few Dura shares as possible, to successfully complete a

28 public offering of Spiros II securities, to restore the value o f

- 10 - 99cv0151-L(NLS)


1 their stock options so that they could unload hundreds of thousands

2 of shares of the Dura stock they owned, pocketing millions in

3 insider-trading proceeds before the stock collapsed, and to achieve

4 large cash bonuses based on Dura's 1997 EPS and a strong 1997 stock

5 performance .

6 21 . To accomplish their scheme, defendants commenced in 4/97

7 a concerted campaign to falsely persuade investors that Dura's

8 sales were increasing and that Dura was successfully completing the

9 development and clinical trials of the Spiros drug delivery system .

10 To ensure their personal gain, the Individual Defendants in 4/97

11 repriced hundreds of thousands of their $37 .63 per share options

12 lower - to just $25 per share . Then on 4/15/97, Dura issued a

13 press release announcing better-than-expected Q1 1997 results,

14 representing that "Dura continues to execute its strategy of

15 developing its proprietary Spires dry powder drug delivery

16 technology" and has completed the design of its Albuterol Spiros

17 drug system and the patient dosing studies necessary for filing an

18 NDA with the FDA . The 4/15/97 press release also represented that

19 Dura was making strong progress selling Ceclor CD and that the drug

20 was being well received by prescribing physicians . In response to

21 these positive representations and Dura's strong Q1 financial

22 results, Dura's stock soared from $27-7/8 on 4/14/97 to $34 on

23 4/15/97 . Following the release of Dura's Q1 1997 results,

24 defendants went to great lengths to convince securities analysts,

25 during conference calls and in one-on-one sessions, that the Spires

26 delivery device development was on track and Dura was executing its

27 strategy to transform itself into a drug development company .

28 Defendants interactions with securities analysts had their desire d

- 11 - 99cv0151-L(NLS)

Case 3 : 99-cv-00151 -L-WMC Document 72 Filed 09/25/2000 Page 14 of 10 2

1 effect as one analyst noted : "Without Spiros, Dura would be

2 strictly a high-growth specialty marketing company, acting as a

3 consolidator of niche respiratory product lines . "

4 22 . In fact, however, despite their public praise of the

5 Spiros technology, defendants knew from the clinical trial data

6 that the Spiros drug delivery system suffered from serious

7 reliability problems forcing Dura to remove over 30% of the

8 inhalers from clinical trials and the Albuterol cassette suffered

9 from serious stability problems, all of which would prevent

10 approval of Dura's NDA . Despite that Dura modified the device,

11 conducted in-house, stability testing showing that Albuterol was

12 not stable and even contracted an outside firm to test the device,

13 defendants assured investors that the device had successfully

14 completed clinical trials, that the Company would file the NDA

15 later in 1997 and commence marketing the device in 1998 .

16 23 . In addition to concealing these problems, defendants also

17 concealed a pre-NDA filing meeting Dura conducted with the FDA in

18 5/97 . This meeting, which took place in the FDA's offices in the

19 Washington, D .C . area, was attended by defendants Garner and

20 Prettyman and Kathleen Heffernan, David Kabakoff and Chet Damecki .

21 During that meeting, the FDA raised concerns about how mechanically

22 reliable the doser was for consistently delivering Albuterol to the

23 user's lungs in the right amount or at all . The FDA also

24 questioned whether and how long Albuterol contained in the cassette

25 would remain chemically stable after removal from the foil pouch .

26 By the time the pre-NDA filing meeting occurred with the FDA, Dura

27 had completed clinical trials and 95% of the data from the trials

28 had been received by Dura .

- 12 - 99cv0151-L(NLS)


1 24 . Despite their knowledge that Dura's engineers wanted to

2 do further development of the Spiros device, that the Eisele List

3 identified the inhaler's reliability and Albuterol's stability as

4 necessary items to be fixed before an NDA could be successfully

5 submitted, that Albuterol had in fact failed Dura's in-house

6 temperature-humidity age testing, that Dura had done nothing to

7 remedy Albuterol's stability problems, that serious reliability

8 problems caused over 30% of the Spiros inhalers to fail during

9 clinical trials, that Dura had retained Wyle Labs to conduct HALT

10 and that Dura executives, including defendants Garner and

11 Prettyman, attended the pre-filing meeting with the FDA which

12 raised the same concerns identified by Dura's own engineers in the

13 Eisele List and for which Dura had no satisfactory answer,

14 defendants embarked on a massive bailout of Dura stock selling

15 188,626 shares for over $7 .3 million between 5/12/97 and 7/22/97 .

