SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarter Ended June 30, 2005

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

Commission File Number 001-31344

PLUMTREE SOFTWARE, INC.

(Exact name of registrant as specified in its charter)


Delaware		52-2303761
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification no.)

500 Sansome Street, San Francisco, CA 94111

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (415) 263-8900

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x ¨ No

The number of shares outstanding of the issuer’s common stock as of June 30, 2005 was 33,301,477 shares.

PLUMTREE SOFTWARE, INC.

FORM 10-Q

June 30, 2005

INDEX


		Page Number
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

a.	Condensed Consolidated Balance Sheets – June 30, 2005 and December 31, 2004	3

b.	Condensed Consolidated Statements of Operations – Three and six months ended June 30, 2005 and June 30, 2004	4

c.	Condensed Consolidated Statements of Cash Flows –Six months ended June 30, 2005 and June 30, 2004	5

d.	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 2.	Unregistered Sales of Equity in Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Submission of Matters to a Vote of Security Holders	40

Item 5.	Other Information	40

Item 6.	Exhibits and Reports on Form 8-K	41

Signatures		42

Certifications

Exhibits

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

PLUMTREE SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)


	As of June 30, 2005			As of December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	12,513		$	23,136
Short-term investments		55,453			41,898
Accounts receivable (net of allowance for doubtful accounts of $660 and $787, respectively)		17,591			20,552
Prepaid expenses and other current assets		3,054			2,313

Total current assets		88,611			87,899
Property and equipment, net		2,453			2,532
Other assets		312			380

Total assets	$	91,376		$	90,811

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,291		$	1,841
Accrued and other current liabilities		14,920			14,944
Current portion of deferred revenue		20,631			20,804

Total current liabilities		37,842			37,589
Deferred revenue, less current portion		1,849			1,856
Other long term liabilities		322			360

Total liabilities		40,013			39,805

Stockholders’ equity:
Convertible preferred stock, $0.001 par value:
Authorized – 20,000 shares; Issued and Outstanding – None
Common stock, $0.001 par value:
Authorized – 100,000 shares; Issued and Outstanding – 33,301 and 32,397, respectively		33			32
Additional paid-in capital		104,559			102,104
Deferred stock-based compensation		(71	)		(165	)
Accumulated other comprehensive loss		(661	)		(412	)
Accumulated deficit		(52,497	)		(50,553	)

Total stockholders’ equity		51,363			51,006

Total liabilities and stockholders’ equity	$	91,376		$	90,811

See accompanying notes to the condensed consolidated financial statements

PLUMTREE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
Revenue:
Licenses	$	7,396		$	7,911		$	17,387		$	14,782
Services and maintenance		15,075			11,557			29,661			22,408
Contingent contract reserve (See Note 1)		(1,543	)		—			(1,543	)		—

Total revenue		20,928			19,468			45,505			37,190
Cost of revenue:
Licenses		114			422			283			850
Services and maintenance		5,771			4,638			11,337			8,756
Amortization of stock-based compensation and acquired technology		5			425			6			872

Total cost of revenue		5,890			5,485			11,626			10,478

Gross margin		15,038			13,983			33,879			26,712
Operating expenses:
Research and development		6,344			5,886			12,933			11,395
Sales and marketing		8,166			8,623			17,476			16,635
General and administrative		2,842			2,752			5,548			5,139
Restructuring charges		–			307			–			307
Amortization of stock-based compensation		17			103			19			287

Total operating expenses		17,369			17,671			35,976			33,763

Loss from operations		(2,331	)		(3,688	)		(2,097	)		(7,051	)
Interest income		393			241			704			516
Other income (loss), net		(5	)		(101	)		(114	)		(227	)

Income (loss) before income taxes		(1,943	)		(3,548	)		(1,507	)		(6,762	)
Provision for income taxes		259			139			437			301

Net loss	$	(2,202	)	$	(3,687	)	$	(1,944	)	$	(7,063	)
Basic and diluted net loss per common share:	$	(0.07	)	$	(0.12	)	$	(0.06	)	$	(0.22	)

Weighted average common shares outstanding:
Shares used to compute basic and diluted net loss per common share:		33,103			31,882			32,938			31,680

See accompanying notes to the condensed consolidated financial statements

PLUMTREE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Six Months Ended June 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(1,944	)	$	(7,063	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for doubtful accounts		106			168
Amortization of premium on short-term investments		209			465
Depreciation and amortization		805			632
Issuance of stock options granted to non-employees		—			30
Amortization of stock-based compensation		25			371
Amortization of acquired technology		—			788
Amortization of warrants issued for services		18			18
Changes in assets and liabilities:
Accounts receivable		2,855			(2,584	)
Prepaid expenses and other current assets		(741	)		(344	)
Other assets		50			4
Accounts payable		450			533
Accrued and other current liabilities		(24	)		499
Deferred revenue		(180	)		1,957
Long-term liabilities		(38	)		(32	)

Net cash provided by (used in) operating activities		1,591			(4,558	)

Cash flows from investing activities:
Purchases of property and equipment		(726	)		(815	)
Purchases of short-term investments		(45,085	)		(16,835	)
Proceeds from sale of short-term investments		31,344			24,186

Net cash provided by (used in) investing activities		(14,467	)		6,536

Cash flows from financing activities:
Proceeds from issuance of common stock		2,525			1,146

Effect of change in exchange rates on cash and cash equivalents		(272	)		210

Net increase (decrease) in cash and cash equivalents		(10,623	)		3,334
Cash and cash equivalents at beginning of period		23,136			20,434

Cash and cash equivalents at end of period	$	12,513		$	23,768

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	509		$	54

Cash paid for interest	$	—		$	15

See accompanying notes to the condensed consolidated financial statements

PLUMTREE SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. BACKGROUND AND BASIS OF PRESENTATION

The Company

Plumtree Software, Inc., (the “Company”) develops and distributes infrastructure software, maintenance and consulting, training and installation services that enable businesses to deploy corporate portals, collaborative communities, and activity based applications.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of December 31, 2004 and June 30, 2005, the results of operations for the three months and six months ended June 30, 2005 and 2004 and cash flows for the six months ended June 30, 2005 and 2004. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed on March 11, 2005.

The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for the full fiscal year ending December 31, 2005.

Revenue Recognition

License revenue consists principally of revenue from the licensing of the Company’s software and is generally recognized when a contract is executed, all delivery obligations have been met, the fee is fixed or determinable, and collectibility is probable. When licenses are sold together with services, in accordance with the provisions of the American Institute of Certified Public Accountants’ Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”), license fees are recognized upon delivery, provided that (1) the above criteria have been met, (2) payment of the license fees is not dependent upon the performance of the services, and (3) the services are not essential to the functionality of the software.

The Company has not established vendor specific objective evidence of fair value (“VSOE”) for license sales and recognizes revenue from arrangements with multiple elements involving software licenses under the residual method as outlined in SOP 97-2, as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Arrangements”. To the extent that a discount exists on any of the elements, the Company follows the residual method and attributes that discount entirely to the delivered elements.

The Company enters into certain arrangements involving the resale of third-party software. In addition, the Company generates qualified leads, for a fee, through third-party partners. The revenue related to these arrangements is reported gross if management determines that it is acting as a principal in the arrangement and is assuming certain risk and rewards or net if management determines that it is acting as an agent in the arrangement, in accordance with the provisions of EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”. Management’s determination is based on a number of factors including who is perceived as the primary obligor in the transaction, who is assuming credit risk and the degree of pricing latitude the Company maintains.

The Company follows EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s product)”. Accordingly, payments to customers (as defined in EITF 01-9) are reviewed and treated as a reduction in revenue or a cost or expense based on the transaction and relationship.

Service revenue consists of consulting, training and installation services that the Company provides to its customers. Revenue from such services is generally recognized as the service is performed. If services are included with a license agreement, and services are not essential to the functionality of the software, amounts related to services are unbundled from the license fee based on VSOE as established by transactions where such services have been sold separately.

Maintenance revenue relates to the technical support and software updates the Company provides to its customers. Revenue on maintenance contracts is recognized ratably over the term of the contract. If maintenance is bundled with a license agreement, amounts related to maintenance are unbundled from the license fee based on VSOE as established by the renewals the Company charges in accordance with its contracts and its established pricing.

Unbilled receivables for professional services and related expenses as of June 30, 2005 and December 31, 2004 are $904,000 and $467,000, respectively. These amounts are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets.

Stock-Based Compensation

In accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, the Company applies the intrinsic value method in accounting for employee stock options. Accordingly, the Company recognizes no compensation expense with respect to stock-based awards to employees for which the exercise price equals the fair market value of the stock on the date of grant. The Company has determined pro forma information regarding net loss and net loss per common share as if the Company had accounted for employee stock options under the fair value method as required by Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, and Statement of Financial Accounting Standards No. 148 (“SFAS 148”), Accounting for Stock-Based Compensation Transition and Disclosure. The fair value of these stock-based awards to employees was estimated using the Black-Scholes option pricing model, using the following weighted average assumptions:


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Risk-free interest rate	3.8	%	3.4	%	3.8	%	3.0	%
Expected life of the option	4 years		4 years		4 years		4 years
Dividend yield	0	%	0	%	0	%	0	%
Volatility	71	%	80	%	68	%	80	%

The fair value of rights under the Company’s 2002 Employee Stock Purchase Plan (“ESPP”) for the three months and six months ended June 30, 2005 and 2004 was estimated using the Black-Scholes option pricing model, using the following weighted average assumptions:


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Risk-free interest rate	2.6	%	2.1	%	2.6	%	1.8	%
Expected life of the option	1.25 years		1.25 years		1.25 years		1.25 years
Dividend yield	0	%	0	%	0	%	0	%
Volatility	73	%	85	%	73	%	85	%

For pro forma purposes, the estimated fair value of the Company’s stock-based awards to employees is amortized over the options’ vesting period (generally four years) and the ESPP’s look back period of up to two years. The weighted-average estimated fair value of stock options issued for the three months ended June 30, 2005 and 2004 was $2.57 and $2.57 per share, respectively. The weighted-average estimated fair value of share purchase rights under the ESPP for the three months ended June 30, 2005 and 2004 was $1.88 and $1.41 per share, respectively. The weighted-average estimated fair value of stock options issued for the six months ended June 30, 2005 and 2004 was $2.51 and $1.41 per share, respectively. The weighted-average estimated fair value of share purchase rights under the ESPP for the six months ended June 30, 2005 and 2004 was $1.88 and $1.41 per share, respectively. The Company’s pro forma net loss and pro forma net loss per common share data under SFAS No. 123 is as follows (in thousands, except per share amounts):


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net loss as reported	$	(2,202	)	$	(3,687	)	$	(1,944	)	$	(7,063	)
Add: Stock-based employee compensation expense included in net loss		22			134			25			371
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards		(1,304	)		(1,506	)		(2,512	)		(3,341	)

Pro forma net loss under SFAS 123	$	(3,484	)	$	(5,059	)	$	(4,431	)	$	(10,033	)

Net loss per common share – Basic and diluted:
As reported under APB 25	$	(0.07	)	$	(0.12	)	$	(0.06	)	$	(0.22	)

As reported under SFAS 123	$	(0.11	)	$	(0.16	)	$	(0.13	)	$	(0.32	)

Amortization of stock-based compensation expense is as follows (in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2005		2004		2005		2004
Amortization of stock-based compensation included in cost of revenue	$	5	$	31	$	6	$	84
Amortization of stock-based compensation included in operating expenses:
Research and development		8		47		9		130
Sales and marketing		7		46		8		130
General and administrative		2		10		2		27

Total stock-based compensation included in operating expenses		17		103		19		287

Total stock-based compensation	$	22	$	134	$	25	$	371

Cash Equivalents and Short-term Investments

Cash equivalents consist of highly liquid investments including money market funds with maturities of 90 days or less from the date of purchase.

The following is a chart of the principal amounts of short-term investments and cash equivalents by expected maturity (in thousands):


	Expected Maturity Date during the Year Ending December 31,								As of June 30, 2005
	2005		2006		2007		Total Cost Value		Total Fair Value
Taxable auction rate securities	$	7,252	$	—	$	—	$	7,252	$	7,252
US Government agencies		5,948		6,000		1,500		13,448		13,369
Corporate notes		19,870		12,004		3,638		35,512		34,832

Total	$	33,070	$	18,004	$	5,138	$	56,212	$	55,453

It is our policy to review our short term investments on a regular basis to evaluate whether or not any investment is impaired. With respect to the above investments we are exposed to market risks for changes in interest rates. We place our investments with high quality credit issuers that have a rating by Moody’s of A-1 or higher, Fitch’s of F-1 or higher and/or Standard & Poors of P-1 or higher.

The Company’s general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. The Company considers all investments to be short-term investments, which are classified in the balance sheet as current assets, because (1) the investments can be readily converted at any time into cash or into securities with a shorter remaining time to maturity and (2) the investments are selected for yield management purposes only and the Company is not committed to holding the investments until maturity. The Company determines the appropriate classification of its investments at the time of purchase and re-evaluates such designations as of each balance sheet date. All short-term investments and cash equivalents in the Company’s portfolio are classified as “available-for-sale” and are stated at fair market value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. The cost of securities sold is based on the specific identification method.

