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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549







FORM 10-Q





|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|    |  |                                                                                        
|    |  | For the quarterly period ended October 31, 2003                                        

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission File Number: 000-28797

NIKU CORPORATION

(Exact name of registrant as specified in its charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Delaware                        |  | 77-0473454         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

305 Main Street
Redwood City, California 94063
(Address of principal executive offices)

Telephone Number (650) 298-4600
(Registrants telephone number, including area code)

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 Exchange Act):

|         |  |       
|-------- |  | ------
|Yes [  ] |  | No [X]

As of December 5, 2003, there were approximately 11,946,000 shares of the
registrants common stock outstanding.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                           
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II: OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT 3.3                  
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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NIKU CORPORATION AND SUBSIDIARIES

Table of Contents

|         |  |                                                                                       |          |   
|-------- |  | ------------------------------------------------------------------------------------- | -------- | --
|         |  |                                                                                       | Page No.
|         |  |                                                                                       |         
|PART I.  |  | FINANCIAL INFORMATION                                                                 |          |   
|Item 1.  |  | Condensed Consolidated Financial Statements:                                          |          |   
|         |  | Condensed Consolidated Statements of Operations                                       |          |   
|         |  | Three and nine months ended October 31, 2003 and 2002                                 |          | 2 
|         |  | Condensed Consolidated Balance Sheets                                                 |          |   
|         |  | October 31, 2003 and January 31, 2003                                                 |          | 3 
|         |  | Condensed Consolidated Statements of Cash Flows                                       |          |   
|         |  | Nine months ended October 31, 2003 and 2002                                           |          | 4 
|         |  | Notes to Condensed Consolidated Financial Statements                                  |          | 5 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |          | 11
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |          | 28
|Item 4.  |  | Controls and Procedures                                                               |          | 29
|PART II. |  | OTHER INFORMATION                                                                     |          |   
|Item 1.  |  | Legal Proceedings                                                                     |          | 29
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                      |          | 30
|         |  | Signatures                                                                            |          | 31

1



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PART I: FINANCIAL INFORMATION




ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




NIKU CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |        |         |        | 
|------------------------------------------------------------------- | ---------------------------------------- | ----------------------------- | ---------------------- | ----- | ------------------ | ------ | ----------------- | ----- | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ------- | ------ | 
|                                                                    |                                          |                               |                        |       | Three Months Ended |        | Nine Months Ended
|                                                                    |                                          |                               |                        |       | October 31,        |        | October 31,      
|                                                                    |                                          |                               |                        |       |                    |        |                  
|                                                                    |                                          |                               |                        |       | 2003               |        | 2002              |       | 2003   |        | 2002  
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |       
|Revenues:                                                           |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    | License                                  |                               | $                      | 6,048 |                    |        | $                 | 4,857 |        |        | $      | 12,392 |        |        | $     | 14,509 |        
|                                                                    | Services                                 |                               |                        | 6,487 |                    |        |                   | 6,917 |        |        |        | 19,990 |        |        |       | 21,886 |        
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    |                                          |                               | Total revenues         |       |                    | 12,535 |                   |       |        | 11,774 |        |        |        | 32,382 |       |        |         | 36,395 | 
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|Cost of revenues:                                                   |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    | License                                  |                               |                        | 254   |                    |        |                   | 179   |        |        |        | 364    |        |        |       | 798    |        
|                                                                    | Services                                 |                               |                        | 3,089 |                    |        |                   | 2,871 |        |        |        | 8,546  |        |        |       | 10,154 |        
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    |                                          |                               | Total cost of revenues |       |                    | 3,343  |                   |       |        | 3,050  |        |        |        | 8,910  |       |        |         | 10,952 | 
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    |                                          |                               | Gross profit           |       |                    | 9,192  |                   |       |        | 8,724  |        |        |        | 23,472 |       |        |         | 25,443 | 
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|Operating expenses:                                                 |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    | Sales and marketing                      |                               |                        | 4,800 |                    |        |                   | 3,438 |        |        |        | 11,746 |        |        |       | 18,999 |        
|                                                                    | Research and development                 |                               |                        | 1,901 |                    |        |                   | 1,967 |        |        |        | 5,615  |        |        |       | 9,989  |        
|                                                                    | General and administrative               |                               |                        | 1,758 |                    |        |                   | 2,232 |        |        |        | 4,826  |        |        |       | 6,770  |        
|                                                                    | Restructuring and other                  |                               |                        | 312   |                    |        |                   | 7,469 |        |        |        | 1,960  |        |        |       | 37,036 |        
|                                                                    | Amortization of stock-based compensation |                               |                        | 93    |                    |        |                   | 165   |        |        |        | 228    |        |        |       | (3,782 | )      
|                                                                    | Asset impairment and other               |                               |                        |      |                    |        |                   | 75    |        |        |        |       |        |        |       | 500    |        
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    |                                          | Total operating expenses      |                        |       | 8,864              |        |                   |       | 15,346 |        |        |        | 24,375 |        |       |        | 69,512  |       
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    |                                          | Income (loss) from operations |                        |       | 328                |        |                   |       | (6,622 | )      |        |        | (903   | )      |       |        | (44,069 | )     
|Interest and other income (expense), net                            |                                          |                               | 117                    |       |                    |        | 184               |       |        |        | (190   | )      |        |        | 616   |       
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|                                                                    |                                          | Net income (loss)             |                        | $     | 445                |        |                   | $     | (6,438 | )      |        | $      | (1,093 | )      |       | $      | (43,453 | )     
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|Basic net income (loss) per common share                            |                                          | $                             | 0.04                   |       |                    | $      | (0.88             | )     |        | $      | (0.10  | )      |        | $      | (5.89 | )     
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|Shares used in computing basic
net income (loss) per common share   |                                          |                               | 11,933                 |       |                    |        | 7,312             |       |        |        | 11,435 |        |        |        | 7,380 |       
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|Diluted net income (loss) per common share                          |                                          | $                             | 0.04                   |       |                    | $      | (0.88             | )     |        | $      | (0.10  | )      |        | $      | (5.89 | )     
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       
|Shares used in computing diluted
net income (loss) per common share |                                          |                               | 12,461                 |       |                    |        | 7,312             |       |        |        | 11,435 |        |        |        | 7,380 |       
|                                                                    |                                          |                               |                        |       |                    |        |                   |       |        |        |        |        |        |        |       |       

See accompanying notes to condensed consolidated financial statements.

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NIKU CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

|                                                            |                                           |                                                                     |                                                |        |        |             |        |             |        |  |  | 
|----------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------- | ------ | ------ | ----------- | ------ | ----------- | ------ |  |  | 
|                                                            |                                           |                                                                     |                                                |        |        | October 31, |        | January 31,
|                                                            |                                           |                                                                     |                                                |        |        | 2003        |        | 2003       
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            |                                           |                                                                     |                                                | Assets |        |             |        |             |        |  |  | 
|Current assets:                                             |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            | Cash and cash equivalents                 |                                                                     | $                                              | 21,754 |        |             | $      | 16,670      |       
|                                                            | Current portion of restricted cash        |                                                                     |                                                |       |        |             |        | 229         |       
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            |                                           | Total cash, cash equivalents and current portion of restricted cash |                                                |        | 21,754 |             |        |             | 16,899 | 
|                                                            | Accounts receivable, net                  |                                                                     |                                                | 6,379  |        |             |        | 7,211       |       
|                                                            | Prepaid expenses and other current assets |                                                                     |                                                | 2,041  |        |             |        | 1,687       |       
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            |                                           | Total current assets                                                |                                                |        | 30,174 |             |        |             | 25,797 | 
|Restricted cash                                             |                                           |                                                                     | 1,108                                          |        |        |             | 1,108  |            
|Property and equipment, net                                 |                                           |                                                                     | 1,566                                          |        |        |             | 2,515  |            
|Deposits and other assets                                   |                                           |                                                                     | 911                                            |        |        |             | 1,143  |            
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            |                                           | Total assets                                                        |                                                | $      | 33,759 |             |        | $           | 30,563 | 
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            |                                           |                                                                     | Liabilities and Stockholders Equity (Deficit) |        |        |             |        |             |        |  | 
|Current liabilities:                                        |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            | Accounts payable                          |                                                                     | $                                              | 1,156  |        |             | $      | 2,422       |       
|                                                            | Accrued liabilities                       |                                                                     |                                                | 6,609  |        |             |        | 6,180       |       
|                                                            | Accrued restructuring                     |                                                                     |                                                | 2,233  |        |             |        | 5,550       |       
|                                                            | Bank borrowings and other obligations     |                                                                     |                                                | 4,333  |        |             |        | 1,051       |       
|                                                            | Deferred revenues                         |                                                                     |                                                | 7,219  |        |             |        | 9,375       |       
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            |                                           | Total current liabilities                                           |                                                |        | 21,550 |             |        |             | 24,578 | 
|Accrued restructuring, less current portion                 |                                           |                                                                     | 6,473                                          |        |        |             | 6,209  |            
|Bank borrowings and other obligations, less current portion |                                           |                                                                     | 82                                             |        |        |             | 3,750  |            
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            |                                           | Total liabilities                                                   |                                                |        | 28,105 |             |        |             | 34,537 | 
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|Stockholders equity (deficit)                              |                                           |                                                                     | 5,654                                          |        |        |             | (3,974 | )          
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            
|                                                            |                                           | Total liabilities and stockholders equity (deficit)                |                                                | $      | 33,759 |             |        | $           | 30,563 | 
|                                                            |                                           |                                                                     |                                                |        |        |             |        |            

See accompanying notes to condensed consolidated financial statements.