16 25 . Defendants compounded their wrongdoing later in 1997 with

17 additional, highly suspicious insider trading of Dura stock .

18 Because the Spiros device was so unreliable and Dura had been

19 forced to modify the device and could not adequately demonstrate

20 the stability of Albuterol, certain Dura insiders were against

21 filing the NDA . In fact, in late October or early November 1997,

22 a meeting was held to discuss the NDA filing . Defendants Garner

23 and Prettyman along with Kabakoff and Damecki attended the meeting

24 during which Prettyman made it very clear that he did not want to

25 file the NDA, for which his department, Regulatory Affairs, was

26 responsible . Prettyman was against filing the NDA because based on

27 his prior experience - Prettyman worked for the FDA for over ten

28 years prior to working for Dura - he knew the NDA would not b e

- 13 - 99cv0151-L(NLS)


1 approved by the FDA . Despite this, defendant Garner and Kabakoff

2 forced Prettyman to file the NDA . Shortly after the NDA was filed,

3 Dura and Spiros II raised $88 million to fund Spiros II . Despite

4 his knowledge that the NDA would not pass, defendant Prettyman sold

5 15,000 shares of Dura stock on 11/5/97 for proceeds exceeding

6 $728, 000 . Other defendants similarly engaged in suspicious insider

7 trading concurrent with the filing of the doomed NDA as defendants

8 collectively dumped 197,607 shares for proceeds exceeding $9 .2

9 million between 11/3/97 and 1/6/98 .

10 26 . In addition to concealing the problems plaguing the

11 Spiros drug delivery system development, defendants also made false

12 statements regarding strong sales of Dura's drugs, including Ceclor

13 CD, Keftab, Nasarel/Nasalide, Rondec and Dura-Vent . Defendants

14 falsely represented that certain of Dura's recently acquired niche

15 pharmaceutical products were selling well to convince the

16 securities markets that it was achieving strong revenues and

17 earnings even as it completed development of the Spiros drug

18 delivery system . Dura had acquired two prescription antibiotics,

19 Ceclor CD and Keftab, on 8/22/96 . Defendant Garner stated : "Keftab

20 and Ceclor CD are ideally suited for Dura as they should provide

21 strong revenue and earnings growth and support the expansion of our

22 sales force to position Dura for an effective launch of our Spiros

23 products . "

24 27 . Ceclor CD would become Dura's largest-selling product,

25 however its sales were not growing, but were flat or declining .

26 Ceclor CD is a slow-release form of Ceclor, a second generation

27 cephalosporin generically known as cefaclor . It was developed by

28 Lilly in the 1980's, which later sold it to Dura . As it has

- 14 - 99cv0151-L(NLS)

Case 3:99-cv-00151-L-WMC Document 72 Filed 09/25/2000 Page 17 of 10 2

1 significant side effects, including serum-sickness-like reactions

2 and shock, its use has decreased in recent years as more powerful

3 antibiotics with less significant side effects have been developed .

4 28 . Also hurting Ceclor CD sales during the Class Period was

5 the fact that the drug was not listed on most managed-care

6 formularies, and therefore would not be covered by most managed-

7 care insurance . As a result of these factors, Ceclor CD sales

8 began to drop around March or April 1997, and significantly

9 worsened during the summer months . Actual sales were 25-40% belo w

10 Dura's internal projections . To bolster their representations of

11 strong Ceclor CD sales, Dura reported market share by comparing

12 Ceclor CD not to the entire class of respiratory antibiotics, but

13 only to sales of Lilly's generic Ceclor product . Defendants

14 therefore knew that the market share increases reported during the

15 Class Period were misleading when made and falsely suggested that

16 Ceclor CD sales were strong and expanding . If Dura had properly

17 compared its sales of Ceclor CD to all other drugs in the same

18 class, namely, those drugs used to cure respiratory infections,

19 sales of Ceclor CD would not have reflected any market share growth

20 during the Class Period .

