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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 28, 2005

OR

For the transition period from                      to                     

Commission file number: 000-25829

PORTAL SOFTWARE, INC.

(Exact name of registrant as specified in its Charter)

10200 South De Anza Boulevard, Cupertino, California 95014

(Address of principal executive offices and Zip Code)

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

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 value

Rights to Purchase Series A Junior Participating Preferred Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨            Accelerated filer  x            Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

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 30, 2004 as reported on the over-the-counter securities market operated by Pink Sheets LLC, was approximately $87,108,206. Shares of common stock held by each officer, director and holders known to the Registrant of 5% or more of the outstanding common stock have been excluded from this calculation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of May 24, 2006, Registrant had outstanding 43,195,525 shares of common stock.

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Explanatory Notes

Delay in filing our Form 10-K for fiscal 2005

Our Form 10-K for fiscal 2005 was due on April 13, 2005. Our delay in filing this Form 10-K was attributable to a number of issues, including:

We, in conjunction with our Audit Committee, determined that it was necessary to review and evaluate these issues prior to filing this Form 10-K. We subsequently embarked on an extensive review of the implications of the issues identified for the current and prior periods.

Merger with Oracle

(a) On April 11, 2006, the Company, Oracle Systems Corporation, a Delaware corporation (“Oracle”), and Potter Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Oracle Corporation (“Purchaser”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which Purchaser will acquire all of the shares of the Company’s common stock for a purchase price of $4.90 per share, net to the holders thereof, in cash. The Merger Agreement provides that, upon the terms and subject to satisfaction or waiver of the conditions therein, Purchaser shall commence a cash tender offer for all of the Company’s shares of common stock (the “Offer”), subject to a minimum condition that at least 50.1% of the shares of Company’s common stock outstanding tender into the offer (for purposes of determining the 50.1% minimum tender threshold, all options to purchase shares of the Company’s common stock with a per share exercise price equal to or less than $6.00 shall be included in the denominator), followed by a merger. Holders of shares of the Company’s common stock not purchased in the Offer will be entitled to receive $4.90 per share in cash in the merger. The Merger Agreement includes other customary offer conditions, including receipt of regulatory approvals, continued accuracy of customary representations of the Company except as would not have a material adverse effect on the Company, and the absence of a material adverse effect with respect to the Company. Under the terms of the Merger Agreement, the Company agrees not to solicit or support any alternative acquisition proposals, subject to customary exceptions for the Company to respond to and support unsolicited proposals in the exercise of the fiduciary duties of its Board of Directors, and the Company will be obligated to pay a termination fee of $5.0 million in certain customary circumstances. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Company’s Form 8-K dated April 17, 2006.

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(b) On April 11, 2006, the Company and Computershare Trust Company, N.A., formerly Equiserve Trust Company, N.A., as Rights Agent, entered into Amendment No. 1 (the “Rights Agreement Amendment”) to the Rights Agreement dated August 16, 2002 (the “Rights Agreement”). The effect of the Rights Agreement Amendment is to permit the execution of the Merger Agreement and the performance and consummation of the transactions contemplated by the Merger Agreement, including the Offer and the Merger (as defined in the Merger Agreement), without triggering the separation or exercise of the Rights (as defined in the Rights Agreement) or any adverse event under the Rights Agreement. The foregoing description of the Rights Agreement Amendment does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement Amendment, which is attached as Exhibit 4.1 to Portal’s Form 8-K dated April 17, 2006.

Restatement

Portal Software, Inc. has restated its quarterly financial data for the first three quarters of fiscal 2005 (the “Restatement”) and revised its previously announced results for the fourth quarter of fiscal 2005. The determination to restate the quarterly consolidated financial statements was made on November 21, 2005 by our management and Audit Committee, in consultation with our independent registered public accounting firm, as a result of our identification of certain individually, and in the aggregate, material errors in such financial statements. Our management has identified multiple material weaknesses and deficiencies in our internal controls and disclosure controls, as more fully discussed in Part II, Item 9A, Controls and Procedures. The Restatement errors were largely identified through additional substantive procedures performed by the Company to validate its financial statements, as well as the annual audit of our financial statements.

The adjustments that gave rise to the restatements of the first three quarters of fiscal 2005 and adjustments to previously reported preliminary unaudited financial data for the fourth quarter of fiscal 2005 fall into five categories:

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See Part II, Item 8: Financial Statements and Supplementary Data, Note 9 of Notes to Consolidated Financial Statements for more information regarding the Restatement.

With respect to the Restatement items above, Portal has determined that these errors did not materially impact its annual or quarterly financial statements for any prior years.

The following table sets forth the effects of the Restatement on our previously reported unaudited financial statements of operations for the first, second and third quarters of fiscal 2005, as filed on Forms 10-Q and 10-Q/A, and the adjustments required to our preliminary unaudited fourth quarter results as filed on Form 8-K (in thousands, except per share amounts):

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PORTAL SOFTWARE, INC.

FORM 10-K

FISCAL 2005

INDEX

* Our fiscal year ends on the Friday nearest January 31. For presentation purposes, all fiscal years have been presented as ending on January 31.

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PART I

GENERAL INFORMATION

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements 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,” “designs,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations and negatives of these words and similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, but not limited to (1) our expectation that we will continue to derive a portion of our revenues from customers that have significant relationships with our integration and platform partners; (2) our belief that the facilities we lease are sufficient; (3) our anticipation that any potential obligation we have to plaintiffs under the July 2001 class action complaint will be covered by existing insurance; (4) our expectation that in regards to the July 2001 class action complaint the defendants and the court will approve of the settlement; (5) our expectation that resolution of the November 2003 shareholder class action will not have a material adverse effect on the financial position of Portal; (6) our belief that our future revenues will be generated primarily from professional services from deployment of licenses and follow-on solutions, delivery of engineered solutions, license fees from new customers, additional license fees from the expansion of subscribers at our existing customers and annual maintenance fees; (7) our expectation that our quarterly and annual professional services revenues will fluctuate based upon the delivery and customer acceptance of project milestones; (8) our belief that we will derive an increasing portion of our total revenues from large global communications and media companies; (9) our belief that, in the future, a larger portion of our services revenues will be based on fixed price contracts; (10) our belief that we may continue to generate operating losses in the future and may therefore have to raise additional capital, and our expectation that, if we must raise additional capital in the future, we may do so on terms that are acceptable to us; (11) our expectation that our sales will continue to involve, large financial commitments from a relatively small number of customers; (12) our belief that we will be able to continue to maintain and/or strengthen our financial, personnel, and managerial controls and reporting systems and procedures and continue to recruit, train and manage our worldwide workforce; (13) our anticipation that we will continue to derive some portion of our market opportunities and revenues from systems integrators and other strategic third parties; (14) our intention to sublease a majority of our facilities for a substantial portion, if not the entire balance, of the applicable lease terms; (15) our anticipation that we will not incur further losses to the extent incurred in prior years on major consulting projects; (16) our expectation regarding the total future cash outlay for our restructuring plans; (17) our ability to raise additional capital on favorable terms may be adversely affected by our delisting from the NASDAQ exchange; (18) our expectation regarding our future contractual obligations; (19) our belief regarding our other commitments; (20) our expectation regarding lease payments for restructured facilities, net of expected sublease income; (21) our belief that with the loss of one or more of our customers or prospective customers could cause our business to suffer; and (22) those factors discussed under “Risk Factors” elsewhere in this Form 10-K, 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 to differ 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 may ultimately prove to be incorrect.

As a result, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to, (1) our ability to meet customer demand in a timely manner; (2) our ability to diversify our product revenue so that we do not need to rely so heavily on our Portal Infranet / Portal 7 product line; (3) our ability to grow and diversify our customer base domestically and abroad; (4) failure of a broad-based increase in technology spending among our customers to materialize; (5) our ability to recruit and retain senior executives and board

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members; (6) our ability to maintain and deepen our relationships with systems integrators and other strategic third parties; (7) our ability to remedy those significant deficiencies and material weaknesses in our disclosure controls and internal controls over financial reporting identified elsewhere in this report; and (8) our belief that our current cash balances will be sufficient to fund our operations for the next 12 months subsequent to the date of this report.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based upon information available to us at this time. These statements are not guarantees of future performance. We disclaim any 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.

On September 3, 2003, the Company’s Board of Directors approved a reverse stock split of the Company’s common stock at a ratio of one-for-five, causing each outstanding share of common stock to convert automatically into one-fifth of a share of common stock. The reverse split became effective at the close of business on September 26, 2003. In lieu of fractional shares, stockholders received a cash payment based on an average trading price of the common stock prior to the effectiveness of the reverse split. All references to share and per share amounts for all periods presented have been restated to reflect this reverse split.

References in this document to “Portal”, the “Company”, “we”, “our” and “us” refer to Portal Software, Inc., a Delaware corporation, its predecessors and each of its subsidiaries. Portal, P-7, Infranet, and the Portal and P-7 logos, 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

Incorporated in 1985, we develop, market, provision and support billing and Revenue Management solutions for global communications and media service providers. We define Revenue Management solutions as those that enable the strategic end-to-end management of revenue across the enterprise. We believe that billing is no longer a back-office function for senior executives struggling to cut costs while building differentiated global brands. It is a mission-critical enterprise solution that impacts a company’s ability to innovate, drive new revenue-generating services to market, retain high-value customers and deliver profit to the bottom line. Through a unified, single-platform approach to Revenue Management, we believe we enable our customers to meet their business goals.

Our solutions are provided in the form of enterprise software (often referred to herein as “products”) and/or services and are used by service providers in the communications, broadband, and entertainment and information sectors to support voice, data, video and content services across wireless, wireline, cable and satellite networks. Our solutions actively manage customer revenue throughout the Revenue Management Lifecycle, integrating and helping to optimize the generation, capture, collection and analysis of revenue across all customer touch points. This approach provides our customers with a comprehensive view of all elements of the revenue cycle across their own customer base.

Our solutions are designed to be based on a platform architecture that is highly scalable and sufficiently flexible to allow service providers to measure, analyze, price and bill their customers’ usage on a real-time basis. Our solutions facilitate the real-time provisioning and reporting of such functions as account creation, user authentication and authorization, activity tracking, pricing and rating, billing and customer service including self-service billing. Because our platform architecture is designed to be highly scalable, we can provide this information in real-time for up to tens of millions of users. Our standard software platform is built on an open architecture that can be seamlessly integrated with other business system components, including existing enterprise resource planning (“ERP”), customer relationship management (“CRM”) and other legacy systems and service delivery networks. The Portal platform is designed to meet the needs of next-generation communications

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markets and services so it can be enhanced with a full suite of prebuilt modules for specific industry segments, including wireless, wireline, cable, ISP and Internet telephony. We believe Portal’s product-based solution provides customers with significant time to market advantages as well as lower total cost of ongoing operations.

Our business is dynamic, as are the markets in which we operate. Business requirements, customer demands and competitors may continue to evolve significantly over time.

INDUSTRY BACKGROUND

We believe the communications industry is dramatically changing due to rapid advancements in Internet Protocol (“IP”), broadband and wireless technologies in an increasingly competitive and aggressive business environment. A number of trends are impacting communications and media companies including 1) convergence and the shift in customer spending from multi-service to multi-network; 2) growth of non-voice revenue; 3) evolution of emerging technologies and business models, such as Voice over IP (“VoIP”), mobile virtual network operators (“MVNO”), and content; 4) focus on customer lifetime value; and 5) global branding initiatives.

In this environment, service providers are challenged to manage multiple dimensions of convergence. These dimensions include prepaid and postpaid convergence; voice data and content convergence; and the convergence of wireline, wireless and broadband. Wireless devices transmit voice and text messages between users around the globe. Satellite networks broadcast television and Internet access to previously unreachable geographies. Broadband providers deliver videoconferencing to enterprises wanting to keep key personnel close to home and operational cost at a minimum. Today, voice, data, commerce and content are flowing simultaneously over multiple networks, giving users access to the most relevant services and content on the most appropriate device.