Intangible Assets

In November 2001, the Company acquired certain technology for $85,000 and 60,000 shares of common stock. In November 2001, the Company also acquired a company (the “Acquired Company”) for 297,594 shares of common stock. The acquisition of the Acquired Company was accounted for under the purchase method. The purchase price was allocated to acquired technology and is being amortized over its estimated useful life of three years. Amortization is being recorded as cost of revenue and was $0 and $394,000 for the three months ended June 30, 2005 and 2004, respectively and $0 and $788,000 for the six months ended June 30, 2005 and 2004, respectively. Acquired technology was fully amortized as of December 31, 2004.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	June 30, 2005		December 31, 2004
Accrued commissions and bonus	$	2,558	$	3,602
Accrued sales taxes		1,222		1,536
Accrued vacation		1,883		1,619
Accrued professional services		2,130		2,711
Accrued contingent contract reserve		1,543		—
Accrued third-party software		460		425
Accrued ESPP		835		739
Accrued other		4,289		4,312

	$	14,920	$	14,944

Commitments

On June 28, 2005, the Company entered into a sixth amendment to our lease with WXI/San Realty, L.L.C. a Delaware limited liability company (“Landlord”), which amends the original lease, as amended, for certain office space in the building located at 500 Sansome Street, San Francisco, California. The original lease, as amended, was set to expire on October 31, 2006. Among other things, the amended lease that took effect on June 1, 2005 extended the term of the lease to October 31, 2008, added an option, subject to certain conditions, to extend the lease term for an additional 3 years, beyond October 31, 2008, permitted the Company to carry out certain office space renovations, and adjusted the monthly base rent payable under the lease. Monthly base rent payable under the original lease, as amended, was $226,000 compared to $153,000 for the extended term. Effective upon signing the sixth amendment to our lease, the required letter of credit (enforceable against the Silicon Valley Bank facility described below) to our landlord was reduced to $400,000. In August 2005, the Company formally reduced the balance subject to the letter of credit to $400,000.

On October 25, 2004 we signed an amended agreement with Silicon Valley Bank that increased our credit limit to $4 million (from $3.1 million) and eliminated the minimum cash balance requirement that previously existed related to United States bank accounts and replaced this requirement with other financial covenants. We have limitations on declaring and paying dividends, incurring any non-permitted indebtedness and acquiring the capital stock of any other company under our loan agreements with Silicon Valley Bank. As of June 30, 2005, we were in compliance with all financial covenants under the revolving line of credit agreement with Silicon Valley Bank. To secure any outstanding loans, we have granted Silicon Valley Bank a security interest in our assets, including our accounts receivable. Interest on the revolving line of credit is payable monthly and accrues at one percentage point above the prime rate as announced by Silicon Valley Bank. As of June 30, 2005, no amounts were outstanding under this facility.

Litigation and Contingencies

Datamize

On May 17, 2002, Datamize, LLC filed a lawsuit against the Company in the United States District Court for the District of Montana (Civil Action No. 02-86-M-LBE). In its complaint, Datamize alleged that it is the owner of U.S. Patent Number 6,014,137 (“the ‘137 patent”), and that the Company infringed one or more claims of the ‘137 patent. Datamize was seeking, among other things, injunctive relief and unspecified damages. The Company moved the Court (the “Motion”) to dismiss the action for lack of personal jurisdiction or, in the alternative, have the action transferred to the Northern District of California. In early July 2003, the Court granted the Motion and entered judgment in favor of the Company on July 7, 2003 in accordance with that order.

In December 2002, the Company filed a complaint for declaratory relief against Datamize in United States District Court for the Northern District of California (Civil Action No. 02-5693 VRW). The Company sought a declaratory judgment that it does not infringe any valid claim of the ‘137 patent, which Datamize claims to own. Datamize filed its answer and a counterclaim alleging that the Company infringes the ‘137 patent. In response to a procedural motion, the Court realigned the parties so that the Company was the defendant, and Datamize was the plaintiff. The parties engaged in discovery, and began the process of construction of the patent claims. On March 31, 2004, the Company filed a motion for summary judgment, seeking to have the ‘137 patent held invalid on the grounds of indefiniteness. On July 9, 2004, the Court granted the Company’s motion, holding the ‘137 patent invalid, and entered a judgment in favor of the Company. Datamize has appealed the district court’s entry of summary judgment of invalidity to the Court of Appeals for the Federal Circuit. On August 5, 2005, the Court of Appeals affirmed the district court’s summary judgment, confirming the invalidity of the ‘137 patent.

In 2002 and 2003, Datamize was issued two new patents based on continuation applications to the ‘137 patent, U.S. Patent Nos. 6,460,040 (“the ‘040 patent”) and 6,658,418 (“the ‘418 patent”). Datamize accused the Company of infringing one or more claims of one or more of these patents. On July 12, 2004, the Company filed a new complaint for declaratory relief against Datamize in the United States District Court for the Northern District of California (Civil Action No. 5:2004-CV-0277), seeking a declaration that the Company does not infringe any valid claims of the ‘040 patent or the ‘418 patent. On October 15, 2004, Plumtree filed a motion for summary judgment, seeking to invalidate the claims of the ‘040 patent and the ‘418 patent on grounds of invalidity in light of the “on sale bar.” On October 18, 2004, Datamize filed a motion to dismiss Plumtree’s new declaratory judgment complaint, alleging that there is no “case or controversy” with respect to these patents. The Court has taken both parties’ motions under submission.

Advarion

On February 28, 2005, Advarion, Inc. (“Advarion”) filed a complaint against the Company and six other defendants in the U.S. District Court for the Southern District of Texas, Case No. 4:04-CV-03841. The allegations of the complaint appear to relate to the Company’s past development efforts with co-defendant ClassFirst Foundation for potential products intended for educational settings. The complaint asserts purported claims for copyright infringement, misappropriation of trade secrets, trade dress infringement, unfair competition, and other state law claims. By its complaint, Advarion seeks damages, preliminary and permanent injunctive relief, declaratory judgment, costs, and attorney’s fees. During a status conference regarding this matter on March 21, 2005, the judge struck the complaint on his own motion, and took under submission whether Advarion could amend its complaint to add Plumtree. On May 31, 2005, Advarion agreed not to add Plumtree to the suit or otherwise sue Plumtree in connection with the allegations made in its complaint. On July 12, 2005, Advarion’s complaint was dismissed with prejudice.

The results of the above issues and proceedings cannot be predicted with certainty and potential exposure is not estimable; however, in the opinion of management, the potential liabilities associated with these complaints are not expected to have a material adverse effect on the Company’s financial position, liquidity or results of operations.

General Services Administration

Since October 2001, the Company has sold licenses, maintenance, and services to the United States Government and other qualified entities under a U.S. General Services Administration (GSA) contract. Under the terms of this contract, the GSA is permitted to audit the Company’s compliance with the terms and conditions of the GSA contact.

In February 2005, we became aware that in connection with certain sales made under our GSA contract, we did not comply with the terms of the “Price Reductions” clause of such contract as it related to two contracts. As a result, we voluntarily offered the GSA a temporary price reduction. In response, we were informed that the matter would be considered further within the GSA. In the second quarter of 2005, we commenced an internal investigation into this matter and, with the assistance of special legal counsel and forensic accountants, concluded that it was probable that a damage payment or future discounts off of the GSA price list was due to the GSA under the referenced GSA contract pursuant to the “Price Reductions” clause.

In the quarter ended June 30, 2005, the Company recorded a $1.5 million contingent contract reserve for the estimated potential damage payment or future discounts off of the GSA price list related to the GSA contract matter. The amount was estimated in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 5 “Accounting for Contingencies” and FASB Interpretation (FIN) No. 14 “Reasonable Estimation of the Amount of a Loss” and has been booked as contra-revenue in the accompanying condensed consolidated statements of operations. The final amount of the potential contract damages or future discounts off of the GSA price list under the “Price Reductions” clause is subject to the outcome of settlement discussions and final resolution with the GSA. It is possible that the final settlement could exceed the reserve and have a material impact on the Company’s financial position, revenues, liquidity and results of operations. In addition, it is possible that the GSA may elect to take other action that may adversely affect our financial position, revenues, liquidity, and results of operations.

Cost of License Revenue

The Company has entered into various license arrangements with other software providers to incorporate the software provider’s software in the Company’s product. In return for these licenses, the Company is required to pay certain fees upon signing of the arrangements plus a certain percentage of the Company’s net revenue, as defined in these agreements, generated from the sales of its product. Royalty expense is recognized in the period in which liability is incurred. Up-front fees are amortized over the period benefited or as the incorporated software is sublicensed, as applicable. For the three months and six months ended June 30, 2005 the Company incurred royalty expense of approximately $103,000 and $167,000, respectively, related to these arrangements. For the three months and six months ended June 30, 2004 the Company incurred royalty expense of approximately $160,000 and $351,000, respectively, related to these arrangements. The Company classifies all royalty expenses as cost of license revenues.

For the three months and six months ended June 30, 2005, the Company incurred $11,000 and $60,000, respectively, related to referral fees owed to third-party partners. For the three months and six months ended June 30, 2004, the Company also included in cost of license revenue $232,000 and $445,000, respectively, related to two separate agreements with third party software providers in which the Company resold their software along with the Company’s software to the customer.

Net Loss Per Share

Basic and diluted net loss per common share are presented in conformity with SFAS No. 128, “Earnings Per Share,” for all periods presented. In accordance with SFAS No. 128, basic net loss per share is calculated by dividing net loss by the weighted average common shares outstanding during the period, less shares subject to repurchase. Diluted net loss per share is calculated by dividing net loss by the weighted average common shares outstanding adjusted for all potential dilutive common shares, which includes shares issuable upon the exercise of outstanding common stock options, warrants, employee stock option plan, and common stock subject to repurchase, using the treasury stock method. The Company excludes all potentially dilutive securities from its diluted net loss per share computation when the affect would be anti-dilutive.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net loss	$	(2,202	)	$	(3,687	)	$	(1,944	)	$	(7,063	)
Basic and diluted:
Weighted average shares of common stock		33,103			31,886			32,938			31,688
Less: Weighted average shares subject to repurchase		—			(4	)		—			(8	)

Weighted average shares used in computing basic and diluted net loss per common share		33,103			31,882			32,938			31,680

Basic and diluted net loss per common share	$	(0.07	)	$	(0.12	)	$	(0.06	)	$	(0.22	)

The weighted average exercise price of options to purchase common stock excluded from the diluted net loss calculation above was $3.88 and $4.27 as of June 30, 2005 and 2004, respectively.

The following potential shares of common stock have been excluded from the computation of diluted net loss per share because the effect of including these shares would have been anti-dilutive (in thousands):


	As of June 30,
	2005	2004
Options to purchase common stock	11,052	11,435
Common stock subject to repurchase	—	4
Employee stock purchase plan	291	264
Warrants	41	41

Weighted average potential shares of common stock excluded	11,384	11,744

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS 123(R) “Share-Based Payment.” SFAS 123(R) requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This cost is recognized over the period during which the employee is required to provide service in exchange for the award (usually the vesting period). The accounting guidance provided in SFAS 123(R) is expected to be effective for the Company as of January 1, 2006. The Company expects to apply the prospective approach for the transition period beginning January 1, 2006. The Company’s stock option plan and Employee Stock Purchase Plan will be subject to the fair value provisions under SFAS 123(R). Note 1 included in these Condensed Consolidated Financial Statements provides the pro forma net loss and earnings per share as if the Company had used the fair-value based method similar to the methods required under SFAS 123(R) to measure the compensation expense for employee stock awards during the three and six months ended June 30, 2005 and 2004. The Company expects this to have a material impact on reported net income (loss) in future periods after adoption.

In December 2004, the FASB also issued Staff Position SFAS No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision (“FSP No. 109-2”) within the American Jobs Creation Act of 2004. The Act provides for a one-time deduction of 85 percent of certain foreign earnings that are repatriated in either an enterprise’s last tax year that began before the date of enactment, or the first tax year that begins during the one year period beginning on the date of enactment. FSP No. 109-2 allows companies additional time to evaluate whether foreign earnings will be repatriated under the repatriation provisions of the new tax law and requires specified disclosures for companies needing the additional time to complete the evaluation. FSP No. 109-2 was effective on date of issuance. The Company does not expect this pronouncement to have a significant affect on operations.

On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC staff’s interpretation of share-based payments. This interpretation expresses the views of the staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods, the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123(R) in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123(R), the modification of employee share options prior to adoption of Statement 123(R) and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS 123(R). The Company will adopt SAB 107 in connection with its adoption of SFAS 123(R), which the Company expects to have a material impact on our consolidated financial position and results of operations.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” This new standard replaces APB Opinion 20, “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was affected by a change in accounting principle, and that corrections of previously issued financial statements should be termed a “restatement”. The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

Note 2. Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, established standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

The Company has organized its operations based on a single operating segment: the development and delivery of corporate portal, collaboration, content management and search software as well as related maintenance and consulting, training and installation services for enterprises.