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NIKU CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |         |        |        |         |  
|------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | ----- | ----------------- | ------- | ------- | ------ | ------ | ------- | -
|                                                                         |                                                                             |                                                   |                                           |                                                     |       | Nine Months Ended
|                                                                         |                                                                             |                                                   |                                           |                                                     |       | October 31,      
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                  
|                                                                         |                                                                             |                                                   |                                           |                                                     |       | 2003              |         | 2002   
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|Cash flows from operating activities:                                    |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|                                                                         | Net loss                                                                    |                                                   | $                                         | (1,093                                              | )     |                   | $       | (43,453 | )     
|                                                                         | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                   |                                           |                                                     |       |                   |         |         |       
|                                                                         |                                                                             | Depreciation                                      |                                           |                                                     | 1,190 |                   |         |         | 2,994  |       
|                                                                         |                                                                             | Amortization of deferred stock-based compensation |                                           |                                                     | 228   |                   |         |         | (3,782 | )     
|                                                                         |                                                                             | Provision for doubtful accounts                   |                                           |                                                     | 423   |                   |         |         | (72    | )     
|                                                                         |                                                                             | Restructuring and other                           |                                           |                                                     | 342   |                   |         |         | 15,294 |       
|                                                                         |                                                                             | Stock issued for services                         |                                           |                                                     | 20    |                   |         |         |       |       
|                                                                         |                                                                             | Notes receivable from stockholders                |                                           |                                                     |      |                   |         |         | 70     |       
|                                                                         |                                                                             | Asset impairment and other                        |                                           |                                                     |      |                   |         |         | 500    |       
|                                                                         |                                                                             | Gain on sale of property and equipment            |                                           |                                                     | (14   | )                 |         |         |       |       
|                                                                         |                                                                             | Changes in operating assets and liabilities:      |                                           |                                                     |       |                   |         |         |        |       
|                                                                         |                                                                             |                                                   | Accounts receivable                       |                                                     |       | 409               |         |         |        | 7,512  |        
|                                                                         |                                                                             |                                                   | Prepaid expenses and other current assets |                                                     |       | (384              | )       |         |        | 3,225  |        
|                                                                         |                                                                             |                                                   | Accounts payable and accrued liabilities  |                                                     |       | (841              | )       |         |        | (8,295 | )      
|                                                                         |                                                                             |                                                   | Accrued restructuring                     |                                                     |       | (3,365            | )       |         |        | 11,777 |        
|                                                                         |                                                                             |                                                   | Deferred revenues                         |                                                     |       | (2,156            | )       |         |        | (3,281 | )      
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|                                                                         |                                                                             |                                                   |                                           | Net cash used in operating activities               |       |                   | (5,241  | )       |        |        | (17,511 | )
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|Cash flows from investing activities:                                    |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|                                                                         | Purchases of property and equipment                                         |                                                   |                                           | (84                                                 | )     |                   |         | (2,480  | )     
|                                                                         | Proceeds from sale of property and equipment                                |                                                   |                                           | 35                                                  |       |                   |         |        |       
|                                                                         | Releases of investment of restricted cash                                   |                                                   |                                           | 229                                                 |       |                   |         | 6,934   |       
|                                                                         | Deposits and other assets                                                   |                                                   |                                           | 232                                                 |       |                   |         | 329     |       
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|                                                                         |                                                                             |                                                   |                                           | Net cash provided by investing activities           |       |                   | 412     |         |        |        | 4,783   |  
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|Cash flows from financing activities:                                    |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|                                                                         | Proceeds from (repayments of) bank borrowings, net                          |                                                   |                                           | (500                                                | )     |                   |         | (22,120 | )     
|                                                                         | Payment of capital lease obligations                                        |                                                   |                                           | (41                                                 | )     |                   |         | (74     | )     
|                                                                         | Net proceeds from issuance of common stock and warrants, net                |                                                   |                                           | 10,292                                              |       |                   |         | 392     |       
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|                                                                         |                                                                             |                                                   |                                           | Net cash provided by (used in) financing activities |       |                   | 9,751   |         |        |        | (21,802 | )
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|Net increase (decrease) in cash and cash equivalents                     |                                                                             |                                                   | 4,922                                     |                                                     |       |                   | (34,530 | )      
|Effect of exchange rate changes                                          |                                                                             |                                                   | 162                                       |                                                     |       |                   | 23      |        
|Cash and cash equivalents at beginning of period                         |                                                                             |                                                   | 16,670                                    |                                                     |       |                   | 51,585  |        
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|Cash and cash equivalents at end of period                               |                                                                             | $                                                 | 21,754                                    |                                                     |       | $                 | 17,078  |        
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|Supplemental disclosures of non-cash investing and financing activities: |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|                                                                         | Deferred stock-based compensation                                           |                                                   | $                                         | 123                                                 |       |                   | $       | (19,263 | )     
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |        
|                                                                         | Repurchases of common stock in settlement of stockholders notes receivable |                                                   | $                                         |                                                    |       |                   | $       | 675     |       
|                                                                         |                                                                             |                                                   |                                           |                                                     |       |                   |         |         |       

See accompanying notes to condensed consolidated financial statements.

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NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared by Niku Corporation (the Company) and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the interim periods presented. Such adjustments are of a normal
recurring nature. The condensed consolidated results of operations for the
interim periods presented are not necessarily indicative of the results for any
future interim period or for the entire fiscal year. Certain information and
footnote disclosures normally included in the annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted, although the Company
believes that the disclosures included are adequate to make the information
presented not misleading. The unaudited condensed consolidated financial
statements and notes included herein should be read in conjunction with the
consolidated financial statements and notes for the fiscal year ended January
31, 2003, included in the Companys fiscal 2003 Annual Report on Form 10-K, as
amended.

The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Unless otherwise specified,
references to the Company are references to the Company and its consolidated
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the condensed consolidated financial
statements and reported consolidated results of operations during the reporting
period. Estimates are used for, but not limited to, revenue recognition,
allowance for doubtful accounts, depreciation and amortization, taxes,
impairment, restructuring, accrued liabilities and contingencies. Actual
results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to prior period amounts to
conform to the current period presentation.

Stock Split

On November 21, 2002, the Company effected a one-for-ten reverse stock
split of its outstanding common stock. All information regarding common stock,
stock options, warrants and income (loss) per share amounts reflects the
reverse stock split.

Stock-Based Compensation

To account for all of its employee stock-based compensation plans, the
Company uses the intrinsic-value method prescribed by Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employeesand
Financial Accounting Standards Board Interpretation (FIN) No. 44, Accounting
for Certain Transactions Involving Stock Compensation. Stock-based
compensation is being amortized over the vesting period of the individual award
in a manner consistent with the method described in FIN No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Awards Plans. The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensationand Emerging Issues Task Force

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Statements (EITF) No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.

The resulting stock-based compensation is amortized over the estimated
term of the stock option, generally four years, using the method described in
FASB Interpretation No. 28. The amortization of stock-based compensation is
attributable to the following functional groups (in thousands):

|                           |  |  |                    |    |                   |  |      |     |      |  |   |     |  |  |   |        |  
|-------------------------- |  |  | ------------------ | -- | ----------------- |  | ---- | --- | ---- |  | - | --- |  |  | - | ------ | -
|                           |  |  | Three Months Ended |    | Nine Months Ended
|                           |  |  | October 31,        |    | October 31,      
|                           |  |  |                    |    |                  
|                           |  |  | 2003               |    | 2002              |  | 2003 |     | 2002
|                           |  |  |                    |    |                   |  |      |     |     
|Cost of revenues           |  |  | $                  | 8  |                   |  | $    | 2   |      |  | $ | 10  |  |  | $ | (289   | )
|Sales and marketing        |  |  |                    | 10 |                   |  |      | 54  |      |  |   | 39  |  |  |   | (1,787 | )
|Research and development   |  |  |                    | 70 |                   |  |      | 46  |      |  |   | 83  |  |  |   | (1,552 | )
|General and administrative |  |  |                    | 5  |                   |  |      | 63  |      |  |   | 96  |  |  |   | (154   | )
|                           |  |  |                    |    |                   |  |      |     |      |  |   |     |  |  |   |        |  
|                           |  |  | $                  | 93 |                   |  | $    | 165 |      |  | $ | 228 |  |  | $ | (3,782 | )
|                           |  |  |                    |    |                   |  |      |     |      |  |   |     |  |  |   |        |  

In future periods, amortization of stock-based compensation will be
contingent on the number of repriced options giving rise to stock-based
compensation then outstanding and the Companys stock price on the financial
statement reporting date. As of October 31, 2003, there were approximately
70,000 repriced options giving rise to stock-based compensation outstanding.
See Note 2  Repricing of Stock Options.

In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  SFAS No. 123,to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. This statement also amends the disclosure requirements
of SFAS No. 123 to require more prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Company adopted the annual disclosure requirements of SFAS No. 148 in
fiscal 2003. The Company adopted the interim disclosure requirements of SFAS
148 during the first quarter of fiscal 2004.

The compensation cost associated with the Companys stock-based
compensation plans, determined using the Black-Scholes option pricing model,
resulted in a material difference from the reported net loss during the three-
and nine-month periods ended October 31, 2003 and 2002. Had compensation costs
been recorded by the Company in its condensed consolidated statements of
operations in accordance with SFAS No. 123 for all of the Companys stock-based
compensation plans, net income (loss) and basic and diluted net income (loss)
per share would have been as follows (in thousands, except per share data):

|                   |                                                                             |   |                    |      |                   |   |        |        |      |   |        |        |   |   |         |         |  
|------------------ | --------------------------------------------------------------------------- | - | ------------------ | ---- | ----------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------- | ------- | -
|                   |                                                                             |   | Three Months Ended |      | Nine Months Ended
|                   |                                                                             |   | October 31,        |      | October 31,      
|                   |                                                                             |   |                    |      |                  
|                   |                                                                             |   | 2003               |      | 2002              |   | 2003   |        | 2002
|                   |                                                                             |   |                    |      |                   |   |        |        |     
|Net income (loss): |                                                                             |   |                    |      |                   |   |        |        |      |   |        |        |   |   |         |        
|                   | As reported                                                                 |   | $                  | 445  |                   |   | $      | (6,438 | )    |   | $      | (1,093 | ) |   | $       | (43,453 | )
|                   | Stock-based employee compensation included
in net income (loss) as reported |   |                    | 93   |                   |   |        | 165    |      |   |        | 228    |   |   |         | (3,782  | )
|                   | Stock-based employee compensation using the
fair value method               |   |                    | (801 | )                 |   |        | (900   | )    |   |        | (2,490 | ) |   |         | (2,721  | )
|                   |                                                                             |   |                    |      |                   |   |        |        |      |   |        |        |   |   |         |        
|Pro forma          |                                                                             | $ | (263               | )    |                   | $ | (7,173 | )      |      | $ | (3,355 | )      |   | $ | (49,956 | )      
|                   |                                                                             |   |                    |      |                   |   |        |        |      |   |        |        |   |   |         |        

|                                                      |             |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------- | ----------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                      |             |  | Three Months Ended |       | Nine Months Ended
|                                                      |             |  | October 31,        |       | October 31,      
|                                                      |             |  |                    |       |                  
|                                                      |             |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                                      |             |  |                    |       |                   |  |      |       |     
|Basic and diluted net income (loss) per common share: |             |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |      
|                                                      | As reported |  | $                  | 0.04  |                   |  | $    | (0.88 | )    |  | $ | (0.10 | ) |  | $ | (5.89 | )
|                                                      | Pro forma   |  | $                  | (0.02 | )                 |  | $    | (0.98 | )    |  | $ | (0.29 | ) |  | $ | (6.77 | )

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The Company calculated the fair value of each option grant on the date of
grant during the three- and nine-month periods ended October 31, 2003 and 2002
using the Black-Scholes option pricing model as prescribed by SFAS No. 123
using the following assumptions:

|                            |  |                    |      |                   |  |            |      |           |  |   |           |   |  |   |           |   | 
|--------------------------- |  | ------------------ | ---- | ----------------- |  | ---------- | ---- | --------- |  | - | --------- | - |  | - | --------- | - | 
|                            |  | Three Months Ended |      | Nine Months Ended
|                            |  | October 31,        |      | October 31,      
|                            |  |                    |      |                  
|                            |  | 2003               |      | 2002              |  | 2003       |      | 2002     
|                            |  |                    |      |                   |  |            |      |          
|Expected life of option     |  | 4 years            |      | 2 years           |  | 2 -4 years |      | 2-3 years
|Risk-free interest rate     |  |                    | 3.08 | %                 |  |            | 1.70 | %         |  |   | 1.51-3.08 | % |  |   | 1.70-3.97 | %
|Dividend yield              |  |                    | 0.00 | %                 |  |            | 0.00 | %         |  |   | 0.00      | % |  |   | 0.00      | %
|Volatility                  |  |                    | 148  | %                 |  |            | 158  | %         |  |   | 142-148   | % |  |   | 142-158   | %
|Weighted average fair value |  | $                  | 4.87 |                   |  | $          | 2.13 |           |  | $ | 3.43      |   |  | $ | 8.38      |  

Note 2. Repricing of Stock Options

On November 12, 2001, the Companys board of directors, acting pursuant to
existing terms of the Companys stock option plans, approved the repricing of
approximately 890,000 outstanding stock options with exercise prices above
$7.50. The exercise prices of all such stock options were repriced to $7.50,
which was the fair market value of the Companys stock on November 12, 2001.
There were no changes to the vesting schedules or other terms of the repriced
stock options. Stock options held by the Companys former Chief Executive
Officer, former Executive Vice President of Strategy and Planning, members of
the board of directors and non-employees were not repriced. The Company has
accounted for the repriced stock options using variable accounting whereby the
aggregate intrinsic value of the repriced stock options is continuously
remeasured and amortized to stock-based compensation expense over the vesting
periods.