As many network-based services become more mature or commoditized, the providers of these services are challenged to increase customer retention. In addition, they are under pressure to quickly drive innovative and profitable new offerings to market, specifically premium and value added services that create new customer revenue streams. To differentiate themselves and create new revenue opportunities, service providers are experimenting with a multitude of new services, pricing plans and business models. To do this quickly and efficiently, we believe they will need a fully convergent system, such as our unified platform, for the management of enterprise revenue in real time across any customer type, service, payment method, business model and geography.

The traditional customer management and billing (“CM&B”) systems of communications companies were typically custom designed and built to service one particular type and size of service provider — such as a large, traditional national or regional carrier, or a small competitive cellular telephone provider — and to interface with and process data from the specific equipment and technologies used in a single network or for a particular service, such as circuit switched wireline telephone, cellular telephones or cable television networks. These highly customized and legacy CM&B solutions can generally be characterized as (1) inflexible with higher total cost of ownership, (2) proprietary and (3) difficult to evolve to meet the complex requirements of providers of new telecommunications and information services. As a result, such CM&B solutions may not be able to effectively address one of the 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 can be high and changes — to increase the functionality or features of the system or to introduce new services — typically require extensive programming using either internal or external professional services. This can often result in additional ongoing expenses, significant time delays and therefore a very high total cost of ownership.

THE PORTAL STRATEGY

Our strategy is to establish ourselves as the premier provider of Billing and Revenue Management solutions for the global communications and media markets. We believe we are providing the most flexible,

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scalable and cost-effective Revenue Management solutions to telecommunications, Internet and content service providers around the world. Key elements of this strategy are:

BASE ALL PORTAL SOLUTIONS ON THE SAME EXTENSIBLE SOFTWARE PLATFORM. We have developed and designed an integrated, platform solution that can address the rapidly changing, highly flexible and complex requirements of evolving communications networks and service offerings. It can also provide a lower total cost of ownership. Our extensible platform provides a framework for integration with a wide variety of other business systems and a foundation for the development of market-specific solutions. Although there are unique aspects to every service, most share the same underlying business infrastructure 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 us to provide every customer with the same basic product, which, in contrast to customized “one off” solutions, creates a future support and upgrade path for all of our customers. Our engineered solutions incorporate customer business requirements directly into our platform, eliminating the need for costly, time-consuming and duplicate customizations. Moreover, this approach enables us to more effectively apply our solutions across a wide variety of markets and leverage our research and development efforts. By incorporating these improvements into the platform, we can in turn benefit a broad range of our existing customers and attract new customers. To meet the unique requirements of specific markets and industries, our platform has been designed to enable Portal and system integrators with whom we work (sometimes referred to as our “system integrator partners” or “partnerships with systems integrators”) to develop specific solutions that integrate with the core platform to address those unique and evolving requirements. We believe that this approach facilitates the rapid development and deployment of unique solutions to address new services without the need for Portal, our system integration partners, or our customers to build an entirely new infrastructure to support each service.

LEVERAGE ALLIANCES WITH SYSTEMS INTEGRATORS AND WITH PLATFORM, SOFTWARE AND NETWORK EQUIPMENT PROVIDERS. We have established a series of alliances with all of the tier one and many of the tier two systems integrators (SI’s), including Accenture (formerly Andersen Consulting), Cap Gemini, Hewlett-Packard, IBM, Atos Origin, and other major regional SI’s, and with platform, software and services providers, such as Hewlett-Packard, IBM, Microsoft, Nokia, Oracle, SAP, Siemens, Sun Microsystems and others. We work with these companies to offer customers an extensive set of market-specific solutions. Together with Siebel Systems (recently acquired by Oracle), Portal has developed TelcoOne^TM, a unique product that provides an end-to-end solution that combines our Revenue Management solution with Siebel’s customer relationship management solution. TelcoOne delivers an enhanced single interface that is designed to enable service providers to dramatically increase call center efficiency and flexibility, and to introduce new services at a fraction of the cost of traditional custom-developed billing applications. Another example of our partner-based products is BillingAgility^TM, a joint solution with Microsoft designed to deliver higher flexibility and performance at a reduced total cost of ownership. BillingAgility, which combines our Revenue Management software platform with Microsoft^® .NET technologies, is designed to facilitate rapid roll-out of new voice, data and content services, as well as support for legacy and business-to-business (B2B) integrations. We have an established relationship and a software development agreement with SAP to deliver an integrated solution that combines our Revenue Management solution with SAP^® for Telecommunications to help telecommunications providers with common Revenue Management challenges, such as controlling revenue leakage during the roll out of new services.

Portal’s core competence as a single platform product for revenue management solutions is synergistic to the core competencies of systems integrators. Working in concert with our SI partners, our services model leverages Portal’s expertise in the application of our platform to customers’ business issues, often incorporating solutions from partners such as SAP, Siebel, Oracle, HP and Microsoft. Portal partners with SIs to provide end-to-end solutions, incorporating the SIs own business process, change management, program management and managed services capabilities.

GROW WITH CUSTOMERS AND THE MARKETS. While initial sales to customers are often significant, our strategy is to maximize our available opportunities for long-term revenue growth by targeting service

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providers we believe have excellent growth potential. Our focus is on building long-term relationships by continuously providing solutions that will require additional software licenses and professional services. Our subsequent revenue growth can then be generated through the addition of subscribers, additional product modules, additional sales to users in other divisions of an existing customer, and performance of a wide variety of professional services as well as maintenance and support agreements.

PORTAL SOFTWARE PLATFORM

The Portal software platform is designed to be a fully-convergent Revenue Management solution that enables our customers to manage enterprise revenue in real-time across all customer types, services, payment methods, business models and geographies. This unified platform’s breadth and depth supports the flexibility, performance and availability demands of today’s increasingly convergent world. It is designed to provide service providers with a comprehensive view of their customers across all revenue streams, providing valuable insight into their buying patterns and service preferences.

Our platform is specifically designed to meet the complex, mission-critical provisioning, accounting, reporting and marketing needs of a wide range of communication and content services. Our integrated extensible platform enables service providers to swiftly define, price and bill for a broad range of convergent services. Because the Portal platform can be deployed in a modular fashion, it enables co-existence between legacy billing systems and new next generation services. In this way, enterprises can protect their existing technology investments, while making a well-planned shift to the Portal platform to support new market-critical services.

In addition to the basic Portal 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 standard enterprise applications and payment processing and tax packages.

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

BUSINESS BENEFITS

The Portal platform is designed to enable service providers to increase revenues, reduce operational costs and improve customer service. These benefits are derived from the platform’s ability to enable service providers to actively manage customer revenue throughout the Revenue Management lifecycle, integrating and optimizing the generation, capture, collection and analysis of revenue across all customer touch points.

INCREASED REVENUES. By helping to accelerate the time to market for new services, we enable service providers to offer a variety of services quickly and to bundle and price these services in an optimal manner. We enable services to be activated immediately when ordered by a subscriber, so the service provider can immediately begin to collect revenue. Subscriber activity can then be monitored in real time, which allows the service provider to promote the consumption of more services through such means as targeted offers or increased credit limits. In addition, we enable a service provider to analyze and “mine” subscriber service usage 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 our data analysis features, a service provider can quickly determine which offerings are not successful and easily make appropriate 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. Our products and services are designed to minimize the service provider’s software implementation and ongoing maintenance and subscriber servicing costs. We believe our products and services provide Total Cost of Operations (“TCO”) advantages over

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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 Portal platform are intended to enable service 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 SERVICE. We help service providers offer improved billing accuracy, enhanced customer service quality, and responsiveness to their subscribers. Portal’s solutions are designed to allow service providers to easily tailor their offerings on a bundled or unbundled basis, substantially increasing customer choice without incurring significant additional costs. Up-to-the-minute account balances and status information can be made available to users on a 24/7 basis, either over the Internet or via customer service representatives. Potential customer account issues can be identified and resolved quickly, since there is no need to wait for regular billing cycles to expose these issues. Our real time capability enhances responsiveness to subscribers’ needs, which can help reduce subscriber “churn” or turnover.

PLATFORM TECHNOLOGY. We believe our software architecture consists of a robust, open platform, upon which market-specific functionality is layered using documented open Application Program Interfaces (“APIs”). 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. We designed our Revenue Management platform to meet the critical functional requirements sought by service providers. These requirements include scalability and reliability, enterprise integration and interoperability, comprehensive functionality and ease of use, flexibility and improved time to market — all operating on a real-time basis. As a result of this robust platform, we have been able to begin offering our customers engineered solutions: a development approach that builds specific customer requirements directly into the product architecture to maintain the ongoing supportability and operations of their Portal Revenue Management solution.

SCALABILITY AND RELIABILITY. The Portal solution has been designed to scale from thousands to millions of users through the incremental addition of servers. This capability allows a service provider to grow its business 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 the Portal solution 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. Our object-to-relational data model is designed for high performance on-line transaction processing and high reliability.

ENTERPRISE INTEGRATION AND INTEROPERABILITY. The Portal platform has been designed with documented, open APIs that allow Portal, its customers, partners and third-party software developers to integrate the platform with existing applications and services with minimal effort and programming overhead. This capability is designed to enable new services to be deployed quickly and efficiently while maintaining smooth interoperability with pre-established services. For example, a telecommunications carrier might use the Portal solution to add Internet-related services, which appear on a subscriber’s monthly telephone bill. Our solution runs on server operating systems from Hewlett-Packard, Microsoft and Sun Microsystems and utilizes database software from Microsoft and Oracle. The Portal solution can also be readily integrated with a variety of packaged software applications, such as help desk, accounting, taxation and payment systems.

COMPREHENSIVE FUNCTIONALITY AND EASE OF USE. We have developed a broad suite of pre-defined, ready-to-use customer management and billing functions, including customer registration, business policies, pricing plans and payment methods. We also seek to provide upgrades and enhancements to our platform on a regular basis, with a strong emphasis on response to customer feedback. We believe the Portal solution employs a simple, intuitive Java-based user interface for efficient addition and deletion of services and

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functions, as well as a set of templates for Web-based capabilities such as subscriber registration, password changes and account balance inquiries. We address the entire Revenue Management and billing life cycle, including account creation, monitoring, pricing, billing, collections, and reporting.

FLEXIBILITY AND IMPROVED TIME TO MARKET. The Portal solution is designed to be a modular, extensible software platform. This flexibility allows each Portal customer to tailor its individual installation to meet the exact needs of a particular environment, set of services and group of subscribers. The service provider is thereby empowered to respond quickly to the rapidly changing needs of the next-generation communications and media services marketplace. In addition, the Portal solution can generally be configured to a service provider’s needs relatively quickly, enabling its customers to improve their time to market with new products and services.

PORTAL SERVICES

Portal Services offers consulting, maintenance and education services designed to help customers optimize their investment in Portal technology. Our service delivery teams seek to leverage best practices gained through the implementation and maintenance of Revenue Management solutions for the world’s most innovative service providers. From strategic planning, to implementation and training, to application management and technical support, Portal Services help our customers align their Revenue Management investment closely with their business objectives.

Portal Consulting

Portal provides a broad range of Business Solutions and Technical Services that are tailored to meet our customers’ specific business and application needs. Our Business Solution Services are designed to optimize the value of Portal’s Revenue Management solutions through application of best practices that help reduce costs and improve service levels. Portal Technical Services are designed to offer customers a comprehensive set of planning, implementation and operational management services which deliver technical expertise throughout pre- and post-production lifecycle stages, such as architecture design, system configuration and customization, and best practice implementation. We can also manage infrastructure, assist with functional execution, and enhance technical capabilities and performance.

Portal Engineered Solutions

Portal provides Engineered Solutions services to deliver additional functionality or features, which are not currently available in the Company’s software products, that are tailored to meet our customers’ specific product or functionality needs. Theses services are generally provided on a fixed-price basis and Portal retains the rights to the development and to date has made available or intends to make the developed functionality and products generally available in its software product releases.

Portal Maintenance

Support Services are designed to protect and maintain our customers’ investment by providing a comprehensive range of expert technical support services, timely maintenance updates, major and minor software releases and documentation. Customers have full access to myPortal, Portal’s online support system, which enables immediate access and download of critical information and also provides a convenient, central access point for submitting and tracking all their technical support activities.