The disaggregated information reviewed on a product basis by the CEO (our chief operating decision maker) is as follows (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005			2004
Revenues:
License	$	7,396		$	7,911	$	17,387		$	14,782
Maintenance		7,303			6,093		14,537			11,972
Professional services and training		7,772			5,464		15,124			10,436
Contingent contract reserve		(1,543	)		—		(1,543	)		—

Total revenues	$	20,928		$	19,468	$	45,505		$	37,190

The Company markets its products primarily from its operations in the United States. International sales are made primarily to customers in Canada, Europe, Japan and Asia Pacific. Substantially all of the Company’s assets are located within the Americas. Information regarding the Company’s revenues in different geographic regions is as follows (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005			2004
Revenues:
United States of America	$	17,202		$	13,104	$	35,348		$	27,024
International		5,269			6,364		11,700			10,166
Contingent contract reserve		(1,543	)		—		(1,543	)		—

Total revenues	$	20,928		$	19,468	$	45,505		$	37,190

For the three months and six months ended June 30, 2005 and 2004, no customer represented more than 10% of the Company’s total revenues. As of June 30, 2005 and 2004, no customer accounted for greater than 10% of accounts receivable.

Note 3. Comprehensive Loss

Comprehensive loss includes net loss, unrealized gains on available-for-sale securities and foreign currency translation adjustments.

Comprehensive loss is comprised of the following (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net loss	$	(2,202	)	$	(3,687	)	$	(1,944	)	$	(7,063	)
Other comprehensive loss:
Change in accumulated foreign currency translation adjustments		(61	)		40			(272	)		208
Change in accumulated unrealized gain (loss) on available-for-sale securities		99			(459	)		23			(429	)

Total comprehensive loss	$	(2,164	)	$	(4,106	)	$	(2,193	)	$	(7,284	)

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report. This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties identified in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2005, as well as other reports that we will file from time to time with the Securities and Exchange Commission. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including, but not limited to, those presented in “Risk Factors that May Affect Our Future Results and the Market Price of Our Stock” and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even if new information becomes available or other events occur in the future.

Overview and Executive Summary

Plumtree Software, Inc. (“we”, “Plumtree” or the “Company”), was incorporated in California on July 18, 1996 and reincorporated in Delaware on May 31, 2002. Our initial public offering of 5,000,000 shares of common stock was on June 4, 2002.

We develop and distribute infrastructure software, maintenance and consulting, training and installation services that enable businesses to deploy corporate portals, collaborative communities, and activity based applications.

We derive our revenue and generate cash from customers from primarily two sources: (i) product license revenue, and (ii) software maintenance, professional services and training revenue. For the three months ended June 30, 2005 and 2004, our total revenue was $20.9 million and $19.5 million, respectively, and our net loss was $2.2 million and $3.7 million, respectively. For the six months ended June 30, 2005 and 2004, our total revenue was $45.5 million and $37.2 million, respectively, and our net loss was $1.9 million and $7.1 million, respectively. The Company’s total revenue for the three and six months ended June 30, 2005 includes the effect of a $1.5 million contingent contract reserve.

In addition to total revenue and net income, in evaluating our business, management considers, among many other factors, the following:

•

Matters that impact our sales cycle.

•

The selling environment continues to be difficult and we have seen evidence of war time budget reallocation, decreased federal funding to state and local governments and purchasing delays, which appear to be consistent across the software industry. All of these factors have an impact on the current software market.

•

Revenue by category (license, maintenance and professional services and training):

•

License. Our license revenue for the three months ended June 30, 2005 was $7.4 million, a 7% decrease over the three months ended June 30, 2004, resulting primarily from customers delaying purchasing decisions. Our license revenue for the six months ended June 30, 2005 was $17.4 million, an 18% increase over the six months ended June 30, 2004, resulting primarily from strong sales in the first quarter of 2005 as well as the release of Plumtree Analytics Server product in the first quarter of 2005.

•

Maintenance, Professional Services and Training. We provide maintenance and customer care through technical support and assigned account managers; we offer professional services to deploy, configure and customize the Plumtree Corporate Portal and other Plumtree products at customer sites, and to train alliance members, including technology vendors and systems integrators; and we offer a series of training classes designed to provide our customers and alliance members with the knowledge and tools necessary to deploy, administer and expand the portal within the enterprise.

•

Revenue for maintenance and technical support for the three months and six months ended June 30, 2005 were $7.3 million and $14.5 million, respectively, representing an increase of $1.2 million or 20% and $2.6 million or 21%, respectively, over the comparable periods in 2004. The increase is primarily attributable to an increase in maintenance revenue from new customers as well as renewals of maintenance contracts from our installed base of customers.

•

Revenue attributable to professional services and training increased during the three months and six months ended June 30, 2005 to $7.8 million and $15.1 million, respectively, as compared to $5.5 million and $10.4 million for the comparable periods in 2004. The increase in professional services and training revenue is primarily related to an increase in demand from our customer base resulting in an increase in professional services and training headcount, utilization, and subcontracted services.

•

We expect our maintenance, professional services and training revenue, in general, to increase during the remainder of 2005, primarily due to increased maintenance revenue from both new customers as well as maintenance renewals from our installed customer base and increased demand for professional services.

•

Contingent contract reserve. We recorded a $1.5 million charge as contra-revenue for the three and six months ended June 30, 2005. This amount related to estimated damages as a result of non-compliance with the “Price Reductions” clause of our GSA contract. The amount was estimated with the assistance of special legal counsel and forensic accountants and based on the Company records as well as specific terms and conditions under the GSA contract. The final amount of the potential contract damages or future discounts off of the GSA price list under the “Price Reductions” clause is subject to the outcome of settlement discussions and final resolution with the GSA. It is possible that the final settlement could exceed the reserve and have a material impact on the Company’s financial position, revenues, liquidity and results of operations. In addition, it is possible that the GSA may elect to take other action that may adversely affect our financial position, revenues, liquidity, and results of operations.

•

Deferred revenue balances:

•

Our total deferred revenue balance at June 30, 2005 was $22.5 million, of which approximately $238,000 relates to deferred license revenue, approximately $21.4 million relates to deferred maintenance revenue and approximately $826,000 relates to deferred professional services and training revenue. During the six months ended June 30, 2005, our total deferred revenue balance decreased $180,000 over the balance at December 31, 2004. The decrease in total deferred revenue from December 31, 2004 to June 30, 2005 is comprised of a decrease in deferred license and deferred professional services and training revenue partially offset by increases in deferred maintenance revenue.

•

Deferred license revenue decreased by $454,000 to $238,000 at June 30, 2005 as compared to $692,000 at December 31, 2004, primarily due to timing of extended payment term license deals.

•

Deferred maintenance revenue increased $803,000 during the six months ended June 30, 2005 as compared to the balance at December 31, 2004 primarily related to an increase in deferred maintenance revenue from new customers as well as renewals of maintenance contracts by our installed base of customers.

•

Deferred professional services and training revenue decreased $529,000 during the six months ended June 30, 2005 as compared to the balance at December 31, 2004 as fewer of our customers at June 30, 2005 prepaid for services and training as compared to December 31, 2004.

•

During the remainder of 2005 we expect the composition of our deferred revenue balances to remain consistent with the current breakdown of deferred revenue, with deferred maintenance revenue increasing as more of our customers renew their maintenance contracts and new license arrangements are signed. The mix between short-term and long-term deferred revenue will depend on the number of maintenance contracts that extend beyond a 12-month period.

•

Number of license revenue transactions and breakdown of new customers versus repeat customers.

During the three months ended June 30, 2005, we completed 66 license transactions, which include 20 new customers or 30% of total license transactions and 46 repeat orders or 70% of total license transactions bringing our total number of customers licensed since inception to 739. During the three months ended June 30, 2004, we completed 78 license transactions, which included 36 new customers or 46% of total license transactions and 42 repeat orders or 54% of total license transactions. During the six months ended June 30, 2005, we completed 126 license transactions, which included 36 new customers or 29% of total license transactions and 90 repeat orders or 71% of total license transactions as compared to the six months ended June 30, 2004, in which we completed 143 license transactions, which included 63 new customers or 44% of total license transactions and 80 repeat orders or 56% of total license transactions.

•

Revenue by geographic region.

We operate our business in 2 geographic regions: (i) United States and (ii) International, which consists of Europe, Middle East and Africa (“EMEA”), Japan and Asia-Pacific (“APAC”), and Canada. In the three months and six months ended June 30, 2005, 77% and 75% of our license, maintenance and service revenue was generated within the United States, respectively, with International license, maintenance and service revenue collectively accounting for 23% and 25%, respectively.

•

Cash and cash equivalents and short-term investments:

At June 30, 2005, our cash, cash equivalents and short-term investments were $68.0 million, an increase of $800,000 from March 31, 2005 and an increase of $2.9 million from December 31, 2004. Historically, we have managed to increase our overall cash and investment position or remain in a relatively cash neutral position on a quarterly basis. We expect to have a continued focus on collections, but anticipate spending cash to expand our product line, make key management additions and improve our product support efforts. We anticipate that our primary utilization of cash during the remainder of 2005 will continue to be capital expenditures, salaries, commissions, bonuses and other payroll related costs.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America or “GAAP.” These accounting principles require 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 these 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 revenues 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. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

•

Software revenue recognition;

•

allowance for doubtful accounts;

•

income taxes; and

•

determination of the fair value of stock options granted to employees.

Software Revenue Recognition

Our software arrangements typically include: (i) an end user license that provides for an initial fee in exchange for a customer’s use of our products in perpetuity based on a specified number of users or CPUs; (ii) a maintenance arrangement that provides for technical support and product updates over a period of 12 months; and (iii) a professional service arrangement on a time and materials basis. We recognize software revenue using the residual method pursuant to the requirements of Statement of Position No. 97-2 “Software Revenue Recognition,” as amended by Statement of Position No. 98-9, “Software Revenue Recognition with Respect to Certain Arrangements.” Under the residual method, revenue is recognized when Plumtree-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e. professional services, training and maintenance), but does not exist for one or more of the delivered elements in the arrangement (i.e. the software product). We allocate revenue to each undelivered element based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. We determine the fair value of the maintenance portion of the arrangement based on consistent pricing of maintenance and maintenance renewals as a percentage of net license fees. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred and recognized over the period that these elements are delivered. For substantially all of our software arrangements, we defer revenue for the fair value of the maintenance and professional services to be provided to the customer and recognize revenue for the software license when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, and collection is deemed probable. We evaluate each of these criteria as follows:

•

Evidence of an arrangement: We consider a non-cancelable agreement signed by us and the customer to be evidence of an arrangement.

•

Delivery: Delivery is considered to occur when media containing the licensed programs is provided to a common carrier or, in the case of electronic delivery, the customer is given access to the licensed programs.

•

Acceptance: Our typical end user license agreement does not include customer acceptance provisions. If the arrangement specifies acceptance provisions, we defer the revenue until the earlier of written acceptance by the customer or the customer’s acceptance rights expire.

•

Fixed or determinable fee: We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and is on standard payment terms. If the arrangement fee is not fixed or determinable, we recognize the revenue as amounts become due and payable.

•

Collection is deemed probable: We conduct reviews for all significant transactions at the time of the arrangement to determine the credit worthiness of the customer. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, we defer the revenue and recognize the revenue upon cash collection.

The Company enters into certain arrangements involving the resale of third-party software. In addition, the Company generates qualified leads, for a fee, through third-party partners. The revenue related to these arrangements is reported gross if management determines that it is acting as a principal in the arrangement and is assuming certain risk and rewards or net if management determines that it is acting as an agent in the arrangement, in accordance with the provisions of EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”. Management’s determination is based on a number of factors including who is perceived as the primary obligor in the transaction, who is assuming credit risk and the degree of pricing latitude the Company maintains.

In addition, the Company follows EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer(Including a Reseller of the Vendor’s product)”. Accordingly, payments to customers (as defined in EITF 01-9) are reviewed and treated as a reduction in revenue or a cost or expense based on the transaction and relationship.

Allowance for Doubtful Accounts

We have provided an allowance for doubtful accounts of $660,000 as of June 30, 2005 for estimated losses resulting from the inability of our customers to make their required payments. The allowance for doubtful accounts changes based on the overall level of accounts receivable, past history of collection, and the aging of customer accounts.

The total allowance for doubtful accounts is comprised of a specific reserve and a general reserve. We regularly review the adequacy of our allowance for doubtful accounts after considering the size of the accounts receivable aging, the age of each invoice, each customer’s expected ability to pay and our collection history with each customer. Unless specific indications arise earlier, we review any invoice greater than 120 days past due to determine if an allowance is appropriate based on the risk category. In addition, we maintain a general reserve for all invoices billed, and not included in the specific reserve, by applying a percentage based on each 30-day age category. For unbilled invoices, we generally apply a percentage to the entire balance. In determining these percentages, we analyze our historical collection experience and current economic trends.

In calculating the specific reserve, we identify specific high-risk accounts where collection is deemed unlikely. In calculating the general reserve, we reduce the gross accounts receivable balance by any specific reserves as well as amounts that have been billed, but not recognized as revenues (deferred revenues). The remaining balance is segregated into 30-day aged categories and a reserve percentage is applied to each category. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. However, historically the reserve has proven to be adequate.

Income Taxes

We provided a valuation allowance of $19.5 million against the entire net deferred tax asset as of December 31, 2004. The valuation allowance was recorded given the accumulated losses we have incurred and uncertainties regarding our future operating profitability and taxable income. Our income tax provision is primarily related to income and withholding taxes on sales and income generated in non-U.S. and domestic state tax jurisdictions for which no U.S. benefit is currently recognizable. We recorded an income tax provision of $437,000 and $301,000 for the six months ended June 30, 2005 and 2004, respectively, related to these tax liabilities. We continue to monitor and evaluate exposures related to doing business in international jurisdictions.