21 29 . Knowing that Dura was experiencing a decline in the

22 demand for its drug lines, including Ceclor CD, Dura undertook a

23 scheme to artificially inflate its revenues and earnings by

24 shipping at the ends of quarters excess amounts of product to

25 wholesalers . Defendants accomplished this in varying ways . The

26 Director of National Accounts, Doug Weiherer, pressured his

27 subordinates to push extra product into the pharmacy chains in

28 order to increase EPS . In addition, defendant Spath or other uppe r

- 15 - 99cv0151-L(NLS)


1 management would contact the Company's larger wholesalers, such as

2 McKesson and Berger Brunswig, to get an "additional buy" from them

3 at quarter ends . The wholesalers took more product than they had

4 orders for because Dura would reduce two or three "points" from the

5 wholesale purchase price and extend the payment date to give them

6 time to move the product . As wholesalers operate on a narrow

7 profit margin, these price reductions could increase their margins

8 30-50% . In 12/97, Dura offered a 5% price reduction to wholesalers

9 on purchases of Ceclor CD .

10 30 . Garner himself had to approve price reductions to

11 wholesalers, so he knew in each instance when these practices

12 occurred . As a result, Dura product inventories in the

13 distribution channel were greatly in excess of the normal one-

14 month supply . As a result of these practices, the success of

15 Dura's products was misrepresented and its sales were artificially

16 inflated . Defendants knew that, as a result of "borrowing"

17 millions of dollars of sales of Ceclor CD and other products fromi

18 future periods, Dura's sales would eventually fall sharply once

19 this practice was stopped . By the spring of 1998, defendants

20 admitted to securities analysts that Dura's wholesale channels were

21 clogged with as much as a five-month inventory of its products .

22 31 . In addition to false statements about Ceclor CD,

23 defendants also falsely portrayed that the Company was experiencing

24 strong sales of its Keftab, Rondec, Dura-Vent and Nasalide

25 products . In fact, all of these products were experiencing

26 declining sales during the Class Period . For Rondec, defendants

27 failed to disclose that Dura would be unable to recoup its

28 investment in that drug . Dura falsified and inflated its 01, Q2 ,

- 16 - 99cv0151-L(NLS)


1 Q3 and Q4 1997 EPS by failing to take required write-downs on the

2 carrying value of its investment in the Rondec product line, which

3 were required because the sales of that product line had so

4 declined and were so poor that Dura could not recover its

5 investment in Rondec .

6 32 . On 2/24/98, after the close of trading, Dura shocked the

7 market by revealing that it expected much lower than forecast 1998

8 revenues and 1998 EPS - at least $ .50-$ .55 lower than the $1 .40-

9 $1 .45 being forecast - due to, inter alia, slower Ceclor CD and

10 Nasarel/Nasalide sales and the immediate need to vastly increase

11 the size of Dura's sales force from 270 to over 450 to try to boost

12 sales of existing products . Investors were stunned . Even though

13 the Dow Jones average went up 87 .7 points on 2/25/98, Dura's stock

14 collapsed from $39--1/8 on 2/24 to $20-3/4 on 2/25 - an 18-3/8

15 point, 47% one-day decline on incredible volume of 32 million

16 shares . Analysts were also furious over having been lied to .

17 Alex . Brown analyst Ryan wrote :

18 Management credibility has been severely damaged by thisannouncement, particularly in light of recent investor

19 conference presentations exuding confidence on theCompany's fundamentals . . . .

20

21

Our confidence in management and their credibilit y22 with us has been greatly diminished . As recently as one

month ago, we reviewed our model with the Company line by

23 line and were guided to higher Ceclor CD estimates .