Portal Education

Portal Education offers Portal customers a series of role-based courses to ensure they are up to date on the latest Portal product capabilities and solutions. The curriculum provides basic and advanced courses to provide the right level of Portal training for new and experienced Portal customers. Portal instructors have an average of over five years of Portal product and training experience and consistently receive high marks in customer satisfaction ratings. Courses are available at regional Education Centers, or can be delivered at our customers’ facilities.

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PRICING

We have structured the pricing of our products to accommodate our target customer segments, including large telecommunications companies, next-generation communications companies and e-services providers. We generally price our software products on a per subscriber basis for a perpetual term, with customary volume discounts. However, in limited situations, products are also priced based on other fixed units of measure, such as a maximum number of end users (seats) or a maximum amount of revenue or transactions (such as call detail records) that may be processed using our products. Licenses are generally perpetual or on occasion may be for a fixed duration after which use of the software ceases or is renewed for a new term. Maintenance and support contracts are typically priced as a percentage of the associated license revenues. Professional services are provided on a time and materials basis or on a fixed price basis. Our initial sales of licenses and associated services, maintenance and support generally range from several hundred thousand dollars to several million dollars. We also provide our customers with flexibility via componentized solutions, which allow us to price our solutions in a modular fashion.

SALES AND MARKETING

SALES

Our sales strategy is to pursue targeted accounts primarily through a direct sales force. We focus our sales efforts on communications and media service providers ranging from emerging growth companies to the largest telecommunications companies.

In October 2004, we realigned our sales organization to expand the scope and depth of key customer relationships, and create a more efficient global operations model. We are focused on acquiring new customers and expanding current customer relationships in key regions of the world including: Europe, Australia/New Zealand, Japan and North and South America.

To support this increased level of focus, we moved from a decentralized regional general manager model to a centralized worldwide integrated sales and services model. We combined four separate regional sales operations and four separate regional services organizations into one integrated worldwide sales and services organization. We believe these changes support our focus on key customers and target markets, reduce costs, and strengthen the connection between Portal and its customers. New business opportunities in other countries and regions are pursued through selective partnering

As of January 31, 2005, Portal maintained direct sales offices across the United States and internationally in Australia, France, Germany, Hong Kong, Italy, Japan, Poland, Spain and the United Kingdom. This direct sales force is organized into individual account teams, which include both account executives and solutions specialists. These direct sales teams operate in conjunction with professional services teams assigned to the accounts, as well as with applicable marketing, legal and finance personnel. We generate leads from contacts made through marketing partners, seminars and conferences, our Web site, trade shows, customers and our ongoing public relations program.

We complement our direct sales force with a series of partnerships and alliances with systems integrators such as Accenture, Cap Gemini, BearingPoint and Deloitte Consulting, and platform, software and services providers, such as Cisco, Hewlett-Packard, IBM, Microsoft, Nokia, Oracle, SAP, Sun Microsystems and others. These partners provide a global extension of our direct sales force and are an additional source of leads and referrals.

We have derived, and anticipate continuing to derive, a significant portion of our revenues from customers that have significant relationships with our integrator and platform partners. Many of these partners also work with competing software companies and our success is affected by their willingness and ability to devote sufficient resources and efforts to marketing our products. Our agreements with these parties typically are in the

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form of non-exclusive agreements that may be terminated by either party without cause or penalty and with limited notice. In a very limited number of cases, the agreements permit the partner to resell our products or provide for payment to the partner of a referral fee.

MARKETING

Our marketing programs are focused on creating awareness of, and generating interest in, our products and services. We engage in a variety of marketing activities, including:

We also work to cultivate relationships with recognized industry analysts. We are an active participant in technology-related conferences and demonstrate our products at trade shows targeted at communication and content service providers. We also focus on a range of joint marketing strategies and programs with our partners in order to leverage our existing strategic relationships and resources.

CUSTOMERS

Our customers range from emerging small companies offering an innovative service to a small number of subscribers to large telecommunications carriers with millions of subscribers. A substantial portion of our revenues are generated from a limited number of customers each quarter and a substantial majority of our revenues are generated outside of the United States.

Affiliates majority-owned by Vodafone Group Plc (“Vodafone”), as publicly reported by Vodafone, accounted for 23%, 31% and 19% of our total revenues during fiscal 2005, 2004 and 2003, respectively. No individual Vodafone affiliate or other customer accounted for more than 10% of revenues during fiscal 2005, 2004 and 2003. See page 36 of this Annual Report on Form 10-K for a discussion of our revenue by geographical area.

RESEARCH AND DEVELOPMENT

We believe that strong product development capabilities are essential to our strategies of enhancing our core technology, developing additional applications incorporating that technology and maintaining the competitiveness of our product and service offerings. We have invested significant time and resources in creating a structured process for undertaking all product development. This process involves several functional groups at all levels within Portal and is designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully.

Our research and development expenses totaled approximately $37.6 million, $30.2 million and $35.7 million for fiscal 2005, 2004 and 2003, respectively. As of January 31, 2005, we had approximately 140 employees engaged in research and development activities. This excludes approximately 283 contractors provided by Ness Global Services, Inc. located in Bangalore, India. Subsequent to fiscal 2005, we significantly reduced the number of contractors in Bangalore, India. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Research and Development Expense” on page 39 for further discussion.

COMPETITION

We compete in markets that are intensely competitive and rapidly changing. We compete on the basis of our product-based business model, performance, ease of integration, functionality, flexibility, scalability,

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extensibility and price. We believe we compete favorably with respect to these factors. Additionally, the relative financial strength of Portal or a competitor is an important factor considered by many potential customers in their vendor selections. We face competition from providers of customer management and billing software, such as Amdocs Ltd., Convergys Corporation, Comverse Technology, Inc. (post-acquisition of billing assets from CSG International), Intec Telecom Systems (post-acquisition of ADC billing assets) and LHS Group Inc. We also compete with in-house solutions built by internal information technology organizations.

Most of our current principal competitors have a services-based business model and significantly more personnel and greater financial, technical, marketing and other resources than Portal. Many of our competitors also have more diversified businesses outside of the billing and Revenue Management market. Intense competition has resulted in deep price discounting by our competitors that has resulted in longer sales cycles, price reductions and decreased margins, and may threaten our ability to realize forecasted business. In spite of these factors, we have been successful to date in winning business from a number of customers in direct competition with each of these competitors.

INTELLECTUAL PROPERTY

We rely upon a combination of patent, copyright, trade secret and trademark laws to protect our intellectual property. We currently have five issued U.S. patents relating to our technology that expire in 2017 and a number of provisional patent applications pending which we will convert and develop into non-provisional applications. While we rely on patent, copyright, trade secret and trademark laws to protect our technology, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are also essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology, including our patented technology.

We generally enter into confidentiality or license agreements with our employees, consultants, customers and corporate partners and generally control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect proprietary rights, unauthorized parties may attempt — in an unauthorized manner — to copy or otherwise obtain and use our products or technology or to develop products with the same functionality as our products. Policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect proprietary rights as fully or effectively as in the United States. In addition, certain of our license agreements require us to place the source code for the Portal solution into third party escrow accounts. Such agreements generally provide that our licensees will have a limited, non-exclusive right to use this source code if: (i) there is a bankruptcy proceeding by or against us that is not dismissed within a reasonable time; (ii) we cease to do business without a successor; or (iii) we discontinue providing maintenance and support.

Substantial litigation regarding intellectual property rights exists in the software industry. We expect that we may be increasingly subject to third-party infringement claims as the number of competitors in our industry segments grows and the functionality of products in different industry segments overlap. Some of our competitors in the market for Revenue Management software or customer management and billing software may have filed or may intend to file patent applications covering aspects of their technology that they may claim our technology infringes. We cannot be certain that any of these competitors will not make a claim of infringement against us with respect to our products and technology.

Our success and ability to compete are substantially dependent upon our internally developed technology. However, portions of the Portal solution incorporate software developed and maintained by third-party software vendors, such as operating systems, tools and database functionality. We may have to rely on third-party software vendors and developers to a larger degree in future products. Although we believe we could find other sources for these products, any significant interruption in the supply of these products could adversely impact our sales unless and until we can secure another source.

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ADDITIONAL INFORMATION

We file annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, D.C. 20549. The public may obtain information on the operation of the public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including Portal, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

We also make available free of charge through our Internet site (http://www.portal.com) our most recent annual reports, quarterly reports, current reports, proxy statements and certain other documents filed with the SEC. These documents are available as soon as reasonably practicable after we file them with the SEC. Copies of these filings will also be provided to the public at no cost upon a written request to the General Counsel of Portal Software, Inc.

EMPLOYEES

As of January 31, 2005, we had 569 employees, 264 of whom were engaged in professional services and support, 81 of whom were in sales and marketing, 140 of whom were in engineering and 84 of whom were in finance, administration and operations. In addition, we had approximately 452 contractors as of January 31, 2005. Our future performance depends in significant part upon the continued service of our key engineering, sales and senior management personnel, none of whom is bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of our key employees could harm our business. Our future success also depends on our continuing ability to attract, assimilate and retain highly qualified technical, sales and managerial personnel. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

SUBSEQUENT EVENTS

Following is a summary of events that have occurred after the close of the fiscal year on January 31, 2005 which we believe were significant for the Company:

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Portal currently has significant excess facility space. We lease a four-story building for our headquarters in Cupertino, California consisting of approximately 142,700 square feet. As of January 31, 2005, we were occupying approximately 104,300 square feet and had listed the vacant space for sub-lease. We also lease a three-story building in Cupertino, California consisting of approximately 93,200 square feet, of which 61,900 square feet are sublet to three tenants committed to short term leases expiring from 2006 through 2008, with renewal options. We lease both Cupertino, California premises under leases expiring in December 2010. We have leased approximately 39,600 square feet for our regional headquarters facilities in Slough, United Kingdom, under a lease expiring in 2021, of which 23,219 square feet are sub-leased to third parties through 2010. In

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addition to our principal office space in Cupertino, California and the UK, we also lease facilities and offices in California, and Texas, and internationally in Hong Kong, Germany and Japan. These leases are for terms expiring at various times through March 2021. Of these additional facilities we only occupy space in Japan — the other spaces are vacant or sublet. We also own two buildings in Quickborn, Germany comprising approximately 20,526 square feet of space. One of these two buildings is sublet to active tenants, and we occupy the other building. Finally, we have a number of small executive suites around the world, each on a short-term renewable lease. We believe that the facilities we currently lease and own are sufficient to meet our needs through the next twelve months.

Since January 31, 2005 we have worked on either terminating or subletting excess properties worldwide. As of March 2006 several changes have occurred in our real estate portfolio. The lease in Bad Hamburg, Germany expired on May 31, 2005. Our leases in Munich, Germany and Plano, Texas expired on March 31, 2006 and our lease in Folsom, California will expire on June 10, 2006. We vacated the Slough facilities on July 15, 2005 to move into executive suites in Maidenhead under short term lease arrangements. This allowed us to put the second floor of the Slough facilities on the market for sublet. Finally, we continue to negotiate for termination or sublet of excess space in Hong Kong.

On February 17, 2006, Portal entered into a Lease Termination Agreement with Symantec Corporation, which agreement was amended on March 22, 2006, regarding the office space located at 10200 South De Anza Boulevard, Cupertino (“De Anza”) and 10201 Torre Avenue, Cupertino (“Torre”), the two California facilities mentioned above. Under the terms of the Agreement, we are committed to pay $5 million to Symantec in consideration of Symantec terminating the leases on De Anza and Torre. Under the terms of the current agreement, we will surrender the De Anza premises by September 30, 2006, or later under certain specified circumstances, and the Torre premises over a period of time as specified in the Agreement. We intend to relocate our corporate headquarters within the immediate area of our current Cupertino headquarters. We expect to reduce future lease liabilities by up to $46 million.

There is currently a large amount of vacant commercial real estate in the cities in which our leased facilities are located. Moreover, currently prevailing rental rates in many locations are substantially lower than those that we are obligated to pay under the leases. We have encountered and may continue to encounter significant difficulties or delays in subleasing such surplus space and may not be able to sublease it for rents equal to or greater than those which we are obligated to pay. To the extent that we are unable to sublease 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 have planned or included within previously accrued restructuring charges. Such increases in operating expenses in a period could cause us to exceed our planned expense levels and adversely affect our financial results for that period. Furthermore, an inability to sublease such space may adversely affect our planned uses of cash and our capital resources (see Management’s Discussion and Analysis regarding Accrued Restructuring Charges under Critical Accounting Policies and Note 4 of Notes to Consolidated Financial Statements.)