Determination of Fair Value of Options Granted to Employees

In connection with the granting of certain stock options, we recorded deferred stock-based compensation charges in the periods before our initial public offering representing the difference between the deemed fair value of our common stock for accounting purposes and the option exercise price. We determined the deemed fair value based upon several factors including our operating performance, issuances of our convertible preferred stock and valuations of comparable publicly traded software companies. As of June 30, 2005 and December 31, 2004, we had $71,000 and $165,000 of deferred stock-based compensation remaining, respectively. For the six months ended June 30, 2005 and 2004 we recognized $25,000 and $371,000 of stock-based compensation expense, respectively. We apply the intrinsic value method in accounting for employee stock options in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. Accordingly, we recognize no compensation expense with respect to stock-based awards to employees with exercise prices equal to the fair market value of the award on the date of grant. Had different assumptions or criteria been used to determine the deemed fair value of the stock, materially different amounts of stock-based compensation could have been reported.

Had we applied fair value accounting for our stock options as outlined in Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, our operating results (in thousands) would have been affected as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net loss as reported	$	(2,202	)	$	(3,687	)	$	(1,944	)	$	(7,063	)
Add: Stock-based employee compensation expense included in net loss		22			134			25			371
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards		(1,304	)		(1,506	)		(2,512	)		(3,341	)

Pro forma net loss under SFAS 123	$	(3,484	)	$	(5,059	)	$	(4,431	)	$	(10,033	)

Net loss per common share – Basic and diluted:
As reported under APB 25	$	(0.07	)	$	(0.12	)	$	(0.06	)	$	(0.22	)

Pro forma under SFAS 123	$	(0.11	)	$	(0.16	)	$	(0.13	)	$	(0.32	)

As noted in the Notes to the Condensed Consolidated Financial Statements, we expect SFAS 123(R) to have a material impact on reported net income (loss) in future periods after adoption.

Results of Operations

Three Months Ended June 30, 2005 and 2004

Revenue

Revenue increased to $20.9 million in the three months ended June 30, 2005 from $19.5 million in the three months ended June 30, 2004. Between these periods, license revenue decreased 7% and services and maintenance revenue increased 30%. In addition, we recorded a $1.5 million charge as contra-revenue for the three months ended June 30, 2005, related to non-compliance with our GSA contract.

Licenses. License revenue decreased to $7.4 million in the three months ended June 30, 2005 from $7.9 million in the three months ended June 30, 2004. The decrease in license revenue for the three months ended June 30, 2005 compared to the comparable period in 2004 was due primarily to customers delaying purchasing decisions. In particular, we would attribute this to a number of existing and prospective customers from the second quarter of 2005 who postponed their purchasing decisions.

Maintenance, Professional Services and Training. Services and maintenance revenue increased to $15.1 million in the three months ended June 30, 2005 from $11.6 million in the three months ended June 30, 2004, primarily due to increased demand from our customer base resulting in an increase in headcount, utilization, and use of subcontractors within our professional services department as well as an increase in maintenance we provided to our new customers and maintenance renewals from our customer base. Professional services and training revenue increased to $7.8 million for the three months ended June 30, 2005 as compared to $5.5 million for the three months ended June 30, 2004. Maintenance revenue increased to $7.3 million in the three months ended June 30, 2005 from $6.1 million in the three months ended June 30, 2004.

Contingent contract reserve. We recorded a $1.5 million charge as contra-revenue for the three months ended June 30, 2005. This amount related to estimated damages as a result of non-compliance with the “Price Reductions” clause of our GSA contract. The amount was estimated with the assistance of special legal counsel and forensic accountants and based on the Company records as well as specific terms and conditions under the GSA contract. The final amount of the potential contract damages or future discounts off of the GSA price list under the “Price Reductions” clause is subject to the outcome of settlement discussions and final resolution with the GSA. It is possible that the final settlement could exceed the reserve and have a material impact on the Company’s financial position, revenues, liquidity and results of operations. In addition, it is possible that the GSA may elect to take other action that may adversely affect our financial position, revenues, liquidity, and results of operations.

Cost of Revenue

Licenses. Our cost of licenses consists primarily of royalty expenses, fees paid to third-party technology vendors, product delivery and fulfillment costs, as well as referral fess paid to third party partners. Cost of licenses decreased to $114,000 in the three months ended June 30, 2005 from $422,000 in the three months ended June 30, 2004 primarily related to two separate agreements with third-party software providers in the three months ended June 30, 2004 in which we resold their software along with our software to the customer totaling $232,000, and decreased royalty expense. We expect that our cost of licenses will increase in future periods, primarily due to the signing of new royalty agreements.

Maintenance, Professional Services and Training. Our cost of maintenance, professional services and training primarily includes salaries and related expenses for our professional services and technical support departments and third-party contractors. Cost of services and maintenance increased to $5.8 million in the three months ended June 30, 2005 from $4.6 million in the three months ended June 30, 2004. This was attributable to an increase of approximately $620,000 related to the increase in headcount in our professional services and technical support departments and general merit increases, along with an increase of approximately $556,000 relating to the increased use of third party contractors due to an increased number of service contracts. As of June 30, 2005, we had 100 professional services and technical support personnel as compared to 89 at June 30, 2004. We currently plan to increase hiring in these departments and expect costs of maintenance, professional services and training to rise in future periods.

Amortization of Stock-Based Compensation and Acquired Technology. In connection with options granted to employees in 2001 and 2000, we recorded deferred stock-based compensation related to our cost of services and maintenance representing the difference between the exercise price of options granted and the deemed fair market value of our common stock at the date of grant. Compensation expense is decreased in the period of forfeiture for any accrued but unvested compensation arising from the surrender of unvested options upon the termination of an option holder. Amortization of stock-based compensation related to cost of services for the three months ended June 30, 2005 and 2004 was $5,000 and $31,000, respectively. In connection with the acquisitions of certain technology in 2001, amortization of acquired technology related to cost of license revenue for the three months ended June 30, 2004 was $394,000. There was no amortization for the three months ended June 30, 2005 as the acquired technology was fully amortized as of December 31, 2004.

Operating Expenses

Research and Development. Research and development expenses primarily consist of costs associated with new software development and enhancement of our existing software products, including our in-house engineering staff and third-party contractors. The costs associated with our in-house development staff consist primarily of salaries and benefit costs. From time to time our in-house development staff is supported by outside developers, primarily located internationally, on an independent contractor basis. Research and development expenses increased to $6.3 million in the three months ended June 30, 2005 from $5.9 million in the three months ended June 30, 2004, due primarily to an increase use of independent contractors as well as merit increases for current staff resulting from our efforts to enhance our core portal product offering and to expand our product line. Outside development costs were $337,000 and $198,000 for the three months ended June 30, 2005 and 2004, respectively. As of June 30, 2005, we had 135 employees in research and development as compared to 141 employees as of June 30, 2004. We currently plan to increase hiring in this department and expect costs to rise in future periods.

Sales and Marketing. Sales and marketing expenses primarily consist of payroll expenses, including salaries and commissions, and related costs for sales and marketing personnel, and promotion expenditures, including public relations, advertising and trade shows. Sales and marketing expenses decreased to $8.2 million in the three months ended June 30, 2005 from $8.6 million in the three months ended June 30, 2004. Sales expenses were flat at $7.1 million for the three months ended June 30, 2005 and 2004, primarily as a result of increased headcount within our sales department, which was offset by a decrease in sales commissions. Sales commissions decreased by $387,000 for the three months ended June 30, 2005 when compared to the corresponding period in 2004. Marketing expenses decreased to $1.1 million in the three months ended June 30, 2005 from $1.5 million in the three months ended June 30, 2004 due to a decrease in staffing within the marketing department and a reduced marketing spend. As of June 30, 2005, we had 137 employees in sales and marketing as compared to 129 employees as of June 30, 2004. We currently plan to increase hiring in this department and expect costs to rise in future periods.

General and Administrative. General and administrative costs consist primarily of salaries and related expenses for our administrative, executive and finance personnel, bad debt expense and costs associated with being a publicly traded company. General and administrative expenses remained flat at $2.8 million in the three months ended June 30, 2005 and the three months ended June 30, 2004, primarily as a result of increased headcount and increased rent expense, offset by a reduction in legal fees, and a decrease in bad debt expense as a result of a lower gross accounts receivable balance. As of June 30, 2005, we had 43 general and administrative personnel as compared to 30 as of June 30, 2004. We expect this expense to significantly increase for legal and other professional fees related to the ongoing internal investigation into the Company’s non-compliance with the GSA contract and other legal matters.

Amortization of Stock-Based Compensation. Amortization of stock-based compensation related to operating expenses for the three months ended June 30, 2005 and 2004 was $17,000 and $103,000, respectively. The remaining value of unamortized deferred compensation as of June 30, 2005 was $71,000. We expect that amounts related to stock-based compensation charges will be fully amortized in the fourth quarter of 2005.

Certain of our expense items are subject to estimates. From time to time these estimates are changed and refined and these changes and refinements can cause increases or decreases in our expenses for any particular period. See Critical Accounting Policies.

Other Income, Net

Other income, net primarily consists of foreign currency gains and losses on transactions denominated in foreign currencies, interest income earned on cash and cash equivalents, realized gains or losses on the sale of short term investments and interest expense incurred on our financing obligations. Total other income, net increased to $388,000 in the three months ended June 30, 2005 as compared to other income, net, of $140,000 in the three months ended June 30, 2004. The increase was primarily the result of a decrease in the loss on foreign currency transactions and increased interest income. The effect of foreign currency transactions was a loss of $14,000 for the three months ended June 30, 2005 as compared to a loss of $110,000 for the comparable period in 2004. Interest income, net, increased to $393,000 for the three months ended June 30, 2005 from $241,000 for the comparable period in 2004 primarily from an increased return on our short-term investments.

Provision for Income Taxes

We recorded an income tax provision of $259,000 and $139,000 for the three months ended June 30, 2005 and 2004, respectively, primarily related to income and withholding taxes currently payable on sales and income generated in non-U.S. and domestic state tax jurisdictions for which no U.S. benefit is currently recognizable.

Six Months Ended June 30, 2005 and 2004

Revenue

Revenue increased to $45.5 million in the six months ended June 30, 2005 from $37.2 million in the six months ended June 30, 2004. Between these periods, license revenue increased 18% and services and maintenance revenue increased 32%. In addition, we recorded a $1.5 million charge as contra-revenue for the six months ended June 30, 2005, related to non-compliance with our GSA contract.

Licenses. License revenue increased to $17.4 million in the six months ended June 30, 2005 from $14.8 million in the six months ended June 30, 2004. The increase in license revenue for the six months ended June 30, 2005 over the comparable period in 2004 was due primarily from positive contributions from new management personnel and a stronger sales force that were added in latter half of 2004 as well as the release of Plumtree Analytics Server product in the first quarter of 2005, partially offset by delayed purchasing decisions by existing and prospective customers.

Maintenance, Professional Services and Training. Services and maintenance revenue increased to $29.7 million in the six months ended June 30, 2005 from $22.4 million in the six months ended June 30, 2004, primarily due to increased demand from our customer base facilitated by an increase in headcount, utilization, and use of subcontractors within our professional services department as well as an increase in maintenance we provided to our new customers and maintenance renewals from our customer base. Services revenue increased to $15.1 million for the six months ended June 30, 2005 as compared to $10.4 million for the six months ended June 30, 2004. Maintenance revenue increased to $14.5 million in the six months ended June 30, 2005 from $12.0 million in the six months ended June 30, 2004.

Contingent contract reserve. We recorded a $1.5 million charge as contra-revenue for the six months ended June 30, 2005. This amount related to estimated damages as a result of non-compliance with the “Price Reductions” clause of our GSA contract. The amount was estimated with the assistance of special legal counsel and forensic accountants and based on the Company records as well as specific terms and conditions under the GSA contract. The final amount of the potential contract damages or future discounts off of the GSA price list under the “Price Reductions” clause is subject to the outcome of settlement discussions and final resolution with the GSA. It is possible that the final settlement could exceed the reserve and have a material impact on the Company’s financial position, revenues, liquidity and results of operations. In addition, it is possible that the GSA may elect to take other action that may adversely affect our financial position, revenues, liquidity, and results of operations.

Cost of Revenue

Licenses. Cost of licenses decreased to $283,000 in the six months ended June 30, 2005 from $850,000 in the six months ended June 30, 2004 primarily related to two agreements with third-party software providers in which we resold their software to the customer totaling $445,000 during the six months ended June 30, 2004, and decreased royalty expense as certain third-party agreements expired and were not renewed. We expect that our cost of licenses will increase in future periods, primarily due to the signing of new royalty agreements.

Maintenance, Professional Services and Training. Cost of services and maintenance increased to $11.3 million in the six months ended June 30, 2005 from $8.8 million in the six months ended June 30, 2004. This was attributable primarily to the increase in headcount in our professional services and technical support departments and increased use of third-party contractors due to an increased number of service contracts. We currently plan to increase hiring in these departments and expect costs of maintenance, professional services to rise in future periods.

Amortization of Stock-Based Compensation and Acquired Technology. Amortization of stock-based compensation related to cost of services for the six months ended June 30, 2005 and 2004 was $6,000 and $84,000, respectively. Amortization of acquired technology related to cost of license revenue for the six months ended June 30, 2004 was $788,000. All acquired technology was fully amortized as of December 31, 2004.