On April 15, 2003, the Company announced a voluntary stock option exchange
program for its employees. Under the program, the Companys employees were
given the opportunity to exchange outstanding stock options previously granted
to them with an exercise price greater than or equal to $7.50 per share for a
new stock option exercisable for 1.15 shares for each share subject to the
tendered stock options, to be granted at a future date, at least six months and
a day from the cancellation date. The new stock options are vested as to the
number of stock options that would have been vested on such date had the old
stock options not been tendered plus the number of shares that would have been
vested had the old stock option been exercisable for 15% more shares. The
Companys Chief Executive Officer, Chief Financial Officer, members of the
board of directors and non-employees were not eligible to participate in this
program. This stock option exchange program did not result in any additional
compensation charges or variable plan accounting. On April 15, 2003, stock
options for 622,511 shares of common stock were eligible to be exchanged. On
May 13, 2003, the Companys employees tendered stock options for 525,031 shares
of common stock.

On November 14, 2003, the Company granted 598,842 new stock options under
this stock option exchange program with an exercise price of $8.85, which was
equal to the fair market value of the Companys common stock on that date. As
a result of this stock option exchange program, the Company is no longer
incurring stock-based compensation for approximately 298,000 outstanding stock
options that were previously repriced in November 2001 and subsequently
cancelled on May 13, 2003. The Company will continue to incur stock-based
compensation for outstanding stock options that were previously repriced in
November 2001 and not tendered pursuant to the stock option exchange program to
the extent the price of the Companys stock on the last day of a quarter is
above $8.67. Based on the stock price on October 31, 2003 of $8.67 per share,
the Company recorded approximately $80,000 of stock-based compensation charges
in the three- and nine-months periods ended October 31, 2003 relating to
approximately 70,000 repriced but not tendered options. The Company also
recorded $13,000 and $148,000 in amortization of other stock-based compensation
charges not associated with the stock option exchange program in the three- and
nine-month periods ended October 31, 2003, respectively.

In October 2002, the Company cancelled stock options to purchase 55,000
shares of common stock held by its Chief Executive Officer and immediately
thereafter granted him stock options to purchase 150,000 shares of common stock
at a price of $1.50, which was the closing price of its common stock on the
grant date. As a result, based on the closing price of its common stock of
$4.67 on April 30, 2003, the Company recorded $35,000 in stock-based
compensation in the first quarter of fiscal 2004. In May 2003, the Companys
Chief Executive Officer

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exercised all of his repriced stock options to purchase 55,000 shares of
common stock and the Company recorded an additional $56,000 in stock-based
compensation. As all such repriced options have been exercised, the Company
will no longer be required to record additional stock-based compensation
relating to these stock options in the future.

Note 3. Restructuring and Other

In the third quarter of fiscal 2004, the Company recorded $312,000 in
restructuring charges as a result of the Companys termination of two leases
and an adjustment of sublease estimates for a facility that the Company had
previously vacated. The consideration for one termination included the release
to the landlord of a $33,000 security deposit and a lease termination payment
of $134,000. The consideration for the other lease termination totaled
$155,000. The Company recorded a $190,000 sublease estimate adjustment for the
vacated facility.

The table below represents restructuring activities in the third quarter
of fiscal 2004 (in thousands):

|                                                 |  |               |       |                    |  |                    |     |                    |  |                  |   |  |  |   |      |   |  |   |       | 
|------------------------------------------------ |  | ------------- | ----- | ------------------ |  | ------------------ | --- | ------------------ |  | ---------------- | - |  |  | - | ---- | - |  | - | ----- | 
|                                                 |  |               |       |                    |  | Restructuring      |     |                    |  |                  |   |  |  |   |      |   |  |  
|                                                 |  | Accrued       |       | Charges in the     |  | Write Offs in the  |     | Paid in the        |  | Accrued         
|                                                 |  | as of         |       | Three Months Ended |  | Three Months Ended |     | Three Months Ended |  | as of           
|                                                 |  | July 31, 2003 |       | October 31, 2003   |  | October 31, 2003   |     | October 31, 2003   |  | October 31, 2003
|                                                 |  |               |       |                    |  |                    |     |                    |  |                 
|Restructuring initiated in fiscal 2003           |  |               |       |                    |  |                    |     |                    |  |                  |   |  |  |   |      |   |  |   |       | 
|Severance                                        |  | $             | 12    |                    |  |                    |    |                    |  |                  |  |  |  | $ | (12  | ) |  |   |      | 
|Net lease commitment costs on vacated facilities |  |               | 1,296 |                    |  | $                  | 155 |                    |  |                  |  |  |  |   | (195 | ) |  | $ | 1,256 | 
|Computer and car leases                          |  |               | 170   |                    |  |                    |    |                    |  |                  |  |  |  |   | (20  | ) |  |   | 150   | 
|Other exit costs                                 |  |               | 590   |                    |  |                    |    |                    |  |                  |  |  |  |   | (132 | ) |  |   | 458   | 
|Restructuring initiated in fiscal 2002           |  |               |       |                    |  |                    |     |                    |  |                  |   |  |  |   |      |   |  |   |       | 
|Net lease commitment costs on vacated facilities |  |               | 6,988 |                    |  |                    | 190 |                    |  |                  |  |  |  |   | (336 | ) |  |   | 6,842 | 
|Other exit costs                                 |  |               | 167   |                    |  |                    | (33 | )                  |  |                  |  |  |  |   | (134 | ) |  |   |      | 
|                                                 |  |               |       |                    |  |                    |     |                    |  |                  |   |  |  |   |      |   |  |   |       | 
|                                                 |  | $             | 9,223 |                    |  | $                  | 312 |                    |  | $                |  |  |  | $ | (829 | ) |  | $ | 8,706 | 
|                                                 |  |               |       |                    |  |                    |     |                    |  |                  |   |  |  |   |      |   |  |   |       | 

The table below represents restructuring activities for the nine months
ended October 31, 2003 (in thousands):

|                                                 |  |                  |        |                   |  |                   |       |                   |  |                  |     |   |  |   |        |   |  |   |       | 
|------------------------------------------------ |  | ---------------- | ------ | ----------------- |  | ----------------- | ----- | ----------------- |  | ---------------- | --- | - |  | - | ------ | - |  | - | ----- | 
|                                                 |  |                  |        |                   |  | Restructuring     |       |                   |  |                  |     |   |  |   |        |   |  |  
|                                                 |  | Accrued          |        | Charges in the    |  | Write Offs in the |       | Paid in the       |  | Accrued         
|                                                 |  | as of            |        | Nine Months Ended |  | Nine Months Ended |       | Nine Months Ended |  | as of           
|                                                 |  | January 31, 2003 |        | October 31, 2003  |  | October 31, 2003  |       | October 31, 2003  |  | October 31, 2003
|                                                 |  |                  |        |                   |  |                   |       |                   |  |                 
|Restructuring initiated in fiscal 2003           |  |                  |        |                   |  |                   |       |                   |  |                  |     |   |  |   |        |   |  |   |       | 
|Severance                                        |  | $                | 1,031  |                   |  | $                 | (5    | )                 |  |                  |    |   |  | $ | (1,026 | ) |  |   |      | 
|Net lease commitment costs on vacated facilities |  |                  | 3,635  |                   |  |                   | 469   |                   |  |                  |    |   |  |   | (2,848 | ) |  | $ | 1,256 | 
|Computer and car leases                          |  |                  | 303    |                   |  |                   | 5     |                   |  |                  |    |   |  |   | (158   | ) |  |   | 150   | 
|Other exit costs                                 |  |                  | 588    |                   |  |                   | (34   | )                 |  |                  |    |   |  |   | (96    | ) |  |   | 458   | 
|Restructuring initiated in fiscal 2002           |  |                  |        |                   |  |                   |       |                   |  |                  |     |   |  |   |        |   |  |   |       | 
|Net lease commitment costs on vacated facilities |  |                  | 6,029  |                   |  |                   | 1,558 |                   |  | $                | (30 | ) |  |   | (715   | ) |  |   | 6,842 | 
|Other exit costs                                 |  |                  | 173    |                   |  |                   | (33   | )                 |  |                  |    |   |  |   | (140   | ) |  |   |      | 
|                                                 |  |                  |        |                   |  |                   |       |                   |  |                  |     |   |  |   |        |   |  |   |       | 
|                                                 |  | $                | 11,759 |                   |  | $                 | 1,960 |                   |  | $                | (30 | ) |  | $ | (4,983 | ) |  | $ | 8,706 | 
|                                                 |  |                  |        |                   |  |                   |       |                   |  |                  |     |   |  |   |        |   |  |   |       | 

The Company expects that of the restructuring and other charges accrued as
of October 31, 2003, other exit costs, computer and car leases will be paid no
later than April 2005 and the net lease commitments on vacated leased
facilities will be paid no later than February 2011.

Note 4. Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed using the weighted
average number of outstanding shares of common stock during the period.
Diluted net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period and, when
dilutive, potential common shares from options and warrants to purchase common
stock, using the treasury stock method.

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The following potential common shares have been excluded from the
calculation of diluted net loss per share for all periods presented because the
effect would have been anti-dilutive (in thousands):

|                                  |  |  |                    |   |                   |  |      |       |      |  |  |       |  |  |  |       | 
|--------------------------------- |  |  | ------------------ | - | ----------------- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                  |  |  | Three Months Ended |   | Nine Months Ended
|                                  |  |  | October 31,        |   | October 31,      
|                                  |  |  |                    |   |                  
|                                  |  |  | 2003               |   | 2002              |  | 2003 |       | 2002
|                                  |  |  |                    |   |                   |  |      |       |     
|Options to purchase common stock  |  |  |                    |  |                   |  |      | 1,492 |      |  |  | 1,307 |  |  |  | 1,492 | 
|Warrants to purchase common stock |  |  |                    |  |                   |  |      | 1,465 |      |  |  | 406   |  |  |  | 1,465 | 
|                                  |  |  |                    |   |                   |  |      |       |      |  |  |       |  |  |  |       | 
|                                  |  |  |                    |  |                   |  |      | 2,957 |      |  |  | 1,713 |  |  |  | 2,957 | 
|                                  |  |  |                    |   |                   |  |      |       |      |  |  |       |  |  |  |       | 

The weighted-average exercise price of anti-dilutive options outstanding
as of October 31, 2003 and 2002 was $4.02 and $11.52 per share, respectively.
The weighted-average exercise price of anti-dilutive warrants as of October 31,
2003 and 2002 was $4.55 and $0.36 per share, respectively.

Note 5. Bank Borrowings and Other Obligations

On July 18, 2003, the Company entered into a $5.0 million line of credit
with a financial institution. The line of credit is secured by the Companys
tangible and intangible assets, accrues interest rate at prime rate plus 0.50%
per annum (currently at 4.50%) and expires in July 2004. The line of credit
has certain financial covenants, including covenants requiring 1) minimum cash
and cash equivalent balance equal to at least 1.25 times the outstanding
principal line balance at each month end, 2) minimum cash balance of $10
million at the end of each fiscal quarter and 3) annual GAAP profitability of
at least $1 (excluding restructuring charges for vacated facilities and
stock-based compensation). As of October 31, 2003, the Company was in
compliance with all financial covenants. The Company had borrowings of $4.3
million as of October 31, 2003, which it repaid in November 2003.