On July 9, 2001, a purported class action complaint was filed in the Federal District Court Southern District of New York against Portal, certain of its officers and several underwriters of the our initial public offering (“IPO”). The lawsuit alleges violations of Section 11 of the Securities Act of 1933, as amended and Section 10(b) of the Securities Exchange Act of 1934, as amended, arising from alleged improprieties by the underwriters in connection with our 1999 IPO and follow-on public offering, and claims to be on behalf of all persons who purchased Portal shares from May 5, 1999 through December 6, 2000. Four additional nearly identical class actions were also filed in July and August 2001 based on essentially the same facts and allegations. Specifically, the complaints allege the underwriters charged certain of their customers fees in excess of those disclosed in the prospectus and engaged in certain allegedly improper activities in connection with the distribution of the IPO shares. The complaint was subsequently amended to allege similar claims with respect to our secondary public offering in September 1999.

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The cases have been consolidated into a single action, and a consolidated complaint was filed on April 19, 2002. These actions are part of the IPO Securities Litigation against approximately 300 issuers and nearly 55 underwriters alleging claims virtually identical to those alleged against us. The action seeks damages in an unspecified amount. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions has been denied.

On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. The underwriter defendants sought leave to appeal this decision and the Second Circuit has accepted the appeal. Plaintiffs have not yet moved to certify a class in the Portal case. We have approved a settlement agreement and related agreements which set forth the terms of a settlement between us, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of our company and the individual defendants for the conduct alleged in the action to be wrongful.

The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims we may have against the underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. Pursuant to those agreements Portal’s insurers would participate in an undertaking to guarantee a minimum recovery by the plaintiffs. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers (including Portal) are required to make up the difference. On April 20, 2006, JPMorgan Chase and the plaintiffs reached a preliminary agreement for a settlement for $425 million. The JPMorgan Chase settlement has not yet been approved by the Court. However, if it is finally approved, then the maximum amount that the issuers’ insurers will be potentially liable for is $575 million. It is anticipated that any potential financial obligation of Portal to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be covered by existing insurance.

Therefore, we do not expect that the settlement will involve any payment by Portal. Based on the amount of Portal’s insurance and agreement of the insurers to cover legal expenses after June 1, 2003, Portal does not anticipate additional expenses or liability if the settlement is approved. We are currently not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and the Company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from Portal’s insurance carriers should arise, Portal’s maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. However, if the JPMorgan Chase settlement is finally approved, Portal’s maximum financial obligation to the plaintiffs pursuant to the settlement agreement would be less than $2 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. Those modifications have been made. On March 20, 2006, the underwriter defendants submitted objections to the settlement to the Court. The Court held a hearing regarding these and other objections to the settlement at a fairness hearing on April 24, 2006, but has not yet issued a ruling. There is no assurance that the court will grant final approval to the settlement. To the extent the settlement agreement is not approved, we will vigorously defend the action.

On November 13, 2003 Portal announced that its results for the quarter ended October 31, 2003 would be lower than previously estimated. On November 20, 2003 a purported class action complaint was filed in the United States District Court for the Northern District of California against Portal, and certain of its officers and directors. The lawsuit claims to be on behalf of all persons who purchased Portal shares from May 20, 2003 through November 13, 2003 (the “Class Period”). Several similar class actions have also been filed in the same court based on essentially the same facts and allegations. These cases were consolidated on February 4, 2004 and a lead plaintiff and lead plaintiff’s counsel were appointed on March 25, 2004. On May 24, 2004, the lead

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plaintiff filed a consolidated amended complaint alleging violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, arising from allegations that during the Class Period, Portal recognized revenue improperly and failed to disclose declining demand for its products and services. The consolidated amended complaint seeks damages in an unspecified amount. The defendants moved to dismiss this complaint on July 6, 2004 and the hearing on the motion was scheduled for September 30, 2004. On September 23, 2004, the lead plaintiff filed a motion for leave to file an amended complaint and requested continuance of the hearing to allow them time to prepare a proposed amended complaint. The court allowed plaintiff 60 days to file a motion for leave to amend, along with the required proposed amendment and took the original hearing date off calendar. The lead plaintiff’s motion for leave to amend and the proposed amended complaint were due to be filed by or about November 29, 2004. Lead plaintiff filed a second amended complaint on November 29, 2004. The second amended complaint purports to add a new plaintiff that may have purchased shares in, or traceable to, the September 2003 secondary offering and to add claims under Sections 11 and 12(a) of the Securities Act on the basis that the registration statement for the secondary offering contained allegedly material misstatements or omissions. The defendants moved to strike the second amended complaint on December 2, 2004. On December 7, 2004 the Court set a briefing schedule for the motion to strike. Plaintiffs filed a motion for leave to amend on December 22, 2004 correcting their failure to file the motion concurrent with the proposed second amended complaint. Defendants filed an opposition to the motion for leave to amend on January 6, 2005. A hearing on defendants’ motion to strike on plaintiffs’ motion for leave to amend was held on January 27, 2005. On March 10, 2005, the court granted plaintiffs’ motion for leave to amend and terminated as moot defendants’ motions to dismiss the consolidated amended complaint and to strike the improperly filed consolidated second amended complaint. The defendants moved to dismiss the consolidated second amended complaint on April 15, 2005. On May 19, 2005, plaintiffs filed their third consolidated amended complaint. The defendants moved to dismiss the third consolidated amended complaint on June 2, 2005, and a hearing on this motion was conducted on July 7, 2005. On August 10, 2005, the Court issued an order granting defendants’ motion to dismiss the third consolidated amended complaint as to all asserted claims and allowing plaintiffs leave to file a fourth consolidated amended complaint on or before October 11, 2005. On October 11, 2005, plaintiffs filed their fourth consolidated amended complaint. Defendants filed a motion to dismiss the fourth consolidated amended complaint on December 9, 2005. Plaintiffs filed an opposition to defendants’ motion to dismiss on February 8, 2006 and defendants’ reply brief in support of the motion to dismiss was filed on March 8, 2006. A hearing on the motion to dismiss took place on March 23, 2006 and an opinion will be issued at a later date. In the opinion of management, resolution of this litigation is not expected to have a material adverse effect on the financial position of Portal. However, depending on the amount and timing, an unfavorable resolution of these matters could materially affect our future results of operations or cash flows in a particular period. We believe the lawsuits are without merit. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation.

On November 17, 2003, a stockholder derivative action was filed in the Superior Court of California, County of San Mateo against the members of the Board of Directors and certain officers of Portal alleging breach of fiduciary duty and other violations of state law. A second similar action was filed in the Superior Court of California, County of San Mateo on November 25, 2003. These complaints were based on allegations that the defendants misrepresented Portal’s financial projections in connection with the quarter ended October 31, 2003 and that certain of the defendants violated state laws relating to insider trading. The actions seek damages in an unspecified amount, disgorgement of improper profits and attorney’s fees, among other forms of relief. In February 2004, both derivative actions were transferred to Santa Clara County Superior Court. The plaintiff in the second action agreed, and the Court so ordered, to voluntarily dismiss this complaint without prejudice. The plaintiff in the first filed action filed an amended complaint on or about September 29, 2004. The amended complaint reiterated the allegations in the original complaint and added allegations from the federal securities litigation that Portal recognized revenue improperly and failed to disclose declining demand for its products and services as well as allegations based on the Company’s financial results in the second quarter of fiscal 2005 and the restatement of the first quarter of fiscal 2005 financial statements. On March 23, 2005, the parties to the derivative action filed a stipulation of settlement with the Superior Court and the Court entered an order approving the stipulation of settlement and dismissed the lawsuit with prejudice on April 5, 2005. The settlement did not have a material financial impact to our company.

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On April 21, 2006, a putative class action lawsuit was filed in the Superior Court of California, County of Santa Clara against the Company and the members of the Board of Directors. The case is captioned William Dashiell v. Portal Software Inc., et al, Case No. 106CV062133. The complaint alleges that the Board of Directors breached their fiduciary duties of loyalty, due care, independence, good faith and fair dealing by approving the merger agreement and the transactions contemplated by the merger agreement. The complaint alleges, among other things, that the defendants were motivated by virtue of the proposed indemnification agreements Oracle would provide them with and did not engage in sufficient efforts to obtain the best offer possible for stockholders. The complaint seeks, among other things, an injunction prohibiting the Company from consummating the transaction, imposition of a constructive trust for any benefits improperly received by the Company and the members of the Board of Directors, as well as attorneys’ fees and costs. Defendants filed a demurrer to the complaint on May 3, 2006. Defendants also filed a motion for protective order on May 10, 2006. Plaintiff submitted a peremptory challenge against Judge Komar on May 10, 2006. The Company believes that the lawsuit is without merit and intends to defend vigorously the case.

Our Annual Meeting of Stockholders was held on January 26, 2005. At the Annual Meeting, the following matters were submitted to a vote of stockholders and were approved with the votes cast on each matter indicated (there were no broker non-votes):

1. The election of two Class II Directors. Mr. Richard A. Moran and Ms. Karen Riley were nominees for election and were the only directors elected at the meeting. Mr. Moran’s election was approved with 29,719,591 shares voting for and 802,028 shares voting against. Ms. Riley’s election was approved with 29,777,017 shares voting for and 744,602 share voting against. The terms of office as director of each of the following directors continued after the meeting: Robert Bond, Robert Eulau, John E. Little, J. David Martin, Richard A. Moran and Karen Riley.

2. The ratification of the appointment of Ernst & Young LLP as independent auditors for Portal for the fiscal year ending January 31, 2005 was approved with 30,334,138 shares voting for, 169,806 shares voting against and 17,675 shares abstaining.

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PART II

As of January 31, 2005, Portal Software, Inc. common stock, par value $0.001, traded on NASDAQ under the symbol “PRSF”. On June 29, 2005, NASDAQ delisted Portal’s common stock from the NASDAQ National Market for failing to meets listing requirements, specifically with respect to timely filing of its periodic reports with the SEC. Since that time, Portal’s stock has traded on the “Pink Sheets” under the ticker symbol “PRSF.PK”, operated by Pink Sheets, LLC. The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities in real-time. Pink Sheets is neither a Securities and Exchange Commission (SEC) registered Stock Exchange or a Broker-Dealer. The price per share reflected in the table below represents the range of high and low sale prices for Portal common stock as reported on NASDAQ for the quarters indicated. All prices have been adjusted for a one-for-five reverse stock split that was effected on September 26, 2003. The closing sale price of Portal’s common stock as reported in the Pink Sheets on May 24, 2006 was $4.88. The number of stockholders of record of Portal’s common stock as of May 24, 2006 was 277.

Dividend Policy

Portal has never paid cash dividends on its capital stock. Portal currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.

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The following table shows selected consolidated financial data for Portal for the past five fiscal years. To better understand the data in the table, investors should also read the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of Portal and the Notes to Consolidated Financial Statements included elsewhere in this report. The basic and diluted net loss per share computations exclude outstanding stock options, potential shares of common stock (options and common stock) subject to repurchase rights held by Portal, preferred stock and warrants, since their effect would be anti-dilutive. See Note 1 of Notes to Consolidated Financial Statements for a detailed explanation of the determination of the shares used to compute basic and diluted net loss per share. Basic and diluted net loss per share and shares used in computing basic and diluted net loss per share have been adjusted to reflect the impact of a one-for-five reverse stock split, which became effective on September 26, 2003 (see Note 6 of Notes to Consolidated Financial Statements). The historical results are not necessarily indicative of results to be expected for any future period.

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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 revenue and product sales, gross margins, product development, operating expenses and the sufficiency of financial 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 only 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

Business

We develop, market, provision and support billing and revenue management solutions primarily for global communications and media markets. Our convergent platform is designed to enable service providers to invoice for and derive revenue from voice, data, video and content services with multiple networks, payment models, pricing plans and value chains.