Operating Expenses

Research and Development. Research and development expenses increased to $12.9 million in the six months ended June 30, 2005 from $11.4 million in the six months ended June 30, 2004, due primarily to an increase in the number of our research and development staff as well as an increase in third-party contractors resulting from our efforts to enhance our core portal product offering and to expand our product line including the release of Plumtree Analytics Server in the first quarter of 2005 and Plumtree Process Server in the second quarter of 2005. Outside development costs were $730,000 and $308,000 for the six months ended June 30, 2005 and 2004, respectively. We currently plan to increase hiring in this department and expect costs to rise in future periods.

Sales and Marketing. Sales and marketing expenses increased to $17.5 million in the six months ended June 30, 2005 from $16.6 million in the six months ended June 30, 2004. Sales expenses increased to $15.3 million in the six months ended June 30, 2005 from $13.9 million in the six months ended June 30, 2004, primarily as a result of increased headcount and sales commissions for the first six months of 2005 as compared to the first six months of 2004. Sales commissions increased by $237,000 for the six months ended June 30, 2005 when compared to the corresponding period in 2004. Marketing expenses decreased to $2.2 million in the six months ended June 30, 2005 from $2.7 million in the six months ended June 30, 2004 due to reduction in headcount within the marketing department as well as a reduction in marketing program spending. We currently plan to increase hiring in this department and expect costs to rise in future periods.

General and Administrative. General and administrative expenses increased to $5.5 million in the six months ended June 30, 2005 from $5.1 million for the six months ended June 30, 2004 primarily as a result of increased headcount within the department and offset by a reduction in legal fees. We expect this expense to significantly increase for legal and other professional fees related to the ongoing internal investigation into the Company’s non-compliance with the GSA contract and other legal matters.

Amortization of Stock-Based Compensation. Amortization of stock-based compensation related to operating expenses for the six months ended June 30, 2005 and 2004 was $19,000 and $287,000, respectively.

Other Income, Net

Total other income, net increased to $590,000 in the six months ended June 30, 2005 as compared to other income, net, of $289,000 in the six months ended June 30, 2004. The increase was primarily the result of a decrease in the loss on foreign currency transactions and an increase in interest income, net of interest expense. Interest income, net, increased to $704,000 for the six months ended June 30, 2005 from $516,000 for the comparable period in 2004 primarily from an increased return on our investments. The effect of foreign currency transactions was a loss of $138,000 for the six months ended June 30, 2005 as compared to a loss of $236,000 for the comparable period in 2004.

Provision for Income Taxes

We recorded an income tax provision of $437,000 and $301,000 for the six months ended June 30, 2005 and 2004, respectively, primarily related to income and withholding taxes currently payable on sales and income generated in non-U.S. and domestic state tax jurisdictions for which no U.S. benefit is currently recognizable.

Liquidity and Capital Resources

As of June 30, 2005, we had $68.0 million of cash and cash equivalents and short-term investments and $50.8 million in working capital.

Our net cash provided by (used in) operating activities increased to $1.6 million for the six months ended June 30, 2005, from ($4.6 million) for the six months ended June 30, 2004. The increase is primarily attributable to the $7.0 million decrease in net loss for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004, offset by increases and decreases in various assets and liabilities.

Capital expenditures were $726,000 and $815,000 for the six months ended June 30, 2005 and 2004, respectively. Our capital expenditures in the first six months of 2005 consisted of purchases of items to manage our operations, including computer hardware and software, office furniture and equipment and leasehold improvements.

On October 25, 2004 we signed an amended agreement with Silicon Valley Bank that increased our credit limit to $4 million (from $3.1 million) and eliminated the minimum cash balance requirement that previously existed related to United States bank accounts and replaced this requirement with other financial covenants. To secure any outstanding loans, we have granted Silicon Valley Bank a security interest in our assets, including our accounts receivable. Interest on the revolving line of credit is payable monthly and accrues at one percentage point above the prime rate as announced by Silicon Valley Bank. As of June 30, 2005, no amounts were outstanding under this facility. In addition, we had maintained a letter of credit for $2.5 million to the landlord of our corporate headquarters in San Francisco, California, which was enforceable against the facility. Effective upon signing the sixth amendment to our lease on June 28, 2005 (See Note 1), the required letter of credit was reduced to $400,000. In August 2005, the Company formally reduced the balance subject to the letter of credit to $400,000. We have limitations on declaring and paying dividends, incurring any non-permitted indebtedness and acquiring the capital stock of any other company under our loan agreements with Silicon Valley Bank. As of June 30, 2005, we were in compliance with all financial covenants under the revolving line of credit agreement with Silicon Valley Bank.

We expect to increase our current level of operating expenses for the foreseeable future in order to execute our business plan. As a result, these operating expenses, as well as planned capital expenditures, may constitute a material use of our cash resources. In addition, we may utilize cash resources to fund acquisitions of complementary businesses, technologies or product lines. We believe that our cash and cash equivalents and short-term investments on hand will be sufficient to meet our cash requirements for at least the next 18 months, including working capital requirements and planned capital expenditures.

Recent Accounting Pronouncements

Risk Factors that May Affect Our Future Results and the Market Price of Our Stock

Risks Relating to Our Business

We typically do substantial business with the United States government and other domestic and international public entities, and our ability to sell to governments is susceptible to unpredictable budgetary and policy changes and involves specific risks that could harm our business.

We derive a significant portion of our software license and service revenue from governmental entities. Sales to government entities can be adversely affected by budgetary cycles, changes in policy and other political events outside of our control, including the outbreak of hostilities overseas and domestic terrorism. Governments often retain the ability to cancel contracts at their convenience in times of emergency or under other circumstances. Recently, some of our government customers have experienced budgetary constraints due to decreased federal funding to state and local governments. Additionally, the government may require special intellectual property rights and other license terms generally more favorable than those typical in private commercial contracts. These requirements involve more licensing cost and increased contract risk for us. The government procurement process in general can be long and complex and being a government vendor subjects us to additional regulations.

We are conducting an internal investigation into our compliance with, and are subject to an ongoing review in relation to, our contract with the U.S. General Services Administration which may adversely impact our financial position, liquidity and results of operations.

The U.S. government often retains the right to audit its vendors for compliance. In February 2005, we became aware that in connection with certain sales made under our U.S. General Services Administration (GSA) contract, we did not comply with the terms of the “Price Reductions” clause of such contract, as it relates to two contracts. As a result, we voluntarily offered the GSA a temporary price reduction. In response, we were informed that the matter would be considered further within the GSA. We commenced an internal investigation into this matter in the second quarter of 2005 and, with the assistance of special legal counsel and forensic accountants, concluded that a damage payment or future discounts off of the GSA price list might be due to the GSA under the GSA contract pursuant to the “Price Reductions” clause. In the quarter ended June 30, 2005, the Company established a $1.5 million contingent contract reserve for the potential damage payment or future discounts off the GSA price list related to the GSA contract matter. The final amount of the potential contract damages or future discounts off of the GSA price list is subject to the outcome of settlement discussions and final resolution with the GSA. It is possible that the final settlement could exceed the reserve and have a material impact on the Company’s financial position, liquidity and results of operations. It is also possible that the GSA may elect to take other action, such as an audit of our compliance with the terms of the applicable GSA contract. Any such audit could prove costly and may distract our management. In addition, as a result of such audit, the U.S. government may require a further discount on future orders under the GSA contract, or seek other remedies. Any such action may adversely affect our financial position, revenue, liquidity and results of operations.

Our efforts to establish and maintain the Enterprise Web Suite and related products as an enterprise-wide platform or to develop and market Integrated Activity Management products and services may fail and, as a result, our revenue may decrease and our ability to compete successfully may be impaired.

We have expended, and plan to continue to expend, significant resources to establish our Enterprise Web Suite as an enterprise-wide platform for integrating an organization’s diverse systems and applications and for building new applications. Plumtree Collaboration Server, Plumtree Studio Server, Plumtree Content Server and Plumtree Analytics Server are our most significant new product developments since the introduction of the Plumtree Corporate Portal. We are also beginning to focus our strategic efforts on Integrated Activity Management (“IAM”), a new category of composite applications that integrates systems, people and processes. To succeed, we must develop and market both enhancements to our historic core Plumtree Corporate Portal and related products and introduce new products that define the IAM product category. These and other new products and subsequent major version releases of our products may not achieve widespread market acceptance.

Even if we are successful in establishing our products as an enterprise-wide platform or in introducing IAM product and services, we face, among others, the following risks:

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We will likely face new competitors, and some of our current system integrators and technology partners with whom we work closely may come to view our new products and services as competitive with their own products and services.

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Our Enterprise Web Suite is designed to be open and integrate existing data and processes from enterprise’s systems. To remain competitive, we must increase the number of systems and applications that can be integrated into and built with our portal platform as Web services. These activities have strained and will increasingly strain our development and support infrastructure and may require us to add significant additional personnel.

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The IAM market is new. We may expend significant time, engineering, marketing and other resources in attempting to enter into and develop products for the IAM market, which may not develop in the near-term or at all. Our efforts to address the IAM market may also detract from our Enterprise Web Suite focus and historic Plumtree Corporate Portal business or result in customer or market confusion regarding our strategy.

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The industry may develop and adopt technology standards different from the standards presently incorporated in our products resulting in our products failing to achieve market acceptance or becoming less competitive.

We have a history of losses, and given expected increases in operating expenditures, we may never sustain profitability on a quarterly or annual basis, which would have a harmful effect on our business and the value of our common stock.

Although we recorded net income in the quarter ended March 31, 2005 and were profitable in 2002, we incurred substantial net losses in each year since inception in 1996. For the years ended December 31, 2004 and 2003, we had a net loss of $9.6 million and $1.5 million, respectively. As of June 30, 2005, we had an accumulated deficit of approximately $52.5 million.

Our total operating expenses increased from $59.7 million for the year ended December 31, 2003 to $72.5 million for the year ended December 31, 2004. As we continue to invest in the business, our results of operations may fluctuate. If our revenue does not increase or if our expenses increase at a greater pace than our revenue, we will not be able to achieve or sustain operating profitability on a consistent basis, if at all. Our ability to increase revenue and achieve and sustain operating profitability also will be affected by other risks and uncertainties described in this section and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our failure to operate profitably or control negative cash flows on a quarterly or annual basis could harm our business and the value of our common stock.

Because our quarterly operating results are volatile and difficult to predict, our operating results in one or more future periods are likely to fluctuate significantly, and if we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.

As a result of the evolving nature of the market in which we compete, our quarterly operating results have varied significantly in the past and are likely to continue to vary significantly in the future. Our success depends upon our ability to increase sales of our products and services to our new and existing customers. Our license revenue is comprised substantially of one-time license fees. As a result, we will be required to regularly and increasingly attract and contract with additional customers for substantial license fees on a timely basis to realize comparable or increased license revenue. Our services and maintenance revenue historically has been comprised almost entirely of consulting fees and technical support and maintenance fees. Our services revenue has a substantially lower gross margin than our license revenue. To the extent the percentage of our services revenue increases compared to the percentage of license revenue, our profitability would be impaired. Our maintenance contracts are generally renewable for 12-month periods. If our customers elect not to renew their maintenance contracts or seek to renegotiate price each year, our revenue could decline.

We expect to continue to experience significant fluctuations in our results of operations due to a variety of factors, some of which are outside of our control, including:

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introduction of products and services and enhancements by us and our competitors;

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competitive factors that affect our pricing;

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the timing and magnitude of our capital expenditures, including costs relating to the management and expansion of our operations within the United States and internationally;

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increase in the amount of third-party products and services that we use in our products or resell with royalties attached;

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the size and timing of customer orders and deployments, particularly large orders and deployments, some of which may represent more than 10% of total revenue during a particular quarter;

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budgetary constraints imposed on our customers, including as a result of decreased federal funding to state and local governments, implementation costs associated with the Sarbanes-Oxley Act of 2002, and the outbreak of hostilities in Iraq and elsewhere; and

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costs associated with governmental audits, litigation, regulatory compliance and other corporate events such as operational reorganizations.

As a result of these factors, we believe that quarter-to-quarter comparisons of our revenue and operating results are not necessarily meaningful, and that these comparisons are not accurate indicators of future performance. Because our staffing and operating expenses are based on anticipated revenue levels, and because a high percentage of our costs are fixed, small variations in the timing of the recognition of specific revenue could cause significant variations in operating results from quarter to quarter. If we are unable to adjust spending in a timely manner to compensate for any revenue shortfall, any significant revenue shortfall would likely have an immediate negative effect on our operating results. If our operating results in one or more future quarters fail to meet the expectations of securities analysts or investors, we would expect to experience an immediate and significant decline in the trading price of our stock.

Intense competition and consolidation in our industry could limit our ability to attract and retain customers.