24 33 . As no great surprise to Dura insiders, Dura subsequently

25 revealed that the FDA had found that Albuterol Spiros was not

26 approvable due to electro-mechanical reliability issues and

27 chemistry, manufacturing and control concerns, but claimed that the

28 FDA "raised no issues on the clinical data with the inhaler file d

- 17 - 99cvOl5l-L(NLS)


1 in the NDA demonstrating therapeutic comparability of Albuterol

2 Spiros" with Ventolina (albuterol) MDI using standard lung function

3 measures ." Just a few days later, however, the FDA issued a

4 "notice of violation" to Dura stating that Dura's press release

5 "'misleadingly minimizes the fact that Dura must conduct a

6 completely new clinical data [study],'" and demanded that Dura

7 immediately cease distribution of materials containing its previous

8 claims . Dura immediately removed the offending press release from

9 its Web site and has admitted that Albuterol Spiros will be delaye d

10 by at least a year as completely new Phase III clinical trials are

11 required . The FDA rejected the NDA for Albuterol Spiros because

12 Dura changed the device during clinical trials, had not shown that

13 the device was reliable, and could not demonstrate Albuterol's

14 device based on the same issues stability . In other words, the FDA

15 rejected the Albuterol Spiros device based on the same issues

16 delineated in the Eisele List in 10/96 .

17 34 . Dura's business performed miserably during 1998 . Sales

18 of Ceclor CD fell sharply to only about $30 million as Dura

19 admitted the distribution channel was clogged with many months of

20 excess inventory . Dura also revealed that sales of Keftab,

21 Nasalide and Dura-Vent were very disappointing and that sales of

22 its Rondec product had plummeted so much that by mid-1998 Dura had

23 to create DJ Pharma, Inc . to take these drugs off its hands so it

24 could avoid reporting large losses for those products . Dura also

25 admitted that its sales force was inadequate, which contributed to

26 Dura's poor sales . By 9/98, forecasts of Dura's 1998 and 1999 EPS

27 were cut to $ .53 and $ .71 - large declines from Dura's 1997 EPS of

28 $ .99 . Dura's CEO admitted that there was excessive inventory o f

18 - 99cv0151-L(NLS)


1

2

3

4

5

6

7

81,

9

10

11 i

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

its top-selling antibiotic Ceclor CD to start the year, which took

at least five months to work down .

35 . Later still, Dura announced that it would abandon its

efforts to seek FDA approval of the Spiros delivery device for use

with Albuterol . Dura was never able to solve the Albuterol

stability issues that were revealed during Dura's in-house

stability testing conducted in 1996 before clinical trials even

began .

36 . The price action of Dura stock from its 1992 IPO through

12/98 is set forth below :

Dura Pharmaceuticals, Inc .

Februa ry 7 , 1992 • Janua ry B,1999

Daily Stock Price s

60

50

40

W

a 304II

C

20

10l is" I't.- . .. : :. ,

0 1 102107192 10/15192 06/24/93 03 103194 11110194 07/21195 03128/96 12/04 1 96 08113197 04124198 12/3119 8

06112192 02/19193 10127/93 07/08194 03117195 11122195 08101/96 04110197 12117197 08/2719 8

37 . Public investors, who purchased Dura stock at prices

inflated by the false representations about the successful

development of Albuterol Spiros, continuing strong sales of Dura's

non-proprietary products, and very strong sales of Ceclor CD, and

who thus paid as high as $53 for Dura's stock during the Clas s

7125197 12117/97 Oura/Spiros sellDura and Merrill Lynch sell $297 5 mill ion in Spiros units

million in debenture s

5/12-7/22/97 111Insiders sell 188 .628 share s

for $7 .345,527

I

r/ I11/3197 - 11619 8Insiders sell 197 ,807 shares

for $9 .274,11 1

- 19 - 99cv0151-L(NLS)

Case 3 :99-cv-00151 -L-WMC Document 72 Filed 09 /25/2000 Page 22 of 10 2

1

2

3

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12

1 3

14

15

16

17

18

19

20

21

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Period, have suffered millions in damages . Dura and Dura's

insiders who knew the truth fared much better . Before the

startling truth was revealed and Dura's stock price collapsed, Dura

raised over $375 million in desperately needed new capital from

note purchasers, and in total the Individual Defendants unloaded

386,233 shares of their Dura stock at artificially inflated prices

as high as $49 .31, pocketing over $16 .6 million in illegal insider-

trading proceeds . This illegal insider selling is summarized

below,

Dura Pharmaceuticals, Inc .