We believe that the growth and rapid change in the global communications and media markets provide a unique opportunity for our solutions which provide real-time, flexible and scalable solutions for these markets. To fully realize this opportunity, we must expand our penetration in this market to enable us to increase our revenues and to achieve profitability and positive cash flow.

During September 2004, we combined our four separate regional sales and services organizations into one integrated worldwide sales and services organization. This change supports a focus on key customers and target markets, reduces costs and strengthens the connection between our company and our customers.

While we currently provide solutions to some of the leading global communications and media markets, we face competitors with substantially greater financial resources than us. As such, it is important that we demonstrate to our customers our ability to successfully compete with larger solution providers by providing equal or greater levels of support for our products, today and in the future, and by continuing to enhance our products to meet the needs of the rapidly changing markets for which our solution was designed.

Beginning with fiscal 1997, substantially all of our revenues have come from the license of a unified enterprise product line and from related services. Revenues are primarily derived from contracts with global communications and media markets and consist of Portal licenses, professional services, engineered solutions and maintenance and support fees. Software license revenues are comprised of perpetual or multi-year license fees. Fees from professional services are derived from the following services: implementation services, operational support services, business consulting and training (“Professional Services”). Maintenance and support fees are derived from agreements that provide technical support and include the right to unspecified upgrades on a when-and-if available basis. Fees from engineered solutions are derived from products or functionality developed for customers.

We have established a number of relationships with systems integrators and hardware, software and service providers. We have derived, and anticipate that we will continue to derive, some portion of our revenues from customers that have significant relationships with our integration and platform partners. In addition, we believe that in the future a larger portion of our services revenues may be based on fixed price contracts. For stand-alone

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Professional Services arrangements, this could result in a higher portion of revenue being recognized on a proportional performance basis, subject to milestone payments, where failure to reach project milestones and obtain customer acceptance in a quarter could have an adverse impact on revenue in that quarter. Also, beginning in the second quarter of fiscal 2005 the Company ceased to maintain VSOE of fair value for Professional Services, and as a result, revenues from multiple element arrangements which include software license and Professional Services will be deferred until completion of all Professional Services. In addition, our margins and overall profitability on fixed price contracts could be more difficult to estimate than for time and materials contracts. For a description of factors that may affect our future results see “Risks Associated with Our Business and Future Operating Results.”

A substantial portion of our total revenues continue to be derived from international operations. For the fiscal year ended January 31, 2005, international revenues were 85% and North America revenues were 15% of our total revenues compared to international revenues of 77% and North America revenues of 23%, for the fiscal year ended January 31, 2004. As a result, we face exposure to the inherent risks associated with international operations. During fiscal 2005 and 2004, the U.S. dollar exhibited significant volatility against the Euro, Japanese Yen and British Pound, which are the major functional currencies of our international subsidiaries based in Europe and Asia. We may experience a material adverse impact to our future operating results if we are unable to effectively minimize or hedge our exposures created by revenues and expenses denominated in the local currencies of our international subsidiaries.

Financial

We adopted a 52/53 week fiscal accounting year commencing with the 2004 fiscal year. Each quarter consists of 13 weeks ending on a Friday. Fiscal 2005 began on January 31, 2004, the day following the last day of fiscal 2004, and ended on January 28, 2005. For consistency of presentation, all references as of and for the periods ended January 31, 2005, 2004 and 2003 reflect amounts as of and for the periods ended January 28, 2005, January 30, 2004 and January 31, 2003, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our 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 U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that the estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. We discuss the development and selection of the critical accounting estimates with the audit committee of our board of directors on a periodic basis, and the audit committee has reviewed our disclosure relating to such estimates in this annual report on Form 10-K.

We believe the following areas contain significant judgments and estimates that are critical to the application of our accounting policies and the preparation of our consolidated financial statements:

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Refer to Note 1, “Significant Accounting Policies”, in Notes to Consolidated Financial Statements included in this Form 10-K for a more detailed discussion of the Company’s policies.

Revenue Recognition

Because the Company enters into both single element arrangements to provide Professional Services and engineered solutions and multi-element arrangements involving software licenses, related maintenance and support, Professional Services and engineered solutions, the Company’s revenue recognition policies are complex and require the application of significant judgment. Specific areas requiring the application of significant judgment are:

The Company’s key revenue recognition concepts and policies are summarized below. Refer to Note 1, “Significant Accounting Policies”, in Notes to Consolidated Financial Statements included in this Form 10-K for a more detailed discussion of the Company’s revenue recognition policies.

Revenues are derived primarily from contracts with global communications and media market companies and consist of software license fees, Professional Services, engineered solutions, and maintenance and support fees. Software license revenue is generally comprised of perpetual or on occasion, multi-year (“term”) license fees. Fees from Professional Services are derived from the following services: implementation services, operational support services, business consulting and training. Fees from engineered solutions are derived from products or functionality developed for customers, which are frequently made generally available to all customers. Maintenance and support fees are derived from agreements that provide technical support and include rights to unspecified upgrades on a when-and-if available basis.

As a result, the Company generally recognizes revenue 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, and related amendments. Under these pronouncements, revenue is recognized when the following conditions (“Basic Criteria”) exist:

Identifying Linked Arrangements

Separate arrangements are considered linked and part of a multiple element arrangement when the commercial negotiations for each arrangement were conducted in close proximity or with the knowledge of each other, such that the negotiation or execution of any of these arrangements could have influenced the negotiated terms or pricing of the other arrangement(s). Our revenue arrangements frequently include multiple elements consisting of a combination of software licenses, Professional Services and maintenance and support, and, on occasion, engineered services. Because these elements are delivered at different times; software licenses are typically delivered upon execution of the agreement, Professional Services and engineered services are generally delivered over several months and maintenance and support are typically delivered over 12 months, revenue must be allocated between total fees in accordance with SOP 97-2, SOP 98-9 and related amendments.

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We review contracts negotiated within close proximity as well as those under negotiation at the end of each accounting period and consider customer discussions with both Company legal personnel and sales representatives involved in the sales activity to identify contracts that should be evaluated as part of a multiple element arrangement. The key indicators of linked arrangements which require significant judgment are:

Should a stand-alone agreement be subsequently determined to be part of a multiple element arrangement, revenue under the agreement would be deferred pending completed delivery of the elements without VSOE of fair value. As a result, the determination of linked arrangements has a substantial and material impact upon the revenue recognition treatment of the Company’s contracts.

Determining the Existence of Vendor-Specific Objective Evidence (“VSOE”) of Fair Value

License fee arrangements are always sold with maintenance and support for an initial period, typically one year. Accordingly, the Company typically recognizes license revenue in these arrangements under the residual method in accordance with SOP 98-9. Under the residual method, the Company must establish Vendor-Specific Objective Evidence of Fair Value (“VSOE”) for each undelivered element. VSOE is based upon the price for those elements when they are sold separately or the price set by management having the proper authority prior to being sold separately. The Company has maintained VSOE for maintenance and support for all periods presented based on the pricing when sold separately. Total fees from the arrangement are first allocated to maintenance and support based upon VSOE. Fees allocated to maintenance and support are deferred and recognized as service revenue on a straight line basis over the life of the related agreement, which is typically one year. The residual amount of total fees, after the allocation to maintenance and support, is recognized as license revenue upon license delivery, assuming the Basic Criteria and all other revenue recognition requirements have been met.

VSOE of fair value is maintained by consistently pricing a particular element (for example, maintenance and support) at the same price when it is sold separately. The Company must exercise judgment in determining the level of consistency that it deems appropriate to establish or maintain VSOE of fair value for a particular element. The Company analyzes all sold separately transactions for pricing consistency against the Company’s published pricing guidelines for a particular element and considers it necessary for a substantial majority of these transactions to be priced consistent with the Company’s price guidelines for VSOE of fair value to be maintained.

At the beginning of the first quarter of fiscal 2005, our Chief Operating Officer resigned resulting in increased discretion over project pricing by regional General Managers. Additionally, during this quarter, we

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launched an initiative to improve our gross margins on our consulting projects. As part of this initiative, we hired experienced Professional Services managers and focused project pricing around achievement of minimum margin thresholds, rather than on published price lists. As a result of these changes, subsequent to the first quarter of fiscal 2005, we ceased to maintain VSOE of fair value for Professional Services.

Accordingly, the Company defers all revenue from agreements that include software license arrangements, maintenance and support and Professional Services while there are undelivered elements for which the Company does not have VSOE (e.g. Professional Services), until all undelivered elements without VSOE have been fully delivered in accordance with SOP 97-2, SOP 98-9 and related amendments. Once undelivered elements without VSOE have been delivered, all revenue (generally license and Professional Services), except for revenue related to undelivered elements for which VSOE exists (generally maintenance and support) is recognized on a ratable basis over the remaining term of the arrangement. The revenue related to remaining undelivered elements for which VSOE does exist (e.g. maintenance and support) is recognized as the services are delivered.

Because the Company does not have VSOE in any period presented for engineered solutions and because engineered solutions provide essential functionality to related software licenses, similar to Professional Services described above all revenue from arrangements that include engineered solutions is deferred until the engineered solutions are delivered, as described above in Engineered Solutions in Single Element Arrangements, and there are no other undelivered elements without VSOE.

The Company’s preliminary analysis for fiscal 2006 suggests the Company may have ceased to maintain VSOE of fair value for maintenance and support at some point during fiscal 2006. If the Company concludes that it has ceased to maintain VSOE of fair value for maintenance and support, the period over which license and Professional Services fees that are part of multiple element arrangements including maintenance and support are recognized, will be significantly extended.

Determining the Proportional Performance on Fixed-price Professional Services Arrangements

Revenue from Professional Services contracts, including both fixed price and time and materials arrangements, is recognized in accordance with SEC Staff Accounting Bulletin (“SAB”) Number 104, Revenue Recognition (“SAB 104”). The Company recognizes revenue from service contracts without customer acceptance provisions as the services are performed. If the contract includes customer specific acceptance provisions, including milestones, the revenue is deferred until customer acceptance.

Upon attainment of contractual milestones and receipt of formal customer acceptance, amounts billable upon milestone achievement and acceptance are recognized as revenue to the extent the amount does not exceed the amount of revenue that would be recognized on a proportional performance basis as measured by the relationship between contract costs incurred to date and the estimated total costs. The Company periodically reviews the estimated total contract costs during the life of the contract. In the event that a milestone has not been reached or customer acceptance has not been obtained, the revenue is deferred until milestone achievement and receipt of customer acceptance.

We estimate proportional performance on contracts with fixed or “not to exceed” fees utilizing costs incurred to date as a percentage of total estimated costs to complete the project. If we do not have a sufficient basis to measure progress towards completion, revenue is deferred until we receive final acceptance from the customer. The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the proportional performance method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.

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Determining the Credit-worthiness of the Customer

The Company prepares a credit evaluation of each customer using industry credit reports and customer financial statements to determine the credit worthiness of the customer. Despite the availability of this information, judgment is required in setting the appropriate limits for each customer. In addition, a customer’s financial status can change quickly resulting in changes to the collectibility of accounts receivable. Collectibility is one of the Company’s basic criteria for revenue recognition. Revenue will be recognized upon cash receipt for any customer that is not deemed credit worthy.

Deferral of Costs of Revenue

The Company generally defers costs directly related to and identifiable with Professional Services and engineering solutions not intended to be made generally available when i) costs incurred exceed revenue recognized to date, ii) the Company has probable and objectively supportable evidence that deferred costs will be recoverable through deferred revenue and/or future billings and iii) the project will not result in a loss as outlined in Note 1, “Significant Accounting Policies”, in Notes to Consolidated Financial Statements included in this Form 10-K. Significant judgment is required in determining when to defer costs with respect to the Company’s evaluation of probable and objectively supportable evidence of project profitability, especially in assessing its estimates of costs to complete Professional Services contracts. Estimates of costs to complete projects are made by project managers and reviewed on a regular basis. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. The Company routinely compares prior estimates with current estimates to measure changes in the Company’s project cost estimates.

Cost/Loss Accruals

When the Company’s project estimates indicate that a loss or negative margin is expected to result upon the completion of a project (based on direct and identifiable costs), the Company accrues costs in an amount to bring the net negative margin of the project recognized to date up to the amount of the expected negative net margin upon completion. The Company’s judgments on its estimates of costs to complete Professional Services contracts are critical to accurately assessing project losses upon completion. As described above in the accounting for deferred costs, estimates of costs to complete projects are made by project managers and reviewed on a regular basis. The Company routinely compares prior estimates with current estimates to measure changes in the Company’s project cost estimates.