The market for our products is intensely competitive, subject to rapid technological change, evolving industry standards and changes in customer needs and preferences, including the preference by some customers for dealing with a single source information technology vendor. Our current competitors include larger, more established software vendors like IBM, BEA, Oracle, Microsoft and SAP that are Web-enabling their applications or are building infrastructure software, emerging companies like Vignette, Hummingbird and OpenText that are offering competitive products and companies choosing to build their own solutions. The software industry is currently undergoing a consolidation which is increasing competition. Some of our competitors are expanding their competitive product offerings and market position through acquisitions. For example, Vignette acquired Epicentric, Inc. in December 2002; Open Text Corporation acquired Corechange, Inc. in February 2003; WebMethods acquired certain assets of Data Channel in October 2003; Vignette acquired Intraspect in December 2003; and Oracle acquired Oblix in March 2005. Many of our competitors have longer operating histories, greater financial, technical, product development and marketing resources, greater name recognition and larger customer bases than we do. Our present or future competitors may be able to develop products comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends or customer requirements, offer more aggressive pricing policies, or devote greater resources to the acquisition of new businesses and the development, promotion and sale of their products than we do. Accordingly, we may not be able to compete effectively in our markets, or competition may intensify or emerge and have a material adverse effect on our business, financial condition and operating results.

If we do not expand our customer base, we may be unable to increase our revenue and our stock price will likely decline.

The market for our products and services is newly emerging and additional customers may not adopt our products. Accordingly, we cannot accurately estimate the potential demand for our products and services. We believe that market acceptance of our products and services depend principally on our ability to:

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withstand downturns in general economic conditions or conditions that slow corporate spending on software products, such as the downturn we are currently experiencing in the overall software market;

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enhance our products to meet changing customer demand;

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effectively market the Enterprise Web Suite and Integrated Activity Management and related products and services;

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hire, train and retain a sufficient number of qualified, engineering, sales and marketing personnel;

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provide high-quality and reliable customer support for our products;

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distribute and price our products and services to be more appealing to customers than those of our competitors or of our customers’ internally-developed solutions; and

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develop and maintain a favorable reputation among our customers, potential customers and participants in the software industry who can serve as reference accounts for our products and services.

Some of these factors are beyond our control. If our customer base does not expand, we may never become consistently profitable.

Because our quarterly results often depend on a small number of large orders, if we were unable to complete one or more of these orders during any future period, our quarterly operating results and the trading price of our stock could be harmed.

We derive a significant portion of our software license revenue in each quarter from a small number of relatively large orders. For example, in the quarter ended June 30, 2005, our top 10 customers accounted for approximately 26% of our license, maintenance and professional services revenue. Our license revenue in the quarter ended June 30, 2005 was significantly impacted by a relatively small number of small to mid-sized deals from existing and prospective customers that were delayed. Our operating results and stock price would be harmed if we were unable to complete one or more mid to large size license sales during any future quarterly period.

If our products employ technology that infringes the proprietary rights of others, we may be subject to infringement claims, forced to pay high prices to license technology or required to stop selling our products.

We expect that software products, including ours, may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments expands and overlaps. Third parties have claimed and others may claim in the future that our products infringe their intellectual property rights. Regardless of whether these claims have any merit, they could:

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be time-consuming to defend;

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result in costly litigation;

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divert our management’s attention and resources;

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require us to indemnify technology vendors, system integrators or customers;

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cause product shipment delays;

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require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all; or

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result in court orders limiting our ability to license our products.

As described in Note 1 to our consolidated financial statements and elsewhere in this report, we are currently involved in a patent suit where the plaintiff, Datamize, has alleged we were infringing one of its patents. The court in this matter granted our motion on summary judgment, holding that the patent which was the subject of the litigation was invalid. However, Datamize appealed entry of summary judgment of invalidity. Also, based on prior communications, we believe that Datamize might bring an action alleging infringement of two other patents issued to Datamize. We have filed an action for a declaratory judgment seeking a determination that we are not infringing these other patents. Datamize is seeking to dismiss this action. We intend to vigorously defend against Datamize’s allegations of infringement and vigorously pursue its claim for declaratory relief.

The tactical direction and pace of litigation, especially in complex patent matters, are inherently difficult to predict. Therefore, our legal costs may fluctuate substantially with little notice which could affect our financial results.

A successful claim of infringement against us or our failure or inability to license the infringed or similar technology could damage our business to the extent that we are required to pay substantial monetary damages or if, as result of a successful claim, we became unable to sell our products without redeveloping them or otherwise were forced to incur significant additional expenses.

Our business currently depends on revenue related to our flagship product suite, the Enterprise Web Suite, and if the market does not increasingly accept this product and related products and services, our revenue may decline.

We generate our revenue from licenses of the Enterprise Web Suite and related products and services, including Plumtree Portlets, the building blocks from which users assemble a personalized Web page as well as our Server Products, which provide significant ancillary functionality to our Portal Platform of the Enterprise Web Suite. We also resell third-party products and services that offer complementary functionality to the Enterprise Web Suite. We expect that our Enterprise Web Suite products, and future upgraded versions of these products will continue to account for a large portion of our revenue in the foreseeable future. Our future financial performance will depend on increasing acceptance of our current product and on the successful development, introduction and customer acceptance of new and enhanced versions of our products. For example, in September 2004 we released version 5.0J for Java, Solaris and AIX platforms. If new and future versions and updates of our products and services, including our new versions or updates to our Plumtree Corporate Portal and our Collaboration Server, Content Server, Analytics Server and Process Server along with G6, which is to be released in the third quarter of 2005, do not gain market acceptance when released commercially, or if we fail to deliver the product enhancements and complementary third-party products that customers want, demand for our products and services, and our revenue, may decline.

Our sales and implementation cycles are long, unpredictable and subject to seasonal fluctuations, making it difficult to accurately forecast our revenue and causing it to fluctuate, which could harm our operating results.

The nature of our products, and the emerging and rapidly evolving nature of the market in which we compete, the typical sales cycle of our portal product is long and unpredictable. A successful sales cycle may last nine to twelve months or longer and typically includes presentations to both business and technical decision makers, often requiring us to expend substantial resources educating prospective customers about the benefits of our software to their business. The implementation of our product can be time-consuming and often involves a significant commitment of resources by prospective customers. Our sales cycle is also affected by a number of other factors, some of which we have little or no control over, including the volatility of the overall software market, the business conditions of each prospective customer, fluctuations as a result of customers’ fiscal year budgeting and purchasing cycles and non-seasonal budgetary constraints and the selection and performance of our technology and of our technology partners, systems integrators and resellers, any of which could harm our operating results. Actions being taken to improve our sales execution could also result in a lengthening of our sales cycle.

Efforts taken to improve our sales focus and shorten our sales cycle may not be effective and the expected benefits may not be realized when expected or at all.

To improve our sales focus and shorten our sales cycle, we have, among other things, reorganized our sales force within the past year; created a more process-driven sales effort; focused training efforts for some sales personnel around selling our products into specific industries such as pharmaceuticals and consumer retail; taken action to improve our customer lead generation; begun overhauling our telemarketing activities and have implemented an expanded telesales operation; and hired a Chief Operating Officer, Vice President of World Wide Sales, a Vice President of Telesales and several other sales managers who are implementing changes in our sales methodology. While these initiatives are intended to improve our sales focus and reduce our typical sales cycle, we may not achieve the expected benefits of these actions to the extent anticipated in the long term. The additions to management may not be as effective as anticipated. The implementation of new sales methodologies and the retraining process involved in developing industry focused sales teams may result in longer sales cycles during the period of transition, which could harm our operating results and business.

We depend on technology licensed from third-party software developers to build and enhance our products, and our ability to develop and sell our products and services could be delayed or impaired if we fail to maintain these license arrangements.

We incorporate into our products and in certain cases resell third-party software that enables, enhances or compliments aspects of our products’ functionality and performance. This third-party software may constitute an increasingly important part of our products and services and significant contributor to our revenue growth, and may not continue to be available on commercially reasonable terms or with acceptable levels of customer support, or at all. In many cases use of third-party software increases the risk of warranties and indemnification contained in our customer contracts. Some of these third-party software developers offer products that compete with the Enterprise Web Suite and our other products. Our loss of or inability to maintain these software licenses on current terms could delay or impair the sale of our products and services until equivalent software, if available, is identified, licensed or developed, and integrated, or could prevent us from developing new products and services to meet our customers’ needs, which could adversely affect our business and impair our future growth.

We depend on our direct sales force to sell our products, and if we fail to hire and train new sales personnel, our future growth will be impaired.

We sell our products primarily through our direct sales force and, although we are seeking to expand our indirect sales channels, including the telesales channel, we expect to continue to rely on direct sales in the immediate future. Our ability to achieve revenue growth in the future will depend, in part, on our ability to recruit, train and retain qualified direct sales personnel and the ability of our sales force to leverage our new product offerings. We have in the past and may in the future experience difficulty in recruiting and retaining qualified sales personnel. The complexity of our product and the length of our sales cycle typically results in a lead time of nine months or more before newly-hired direct sales people become productive and can generate revenue. In addition to recently hiring a Chief Operating Officer, a Vice President of World Wide Sales and a Vice President of Telesales, we added a number of new sales executives. These management changes and reorganization efforts have resulted in and in the near-term are expected to continue to result in attrition in our sales force. Our inability to rapidly and effectively expand and train our direct sales force could impair our growth and cause our stock price to fall.

If we are unable to establish and maintain relationships with systems integrators and resellers, our ability to market, sell and deploy our products and services will be harmed.

We have relationships with a number of systems integrators and resellers, such as Deloitte, Bearing Point, Lexis Nexis, Hewlett Packard, Project Performance Corporation, SAIC, Rapidigm, SRA International, Enterpulse, Hitachi, and Merlin Technical Solutions. Our relationships with these parties who market, sell and deploy our products have been a key factor in our overall business strategy. We are currently seeking to expand our indirect sales channels and recently hired a new head of channel sales. Our efforts to expand our relationships with integrators and resellers may not succeed and these relationships involve a number of risks, including:

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Systems integrators and resellers may not view their relationships with us as valuable or significant to their own businesses. The related arrangements typically may be terminated by either party with limited notice and in some cases are not covered by a formal agreement.

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Under our co-deployment model, we often rely on our system integrators’ and resellers’ employees to perform implementations. If we fail to work together effectively, or if these parties perform poorly, our reputation may be harmed and deployment of our products may be delayed or inadequate.

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Systems integrators may attempt to market their own products and services rather than ours.

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Our competitors may have stronger relationships with these parties and, as a result, these systems integrators and resellers may recommend a competitor’s products and services over ours.

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If we lose our relationships with our systems integrators and resellers, we will not have the personnel necessary to deploy our products effectively, and we will need to commit significant additional sales and marketing resources in an effort to reach the markets and customers served by these parties.

If our alliances with technology and content providers are discontinued, our future growth will be impaired.

We have relationships with technology providers, such as Microsoft, Sun Microsystems, Oracle, BEA, BMC, Fuego, Stellent, Cognos, Business Objects, Handysoft, and EMC, to provide our customers with support of many applications and services. Although these relationships are a key factor in our overall business strategy, our alliance members may not view their relationships with us as significant to their own businesses. A number of our competitors may have stronger relationships with these or other technology and content vendors and, as a result, these alliance members may be more likely to support our competitors’ products and services over ours. In addition, our technology providers may offer products and services that are competitive to ours. Our arrangements generally do not establish minimum performance requirements but instead rely on voluntary efforts. In addition, most of our agreements with these entities may be terminated by either party with limited notice. In some cases these arrangements are not covered by a formal agreement. We currently invest significant resources to develop these alliances and plan to continue to do so. If we are unable to maintain our existing relationships or fail to enter into additional relationships, our ability to increase our sales could be harmed, and we could also lose anticipated customer introductions and co-marketing benefits. Even if we succeed in establishing and maintaining these relationships, they may not result in additional customers or revenue.

If our software or software we furnish contains errors, our ability to develop and market our products and services will be harmed and we may lose customers or experience reduced market acceptance of our products.

Our software products are inherently complex and may contain defects and errors that are detected only when the product is in use. We periodically release updated versions of our products, which increases the risk of undetected defects or errors. It is also possible that our products including Analytics Server (released in March 2005) and version 5.0J (released in September 2004) and 5.0 (released in June 2003) of our portal product, and upcoming portal product version releases, our server products, and new product introductions may contain undetected defects or errors that are discovered after release. In addition, third-party software that we bundle with, resell or incorporate into our products, or with which we integrate to build or deploy our products, has contained, and may in the future contain, defects or errors for which we may become liable. Further, we often render implementation, consulting and other technical services, the performance of which typically involves working with sophisticated software, computing and networking systems. As a result of product defects or our failure to meet project milestones for services, we may not be paid for work performed subject to acceptance rights or fixed price bidding, we may lose customers, customers may not implement our products more broadly within their organization, we may experience reduced market acceptance of our products, and we may be subject to warranty and product liability claims by our customers.

Such errors or defects may produce a number of risks, including:

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Some of our customers may require enhanced modifications or fixes of our software for their specific needs which will divert the attention of our engineering team away from new product development and upgrades of existing products.

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Some of our customers may make increasingly frequent and disproportionate demands on our support personnel, which could result in impaired technical support response times to our entire installed base.

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Our professional services consultants may be required to assist in the implementation of software modifications and corrections of errors or defects, thereby reducing their ability to perform revenue-generating services.

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Frequent modifications intended to correct errors may increase the likelihood of undetected defects or errors and may further drain our engineering, customer care and consulting services resources.

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We may lose customers, customers may not implement our products more broadly within their organization, customers may choose not to renew their maintenance contracts with us or they may choose to abandon their projects.

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We may lose valuable customer references and our reputation in the industry may diminish, making our sales and marketing efforts more difficult.

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We may experience reduced demand for our products, reduced market acceptance of our products and loss of overall competitiveness.