The Company previously had a term loan for $5.0 million from the same
financial institution, which it entered into in September 2002. The term loan
was secured by the Companys tangible and intangible assets, accrued interest
at 7.50% per annum and was to mature on February 15, 2004. At January 31,
2003, the Company had $4.8 million outstanding under the facility. On July 23,
2003, the Company terminated the term loan and repaid the remaining outstanding
balance as of that date plus all accrued interest.

In August 2003, the Company entered into a non-cancelable master lease
agreement with a computer equipment vendor. The agreement enables the Company
to lease equipment from the vendor under a capital lease. At October 31,
2003, equipment held under the lease was $155,000.

Interest expense was $3,000 and $52,000 during the three-month periods
ended October 31, 2003 and 2002, respectively, and $141,000 and $86,000 for the
nine-month periods ended October 31, 2003 and 2002, respectively. Cash paid
for interest was $138,000 and $48,000 for the nine-month periods ended October
31, 2003 and 2002, respectively.

Note 6. Notes Receivable from Stockholder

In November 1999, the Company loaned $1,250,000 to its then president,
vertical markets, Joshua Pickus, who is now its Chief Executive Officer,
secured by a stock pledge agreement and personal assets, in connection with his
purchase of 125,000 shares of the Companys restricted common stock. The loan
initially accrued interest at 6.08% and was to mature in November 2002. In May
2002, the Company extended the maturity date of the loan to November 2004 and
reduced the interest rate to 3.21%. In July 2002, the Company repurchased
these 125,000 shares of common stock from Mr. Pickus for $675,000, the fair
market value of the common stock at that time, and Mr. Pickus used the
consideration to repay the equivalent principal amount of the note. In
connection with this repayment, the Company cancelled $116,000 in accrued
interest, which was recorded as compensation expense. The remaining amount of
the loan of $674,000, including $99,000 in accrued interest, was reclassified
to other assets in the second quarter of fiscal 2003 as the loan was no longer
secured by the common stock. On March 16, 2003, Mr. Pickus made a $150,000
payment against this loan, which reduced the interest outstanding as of the
date of payment to zero and reduced the principal outstanding to $537,000. On
June 2, 2003, Mr. Pickus made a $120,000 payment against this loan which
reduced the interest outstanding as of the date of payment to zero and

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reduced the principal outstanding to $421,000. As of October 31, 2003, the
outstanding balance of the loan including interest amounted to $427,000. The
loan remains secured by the personal assets of Mr. Pickus.

Note 7. Comprehensive Income and (Loss)

Other comprehensive income and loss refers to revenues, expenses, gains
and losses that under the accounting principles generally accepted in the
United States of America are recorded as an element of stockholders equity and
are excluded from net loss.

The comprehensive income (loss) comprises the following items (in
thousands):

|                                   |                        |   |                    |    |                   |   |        |     |      |   |        |     |  |   |         |    | 
|---------------------------------- | ---------------------- | - | ------------------ | -- | ----------------- | - | ------ | --- | ---- | - | ------ | --- |  | - | ------- | -- | 
|                                   |                        |   | Three Months Ended |    | Nine Months Ended
|                                   |                        |   | October 31,        |    | October 31,      
|                                   |                        |   |                    |    |                  
|                                   |                        |   | 2003               |    | 2002              |   | 2003   |     | 2002
|                                   |                        |   |                    |    |                   |   |        |     |     
|Net income (loss)                  |                        | $ | 445                |    |                   | $ | (6,438 | )   |      | $ | (1,093 | )   |  | $ | (43,453 | ) 
|Other comprehensive income (loss): |                        |   |                    |    |                   |   |        |     |      |   |        |     |  |   |         |   
|                                   | Translation adjustment |   |                    | 89 |                   |   |        | (46 | )    |   |        | 181 |  |   |         | 72 | 
|                                   |                        |   |                    |    |                   |   |        |     |      |   |        |     |  |   |         |   
|Comprehensive income (loss)        |                        | $ | 534                |    |                   | $ | (6,484 | )   |      | $ | (912   | )   |  | $ | (43,381 | ) 
|                                   |                        |   |                    |    |                   |   |        |     |      |   |        |     |  |   |         |   

Accumulated other comprehensive income (loss) as of October 31, 2003 and
January 31, 2003 comprises the following (in thousands):

|                                  |  |             |     |             |  |   |     |  
|--------------------------------- |  | ----------- | --- | ----------- |  | - | --- | -
|                                  |  | October 31, |     | January 31,
|                                  |  | 2003        |     | 2003       
|                                  |  |             |     |            
|Cumulative translation adjustment |  | $           | 112 |             |  | $ | (69 | )

Note 8. Segment Reporting

SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information,establishes standards for the reporting by public business
enterprises of information about operating segments, products and services,
geographic areas and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance.

The Companys Chief Operating Decision Makers are considered to be the
Chief Executive Officer and the Chief Financial Officer. The Chief Executive
Officer and the Chief Financial Officer review financial information presented
on a consolidated basis for purposes of making operating decisions and
assessing financial performance. The Company operates in a single segment:
software.

Disaggregated product information is as follows (in thousands):

|          |             |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |        | 
|--------- | ----------- | - | ------------------ | ----- | ----------------- | - | ------ | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|          |             |   | Three Months Ended |       | Nine Months Ended
|          |             |   | October 31,        |       | October 31,      
|          |             |   |                    |       |                  
|          |             |   | 2003               |       | 2002              |   | 2003   |       | 2002
|          |             |   |                    |       |                   |   |        |       |     
|License   |             | $ | 6,048              |       |                   | $ | 4,857  |       |      | $ | 12,392 |        |  | $ | 14,509 |       
|Services: |             |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|          | Consulting  |   |                    | 2,672 |                   |   |        | 2,596 |      |   |        | 8,072  |  |   |        | 8,276  | 
|          | Maintenance |   |                    | 3,815 |                   |   |        | 4,321 |      |   |        | 11,918 |  |   |        | 13,610 | 
|          |             |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|          |             | $ | 12,535             |       |                   | $ | 11,774 |       |      | $ | 32,382 |        |  | $ | 36,395 |       
|          |             |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       

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The Company markets its products primarily from its operations in the
United States. International sales are primarily to customers in the United
Kingdom, the Netherlands and the rest of Europe. Revenue is attributed to the
location of the customers. Geographic information regarding the Companys
revenue is as follows (in thousands):

|                |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|--------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                |  | Three Months Ended |        | Nine Months Ended
|                |  | October 31,        |        | October 31,      
|                |  |                    |        |                  
|                |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                |  |                    |        |                   |  |      |        |     
|United States   |  | $                  | 5,754  |                   |  | $    | 8,152  |      |  | $ | 17,890 |  |  | $ | 23,176 | 
|United Kingdom  |  |                    | 4,284  |                   |  |      | 2,155  |      |  |   | 6,849  |  |  |   | 6,416  | 
|The Netherlands |  |                    | 1,042  |                   |  |      | 533    |      |  |   | 3,438  |  |  |   | 1,813  | 
|Europe Others   |  |                    | 1,455  |                   |  |      | 934    |      |  |   | 4,205  |  |  |   | 4,990  | 
|                |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|                |  | $                  | 12,535 |                   |  | $    | 11,774 |      |  | $ | 32,382 |  |  | $ | 36,395 | 
|                |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 

The Companys long-lived assets residing in countries other than in the
United States are insignificant.

There
were no customers individually representing more than 10% of gross
accounts receivables (including unbilled accounts receivable) as of October 31,
2003 and January 31, 2003, respectively. There was one customer representing
more than 20% and nearly 10% of total revenue in the three- and
nine-month periods ended October 31, 2003, respectively. There were no
customers individually representing more than 10% of total revenue in the
three- and nine-month periods ended October 31, 2002.

Note 9. Litigation

In August 2001, Goldman, Sachs and Co., Dain Rauscher Wessels, U.S.
Bancorp Piper Jaffray and Thomas Weisel Partners, the managing underwriters of
the Companys initial public offering, the Company, and certain of the
Companys officers and directors, were named as defendants in a number of
purported securities class actions in United States District Court for the
Southern District of New York arising out of the Companys IPO in February
2000. The complaints in these actions allege, among other things, that the
registration statement and prospectus filed with the Securities and Exchange
Commission for purposes of the IPO were false and misleading because they
failed to disclose that the managing underwriters allegedly (i) solicited and
received commissions from certain investors in exchange for allocating to them
shares of Company stock in connection with the IPO and (ii) entered into
agreements with their customers to allocate such stock to those customers in
exchange for the customers agreeing to purchase additional shares of the
Company in the aftermarket at pre-determined prices. The Company believes that
the claims asserted against it in these cases are without merit. On August 8,
2001 the Court ordered that these actions, along with hundreds of IPO
allocation cases against other issuers, underwriters and directors and
officers, be transferred to one judge for coordinated pre-trial proceedings.
In July 2002, omnibus motions to dismiss the complaints based on common legal
issues were filed on behalf of all issuers, underwriters and directors and
officers. By order dated October 8, 2002, the Court dismissed the Companys
officers and directors from the case without prejudice. In an opinion issued
on February 19, 2003, the Court granted in part and denied in part the motions
to dismiss. The complaints against the Company and the other issuers and
underwriters were not dismissed as a matter of law. The plaintiffs and the
issuer defendants signed a Memorandum of Understanding, dated as of June 5,
2003, agreeing to settle the cases. Final settlement papers are in the process
of being negotiated and approved.




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the condensed
consolidated financial statements and related notes contained herein and the
information contained in our annual report on Form 10-K, as amended, for the
fiscal year ended January 31, 2003 and in our other filings with the Securities
and Exchange Commission. This discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. Any statements herein that are not statements of
historical fact may be deemed to be forward-looking statements. We may
identify these statements by the use of words such as believe, expect,
anticipate, intend,

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potential, strategy, plan and similar expressions. These
forward-looking statements involve known and unknown risks and uncertainties.
Our actual results may differ materially from those set forth in these
forward-looking statements as a result of a number of factors, including those
described under the caption Factors That May Affect Future Results herein and
in our annual report on Form 10-K, as amended, for the year ended January 31,
2003 and in our other filings with the Securities and Exchange Commission.
These forward-looking statements speak only as of the date of this quarterly
report. We do not assume any duty to update them.

Overview

We provide portfolio management software for large enterprises. Our
principal customers within these enterprises are information technology
departments, new product development groups and consulting organizations. Our
software provides executives with current and accurate information on the
status of their projects, programs, resources and budgets, giving them the
ability to manage their portfolios with control and predictability. Our
software also allows project managers and members of project teams to schedule
projects, collaborate and communicate on tasks and deliverables, track time and
expense, and create and disseminate best practices for project and program
management. Our software is based on a web services architecture that is
delivered through a web browser. It is designed to integrate easily with other
applications through extensible markup language (XML) and to be scalable to
support tens of thousands of users.

Our principal offices are located at 305 Main Street, Redwood City,
California 94063, and our telephone number at that location is (650) 298-4600.
We maintain a website at www.niku.com. Investors can obtain copies of our
filings with the Securities and Exchange Commission from this site free of
charge, as well as from the Securities and Exchange Commission website at
www.sec.gov.

Critical Accounting Policies, Methods and Estimates

Accounting policies, methods and estimates are an integral part of our
condensed consolidated financial statements prepared by management and are
based upon managements current judgments. Those judgments are normally based
on knowledge and experience with regard to past and current events and
assumptions about future events. Certain accounting policies, methods and
estimates are particularly sensitive because of their significance to the
financial statements and because of the possibility that future events
affecting them may differ markedly from managements current judgments. While
there are a number of accounting policies, methods and estimates affecting our
condensed consolidated financial statements, areas that are particularly
significant include:



| |  |  | revenue recognition;                                             
| | - |  | -----------------------------------------------------------------
|
| |  |  | estimating the allowance for doubtful accounts;                  
|
| |  |  | valuation and impairment of long-lived assets; and               
|
| |  |  | estimate of restructuring reserves for vacated leased facilities.