Allowance for Doubtful Accounts

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’ inability to make required payments. It is a significant estimate and is regularly evaluated for adequacy by taking into consideration factors such as past experience, credit quality of the customer, age of the receivable balance and current economic 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 telecommunications and information 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.

Accrued Restructuring Charges

Over the past few years, we implemented restructuring plans that were a combination of reductions in workforce, consolidation and closure of facilities and the disposal of associated assets. The restructuring charges were based on actual and estimated costs incurred in connection with these restructuring plans and include employee severance and benefit costs, write-off of property and equipment, costs related to leased facilities

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vacated, and cash flows from actual or anticipated subleasing arrangements. We have accrued restructuring charges for lease commitments, net of estimated projected sublease income, for the various facilities included as part of the restructuring. The assumptions we have made are based on the current and expected future market conditions in the various areas where we have vacant space and necessarily entail a high level of management judgment supported by advice from third party specialists. Our assumptions and judgments include such factors as future changes in property occupancy rates, the future rental prices charged for comparable properties and the future general economic condition of the areas in which our facilities are located. These changes, as well as the timing of the execution of restructuring plans and changes to prior restructuring cost estimates, could materially affect our accrual. If, in future periods, it is determined that we have over-accrued restructuring charges for the consolidation of certain facilities, the reversal of such over-accrual would have a favorable impact on our financial statements in the period this was determined and would be recorded as a credit to restructuring costs. Conversely, if it is determined that our accrual is insufficient, an additional charge would have an unfavorable impact on our financial statements in the period this was determined.

Severance costs, benefit costs and all other costs associated with restructuring plans executed prior to our third fiscal quarter of 2005 were accounted for in accordance with Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) No. 94-3, Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring, (“EITF 94-3”). The restructuring plan implemented in the third quarter of fiscal 2005 was accounted for, and all future restructuring plans, including the subsequent restructuring event in the third quarter of fiscal 2006 (see Results of Operations, Restructuring Charges), will be accounted for in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (“SFAS 146”).

Accounting for Income Taxes

We make judgments regarding the potential outcomes of pending or possible future audits in tax jurisdictions and related tax payments which may be required. These judgments are supported by advice from local tax experts in those jurisdictions. If the authorities in a specific tax jurisdiction successfully disagreed with our methodology, it may cause a material increase or decrease to our provision for income taxes in a particular period.

We currently have $177.9 million of deferred tax assets, mostly arising from net operating losses, tax credits, accruals and timing differences, and $5.6 million of deferred tax liabilities. Our deferred tax assets net of deferred tax liabilities are offset fully by a $172.3 million valuation allowance. We believe there is sufficient uncertainty regarding the realization of deferred tax assets to require a full valuation allowance. These factors include consideration of past operating results, the competitive nature of our market and the unpredictability of future operating results. Therefore, we continue to provide a valuation allowance on our deferred tax assets as of January 31, 2005. We will continue to assess our ability to realize tax benefits available to us based on actual and forecasted operating results.

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RESULTS OF OPERATIONS

Restatement of Fiscal 2005 Quarterly Results

Portal Software, Inc. has restated its quarterly financial data for the first three quarters of fiscal 2005 (the “Restatement”) and revised its previously announced results for the fourth quarter of fiscal 2005. The determination to restate the quarterly consolidated financial statements was made on November 21, 2005 by our management and Audit Committee, in consultation with our independent registered public accounting firm, as a result of our identification of certain individually, and in the aggregate, material errors in such financial statements. Our management has identified multiple significant material weaknesses and significant deficiencies in our internal controls and disclosure controls, as more fully discussed in Part II, Item 9A, Controls and Procedures. The Restatement adjustments were largely identified through additional substantive procedures performed by the Company to validate its financial statements, as well as the annual audit of our financial statements.

See Explanatory Note in front of this Form 10-K and Part II, Item 8: Financial Statements and Supplementary Data, Note 9 of Notes to Consolidated Financial Statements for more information regarding the Restatement. Portal has determined that these errors did not materially impact its annual or quarterly financial statements for any prior years.

Status of Fiscal 2006 Financial Statements

Portal’s fiscal 2006 ended on January 31, 2006. Due to the significant time and resources required to restate and finalize our fiscal 2005 results, we have not, as of the date of this filing, finalized our quarterly or annual fiscal 2006 financial results. Because we have not been able to complete our financial close procedures for our fiscal 2006 quarterly or annual results, we are not able to estimate fiscal 2006 revenues, expenses or net income or loss at this time.

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The following table sets forth, for the periods indicated, each item from our consolidated statements of operations, the relative percentage that those amounts represent to consolidated revenues (unless otherwise indicated) and the percentage change in those amounts from period to period. All percentages are calculated using actual amounts rounded to the nearest thousand.

Revenues

Fiscal 2005 Compared to Fiscal 2004

Total revenues decreased 26% to $93.7 million in fiscal 2005 from $126.8 million in fiscal 2004. Revenue decreased by $33.1 million primarily due to a $29.1 million increase in deferred revenue. The primary reasons for the increase in deferred revenues were a loss of Vendor-Specific Objective Evidence (“VSOE”) of fair value for Professional Services, and the deferral of revenue from engineered solutions which are deferred until customer acceptance.

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In fiscal 2004, the Company maintained VSOE of fair value for Professional Services. License fees in multiple element arrangements were generally recognized upon contract execution and delivery and Professional Services fees were generally recognized over the delivery period as billed or as milestones were met and accepted by the customer. Subsequent to the loss of VSOE of fair value for Professional Services in the second quarter of fiscal 2005, all fees from multiple element arrangements including license, support and maintenance and Professional Services are deferred until delivery of all Professional Services are completed.

Deferred Revenue by type was comprised of the following (in thousands):

License revenues declined by 62% to $15.2 million in fiscal 2005 from $39.6 million in fiscal 2004 due to a decrease in both the number of and average dollar value of license sales in fiscal 2005 and the increase in the deferral of license fees of $8.1 million due to the loss of VSOE of fair value for Professional Services and linked undelivered engineered solutions The decrease in license fees in fiscal 2005 compared to fiscal 2004 was a result of relatively strong license sales to new customers in fiscal 2004 and a reduction in license purchases by these customers in fiscal 2005 as they integrated and began utilization of their fiscal 2004 license purchases. Sales in fiscal 2005 to new customers did not offset the decline in sales to existing customers.

Total services revenue, including Professional Services, engineered solutions and maintenance and support declined 10% to $78.5 million in fiscal 2005 from $87.2 million in fiscal 2004. The $8.7 million decrease was due to the decline in consulting services resulting from the decline in license sales in fiscal 2005, as such services primarily relate to the implementation of software licenses. The increase in deferred Professional Services of $9.1 million was a result of the loss of VSOE of fair value for such services.

Beginning in late fiscal 2004, Portal began to offer additional products and functionality to certain customers under its engineered solutions services offerings. Through the first quarter of fiscal 2005, we expected these additional products and functionality to be made available exclusively to the customer we contracted with to deliver the product or functionality. As a result, fees received under these agreements were recognized upon delivery and customer acceptance of milestones under these contracts. Portal recognized $1.5 million of revenue in fiscal 2004 and $5.6 million of revenue in the first quarter of fiscal 2005 from these services. In the second quarter of fiscal 2005, Portal executed an agreement with the customer to which it was delivering these engineered solutions that allowed us to make the products and functionality generated by these engineered solutions services generally available to all customers, and Portal elected to do so. As a result, Portal began to defer all revenue from engineered services arrangements as well as all fees from all other elements which were part of multiple element arrangements that included engineered solutions until final delivery and receipt of customer acceptance of the finished product or functionality in accordance with SOP 97-2. Approximately $11.3 million of these engineered solutions fees were deferred at the end of fiscal 2005. A portion of these engineered solutions was delivered in fiscal 2006 and the remaining portion is expected to be delivered in fiscal 2007. As a result, we expect revenues recognized from engineered solutions to increase in fiscal 2006 and 2007 over fiscal

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2005. Engineered Solutions revenue is included in services revenue in fiscal 2005 and fiscal 2004. There was no engineered solutions revenue in fiscal 2003.

Maintenance and support revenues increased in fiscal 2005 over fiscal 2004 as a result of maintenance and support fees on a greater installed base from ongoing license sales.

Fiscal 2004 Compared to Fiscal 2003

The increase in revenues in fiscal 2004 over fiscal 2003 was a result of an increased demand for our services, primarily consulting services, offset by a decrease in our license revenues. License fees revenues decreased in fiscal 2004 from fiscal 2003 primarily due to a decline in the volume of orders and average order size. The decline in the average order size in fiscal 2004 was driven by a change in our customer base, which has shifted from internet based companies to wireless operators and content providers. Sales arrangements with wireless operators and content providers have resulted in smaller initial sales of licenses and a larger amount of service fees.

Services revenues increased in fiscal 2004 primarily due to increased demand for our consulting services from wireless operators and content providers. Wireless customers have traditionally purchased smaller licenses initially for internal development purposes. Their approach was to enter into consulting engagements spanning multiple quarters prior to making a decision to purchase additional licenses. Once a decision is made, the customer purchases additional licenses and can go into production with a specific number of subscribers. This contributed to the increase in the overall volume of consulting services performed and a decrease in license revenues in fiscal 2004.

Revenues by Region

The following table shows our revenues by region:

Revenues from the United States and Canada decreased to $13.6 million in fiscal 2005 from $28.6 million in the prior year. This decline is the result of increases in the deferral of license, maintenance and support, and Professional Services fees of $7.7 million resulting from the loss of VSOE of fair value for Professional Services beginning in the second quarter of fiscal 2005 and a significant transaction with extended payment terms, which delays revenue recognition until the receipt of cash.

Revenues from Europe, the Middle East and Africa (“EMEA”) decreased to $55.1 million in fiscal 2005 from $71.7 million in fiscal 2004 as a result of lower license and consulting services sales due to relatively strong license and consulting services sales to new customers in fiscal 2004 and a reduction in license purchases by these customers in fiscal 2005 as they integrated and began utilization of their fiscal 2004 license purchases, and increased deferrals of license and Professional Services fees resulting from the loss of VSOE of fair value for

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Professional Services beginning in the second quarter of fiscal 2005. Sales in fiscal 2005 to new customers did not offset the decline in sales to existing customers.

Rest of World revenues, which include the Asia-Pacific region, Japan, South America and Mexico were $25.0 million in fiscal 2005, which was comparable to $26.5 million in the prior year.

Revenue from the United States and Canada, decreased in fiscal 2004 from fiscal 2003 primarily due to the shift from Internet based customers to customers in the wireless industry. North American wireless carriers largely outsource their billing applications to billing providers, and have not invested significant funds in internal billing projects due to ongoing consolidations within the industry. In addition, we experienced a decline in both volume of orders and our average order size in North America in fiscal 2004 when compared to fiscal 2003.

Revenues for EMEA increased in fiscal 2004 from fiscal 2003 primarily as a result of our success in obtaining new business with wireless and content service providers in this region. Rest of World revenues increased in fiscal 2004 from fiscal 2003 primarily as a result of obtaining new business with a wireless provider in Japan, and with wireless and cable providers in Latin America.

Affiliates majority-owned by Vodafone Group Plc (“Vodafone”), as publicly reported by Vodafone, accounted for 23%, 31% and 19% of total revenues during fiscal 2005, 2004 and 2003, respectively. No individual Vodafone affiliate or other customer accounted for more than 10% of revenues during fiscal 2005, 2004 or 2003.

Cost of License Fees

Cost of license fees consists of third-party royalty obligations with respect to third-party technology included in licensed products. Costs increased slightly in fiscal 2005 over fiscal 2004 due to an increase in royalty obligations for third-party technology included in Portal Infranet. In fiscal 2004 compared to fiscal 2003, these costs decreased due to a reduction in reseller commission payments.