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We may be subject to product recalls.

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We may be subject to product liability or warranty claims by our customers.

If we are unable to develop products that are compatible and can be integrated with a large variety of hardware, software, database and networking systems, our ability to attract and retain customers will be harmed.

The Enterprise Web Suite is designed to integrate with and support a broad set of software applications and online services through Plumtree Portlets. To gain broad market acceptance, and to execute on our strategy of openness, we believe that we must support an increased number of technology standards, operating environments, applications and services in the future. If the underlying applications and services are upgraded or changed, maintaining this support may be difficult or impossible. If we are unable to support an increased number of technology standards, applications and services in the future or if we are unable to maintain compatibility with these systems, our ability to attract and retain customers will be harmed. Furthermore, providers of competitive products and services may cease cooperating with our development efforts to integrate our Enterprise Web Suite with products in their portfolio.

Some of our customers are in the preliminary phase of implementing our products and this implementation may not proceed on a timely basis or at all.

Some of our customers are currently in a pre-deployment or preliminary stage of implementing our products and may encounter delays or other problems in introducing them. These delays or other problems may result from matters specific to the customer and unrelated to us or our products. A customer’s decision not to implement our product, or a delay in implementation, could result in a delay or loss in related service revenue or otherwise harm our business or prospects. In particular, we believe the decrease in license revenue for the three months ended June 30, 2005 compared to the comparable period in 2004 can be partly attributed to certain prospective customers’ delaying their purchasing decisions. We cannot predict when or if any customer currently in a pilot or preliminary phase will choose to implement broader use of our products.

If we fail to adequately address our customer support demands, our ability to attract and retain customers will suffer.

We expect that our customers increasingly will demand enhancements to the technical support services we provide. To meet these demands, we must develop and implement expanded customer support services and programs. In addition, if we increase our customer base, we expect the demands on our technical support resources to grow rapidly, and we may experience difficulties in responding to customer demand for our services and providing technical support in accordance with our customers’ expectations. We expect that these demands will require not only the addition of new management personnel, but also the development of additional expertise by existing personnel and the establishment of long-term relationships with third-party service vendors. If we are unable to address these customer demands, our ability to attract and retain customers will suffer. If the company is not able to retain customers, it could adversely affect future maintenance revenue.

Security breaches with our software may lead to unexpected capital expenditures and cause a loss in revenue and reputation.

The Enterprise Web Suite is designed to facilitate the secure transmission of sensitive business information to specified parties outside the business over the Internet. This includes product information, competitive intelligence, sales and inventory data, sales reports and corporate e-mail. As a result, the reputation of our software for providing security is vital to its acceptance by customers. Many of our government customers, and those in highly regulated industries such as banking, insurance and pharmaceuticals, are highly sensitive to issues of security and data privacy. Problems caused by security breaches associated with our products or products furnished by us could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, diversion of research and development resources, harm to our reputation, customer claims against us, government regulatory enforcement against us, increased insurance costs or increased service and warranty costs. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques. Moreover, our products may be even more susceptible to security breaches, since portals and integrated framework software require the aggregation of many different Web applications on many different servers, with different security standards and protocols.

Capacity restrictions of our software could reduce the demand for and use of our products, which may limit our ability to generate license revenue.

Our products are designed to support enterprise-wide deployments with up to hundreds of thousands of users. However, the maximum amount of information and the maximum number of concurrent users that our products can support in any particular deployment is uncertain. It is also subject to factors outside of our control such as customer architecture. If the capacity boundaries of our products are reached, or significant changes or additions to customers’ architecture is necessary to support the number and type of intended users, our customers may be dissatisfied, and we may lose customers or fail to gain new customers, existing customers may seek products with more use capacity and overall demand for our products could decline.

If we are unable to retain key personnel, our growth will be limited.

We are highly dependent on certain members of our management staff, including, without limitation, our Chief Executive Officer, John Kunze, our President and Chief Operating Officer, Paul Ciandrini, and our Vice President of Engineering, Eric Zocher. Our ability to continue to deliver products and services that are responsive to customer needs, which is critical to our success, also depends on our ability to retain several members of our sales & marketing, management and engineering teams. The loss of one or more of these officers, sales or marketing managers, or key engineers may impede the achievement of our business objectives. None of our officers or key employees is bound by an employment agreement for any specific term, and no one is constrained from terminating his or her employment relationship with us at any time. Additions to the management team and reorganization in sales and operations have resulted and may continue to result in increased employee attrition. In addition, since a number of our long-standing employees have most of their stock options vested, their economic incentive to remain in our employ may be diminished.

If we are unable to recruit and train new personnel, our operations will be disrupted and our growth impaired.

Recruiting and retaining qualified sales, management and technical personnel is critical to our success. If our business grows, we will also need to recruit a significant number of management, technical and other personnel for our business. Competition for specialized employees in our industry can be intense. If we are not able to continue to attract and retain skilled and experienced personnel on acceptable terms, our growth may be limited due to our limited capacity to develop and market our product. We are currently recruiting for skilled technical personnel for our engineering, professional services group, and customer support staff. It may take an extended period of time to hire a sufficient number of new technical professionals. With some of our senior operations executives in place for only a relatively short period our sales force may lack direction and our sales process and productivity may suffer. Similarly, we may not be able to meet customer demand for professional services and technical support. Once hired, new personnel will need time to familiarize themselves with our products and business practices. The integration of new personnel, including members of management and key personnel in engineering, sales and marketing, has resulted and will continue to result in some unavoidable disruption to our ongoing operations. Our failure to complete this integration in an efficient manner could harm our business and prospects.

Managing the breadth of our operations will continue to strain managerial, operational and financial resources, and if we are unable to do so our business and operating results could be harmed.

The planned conduct of our operations, coupled with planned increases and reallocations in headcount and pursuit of the Integrated Activity Management market will place a significant strain on our management, financial controls, operations systems, personnel and other resources. Last year we experienced significant turnover in our general and administrative organizations, sales and engineering departments, both in the U.S. and internationally. Although we have replaced a number of these individuals this turnover may strain our organization as these individuals will require time to become more efficient in their job capacities.

Our ability to manage our business and achieve growth depends in large part upon a number of factors, including our ability to rapidly:

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build and train our sales and marketing staff to create an effective presence in the evolving corporate portal market, and keep them sufficiently trained over time regarding the technical features, issues and key selling points of our product;

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attract and retain qualified technical personnel in order to continue to develop reliable and scalable products and services that address evolving customer needs;

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develop and improve our customer support capacity, especially if sales of our products increase, so that we can provide customer support without diverting resources from product development efforts; and

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maintain and expand our internal management, legal and financial controls significantly, so that we can maintain control over our operations and provide support to other functional areas within Plumtree and ensure compliance with increasing government regulation, and changing accounting standards applied to public companies.

Our inability to achieve any of these objectives could harm our business and operating results.

We may be unable to manage or grow our international operations, which could impair our overall growth.

We have invested substantial capital and management resources in expanding our international operations, and we are seeking to increase the portion of our revenue that is derived from sources outside the United States. Our revenue from sales outside the United States constituted approximately 25% and 27% of our license, maintenance and professional services revenue during the six months ended June 30, 2005 and 2004, respectively. If we are unable to grow our international operations, we may not generate sufficient revenue to offset the expenditures required to establish and maintain the international sales and marketing operations, which could slow our overall growth and impair operating margins.

We have committed substantial resources to modify our products for selected international markets, including France, Germany, South Korea, Italy, Spain, Brazil, Portugal, China, the Netherlands and Japan. We expect to continue to commit additional resources to modify our products for other select international markets and to develop our international sales and support organization. We are also investing resources in attracting and developing more distributors and resellers in local markets. However, even if we successfully expand our international operations and successfully modify our products, we may be unable to maintain or increase international market demand for our products.

Our international operations are subject to a number of risks, including:

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costs of modifying our products for foreign countries;

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compliance with multiple, conflicting and changing foreign governmental laws and regulations, including taxes, intellectual property, securities and employment laws;

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increased reliance on systems integrators and resellers abroad;

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longer sales cycles;

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import and export restrictions and tariffs and capital repatriation controls;

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fluctuations in foreign currency exchange rates;

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difficulties in staffing and managing international operations;

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greater difficulty in enforcing our intellectual property rights; and

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greater difficulty or delay in accounts receivable collection.

We have historically structured our operations so that certain international license contracts between certain foreign customers and our Swiss subsidiary, Plumtree Software GmbH, are not subject to tax at source. There is a risk that local jurisdictions may challenge the characterization of these transactions. In the event these transactions are challenged by local tax authorities, the review process would divert management attention and resources and we may incur substantial costs. If we fail to comply with complex and changing tax requirements some tax authorities may seek to collect applicable taxes from our customers and we may in turn become subject to claims by our customers seeking reimbursement for any tax assessed. We have subsequently changed our method of licensing in international markets, choosing to license our products through Plumtree Software, Inc. (Delaware).

Product liability claims could divert management’s attention and be costly to defend.

Our license agreements with customers and arrangements with our systems integrators and technology vendors typically contain provisions designed to limit our exposure to potential product liability claims. Not all domestic and international jurisdictions may enforce these limitations. Although we have not experienced any significant product liability claims to date, we may encounter this type of claim in the future. Product liability claims brought against us, whether or not successful, could divert the attention and resources of our management and key personnel, could be costly to defend and could require us to pay significant monetary damages or impair our ability to market our products.

If we are unable to effectively protect our proprietary rights, our competitors may be able to copy important aspects of our products or product presentations, which would undermine the relative appeal of our products to customers and reduce our sales.

We believe that proprietary rights are important to our business. We have one issued patent. We have fifteen non-provisional patent applications pending with the U.S. Patent and Trademark Office, including eight published U.S. applications, two international patent applications pending with the World Intellectual Property Organization, two international patent applications pending in the Canadian Patent Office, two patent applications pending in the Chinese (PRC) Patent Office, six patent applications pending in the European Patent Office, including two published European applications and two Hong Kong extensions, two patent applications pending in the Indian Patent Office, three patent applications pending in the Japanese Patent Office, one patent application pending in the Australian patent office and one patent application pending in the Korean Patent Office. However, current or future patent applications may not be granted, and it is possible that any patents issued to us may be circumvented by our competitors or otherwise may not provide significant protection or commercial advantage to us. Similarly, our trademark, service mark and copyright rights may not provide significant protection or commercial advantage to us, and the measures we take to maintain the confidentiality of our trade secrets may not be effective.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our software product or technology without authorization. Policing unauthorized use of our products is difficult and costly, especially matters that require litigation, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as those in the United States.

We generally enter into confidentiality or license agreements with our employees, consultants and alliance members, control access to our source code and other proprietary technology and limit distribution of our software, documentation and other proprietary information. These measures afford only limited protection and may be inadequate. Others may develop noninfringing technologies that are similar or superior to our own.

We may be subject to misappropriation and other claims by former employers of our personnel, which could be costly and disruptive to our business.

From time to time, we hire or retain employees or consultants who have worked for independent software vendors or other companies developing products similar to those offered by us. Those prior employers may claim that our products are based on their products and that we have misappropriated their intellectual property. Any claims of that variety, with or without merit, could cause a significant diversion of management attention, result in costly and protracted litigation, cause product shipment delays, require us to indemnify our alliance members and customers, require us to refund license fees or require us to enter into royalty or licensing agreements. Those royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could harm our business. We have and are likely in the future to hire employees subject to agreements containing non-competition clauses and non-solicitation covenants which purport to limit their ability to work for us, interact with some or all of our customers or prospective customers, or to solicit former colleagues or others for employment at Plumtree. Although these types of restrictions are often difficult to enforce, especially in California, we may still be subject to claims that we violated these restrictions. Such claims against the Company or our employees, with or without merit, could cause a significant diversion of management attention or the employees’ attention, and result in costly and protracted litigation.

Acquisitions of companies or technologies may result in disruptions to our business and management due to difficulties in assimilating personnel, acquired products and technology and operations and may dilute stockholder value.

We have made, and in the future may make acquisitions or investments in other companies or technologies. We may not realize the anticipated benefits of any acquisitions or investments we undertake. Acquisitions such as these require us to assimilate the operations, products, technology and personnel of the acquired businesses and train, retain and motivate key personnel from the acquired businesses. We may be unable to maintain uniform standards, controls, procedures and policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert management’s attention from day-to-day operations, which could impair our relationships with our current employees, customers and strategic partners. If we consummate acquisitions through an exchange of our securities, our existing stockholders could suffer significant dilution. In addition, our profitability may suffer because of acquisition-related costs or impairment costs for acquired goodwill and other intangible assets, or undisclosed liabilities of the acquired business. Finally, the terms of our existing contractual obligations may restrict or prohibit acquisitions that we may seek to consummate.

If we are required to raise additional funds, we may be unable to obtain these funds on terms acceptable to us or at all.

The development and expansion of our business will require significant capital to fund our operating expenses, working capital needs and capital expenditures. During the next 18 months, we expect to meet our cash requirements with existing cash and cash equivalents and short-term investments, cash flow from sales of our products and services and proceeds from existing and future working capital lines of credit and other borrowings. Our failure to generate sufficient cash flows from sales of products and services or to raise sufficient funds may require us to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities.