Revenue Recognition

We derive our revenue principally from licenses of our products,
maintenance and support of our products, and delivery of implementation
services for our products. We offer our products primarily through our direct
sales force and to a lesser degree through indirect sales channels.

Revenue from license fees is recognized in accordance with Statement of
Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions, which permits revenue recognition when (1) persuasive
evidence of an arrangement exists, (2) delivery of the product has occurred and
no significant obligations of ours with regard to implementation remain, (3)
the fee is fixed or determinable, and (4) collectibility is probable. If there
are sales to channel partners, they are recognized upon sell-through to the
end-user customer. We define each of the four criteria above as follows:

Persuasive evidence of an arrangement exists.Our customary practice is
to have a written contract, which is signed by both the customer and us, or a
purchase order from those customers who have previously negotiated a contract
with us.

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Delivery has occurred. Our software may be either physically or
electronically delivered to the customer. Delivery is deemed to have occurred
upon meeting one of the following criteria as set forth in the revenue
contract: (1) the shipment or electronic delivery of the product, (2)
notification of receipt of the product by the customer or (3) notification by
the customer of acceptance when such acceptance is required by the terms of the
contract. If undelivered products or services exist in an arrangement that are
essential to the functionality of the delivered product, revenue is recognized
when these products or services are delivered.

The fee is fixed or determinable.We negotiate the fees for our products
at the outset of an arrangement. In these arrangements, the majority of the
licenses are perpetual and related fees are nonrefundable. The fees are
generally due within six months or less. We generally consider fees relating
to arrangements with payment terms extending beyond six months not to be fixed
or determinable. If the fee is not fixed or determinable, revenue is
recognized as payments become due from the customer.

Collectibility is probable.Collectibility is evaluated on a
customer-by-customer basis. A customers purchase order or waiver of purchase
order is generally required with each arrangement. Where appropriate, new
customers are subject to a credit review process, which evaluates the
customers financial position (e.g. cash position and credit rating) and their
ability to pay, and existing customers are subject to a review of payment
histories. If collectibility is not considered probable at the outset of an
arrangement in accordance with our credit review process, revenue is recognized
when the fee is collected.

Revenue from multiple-element software arrangements is recognized using
the residual value method. The determination of the fair value of maintenance
and support and implementation services is based on the objective evidence of
the fair value of each element that is specific to us. Our determination of
the fair value of each element in multiple-element arrangements is based on
vendor-specific objective evidence (VSOE). The VSOE for each element is
established when the same element is sold separately. We have analyzed and
determined that we have sufficient VSOE to allocate revenues to the maintenance
and support services and implementation services components of our perpetual
license arrangements. VSOE for maintenance and support is determined based
upon the customers annual renewal rates for this element. We sell our
implementation services separately and have established VSOE on that basis.

Assuming all other revenue recognition criteria are met, revenue from
licenses is recognized upon delivery using the residual method in accordance
with SOP 98-9. Our software products are fully functional upon delivery and
implementation and do not require significant modifications. The customer may
implement using their own resources or obtain the services of other
implementation service organizations to provide these services. Therefore, our
implementation services are not considered essential to the functionality of
the other elements of the arrangement. The revenue allocable to the
implementation services is generally recognized as services are performed.
Maintenance and support revenue is deferred and recognized on a straight-line
basis over the contractual service period, which is typically one year.

Deferred revenues include amounts billed to customers for which revenue
has not been recognized. Deferred revenues generally result from the
following: (1) maintenance and support, (2) implementation services not yet
rendered for which we have been paid and (3) transactions in which one of the
four revenue recognition criteria has not been met but cash has been received.

Allowance for Doubtful Accounts

Accounts receivable are recorded net of allowances for doubtful accounts
and totaled $6.4 million and $7.2 million as of October 31, 2003 and January
31, 2003, respectively. The allowances for doubtful accounts were $898,000 and
$1.0 million as of October 31, 2003 and January 31, 2003, respectively. These
amounts represent 14% each of total accounts receivable at October 31, 2003 and
January 31, 2008. We regularly review the adequacy of our allowance for
doubtful accounts after considering the amount of the aged accounts receivable,
the age of each invoice, each customers expected ability to pay and our
collection history with each customer. We review any invoice greater than 30
days past due to determine if an allowance is appropriate based on the risk
category using the factors discussed above. In addition, we maintain a reserve
for all invoices by applying a percentage to aging categories based on
historical loss experience. The allowance for doubtful accounts represents our
best estimate, but

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changes in circumstances such as our customers financial positions may
result in a requirement for additional allowances in the future.

Impairment Assessment

We evaluate our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable. Factors we consider important that could trigger an
impairment review include, but are not limited to, a significant decline in our
stock price for a sustained period, our market capitalization relative to net
book value, significant underperformance relative to historical or projected
future operating results, significant changes in the manner of use of the
acquired assets or the strategy for our overall business, and significant
negative industry or economic trends. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If these
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. The estimate of fair value of an asset considers
prices for similar assets and the results of valuation techniques to the extent
available under the circumstances. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

There were no asset impairment charges in the third quarter of fiscal 2004
or the nine-month period ended October 31, 2003. In the second and third
quarter of fiscal 2003, we recorded $425,000 and $75,000, respectively, in
asset impairment charges related to a $500,000 strategic equity investment we
made in a private company in April 2000. In this transaction, we purchased
75,000 shares of the private companys common stock at $6.67 per share. In
performing an impairment assessment, we considered the private companys
current solvency, future access to capital and recent equity transactions.
Based on an analysis of these factors, including the terms in a proposed
financing in the second quarter of fiscal 2003, which indicated that its price
per share has dropped to $0.32 per share, we determined that the investment
impairment was other than temporary and recorded asset impairment charges in
the second and third quarter of fiscal 2003. As a result of these charges, the
equity investment was completely written off at October 2002.

Restructuring Reserves for Vacated Leased Facilities

We have recorded restructuring charges in connection with vacating certain
leased facilities pursuant to our restructuring program. Costs associated with
vacated leased facilities include remaining lease liabilities and brokerage
fees, offset by estimated sublease income. Estimated sublease income is
determined by taking into consideration the type and condition of the subject
property, information regarding the local commercial real estate market and
expectations about time to obtain a sublessee provided by local commercial real
estate brokerages. We review these estimates in the second quarter and fourth
quarter of each year or anytime we have persuasive evidence that a change in
estimate has occurred. As a result of our current assessment of sublease
opportunities for facilities previously vacated, we recorded $312,000 and $7.5
million in restructuring charges in the three-month periods ended October 31,
2003 and 2002, respectively. We recorded $2.0 million and $37.0 million such
restructuring charges in the nine-month periods ended October 31, 2003 and
2002, respectively. To the extent that these estimates continue to change due
to changes in market conditions, the actual restructuring expenses for vacated
leases could vary by material amounts.

Future lease payments, net of estimated sublease income, relating to
remaining facilities that we vacated pursuant to the restructuring program
amounted to $1.7 million, $1.3 million, $1.2 million, $1.0 million and $930,000
for the twelve months ending October 31, 2004, 2005, 2006, 2007 and 2008,
respectively, and $2.0 million thereafter. These amounts are recorded in
accrued restructuring and long-term accrued restructuring on the condensed
consolidated balance sheets.

Private Placement of Common Stock and Warrants to Purchase Common Stock

In February 2003, we entered into a common stock and warrant purchase
agreement with various investors led by WaldenVC, providing for the issuance of
3,088,230 shares of our common stock at a price of $3.35 per share and warrants
to purchase 386,034 shares of common stock at a price of $0.40 per warrant in
connection with a private placement. The warrants have an exercise price of
$3.40. In February 2003, we issued 1,549,735 shares of our

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common stock and warrants to purchase 193,720 shares of common stock in
connection with initial closing of this private placement. In April 2003, our
stockholders approved and we subsequently issued the remaining 1,538,495 shares
of our common stock and warrants to purchase 192,314 shares of common stock.
Total net proceeds from the private placement approximated $10.2 million. On
April 30, 2003, we filed a registration statement on Form S-3, registering for
resale the 4,919,264 shares of common stock issued in the private placement or
issuable upon the exercise of warrants issued in the private placement. The
registration statement was declared effective in August 2003.

Reverse Stock Split

On November 21, 2002, we effected a one-for-ten reverse stock split of our
outstanding common stock. All information regarding common stock, stock
options, warrants and income (loss) per share amounts reflects the reverse
stock split.

Repricing of Stock Options

On November 12, 2001, our board of directors, acting pursuant to existing
terms of our stock option plans, approved the repricing of approximately
890,000 outstanding stock options with exercise prices above $7.50. The
exercise prices of all such stock options were repriced to $7.50, which was the
fair market value of our stock on November 12, 2001. There were no changes to
the vesting schedules or other terms of the repriced stock options. Stock
options held by our former Chief Executive Officer, former executive Vice
President of Strategy and Planning, members of the board of directors and
non-employees were not repriced. We have accounted for the repriced stock
options using variable accounting whereby the aggregate intrinsic value of the
repriced stock options is continuously remeasured and amortized to stock-based
compensation expense over the vesting periods.

On April 15, 2003, we announced a voluntary stock option exchange program
for our employees. Under the program, our employees were given the opportunity
to exchange outstanding stock options previously granted to them with an
exercise price greater than or equal to $7.50 per share for a new stock option
exercisable for 1.15 shares for each share subject to the tendered stock
options, to be granted at a future date, at least six months and a day from the
cancellation date. The new stock options are vested as to the number of stock
options that would have been vested on such date had the old stock options not
been tendered plus the number of shares that would have been vested had the old
stock option been exercisable for 15% more shares. Our Chief Executive
Officer, Chief Financial Officer, members of the board of directors and
non-employees were not eligible to participate in this program. This stock
option exchange program did not result in any additional compensation charges
or variable plan accounting. On April 15, 2003, stock options for 622,511
shares of common stock were eligible to be exchanged. On May 13, 2003, our
employees tendered stock options for 525,031 shares of common stock.

On November 14, 2003, we granted 598,842 new stock options under this
stock option exchange program with an exercise price of $8.85, which was equal
to the fair market value of our common stock on that date. As a result of
this stock option exchange program, we are no longer incurring stock-based
compensation for approximately 298,000 outstanding stock options that were
previously repriced in November 2001 and subsequently cancelled on May 13,
2003. We will continue to incur stock-based compensation for outstanding stock
options that were previously repriced in November 2001 and not tendered
pursuant to the stock option exchange program to the extent the price of our
common stock on the last day of a quarter is above $8.67. Based on the stock
price on October 31, 2003 of $8.67 per share, we recorded approximately $80,000
of stock-based compensation charges in the three- and nine-months periods ended
October 31, 2003 relating to approximately 70,000 repriced but not tendered
options. We also recorded $13,000 and $148,000 in amortization of other
stock-based compensation charges not associated with the stock option exchange
program in the three- and nine-month periods ended October 31, 2003,
respectively

In October 2002, we cancelled stock options to purchase 55,000 shares of
common stock held by our Chief Executive Officer and immediately thereafter
granted him stock options to purchase 150,000 shares of common stock at a price
of $1.50, which was the closing price of our common stock on the grant date.
As a result, based on the closing price of our common stock of $4.67 on April
30, 2003, we recorded $35,000 in stock-based compensation in the first quarter
of fiscal 2004. In May 2003, our Chief Executive Officer exercised all of his
repriced stock options to purchase 55,000 shares of common stock and we
recorded an additional $56,000 in stock-

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based compensation in May 2003. As all such repriced options have been
exercised, we will no longer be required to record additional stock-based
compensation relating to these stock options in the future.