Cost of Services

Cost of services consists of direct and identifiable costs of providing Professional Services, and maintenance and support services. These costs are primarily personnel costs for employees and third party contractors. We also include personnel and related costs of employees in our research and development organization to the extent that they work on contractual Professional Services engagements or on engineered solutions for particular customers where the functionality is not expected to be included in our generally available products. The personnel and related costs of employees in our research and development organization performing engineered solutions for particular customers where the functionality is expected to be included in our generally available products are charged to research and development.

Portal defers costs incurred in the delivery of Professional Services to the extent that those costs exceed revenue recognized, the Professional Services are expected to be profitable and the deferred costs are realizable. These cost deferral situations generally occur when the Company defers Professional Services revenue in multiple element arrangements due to the lack of VSOE of fair value for Professional Services or when costs incurred exceed revenues recognized due to incomplete project milestones in stand-alone Professional Services arrangements. In these instances, the Company will defer costs when it is able to assure itself that the project will result in a positive margin. Costs deferred at the end of fiscal 2003 and 2004 were not significant. Costs deferred at the end of fiscal 2005 totaled $5.9 million. The primary reason for the increase at the end of fiscal 2005 was the loss of VSOE of fair value on Professional Services subsequent to the first quarter of fiscal 2005, which resulted in increased deferrals of Professional Services revenues in multiple element arrangements and for which costs are then deferred until completion of the project.

The Company also accrues losses when its estimates of project margin at completion indicate a loss. The amount of the accrual is based on the difference between the amount of the loss estimated to be incurred upon

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completion of the project and the net profit or loss reflected in the financial statements for the project to date based upon costs incurred and revenue recognized. The Company adjusts its estimates on a quarterly basis and routinely assesses the accuracy of its estimates to continuously improve its ability to accurately estimate its progress on fixed price services engagements. Despite this routine estimation process and assessment, over the course of the engagement, the Company has experienced on a limited number of projects significant changes to its estimates of project margin at completion. A small number of projects that were initially forecast to be profitable were subsequently projected to result in a loss and projected losses have increased over the course of the project. Costs accrued based on loss estimates totaled $2.0 million, $0.6 million and zero at January 31, 2005, 2004 and 2003, respectively.

Cost of services increased to $64.4 million in fiscal 2005 from $56.6 million in fiscal 2004 primarily due to increases in headcount and subcontractor expense for fiscal 2005. These increases in cost occurred despite a decrease in services revenue primarily as a result of increased losses on two projects contracted in fiscal 2004 and two projects contracted in fiscal 2005, as well as an increased mix of contractors compared to employees than in the prior year. Cost of services increased to $56.6 million in fiscal 2004 from $44.5 million in fiscal 2003 largely due to the increase in our consulting revenue, which required additional headcount.

Amortization and Impairment of Purchased Developed Technology

In fiscal 2001, Portal recorded an asset of $13.8 million for purchased developed technology as a result of acquiring Solution42. Purchased developed technology was amortized, on a straight-line basis, over the estimated useful life of three to four years. (See Note 1 of Notes to Consolidated Financial Statements.) The value was determined by using the income approach which estimates the present value of future cash flows from developed technology based on management and industry assumptions and market data. Amortization and impairment of purchased developed technology related to Solution42 was $2.0 million, $2.7 million and $4.6 million in fiscal 2005, 2004 and 2003, respectively. Fiscal 2003 included a $1.4 million impairment charge. Our investment in Solution42 was fully amortized during fiscal 2005.

Gross Margin

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Our total gross margin was 29%, 53% and 59% in fiscal 2005, 2004 and 2003, respectively. The decline in fiscal 2005 from fiscal 2004 was largely due to lower services margins as well as a lower mix of license revenues, which have a relatively higher gross margin. The decline in total gross margins in fiscal 2004 from fiscal 2003 was also due to lower services margins and a lower mix of license to services revenues. The Company’s total gross margins for fiscal 2006 are expected to improve due to a lower number of loss projects.

Services gross margins declined to 18% in fiscal 2005 from 35% in fiscal 2004 primarily due to four large contracts under which we expect to incur aggregate losses of approximately $9.2 million upon completion of those projects, most of which was recognized in fiscal 2005, and a greater reliance upon higher cost contractors than in fiscal 2004. The losses were due to poor execution and scope management on these projects.

Research and Development Expense

Research and development expenses consist primarily of personnel and related costs for our product development and certain technical support efforts. A substantial portion of our research and development efforts are performed in Bangalore, India through a single subcontractor, Ness Global Services, Inc (“Ness”). Research and development expenses were $37.6 million, $30.2 million and $35.7 million for fiscal 2005, 2004 and 2003, respectively. The $7.4 million increase in fiscal 2005 over fiscal 2004 is primarily due to a $2.2 million increase related to employee headcount, and an increase of $6.5 million in contractor expenses in India attributed to large-scale projects contracted with major customers for delivery of engineered software solutions. The higher headcount and contractor expenses were partially offset by the allocation of $1.9 million of expense to cost of services expense for the work performed by research and development personnel on designated engineered solutions engagements in the first quarter of fiscal 2005. The $5.5 million decrease in fiscal 2004 from fiscal 2003 was primarily due to a shift of our engineering workforce from higher cost U.S. locations to our lower cost operations in Bangalore, India. In addition, facility costs decreased as a result of our restructuring programs initiated in prior years.

In the third quarter of fiscal 2006, in connection with the completion of recent product development milestones, our Board of Directors approved a plan of termination and general restructuring. This plan included termination of approximately 30 research and development employees located in the United States and foreign countries, as well as a reduction of approximately 95 engineers contracted through Ness. See “Restructuring Charges” below for further discussion of this restructuring plan. We expect research and development expenses to decrease slightly in fiscal 2006 compared to fiscal 2005, as reductions in research and development expenses resulting from the third quarter restructuring plan were realized beginning in the fourth quarter of fiscal 2006.

Sales and Marketing Expense

Sales and marketing expenses consist of personnel and related costs for our direct sales force, marketing staff and marketing programs, including trade shows, advertising and costs associated with the recruitment of new, and maintenance of existing, strategic partnerships. Sales and marketing expenses were $44.7 million, $45.6 million and $51.9 million in fiscal 2005, 2004 and 2003, respectively. The $0.9 million decrease in sales and marketing expenses in fiscal 2005 from fiscal 2004 was due primarily to a reduction in the number of sales and marketing personnel, resulting in a cost reduction of $2.5 million partially offset by increased spending of $1.0 million associated with other marketing-related services and $0.6 million in severance costs related to the departure of our COO. The $6.3 million decrease in sales and marketing expenses in fiscal 2004 compared to fiscal 2003 was due primarily to a reduction in the number of sales and marketing personnel and a reduction in facilities costs as a result of our restructuring plan initiated in fiscal 2003.

We expect sales and marketing expenses to decrease in fiscal 2006 from fiscal 2005 by approximately $10.0 to $13.0 million due to reduced headcount and headcount-related expenses such as salaries and benefits, travel, facilities and other expenses. Sales and marketing headcount declined to 81 at the beginning of fiscal 2006 from 153 at the beginning of fiscal 2005.

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General and Administrative Expense

General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources and information system and facilities expenses not allocated to other departments. General and administrative expenses were $29.1 million, $15.5 million and $15.7 million in fiscal 2005, 2004 and 2003, respectively. General and administrative expenses increased $13.6 million in fiscal 2005 primarily due to an increase in accounting and audit related costs of $9.4 million, increased headcount and contractor costs of $2.8 million to support the financial audit and Sarbanes-Oxley compliance, severance costs related to the departure of our former CEO and CFO of $0.9 million, and other expenses of $0.5 million. General and administrative expenses decreased $0.2 million in fiscal 2004 compared to fiscal 2003 due to decreases in headcount related costs of $1.6 million, decreased expenses of $0.8 million for consultants who assisted in various general and administrative related functions, decreased travel and other miscellaneous expenses of $1.1 million, offset by increases in legal and audit fees of $2.3 million and bad debt expense of $0.9 million.

We expect general and administrative expenses to decrease slightly in fiscal 2006 compared to fiscal 2005. Accounting and auditing fees and contractor costs to support the financial audit and Sarbanes-Oxley compliance will decrease only slightly and will continue to comprise a significant portion of our costs.

Stock Compensation (Benefit) Charges

In fiscal 2003, our Compensation Committee of the Board of Directors approved a plan to reprice stock options for employees (excluding our Chief Executive Officer and members of our Board of Directors). Under this repricing plan, outstanding options to purchase 4,163,894 shares of our common stock with an exercise price greater than $3.45 per share (the closing market price on the date of repricing) were repriced to an exercise price of $3.45 per share. There were no changes to the vesting schedules of these options. These repriced options became subject to variable accounting, which requires their cost or benefit to be remeasured based upon the current fair market value of our common stock at the end of each accounting period until they are exercised or expire. In fiscal 2005 we recorded a stock compensation benefit of $7.3 million due to the decrease in the price of our common stock, compared to a stock compensation charge of $14.7 million and $2.3 million in fiscal 2004 and 2003, respectively. Total shares subject to variable accounting for fiscal 2005 and 2004 were 1,716,887 and 2,475,602 respectively.

The following table shows the amounts of stock compensation charges and benefit that would have been recorded under the following expense categories if it had not been separately stated on the Consolidated Statements of Operations (in thousands):

We do not expect to incur a stock compensation charge in fiscal 2006, as the price of the Company’s stock remained below the exercise price of $3.45 per share.

Impairment of Long-Lived Assets and Intangibles

Long-lived assets and intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. On at least an annual basis,

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the estimated future net undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if impairment has occurred. If such assets were deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets is recognized. If quoted market prices for the assets are not available, the fair value is calculated using the present value of estimated expected future net cash flows. The cash flow calculations are based on management’s best estimates, using assumptions and projections it deemed appropriate at the time. In fiscal 2005 and 2004 there were no charges recorded related to impairment of long-lived assets and intangibles.

During the third quarter of fiscal 2003, we recorded a charge of $2.9 million in impairment of assets related to computer equipment and software that we abandoned. Of the total impairment charge, $1.4 million was related to third-party software for which some of the functionality was previously integrated into our product. Due to reductions in the workforce, Portal re-assessed its need for this third-party software and abandoned it when the related resources to integrate and maintain the software were eliminated. The $1.4 million impairment of this software is included in Amortization and Impairment of Purchased Developed Technology in the Consolidated Statements of Operations. The remaining $1.5 million in impairment of assets is included in Impairment of Long-Lived Assets and Intangibles in the Consolidated Statements of Operations.

In the fourth quarter of fiscal 2003, we issued 136,362 additional shares valued at $0.5 million to the former Solution42 stockholders under the terms of the original purchase agreement. The value of these shares was impaired in the same quarter they were issued, resulting in an additional impairment charge during the quarter of $0.5 million.

Restructuring Charges

In the third quarter of fiscal 2005, our Board of Directors approved a plan to combine four separate regional sales operations and services organizations into one integrated worldwide sales and services organization. This plan included reductions in the worldwide workforce of approximately 65 employees, as well as the closure of certain facilities. These changes were designed to support our focus on key customers and target markets, reduce costs and strengthen the connection between us and our customers. Execution of this plan resulted in a $4.1 million charge to operations in the third quarter of fiscal 2005. This charge was offset by a restructuring benefit of $4.6 million from the release of a prior restructuring plan provision due to the reoccupation by Portal personnel of certain formerly vacated facilities, resulting in a net restructuring benefit of $0.5 million in the third quarter of fiscal 2005.

During the fourth quarter of fiscal 2005, we undertook a comprehensive review of leased properties restructured under prior years’ restructuring plans approved by our Board of Directors. In light of ongoing high vacancy rates of commercial office space in the geographic markets in which we lease facilities, we revised our estimates of future sublease opportunities for major leased and partially occupied properties in Cupertino, California and Slough, UK. Accordingly, after consultation with our professional commercial property advisors we revised our estimates for the market opportunities and increased the length of time required to obtain suitable subtenants or terminate leases at these locations. Subsequent to this market review, on February 17, 2006 we entered into a lease termination agreement with Symantec Corporation, which purchased both of our leased Cupertino properties from the current landlord. This agreement requires that we pay Symantec $5.0 million on or before September 30, 2006, and will allow us to eliminate the future lease liability for both leased Cupertino facilities, beginning in fiscal 2007, over a future period of time upon meeting certain conditions. We adjusted our future lease liability estimates at the end of fiscal 2005 to reflect this subsequent event. The net additional restructuring charge due to changes in prior estimates and the subsequent lease termination agreement with Symantec resulted in a net charge of $8.6 million in the fourth quarter of fiscal 2005. The total net restructuring charge recorded in fiscal 2005 related to leased facilities, abandoned property and severance costs associated with headcount reductions was $8.1 million.