Future equity or debt financing may not be available to us on favorable terms or at all. The terms of our existing loan agreement with Silicon Valley Bank limit our ability, among other things, to incur additional indebtedness. Future borrowing instruments, such as credit facilities and lease agreements, are also likely to contain restrictive covenants and will likely require us to pledge assets as security for borrowings under those future arrangements. If we raise additional funds through the issuance of equity securities, the issuance could result in substantial dilution to existing stockholders. Our inability to obtain additional capital on satisfactory terms may result in a delay or failure to develop and enhance our products, acquire new technologies or businesses, expand operations and hire and train employees.

We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.

Our operating results are subject to fluctuations in foreign currency exchange rates. We attempt to mitigate a portion of these risks through foreign currency hedging. We have established a hedging program to hedge only known asset and liability exposures denominated in foreign currencies. We regularly review our hedging program and will make adjustments based on our judgment. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates.

Changes in, or interpretations of, accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by the Securities and Exchange Commission (the “SEC”) and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting policies that recently have been or may be affected by changes in the accounting rules are as follows:

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software revenue recognition

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accounting for share-based payments

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accounting for income taxes

In particular, the FASB recently enacted SFAS 123(R) and the SEC enacted SAB 107, which will have a significant adverse effect on our reported financial results when SFAS 123(R) is expected to be implemented on January 1, 2006 and may impact the way in which we conduct our business (see Note 1).

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources. In addition, it has become more difficult and more expensive for us to obtain director and officer liability insurance, and we have purchased reduced coverage at substantially higher cost than in the past. We expect these efforts to require the continued commitment of significant resources. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

Risks Relating to Our Industry

Downturns in the software market may decrease our revenue and margins.

The market for our products is affected by economic conditions of the broader software market. Downturns in the economy may cause businesses and governments to delay or cancel corporate portal projects, reduce their overall information technology budgets or reduce or cancel orders for our products. In this environment, customers may experience financial difficulty, fail to or defer the budget for the purchase of our products or cease operations. This, in turn, may lead to longer sales cycles, delays or failures in payment and collection, and price pressures, causing us to realize lower revenues and margins. In particular, capital spending in the information technology sector generally has been limited in most of the past 36 months, and many of our customers and potential customers have experienced volatile declines in their revenues and operations. We believe that, in light of these events, some businesses and governments may curtail or eliminate capital spending on information technology. If capital spending in our markets declines, it may be necessary for us to gain significant market share from our competitors in order to achieve our financial goals or to sustain annual or quarterly profitability.

Our failure to introduce new products and enhancements in a timely manner will make market acceptance of our products less likely.

New products, platforms and language support can require long development and testing periods. Any delays in developing and releasing new products could harm our business. New products or enhancements may not be released according to schedule or may contain defects when released. Version 1.0 of Plumtree Analytics Server, Version 5.0J of the Plumtree Corporate Portal, Version 4.0 of the Plumtree Collaboration Server, Version 6.1 of the Plumtree Content Server, and Version 1.0 of the Plumtree Process Server were released in the past twelve months or have been recently updated, increasing the risk of undetected defects or errors. Efforts to correct any such errors or defects could divert our engineers from or delay development of new products. In addition, our efforts to develop and release new products of the Plumtree Corporate Portal, and applications, such as dashboard and score carding with Cognos, an Enterprise Web customer service application for insurers with SEEC and an electronic courtroom management application with MediaEdge, could be delayed or hindered by development problems. Product release delays or product defects could result in adverse publicity, loss of sales, delay in market acceptance of our products or customer claims against us, any of which could harm our business. We may be unable to successfully develop and market product enhancements or new products that respond to technological changes, shifting customer tastes or evolving industry standards, and may experience difficulties that could delay or prevent the successful development, introduction and marketing of new or enhanced products. If we are unable to develop and introduce new products or enhancements of existing products in a timely manner or if we experience delays in the commencement of commercial shipments of new products and enhancements, our ability to attract and retain customers will be harmed.

If we fail to manage technological change, demand for our products and services will drop and our revenue will decline.

The market for our products is still in an early stage of development and is characterized by rapidly changing technology, evolving industry standards, frequent new service and product introductions and changes in customer demands. Our future success will depend to a substantial degree on our ability to offer products and services that incorporate leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. You should be aware that:

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our technology or systems may become obsolete upon the introduction of alternative technologies;

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the technological life cycles of our products may end abruptly and, in any event, are difficult to estimate;

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we may not have sufficient resources to develop, license or acquire new technologies or to introduce new services capable of competing with future technologies or service offerings; and

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the price of the products and services we provide may decline as rapidly as, or more rapidly than, the price of any competitive alternatives, particularly if the unique features of our products become widely adopted through new technologies.

We may not be able to continue to effectively respond to the technological requirements of the changing market for our corporate portal and the other products comprising the Enterprise Web product suite. To the extent we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of those technologies and equipment are likely to continue to require significant capital investment by us. We may not have sufficient capital for these purposes in the future. Even if we successfully raise capital to develop, license or acquire new technologies, investments in these technologies may not result in commercially viable technological processes, or there may not be commercial applications for those technologies. In addition, we may become increasingly reliant on third party providers of software that enables, enhances or complements aspects of our products’ functionality. If we do not develop and introduce new products and services, and achieve market acceptance in a timely manner, demand for our products and services will drop and our revenue will decline.

Terrorist activities and resulting military and other actions could harm our business

The terrorist attacks of September 11, 2001 and the war in Iraq, and expanded military action associated with the war on terror, have disrupted commerce throughout the world. The continued threat of terrorism, continued military action and heightened security measures in response to this threat have diverted public and corporate spending priorities and periodically disrupted commerce. To the extent that these events result in a general decrease in corporate spending on information technology, our business and results of operations could be harmed. We are unable to predict whether these threats or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have a long-term adverse effect on our business, results of operations or financial condition. Additionally, if any attacks were to affect the operation of the Internet or key data centers, our business could be harmed.

Business disruptions in the event of a catastrophic event.

We are a highly automated business and a disruption or failure of our systems in the event of a major earthquake, cyber-attack, or other catastrophic event could cause delays in completing sales and providing services. Our corporate headquarters, a significant portion of our research and development activities, and certain other critical business operations are located in San Francisco, California, which is near a major earthquake fault. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2005, we had cash, cash equivalents and short-term investments totaling $68.0 million. Our investment portfolio consists of money market funds, corporate-backed debt obligations, municipal bonds and U.S. government discount notes, generally due within one to two years. We place investments with high quality issuers and limit the amount of credit exposure to any one issuer. These securities are subject to interest rate risks. Based on the duration of our portfolio and our ability to hold investments to maturity, we believe that, if a significant change in interest rates were to occur, it would not have a material effect on our financial condition, although there can be no assurance of this.

For the three months ended June 30, 2005, we earned approximately 23% of our license, maintenance and professional services revenue from international markets, most of which are denominated in various currencies. As a result, our operating results are and may become subject to more significant fluctuations based upon changes in the exchange rates of some currencies in relation to the U.S. dollar and diverging economic conditions in foreign markets. We have implemented a hedging strategy which should mitigate our exposure to currency fluctuation. We hedge our net recognized foreign currency assets and liabilities with short-term forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. However, this may not provide absolute assurance that exchange rate fluctuations will not adversely affect our financial results in the future. There were no outstanding contracts as of June 30, 2005.

We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.

We regularly review our hedging program and may as part of this review determine at any time to change our hedging program.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of June 30, 2005, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and Form 10-Q.

There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Plumtree have been detected.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Datamize

Advarion

ITEM 2.

UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Annual Meeting of Stockholders of Plumtree Software, Inc. was held at 8:00 a.m. Pacific Daylight Time, on May 20, 2005 at the Omni San Francisco Hotel’s Nob Hill Room located at 500 California Street, San Francisco, California 94104.

Two proposals presented were at the meeting:

To elect two (2) Class II directors for a term of three years.

To consider and ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the 2005 fiscal year.

(b) Each of John Kunze and Bernard Whitney was elected as a Class II director for a term of three years and received the number of votes set forth below:


Name	For	Withheld
John Kunze	29,559,036	75,580
Bernard Whitney	29,552,182	82,434

The term of office of John Dillon, Rupen Dolasia, James Richardson and David Pratt as directors continued after the meeting.

(c) The appointment of KPMG LLP as the Company’s independent registered public accounting firm for the 2005 fiscal year was ratified by the votes set forth below:


For	Against	Abstained
29,615,600	16,816	2,200

ITEM 5.

OTHER INFORMATION

None.

Item 6.

Exhibits

(a) Exhibits.

EXHIBIT INDEX


Exhibit		Description

3.1		Amended and Restated Certificate of Incorporation of the Registrant (8)

3.2		Bylaws of the Registrant (1)

4.1		Specimen common stock certificate (1)

4.2		Warrant to purchase Common Stock, dated May 31, 2000, issued to WXI/SAN Realty, L.L.C. (1)

4.3		Warrant to purchase Common Stock, dated Sept. 20, 2000, issued to WXI/SAN Realty, L.L.C. (1)

10.1*		Form of Indemnification Agreement between the Registrant and each of its directors, officers and certain other key employees (1)

10.2*		1997 Equity Incentive Plan, as amended, and form of agreements thereunder (1)

10.3*		2002 Stock Plan, as amended, and form of agreements thereunder (1)

10.4*		2002 Employee Stock Purchase Plan, and form of agreements thereunder (3)

10.5*		2002 Director Option Plan, and form of agreements thereunder (1)

10.6		Loan and Security Agreement, dated March 14, 2001, between the Registrant and Silicon Valley Bank (1)

10.7		Office Lease for 500 Sansome Street, dated April 7, 1999, between the Registrant and BPG Sansome, L.L.C. (1)

10.8		First Amendment to Lease for 500 Sansome Street, dated May 3, 2000, between the Registrant and WXI/SAN Realty, L.L.C. (1)

10.9*		Offer letter between the Registrant and John H. Kunze (1)

10.10*		Offer letter between the Registrant and Eric Borrmann (1)

10.11		Second Amendment to Lease for 500 Sansome Street, dated September 20, 2000, between the Registrant and WXI/SAN Realty, L.L.C. (1)

10.12		Third Amendment to Lease for 500 Sansome Street, dated November 22, 2000, between the Registrant and WXI/SAN Realty, L.L.C. (1)

10.13		Fourth Amendment to Lease for 500 Sansome Street, dated July 31, 2002, between the Registrant and WXI/SAN Realty, L.L.C. (2)

10.14		Fifth Amendment to Lease for 500 Sansome Street, dated July 21, 2003, between the Registrant and WXI/SAN Realty, L.L.C. (2)

10.15*		Offer letter between Registrant and Eric Zocher (2)

10.16*		2004 Bonus Plan (3)

10.17*		2004 Outside Director Stock in Lieu of Fees Plan (3)

10.18*		Employment Agreement between the Registrant and Paul Ciandrini (4)

10.19*		Employment Agreement between the Registrant and Ira Pollack (4)

10.20*		Offer Letter between the Registrant and Adriana Chiocchi (4)

10.21		Office Lease for 505 Sansome Street, dated October 22, 2004, between Registrant and Transamerica Realty Investment Properties, LLC. (5)

10.22		Revolving Line of Credit Amendment, dated October 25, 2004, between Registrant and Silicon Valley Bank (5)

10.23*		2005 Bonus Plan (6)

10.24*		2005 Independent Director Cash Compensation Plan (6)

10.25*		2005 Executive Officer Annual Compensation Table (7)

10.26*		Stock Option Agreement with Eric Zocher (7)

10.27		Sixth Amendment to Lease for 500 Sansome Street, dated June 28, 2005, between the Registrant and WXI/SAN Realty, L.L.C.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (“S-O Act”)

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the S-O Act

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the S-O Act

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the S-O Act

*	Management contract or compensatory plan or arrangement.

(1)	Incorporated by reference to Exhibits filed with Registration Statement No. 333-45950, as amended, which became effective on June 3, 2002.

(2)	Incorporated by reference to Exhibits filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2003 and filed with the SEC on November 3, 2003 (File No. 001-31344).

(3)	Incorporated by reference to Exhibits filed with the Registrant’s Form 10-K for the year ended December 31, 2003 and filed with the SEC on March 12, 2004 (File No. 001-31344).

(4)	Incorporated by reference to Exhibits filed with the Registrant’s Form 10-Q for the quarter ended June 30, 2004 and filed with the SEC on August 6, 2004 (File No. 001-31344).

(5)	Incorporated by reference to Exhibits filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2004 and filed with the SEC on November 5, 2004 (File No. 001-31344).

(6)	Incorporated by reference to Exhibits filed with the Registrant’s Form 10-K for the year ended December 31, 2004 and filed with the SEC on March 11, 2005 (File No. 001-31344).

(7)	Incorporated by reference to Exhibits filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2005 and filed with the SEC on May 5, 2005 (File No. 001-31344).

(8)	Incorporated by reference to Exhibits filed with the Registrant’s Form 8-K filed with the SEC on July 18, 2005 (File No. 001-31344).

SIGNATURES

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


PLUMTREE SOFTWARE, INC. (Registrant)

Dated: August 9, 2005				/s/ John H. Kunze
				John H. Kunze
				Chief Executive Officer and Director
				(Duly Authorized Officer)

Dated: August 9, 2005				/s/ Eric Borrmann
				Eric Borrmann
				Chief Financial Officer
				(Principal Financial Officer)

PLUMTREE SOFTWARE INC 10-Q