Pro Forma Financial Results

We prepare and release quarterly unaudited financial statements prepared
in accordance with generally accepted accounting principles in the United
States of America (GAAP). We also disclose and discuss certain non-GAAP pro
forma financial information in the quarterly and annual financial results press
release and investor conference call. This non-GAAP pro forma financial
information excludes certain non-cash and special charges, consisting primarily
of stock-based compensation, restructuring and other charges and impairment
charges. We have historically provided such non-GAAP financial information to
investors, and we believe that some investors consider such information useful
in evaluating our on-going operations. However, we urge investors to carefully
review the GAAP financial information included as part of our quarterly reports
on Form 10-Q and our annual reports on Form 10-K. The investors should also
read the portions of our quarterly and annual financial results press releases
which compare GAAP financial information with the non-GAAP pro forma financial
results, and include a reconciliation of the GAAP and non-GAAP pro forma
financial information.

Results of Operations

The following table sets forth, for the periods indicated, selected
consolidated financial data as a percentage of total revenues:

|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |     |      |   
|---------------------------------------- | -------------------------- | ----------------------------- | - | ------------------ | --- | ----------------- | - | ---- | --- | ---- | - | -- | --- | -- | - | --- | ---- | --
|                                         |                            |                               |   | Three Months Ended |     | Nine Months Ended
|                                         |                            |                               |   | October 31,        |     | October 31,      
|                                         |                            |                               |   |                    |     |                  
|                                         |                            |                               |   | 2003               |     | 2002              |   | 2003 |     | 2002
|                                         |                            |                               |   |                    |     |                   |   |      |     |     
|Revenues:                                |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         | License                    |                               |   | 48                 | %   |                   |   | 41   | %   |      |   | 38 | %   |    |   | 40  | %   
|                                         | Services                   |                               |   | 52                 |     |                   |   | 59   |     |      |   | 62 |     |    |   | 60  |     
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         |                            | Total revenues                |   |                    | 100 |                   |   |      | 100 |      |   |    | 100 |    |   |     | 100  |   
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|Cost of revenues:                        |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         | License                    |                               |   | 2                  |     |                   |   | 2    |     |      |   | 1  |     |    |   | 2   |     
|                                         | Services                   |                               |   | 25                 |     |                   |   | 24   |     |      |   | 27 |     |    |   | 28  |     
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         |                            | Total cost of revenues        |   |                    | 27  |                   |   |      | 26  |      |   |    | 28  |    |   |     | 30   |   
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         |                            | Gross margin                  |   |                    | 73  |                   |   |      | 74  |      |   |    | 72  |    |   |     | 70   |   
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|Operating expenses:                      |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         | Sales and marketing        |                               |   | 38                 |     |                   |   | 29   |     |      |   | 36 |     |    |   | 52  |     
|                                         | Research and development   |                               |   | 15                 |     |                   |   | 17   |     |      |   | 17 |     |    |   | 27  |     
|                                         | General and administrative |                               |   | 14                 |     |                   |   | 19   |     |      |   | 15 |     |    |   | 19  |     
|                                         | Restructuring and other    |                               |   | 2                  |     |                   |   | 63   |     |      |   | 6  |     |    |   | 102 |     
|                                         | Stock-based compensation   |                               |   | 1                  |     |                   |   | 1    |     |      |   | 1  |     |    |   | (10 | )   
|                                         | Asset impairment and other |                               |   |                   |     |                   |   | 1    |     |      |   |   |     |    |   | 1   |     
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         |                            | Total operating expenses      |   |                    | 70  |                   |   |      | 130 |      |   |    | 75  |    |   |     | 191  |   
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         |                            | Income (loss) from operations |   |                    | 3   |                   |   |      | (56 | )    |   |    | (3  | )  |   |     | (121 | ) 
|Interest and other income (expense), net |                            |                               | 1 |                    |     |                   | 1 |      |     |      |  |    |     |    | 2 |    
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |    
|                                         |                            | Net income (loss)             |   |                    | 4   | %                 |   |      | (55 | )%   |   |    | (3  | )% |   |     | (119 | )%
|                                         |                            |                               |   |                    |     |                   |   |      |     |      |   |    |     |    |   |     |     

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Revenues

The following sets forth, for the periods indicated, our revenues (in thousands, except percentages):

|         |  |                    |        |                   |  |        |        |      |  |      |    |        |  |   |        |  |  |   |        |  |  |  |     |   
|-------- |  | ------------------ | ------ | ----------------- |  | ------ | ------ | ---- |  | ---- | -- | ------ |  | - | ------ |  |  | - | ------ |  |  |  | --- | --
|         |  | Three Months Ended |        | Nine Months Ended
|         |  | October 31,        |        | October 31,      
|         |  |                    |        |                  
|         |  | 2003               |        | 2002              |  | Change |        | 2003 |  | 2002 |    | Change
|         |  |                    |        |                   |  |        |        |      |  |      |    |       
|License  |  | $                  | 6,048  |                   |  | $      | 4,857  |      |  |      | 25 | %      |  | $ | 12,392 |  |  | $ | 14,509 |  |  |  | (15 | )%
|Services |  |                    | 6,487  |                   |  |        | 6,917  |      |  |      | (6 | )%     |  |   | 19,990 |  |  |   | 21,886 |  |  |  | (9  | )%
|         |  |                    |        |                   |  |        |        |      |  |      |    |        |  |   |        |  |  |   |        |  |  |  |     |   
|         |  | $                  | 12,535 |                   |  | $      | 11,774 |      |  |      | 6  | %      |  | $ | 32,382 |  |  | $ | 36,395 |  |  |  | (11 | )%
|         |  |                    |        |                   |  |        |        |      |  |      |    |        |  |   |        |  |  |   |        |  |  |  |     |   

License.License revenue consists of revenue from licenses of our
software products. License revenue increased 25% or $1.2 million for the
three-month period ended October 31, 2003 from the corresponding prior year
period. For the nine-month period ended October 31, 2003, license revenues
decreased 15% or $2.1 million from the corresponding prior year period.
License revenues accounted for 48% and 38% of total revenues for the three- and
nine-month periods ended October 31, 2003, as compared to 41% and 40% of total
revenues for the corresponding prior year periods, respectively. For the
three-month period, the increase in license revenue in absolute dollars and as
a percentage of total revenues was primarily due to the increased sales of the
Niku 6 product suite and one especially large transaction. For the nine-month
period, the decrease in license revenue in absolute dollars and as a percentage
of total revenues was primarily due to a slowdown in corporate information
technology spending, a restructuring program we implemented in fiscal 2003 in
response to the slowdown in spending that reduced the number of revenue
producing account executives, and a decline in the average size of our software
licenses resulting from a smaller number of seats being purchased or a decrease
in the per seat price.

Services.Services revenue consists of revenue from the delivery of
implementation services and maintenance and support contracts. Services
revenue decreased 6%, or $430,000 and 9%, or $1.9 million for the three- and
nine-month periods ended October 31, 2003 from the corresponding prior year
periods, respectively. As a percentage of revenues, service revenues accounted
for 52% and 62% of total revenues for the three- and nine-month periods ended
October 31, 2003, as compared to 59% and 60% of total revenues for the
corresponding prior year periods, respectively. Implementation services
revenue increased $76,000 for the three-month period ended October 31, 2003
from the corresponding prior year period. For the three-month period, the
increase in implementation services revenue in absolute dollars was primarily
due to higher utilization of our professional services organization.
Implementation services decreased $204,000 for the nine-month period ended
October 31, 2003 from the corresponding prior year period. For the nine-month
period, the decrease in absolute dollars in implementation services revenue was
primarily due to a decrease in the size of the implementation services
organization pursuant to the restructuring program we implemented in fiscal
2003 which reduced revenue generating implementation services consultants as
well as a decrease in license revenue that led to a decrease in demand for
implementation services, partially offset by an increase in utilization in the
second and third quarter of fiscal 2004. Maintenance and support revenue
decreased $506,000 and $1.7 million, for the three- and nine-month periods
ended October 31, 2003 from the corresponding prior year periods, respectively.
The decrease in maintenance and support revenue was primarily due to a
decrease in the number of supported users for maintenance renewals on legacy
products and the absence of amortization of deferred maintenance revenue from
the ABT acquisition in the three- and nine-month periods ended October 31,
2003, compared to $200,000 and $1.2 million of such amortization in the three-
and nine-month periods ended October 31, 2002, respectively.

Cost of Revenues

The following sets forth, for the periods indicated, our cost of revenues
(in thousands, except percentages):

|                |  |                    |       |                   |  |        |       |      |  |      |    |        |  |   |       |  |  |   |        |  |  |  |     |   
|--------------- |  | ------------------ | ----- | ----------------- |  | ------ | ----- | ---- |  | ---- | -- | ------ |  | - | ----- |  |  | - | ------ |  |  |  | --- | --
|                |  | Three Months Ended |       | Nine Months Ended
|                |  | October 31,        |       | October 31,      
|                |  |                    |       |                  
|                |  | 2003               |       | 2002              |  | Change |       | 2003 |  | 2002 |    | Change
|                |  |                    |       |                   |  |        |       |      |  |      |    |       
|Cost of license |  | $                  | 254   |                   |  | $      | 179   |      |  |      | 42 | %      |  | $ | 364   |  |  | $ | 798    |  |  |  | (54 | )%
|Cost of service |  |                    | 3,089 |                   |  |        | 2,871 |      |  |      | 8  | %      |  |   | 8,546 |  |  |   | 10,154 |  |  |  | (16 | )%
|                |  |                    |       |                   |  |        |       |      |  |      |    |        |  |   |       |  |  |   |        |  |  |  |     |   
|                |  | $                  | 3,343 |                   |  | $      | 3,050 |      |  |      | 10 | %      |  | $ | 8,910 |  |  | $ | 10,952 |  |  |  | (19 | )%
|                |  |                    |       |                   |  |        |       |      |  |      |    |        |  |   |       |  |  |   |        |  |  |  |     |   

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Cost of License Revenue.Cost of license revenue consists of royalties
payable to third parties for software that was either embedded in or bundled
with our software products, product packaging, documentation and shipping
costs. Cost of license increased 42% or $75,000 for the three-month period
ended October 31, 2003 from the corresponding prior year period. Cost of
license decreased 54% or $434,000 for the nine-month period ended October 31,
2003 from the corresponding prior year period. As a percentage of related
license revenue, cost of license was 4% and 3% the three- and nine-month
periods ended October 31, 2003, as compared to 4% and 6% for the corresponding
prior year periods, respectively. For the three-month period, the increase in
cost of license revenue in absolute dollars was primarily due to higher
payments to third party software providers for products embedded or bundled
with our products as a result of higher license revenues. For the nine-month
period, the decrease in cost of license revenue in absolute dollars was
primarily due to a decline in license revenue and the reversal of $110,000 in
royalties previously accrued as a result of a settlement during the first
quarter of fiscal 2004 with a third party vendor. Royalties are calculated and
paid quarterly based on among other things, percentage of total license
revenue, number of seats sold or number of servers on which our customers have
our product installed.