Class Period : April 15, 1997 - February 24, 199 8

Class Percent Percent ofPeriod of Total

Insider Sales / Sales Stock Holding sDistribut Proceeds Sold Sold (2)

ions (1)

Brown, Julia R 39,383 $1,583 , 590 100% 36%

Cook, Joseph C . 40,000 $1,780 , 950 43% 29%Jr .

Garner, Cam L .

Newman, James W

Prettyman,

Charles W .

Spath, Walter F

Woodbury,Mitchel l

Total :

154,623 $6,456,801 67% 62 %

52,227 $2,390,417 78% 34 %

15,000 $728,100 100% 46 %

50,000 $2,076,500 100% 32 %

35,000 $1,603,280 100% 31 %

386,233 $16,619,63 8

(1) Includes common stock and options exercised and sold duringthe Class Period .

(2) Includes common stock, options and warrants exercisable .

38 . Dura's quarterly financial performance is set forth

below :

- 20 - 99cv0151-L(NLS)


1

2

3

4

5

6

7

8

9

10

11

1 2

13

14

1 5

16

17

18

19

2 0

21

22

23

24

25

26

27

28

DuraQuarterly Result s

(in thousands, except EPS )

199 603 31 06/30 09/30 12 31 Year

Revenues $18,590 $18,800 $25,920 $40,810 $104,21 0

Net income $ 4,060 $ 4,610 $ 5,810 $ 9,860 $ 24,34 0EPS $ .13 $ .14 $ .15 $ .24 $ .6 8

199 7

03/31 06/30 09/30 *12 31 Year

Revenues $40,890 $43,630 $43,340 $53,460 $181,32 0

Net income $ 8,790 $ 9,280 $11,200 $18,000 $ 47,40 0EPS $ .19 $ .20 $ .24 $ .37 $ .9 9

199 8

03/31 06/30 09/30 12/31 Yea rRevenues $48,770 $51,940 $43,360 $55,080 $199,15 2Net income $ 7,160 $ 8,180 $ 2,420 ($15,030 ) $ 2,73 3(Loss )EPS $ .16 $ .18 $ .05 ($0 .33) $0 .0 6

* Excludes one-time charges of $1 37 .6 mil lion in Q4 1997 relatedto the Spiros development program . Including the charges, Dur asuffered a loss of $2 .57 and $1 .93 for the quarter and year ended12/31/97 .

39 . The chart below shows how the def endants took advantage

of their false and misleading statements and Dura's artificiall y

inflated stock price and that, when compared to an index of simila r

stocks, Dura's stock wa s inflated and dec lined due to company -

specific events and not market or i ndustry forces :

21 99cv0151-L(NLS)


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Dura Pharmaceuticals, Inc.

January 2,1997 - November 10, 19M

60Daily Stock Prices

5/12197-7122197 1111097-116/98

Insiders sell 188,626 shares Insiders 961197,607 shares

for $7 ,345,527 for $9,274,11 150

40

LD H&Q rging Pharm.Index

1230

12/17197 Dura/Spi ros sell$88 rmllion in Spiros units

20 7/5'97

Dura and Merri ll Lynch Dura Pharm

sell $287. 5 million i n10 debentures

Class Period4, 15197 2124198

001/02/97 04/18/97 08/04/97 11/17/97 03/06/98 06/22/98 10106/98

02/25/97 06/11/97 09(25/97 01112/98 04/29 /98 081 13198

JURISDICTION AND VENUE

40 . The claims asserted herein arise under §§10(b) and 20(a)

of the Securities Exchange Act of 1934 (111934 Act") and Rule 10b-5 .

Jurisdiction is conferred by §27 of the 1934 Act . Venue is proper

pursuant to §27 of the 1934 Act .

THE PARTIES

Lead Plaintiff s

41 . Michael Broudo purchased 100 shares of Dura common stock

on 2/24/98 at $38 .94 per share and 2,000 shares on 2/24/98 at $38 .88

per share, and was damaged thereby .

- 22 - 99cv0151-L(NLS)

BORIS FELDMAN, State Bar No. 128838 PERI NIELSEN, State...

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