As of January 31, 2005, including the effect of the subsequent lease termination agreement with Symantec, the remaining restructuring accruals were $25.2 million, of which $24.0 million represented committed excess

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facilities costs, net of anticipated sublease income, and $1.2 million represented severance-related costs and other restructuring-related costs. Severance payments attributed to restructuring events in the third quarter of fiscal 2005 were paid through the second quarter of fiscal 2006. Net lease payments for the excess facilities are expected to occur through March 2021 as a result of our revised estimates reflected as of January 31, 2005.

In the third quarter of fiscal 2006, our Board of Directors approved a plan of termination and general restructuring. Under the plan, we terminated approximately 50 employees located in the United States and abroad. The restructuring also included a reduction of approximately 95 research and development contractors located in Bangalore, India. In connection with the completion of recent product development milestones, this plan was intended to streamline our organization to match with business demands. These changes were consistent with our goals to increase our balance of cash and investments by the end of fiscal 2006 and to align our operations for long-term profitability. We completed the majority of the reductions in the third quarter of fiscal 2006. We anticipate these activities will result in a total restructuring charge of approximately $1.4 million, including one-time severance and benefit expenses of approximately $1.1 million; one-time charges of approximately $0.2 million related to the early retirement of certain fixed assets; and one-time legal, accounting and other associated operating expenses of approximately $0.1 million. In addition to the $1.4 million restructuring charge, an additional $0.2 million contract cancellation charge was incurred as a result of reducing the size of our contracted workforce in Bangalore, India. The majority of the restructuring charges are expected to be recognized in our third quarter of fiscal 2006. Cash restructuring expenses of approximately $1.1 million were paid over the third and fourth quarters of fiscal 2006.

Although we believe that our business operations realignment has assisted us in streamlining operations and reducing expenses, there is no assurance that we will achieve or maintain the anticipated results. We may in the future take additional actions, including further changes to our business organization, in an attempt to match our operations with forecast requirements. If we are not successful in realigning our business to increase revenues and decrease costs, we may continue to remain unprofitable.

Interest and Other Income (Expense), Net

Interest and other income (expense), net includes foreign currency exchange gain (loss) and interest and dividend income from cash, cash equivalents and investments, offset by interest expense paid on capital leases and notes payable. Net interest and other expense for fiscal 2005 was $1.8 million compared to net interest and other income of $2.0 million and $3.0 million in fiscal 2004 and 2003, respectively. Interest and other income (expense), net in fiscal 2005 also includes a $1.5 million impairment of our investment in a privately held company during the third quarter of fiscal 2005.

We generated interest income, of $1.0 million and $0.8 million in fiscal 2005 and 2004, respectively. Higher net interest income resulted from higher returns on invested cash balances due to a rising interest rate environment in fiscal 2005 compared to fiscal 2004, despite declining average cash balances in fiscal 2005. Interest expense was insignificant. In addition, net foreign exchange losses were $0.8 million in fiscal 2005 compared to net foreign exchange gains of $1.7 million in fiscal 2004.

During fiscal 2005, we recorded an impairment charge for the full book value of $1.5 million for non-marketable securities of a private company that we held, thereby reducing the carrying value of this investment to zero. We evaluate the carrying value of investments whenever certain events or changes in circumstances indicate that the carrying value may not be recoverable. Based upon our assessment of the investee company’s liquidity and capital resources, we determined that there were sufficient indicators that an other-than-temporary decline in value had occurred and that the non-marketable securities held in this company had zero value as of January 31, 2005.

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Provision for Income Taxes

The income tax provision was $0.1 million, $3.5 million and $2.8 million for fiscal 2005, 2004 and 2003, respectively. The income tax provision for each of these fiscal years primarily relates to foreign withholding taxes on revenue, and foreign taxes related to operations in foreign countries. Withholding taxes, when applicable and in certain jurisdictions, attach to gross revenues regardless of overall profitability. We recorded net losses of $86.9 million, $40.2 million, and $72.2 million for fiscal 2005, 2004 and 2003, respectively. These net losses were allocated among Portal and its subsidiaries in accordance with our transfer pricing policies, which we believe are in accordance with Internal Revenue Service Regulations and OECD guidance. However, this guidance is inherently subjective and in some jurisdictions income taxes have been paid or accrued. The decrease in the provision for income taxes in fiscal 2005 compared to fiscal 2004 was primarily due to an unanticipated refund from a foreign tax authority in the amount of $1.4 million and adjustments to withholding taxes.

We file income tax returns in various foreign countries worldwide. On a regular basis, our operations in those jurisdictions are audited. Portal is undergoing tax audits in numerous foreign jurisdictions around the world, and is also currently behind in its filings of tax returns in several foreign jurisdictions. We believe that we have properly accrued for probable tax liabilities. However, the results of the audits are uncertain and may cause a material increase or decrease to our provision for income taxes in a particular period. In addition, we may incur substantial fees and penalties as a result of failing to meet timely filing requirements.

We believe there is sufficient uncertainty regarding the realization of our deferred tax assets to require a valuation allowance. These factors include consideration of past operating results, the competitive nature of our market and the unpredictability of future operating results. Therefore, we continue to reserve our deferred tax assets as of January 31, 2005. We will continue to assess our ability to realize tax benefits available to us based on actual and forecasted operating results.

Liquidity and Capital Resources

We have generated net losses from operations during the past several years, and as a result our operations have largely been funded by our sale of common stock. In 2004, we raised $56.0 million in net proceeds through the sale of 4,528,302 shares of common stock in a registered public offering. The proceeds of this stock offering have been used to fund our operating losses and restructuring efforts incurred to date. We expect to continue to generate operating losses in the future which may require us to raise additional capital. Although we believe we have adequate funds to meet our operating needs for the next twelve months subsequent to the date of this report, our future ability to raise additional capital on favorable terms may be adversely affected, including as a result of by our delisting from the NASDAQ National Market on June 29, 2005.

Cash, cash equivalents and investments (including restricted investments of $14.5 million and $15.7 million as of January 31, 2005 and January 31, 2004, respectively) totaled $59.7 million at January 31, 2005, compared to a balance of $98.6 million at January 31, 2004. Cash equivalents and investments (including restricted investments of $13.4 million) totaled $60.5 million at January 31, 2006, an increase of $0.8 million compared to the balance of $59.7 million at January 31, 2005.

Net cash used in operating activities during fiscal 2005 increased to $35.9 million from $24.7 million in fiscal 2004. The net cash flows used by operating activities for fiscal 2005 were primarily comprised of the net loss of $86.9 million, depreciation and amortization of $7.9 million and other non cash items of $3.7 million offset by cash generated from changes in operating assets and liabilities of $46.8 million. Cash generated from changes in operating assets and liabilities included $7.7 million from a reduction in accounts receivable and $29.1 million from an increase in deferred revenue. The accounts receivable reduction resulted primarily from improved collection efforts as days sales in account receivables improved from approximately 86 days at the end of fiscal 2004 to approximately 54 days at the end of fiscal 2005. The increase in deferred revenue was primarily due to a change in the mix of sales from license and consulting to engineered solutions, and the impact of the loss of VSOE of fair value for Professional Services, as further discussed above under “Revenues”.

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Net cash provided by investing activities was $17.5 million for the year ended January 31, 2005, an increase of $33.5 million from the $16.0 million used in investing activities for the year ended January 31, 2004. In fiscal 2005, we recorded net maturities of available for sale investments of $22.0 million compared to net purchases of available for sale investments of $10.6 million in fiscal 2004. During the years ended January 31, 2005 and 2004, respectively, we purchased computer hardware equipment and software, and purchased other capital equipment amounting to approximately $4.5 million and $5.4 million, primarily to support our operations and improve our information systems. No capital leases or other debt arrangements were entered into during fiscal 2005.

Cash provided by financing activities was $2.4 million in fiscal 2005, primarily due to receipt of $2.4 million from the exercise of stock options related to our employee stock incentive plans. Subsequent to the end of fiscal 2005, during the second quarter of fiscal 2006 our employee stock purchase program was suspended due to the expiration of our registration statement as a result of delays in the filing of this Form 10-K for fiscal 2005. The uncertainty as to the timing of the reinstatement of this program has subsequently decreased our ability to raise funds from this type of financing activity in fiscal 2006. The $63.1 million of cash provided by financing activities for fiscal 2004 was primarily attributable to the receipt of $56.0 million in net proceeds through the sale of common stock in a registered public offering completed in September 2003.

At January 31, 2005, the total future net cash outlay for the restructuring plans enacted during fiscal 2005 and the past fiscal years, including the effect of the February 2006 lease termination agreement with Symantec Corporation, was approximately $25.2 million. This amount included lease liabilities, net of sublease payments, through 2021 of $24.0 million and severance and other payments to be paid through the second quarter of fiscal 2006 of $1.2 million. This outlay is expected to be funded by available cash. Subsequent to the end of fiscal 2005, we completed a restructuring plan in the third quarter of fiscal 2006 during which we terminated approximately 50 employees located in the United States and abroad. The restructuring also included a reduction of approximately 95 international contractors engaged by Portal. The restructuring charge, primarily comprised of severance costs, is estimated to be approximately $1.4 million in the third quarter of fiscal 2006. In addition to the restructuring charge, an additional $0.2 million contract cancellation charge was incurred as a result of reducing the size of our contracted workforce in Bangalore, India.

In the normal course of business, we enter into leases for facilities in both domestic and international locations. Our current leases on various domestic and international operations include terms expiring through March 2021. In connection with our facility leases, we have issued letters of credit in lieu of security deposits for various facilities (see Note 5 of Notes to Consolidated Financial Statements). In addition, due to the size and location of some of our major customer consulting projects, we have been required to post performance bonds or letters of credit through the duration of the contract. Due to the restructuring activities that occurred in fiscal 2005 and in prior fiscal years, several facilities were vacated or are underutilized. Wherever possible we attempt to sublease vacant leased office space in order to reduce our committed expense of leasing these facilities. In February 2006, we entered into a lease termination agreement with Symantec Corporation whereby beginning in fiscal 2007 we will be allowed to terminate our lease obligations and supporting letters of credit after certain conditions have been met for both of our Cupertino, California facilities.

Our working capital requirements depend on numerous factors, including the timing of customer orders and engagements, and related obligations and payments, market acceptance 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. To reduce operating expenses, severance or other significant costs may be incurred. Expenses exceeded the revenues we recognized in each of the four quarters of fiscal 2005. As a result, we will need to generate significantly higher revenues from licenses of our products and sale of our services to achieve operating profitability. In the event we are unable to offset anticipated cash usage through increasing revenue and collections, and lowering operating expenses, our cash position will continue to decline, impairing liquidity and potentially impacting our ability to fund operations. In addition, should we be required to reduce operating expenses, future severance or other significant cash related costs may be incurred in the short term. We believe that our current cash balances will be sufficient to fund our operations for the next 12 months subsequent to the

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date of this report. We may be required to raise additional funds and may do so at any time that we believe favorable market conditions exist. 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. Our delisting from the NASDAQ stock exchange on June 29, 2005 could have a significant impact on the availability, form, cost and terms and conditions of any additional financing we may seek. We have not yet finalized our results of operations for fiscal 2006; however, cash, cash equivalents and investments (including restricted investments of $13.4 million) totaled $60.5 million at January 31, 2006, an increase of $0.8 million compared to the balance of $59.7 million at January 31, 2005.

The following table summarizes our contractual obligations, including related interest charges, as of January 31, 2005 and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table reflects the February 2006 lease termination agreement with Symantec. Of the $71.2 million in non-cancelable operating lease commitments, $43.3 million has been included in accrued restructuring expenses as of January 31, 2005 (amounts in thousands):