Cost of Services Revenue.Cost of services revenue consists of
personnel-related expenses for our implementation services and maintenance and
support personnel and the costs of third parties contracted to provide
implementation services to our customers. Cost of services increased 8% or
$218,000 for the three-month period ended October 31, 2003 from the
corresponding prior year period. Cost of services decreased 16% or $1.6
million for the nine-month period ended October 31, 2003 from the corresponding
prior year period. As a percentage of related services revenue, cost of
service revenue was 48% and 43% for the three- and nine-month periods ended
October 31, 2003, respectively, as compared to 42% and 46% for the
corresponding prior year periods, respectively. For the three-month period,
the increase in cost of services revenue in absolute dollars was primarily due
to a $171,000 increase in utilization bonuses and a $125,000 increase in the
cost of services provided by third parties, which were partially offset by
reduction of facility and IT department allocation costs. For the nine-month
period, the decrease in cost of services revenue in absolute dollars was
primarily due to a $1.2 million decrease in facility and IT department
allocation costs, a $212,000 decrease in personnel-related costs resulting from
reductions in headcount effected pursuant to the restructuring program we
implemented in fiscal 2003, a $63,000 decrease in travel expenses and decreases
in other costs associated with implementation and support services.

Operating Expenses

The following sets forth, for the periods indicated, our operating
expenses (in thousands, except percentages):

|                           |  |                    |       |                   |  |        |        |      |  |      |      |        |  |   |        |  |  |   |        |   |  |  |      |   
|-------------------------- |  | ------------------ | ----- | ----------------- |  | ------ | ------ | ---- |  | ---- | ---- | ------ |  | - | ------ |  |  | - | ------ | - |  |  | ---- | --
|                           |  | Three Months Ended |       | Nine Months Ended
|                           |  | October 31,        |       | October 31,      
|                           |  |                    |       |                  
|                           |  | 2003               |       | 2002              |  | Change |        | 2003 |  | 2002 |      | Change
|                           |  |                    |       |                   |  |        |        |      |  |      |      |       
|Sales and marketing        |  | $                  | 4,800 |                   |  | $      | 3,438  |      |  |      | 40   | %      |  | $ | 11,746 |  |  | $ | 18,999 |   |  |  | (38  | )%
|Research and development   |  |                    | 1,901 |                   |  |        | 1,967  |      |  |      | (3   | )%     |  |   | 5,615  |  |  |   | 9,989  |   |  |  | (44  | )%
|General and administrative |  |                    | 1,758 |                   |  |        | 2,232  |      |  |      | (21  | )%     |  |   | 4,826  |  |  |   | 6,770  |   |  |  | (29  | )%
|Restructuring and other    |  |                    | 312   |                   |  |        | 7,469  |      |  |      | (96  | )%     |  |   | 1,960  |  |  |   | 37,036 |   |  |  | (95  | )%
|Stock-based compensation   |  |                    | 93    |                   |  |        | 165    |      |  |      | (44  | )%     |  |   | 228    |  |  |   | (3,782 | ) |  |  | (106 | )%
|Asset impairment and other |  |                    |      |                   |  |        | 75     |      |  |      | (100 | )%     |  |   |       |  |  |   | 500    |   |  |  | (100 | )%
|                           |  |                    |       |                   |  |        |        |      |  |      |      |        |  |   |        |  |  |   |        |   |  |  |      |   
|                           |  | $                  | 8,864 |                   |  | $      | 15,346 |      |  |      | (42  | )%     |  | $ | 24,375 |  |  | $ | 69,512 |   |  |  | (65  | )%
|                           |  |                    |       |                   |  |        |        |      |  |      |      |        |  |   |        |  |  |   |        |   |  |  |      |   

Sales and Marketing.Sales and marketing expenses consist primarily of
personnel-related costs including salaries, benefits, bonuses and commissions;
travel, bad debt and marketing programs including customer conferences,
promotional materials, trade shows and advertising. Sales and marketing
expenses increased 40% or $1.4 million for the three-month period ended October
31, 2003 from the corresponding prior year period. Sales and marketing
expenses decreased 38% or $7.3 million for the nine-month period ended October
31, 2003 from the corresponding prior year period. As a percentage of
revenues, sales and marketing expenses were 38% and 36% for the three- and
nine-month periods ended October 31, 2003 compared to 29% and 52% for the
corresponding prior year periods, respectively. For the three-month period,
the increase in sales and marketing expense was primarily due to a $801,000
increase in commissions and personnel-related costs, a $415,000 increase in bad
debt expense, and a $331,000 increase in marketing programs, which were
partially offset by a $174,000 decrease in facility and IT department
allocation costs and a $105,000 decrease in depreciation. For the nine-month
period, the decrease was primarily due to a $3.4 million decrease in facility
and IT department allocation costs, a $3.5 million decrease in

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personnel-related costs from reductions in headcount effected pursuant to
the restructuring program we implemented in fiscal 2003, a $557,000 million
decrease in depreciation and a $258,000 million decrease in travel expenses.

Research and Development.Research and development expenses consist
primarily of personnel-related costs associated with the development of new
products, the enhancement of existing products and quality assurance and
testing costs. Research and development expenses decreased 3%, or $66,000 and
44%, or $4.4 million for the three- and nine-month periods ended October 31,
2003 from the corresponding prior year periods, respectively. As a percentage
of revenues, research and development expenses were 15% and 17% for the three-
and nine-month periods ended October 31, 2003 compared to 17% and 27% for the
corresponding prior year periods, respectively. For the three-month period,
the decrease was primarily due to a $95,000 decrease in facility and IT
department allocation costs and a $22,000 decrease in equipment expenses, which
were partially offset by reduction of temporary labor expenses. For the
nine-month period, the decrease was primarily due to a $2.5 million decrease
in facility and IT department allocation costs and a $1.6 million decrease in
personnel-related costs resulting from reductions in headcount effected
pursuant to the restructuring program we implemented in fiscal 2003, a $157,000
decrease in depreciation and a $97,000 decrease in outside consulting services.

General and Administrative.General and administrative expenses consist
primarily of personnel-related costs and other related costs for finance, human
resource, information technology and legal department employees, professional
services fees and other general corporate expenses. General and administrative
expenses decreased by 21%, or $474,000 and 29%, or $1.9 million in the three-
and nine-month periods ended October 31, 2003 from the corresponding prior year
periods, respectively. As a percentage of revenues, general and administrative
expenses were 14% and 15% for the three- and nine-month periods ended October
31, 2003, respectively, as compared to 19% for each of the corresponding prior
year periods, respectively. For the three-month period, the decrease in
general and administrative expense was primarily due to a $507,000 decrease in
accounting and legal expenses, a $ 156,000 decrease in depreciation expense and
a $141,000 decrease in salaries and benefits, which were partially offset by a
$321,000 increase in IT department allocation costs. For the nine-month
period, the decrease was primarily due to a $1.1 million decrease in
depreciation, a $1.2 million decrease in equipment expenses, an $811,000
decrease in accounting and legal expenses and a $690,000 decrease in
personnel-related costs, which were partially offset by $1.8 million increase
in facility and IT department allocation costs.

Restructuring and Other.In the three-month period ended October 31,
2003, we recorded $312,000 in restructuring charges as a result of our
termination of two leases and an adjustment of sublease estimates for a
facility that we had previously vacated. Consideration for the termination of
the lease for the previously vacated facility included the release to the
landlord of a $33,000 security deposit and a lease termination payment of
$134,000. The consideration for the other lease termination totaled $155,000.
We recorded a $190,000 sublease estimate adjustment for the vacated facility.
In the three-month period ended October 31, 2002, we reduced our workforce and
recorded $2.2 million in severance and related costs. We also retired $1.5
million in property and equipment for assets no longer in use. We vacated and

terminated leases for certain facilities and recorded $3.8 million in net lease
commitment costs and other exit costs on vacated leases. We recorded $2.0
million and $37.0 million of restructuring charges in the nine-month periods
ended October 31, 2003 and 2002, respectively.

Stock-based Compensation.Amortization of stock-based compensation was
$93,000 and $228,000 for the three- and nine-month periods ended October 31,
2003 compared to $165,000 and ($3.8 million) for the corresponding prior year
periods, respectively. As a result of a stock option exchange program we
initiated in May 2003, we no longer incur stock-based compensation for
approximately 298,000 previously repriced options. Repriced options that were
not tendered pursuant to the stock option exchange program are still subject to
deferred-stock based compensation charges to the extent that our common stock
price on the last day of a quarter is above $8.67. We had approximately 70,000
repriced but not tendered options outstanding as of October 31, 2003. The
stock-based compensation in the three-month period ended October 31, 2003 was
primarily due to the amortization of these options. The recovery of
stock-based compensation in the nine-month ended October 31, 2002 was mainly
due to variable accounting applied to our stock options that were repriced in
November 2001. See Note 2  Repricing of Stock Options to the Condensed
Consolidated Financial Statements under Part I., Item. 1.

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The amortization of stock-based compensation relates to the following
functional groups in the accompanying condensed consolidated statement of
operations (in thousands):

|                           |  |                    |    |                   |  |      |     |      |  |   |     |  |  |   |        |   | 
|-------------------------- |  | ------------------ | -- | ----------------- |  | ---- | --- | ---- |  | - | --- |  |  | - | ------ | - | 
|                           |  | Three Months Ended |    | Nine Months Ended
|                           |  | October 31,        |    | October 31,      
|                           |  |                    |    |                  
|                           |  | 2003               |    | 2002              |  | 2003 |     | 2002
|                           |  |                    |    |                   |  |      |     |     
|Cost of revenues           |  | $                  | 8  |                   |  | $    | 2   |      |  | $ | 10  |  |  | $ | (289   | )
|Sales and marketing        |  |                    | 10 |                   |  |      | 54  |      |  |   | 39  |  |  |   | (1,787 | )
|Research and development   |  |                    | 70 |                   |  |      | 46  |      |  |   | 83  |  |  |   | (1,552 | )
|General and administrative |  |                    | 5  |                   |  |      | 63  |      |  |   | 96  |  |  |   | (154   | )
|                           |  |                    |    |                   |  |      |     |      |  |   |     |  |  |   |        |  
|                           |  | $                  | 93 |                   |  | $    | 165 |      |  | $ | 228 |  |  | $ | (3,782 | )
|                           |  |                    |    |                   |  |      |     |      |  |   |     |  |  |   |        |  

In future periods, amortization of stock-based compensation will be
contingent on the number of repriced options giving rise to stock-based
compensation then outstanding and our stock price on the financial statement
reporting date. As of October 31, 2003, there were approximately 70,000 shares
of repriced options giving rise to stock-based compensation outstanding

Asset Impairment and Other.Asset impairment and other charges were zero
for each of the three- and nine-month periods ended October 31, 2003 compared
to $75,000 and $500,000 for the corresponding prior year periods, respectively.
We regularly perform an impairment assessment of a $500,000 strategic equity
investment we made in a private company in April 2000. In performing an
impairment assessment, we considered the private companys current solvency,
future access to capital and recent equity transactions. Based on an analysis
of these factors at the end of the three-month period ended July 31, 2002, we
determined that there was an impairment of $425,000 associated with the
investment. At October 31, 2002, we determined that the remaining balance of
$75,000 was impaired. The carrying value of our strategic equity investment
was zero as of October 31, 2002.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, consists of interest income,
interest expense and other non-operating expenses. Interest and other income
(expense) was 117,000 and ($190,000) for the three- and nine-month periods
ended October 31, 2003 compared to $184,000 and 616,000 for the corresponding
prior year periods, respectively. The changes for the three- and nine-month
periods from the corresponding prior year periods was primarily due to foreign
exchange gains and losses we incurred from the revaluation of our intercompany
balances and interest expense from bank borrowings.

Liquidity and Capital Resources

Since inception, we have financed our operations through private and
public sales of our capital stock, bank loans, equipment leases, and cash from
sales of our products and delivery of related services. The cash from these
sources is used for working capital for our business. As of October 31, 2003,
we had cash and cash equivalents of $21.8 million. We also had restricted cash
in the amount of $1.1 million in the form of a certificate of deposit securing
a letter of credit for a leased facility. We had bank borrowings under a bank
line of credit of $4.3 million as of October 31, 2003, of which the entire
amount was repaid in November 2003. As of October 31, 2003, we had working
capital of $8.6 million, compared to working capital of $1.2 million as of
January 31, 2003. The increase in working capital as of October 31, 2003 was
primarily attributable to increases in cash and cash equivalents in connection
with our recent private placement described below, an increase in prepaid
expenses and a decrease in accrued restructuring, offset in part by a
reclassification of the long-term portion of bank borrowings to short-term bank
borrowings and a decrease in net accounts receivable. We believe that cash from
operations and existing cash, including approximately $10.2 million net
proceeds from the private placement, will be sufficient to meet our current
expectations for working capital and expense requirements for at least the next
twelve months. As of October 31, 2003, we had no material commitments for
capital expenditures. Our liquidity could be negatively impacted by factors
discussed under Factors That May Affect Future Results.

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Cash provided (used) in the nine-month period ended October 31, 2003 and
2002 is as follows (in thousands):

|                                                |  |                   |        |      |  |   |         |  
|----------------------------------------------- |  | ----------------- | ------ | ---- |  | - | ------- | -
|                                                |  | Nine Months Ended
|                                                |  | October 31,      
|                                                |  |                  
|                                                |  | 2003              |        | 2002
|                                                |  |                   |        |     
|Cash used in operating activities               |  | $                 | (5,241 | )    |  | $ | (17,511 | )
|Cash provided by investing activities           |  | $                 | 412    |      |  | $ | 4,783   |  
|Cash provided by (used in) financing activities |  | $                 | 9,751  |      |  | $ | (21,802 | )

Operating Activities.For the nine-month period ended October 31, 2003,
net cash used in operating activities was $5.2 million which was primarily due
to decreases in accrued restructuring, deferred revenues, accounts payable and
accrued liabilities and a net loss of $1.1 million, offset in part by a
decrease in accounts receivable. For the nine-month period ended October 31,
2002, net cash used in operating activities was $17.5 million which was
primarily due to a net loss of $43.5 million and a decrease in accrued
liabilities, offset in part by non-cash restructuring charges, an increase in
accrued restructuring and a decrease in net accounts receivable.

Investing Activities.Net cash provided by investing activities was
$412,000 for the nine-month ended October 31, 2003. Our investing cash flow
primarily resulted from $232,000 of proceeds received from deposits and other
assets, $229,000 releases of restricted cash and $35,000 sales of property and
equipment, partially offset by $84,000 to purchase of property and equipment.
Net cash provided by investing activities was $4.8 million for the nine-month
ended October 31, 2002. This primarily resulted from $6.9 million of proceeds
received from the releases of investment and restricted cash and $329,000 of
proceeds from deposit and other assets, offset by $2.5 million to purchase
property and equipment.

Financing Activities.Net cash provided by financing activities of $9.8
million for the nine-month ended October 31, 2003 included net proceeds from
$10.3 million issuance of common stock and warrants, offset by $500,000
repayments of bank borrowings and $41,000 of payment of capital lease
obligations. Net cash used in financing activities of $21.8 million for the
nine-month ended October 31, 2002 included $22.1 million of repayments of bank
borrowings and $74,000 of payment of capital lease obligations, offset by
$392,000 in issuance of common stock and warrants.

In February 2003, we entered into a common stock and warrant purchase
agreement with various investors led by WaldenVC, providing for the issuance of
3,088,230 shares of our common stock at a price of $3.35 per share and warrants
to purchase 386,034 shares of common stock at a price of $0.40 per warrant in
connection with a private placement. The warrants have an exercise price of
$3.40. In February 2003, we issued 1,549,735 shares of our common stock and
warrants to purchase 193,720 shares of common stock in connection with initial
closing of this private placement. In April 2003, our stockholders approved and
we subsequently issued the remaining 1,538,495 shares of our common stock and
warrants to purchase 192,314 shares of common stock. Total net proceeds from
the private placement approximated $10.2 million. We also receive cash from
the exercise of stock options. While we expect to continue to receive these
proceeds in future periods, the timing and amount of such proceeds is difficult
to predict and is contingent on a number of factors including the price of our
common stock and general market conditions.

Bank Borrowings and Other Obligations.On July 18, 2003, we entered into
a $5.0 million line of credit with a financial institution. The line of credit
is secured by the Companys tangible and intangible assets, accrues interest
rate at prime rate plus 0.50% per annum (currently at 4.50%) and expires in
July 2004. The line of credit has certain financial covenants, including
covenants requiring 1) minimum cash and cash equivalent balance equal to at
least 1.25 times the outstanding principal line balance at each month end, 2)
minimum cash balance of $10 million at the end of each fiscal quarter and 3)
annual GAAP profitability of at least $1 (excluding restructuring charges for
vacated facilities and stock-based compensation). As of October 31, 2003, we
were in compliance with all financial covenants. We had borrowings of $4.3
million as of October 31, 2003, which we repaid in November 2003.

We previously had a term loan for $5.0 million from the same financial
institution, which we entered into in September 2002. The term loan was secured
by our tangible and intangible assets, accrued interest at 7.50% per annum and
was to mature on February 15, 2004. At January 31, 2003, the Company had $4.8
million outstanding

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under the facility. On July 23, 2003, we terminated the term loan and
repaid the remaining outstanding balance as of that date plus all accrued
interest.

In August 2003, we entered into a non-cancelable master lease agreement
with a computer equipment vendor. The agreement enables us to lease equipments
from the vendor under a capital lease. At October 31, 2003, equipment held
under the lease was $155,000

Future minimum lease and termination payments under operating leases,
payments under bank borrowings and capital lease payments are as follows as of
October 31, 2003 (in thousands):

|                                |  |           |        |         |  |            |     |       |  |   |       |  |  |   |        | 
|------------------------------- |  | --------- | ------ | ------- |  | ---------- | --- | ----- |  | - | ----- |  |  | - | ------ | 
|                                |  | Operating |        | Capital |  | Bank       |     |       |  |  
|Twelve Months Ended October 31, |  | Leases    |        | Leases  |  | Borrowings |     | Total
|                                |  |           |        |         |  |            |     |      
|2004                            |  | $         | 4,227  |         |  | $          | 79  |       |  | $ | 4,250 |  |  | $ | 8,556  | 
|2005                            |  |           | 2,579  |         |  |            | 88  |       |  |   |      |  |  |   | 2,667  | 
|2006                            |  |           | 1,591  |         |  |            |    |       |  |   |      |  |  |   | 1,591  | 
|2007                            |  |           | 1,254  |         |  |            |    |       |  |   |      |  |  |   | 1,254  | 
|2008                            |  |           | 1,069  |         |  |            |    |       |  |   |      |  |  |   | 1,069  | 
|Thereafter                      |  |           | 2,107  |         |  |            |    |       |  |   |      |  |  |   | 2,107  | 
|                                |  |           |        |         |  |            |     |       |  |   |       |  |  |   |        | 
|                                |  | $         | 12,827 |         |  | $          | 167 |       |  | $ | 4,250 |  |  | $ | 17,244 | 
|                                |  |           |        |         |  |            |     |       |  |   |       |  |  |   |        | 

Included in the lease payments above are the following amounts, net of
estimated sublease income, relating to facilities that we have vacated pursuant
to our restructuring program: $1.7 million, $1.3 million, $1.2 million, $1.0
million and $930,000 for the twelve months ended October 31, 2004, 2005, 2006,
2007 and 2008, respectively, and $2.0 million thereafter. These amounts are
recorded in accrued restructuring and long-term accrued restructuring on the
condensed consolidated balance sheets. We regularly review the estimates for
sublease income in the second and fourth quarter of each year or anytime we
have persuasive evidence that a change of estimate has occurred. In the
three-month period ended October 31, 2003, we recorded an additional $312,000
in restructuring reserves due to our termination of two leases and an
adjustment of a sublease estimate for a facility that we had previously
vacated. To the extent that these estimates change due to changes in market
condition, the actual restructuring payments could vary by material amounts.

We believe that cash from operations and existing cash will be sufficient
to meet our current expectations for working capital and expense requirements
for at least the next twelve months based on, among other things, our current
revenue and expense projections. However, we may require additional financing
in the future. If we are unable to raise capital in the event of ongoing
losses and depletion of our available cash resources, the absence of funding
would have a material adverse effect on our business. If we issue additional
equity securities, stockholders will experience additional dilution and the new
equity securities may have rights, preferences or privileges senior to those of
the then existing holders of our common stock.

Recent Accounting Pronouncements

In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities.SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative. It also clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS No. 149
is generally effective for contracts entered into or modified after September
30, 2003 and is not expected to have an impact on our consolidated financial
statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify certain financial instruments as a
liability (or as an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatory redeemable financial instruments of
non-public entities. The impact of the effective provisions of SFAS No. 150
have not had a material

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impact on our consolidated financial statements. We will continue to
assess the possible impact of potential changes to this pronouncement as and
when they are announced.

In November 2002, FASB issued FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others an Interpretation of FASB Statements No. 5, 57 and 107
and rescission of FASB Interpretation No. 34. The interpretation requires that
a guarantor recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken by issuing the guarantee. The
interpretation also requires additional disclosures to be made by a guarantor
in our interim and annual financial statements about our obligations under
certain guarantees we have issued. The accounting requirements for the initial
recognition of guarantees are applicable on a prospective basis for guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective for all guarantees outstanding, regardless of when they were issued
or modified, during the first quarter of 2003. The adoption of FIN No. 45 did
not have a material effect on our consolidated financial statements.
Indemnification and warranty provisions within our customer license and service
agreements are generally consistent with those prevalent in our industry. The
duration of our product warranties generally does not exceed 90 days following
delivery of our products. We have not incurred significant obligations under
customer indemnification or warranty provision historically. Accordingly, we
do not maintain accruals for potential customer indemnification or
warranty-related obligations. Also, as permitted under Delaware law, we have
agreements whereby our officers and directors are indemnified for certain
events or occurrences while the officer or director is, or was, serving at our
request in such capacity. The term of the indemnification period is for the
officers or directors term in such capacity. The maximum potential amount of
future payments we could be required to make under these indemnification
agreements is unlimited; however, we have a director and officer insurance
policy that limits the Companys exposure and enables us to recover a portion
of any future amounts paid. As a result of our insurance policy coverage, we
believe the estimated fair value of these indemnification agreements is not
significant. All of these indemnification agreements were grandfathered under
the provisions of FIN No. 45 as they were in effect prior to December 31, 2002.
Accordingly, we have no liabilities recorded for these agreements as of
October 31, 2003.

In January 2003, FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51.FIN No. 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after December 15, 2003. In addition, FIN
No. 46 requires that we make disclosures in our consolidated financial
statements for the year ended December 31, 2002 when we believe it is
reasonably possible that it will consolidate or disclose information about
variable interest entities after FIN No. 46 becomes effective. At this time,
we do not believe we have any variable interest entities.

Factors That May Impact Future Operating Results

The occurrence of any of the following risks could materially and
adversely affect our business, financial condition and operating results. In
this case, the trading price of our common stock, which has been extremely
volatile, could decline and you might lose all or part of your investment.

We have a history of losses and an accumulated deficit. Further losses could
deplete our cash resources and may cause us to be unable to implement our
business plan.

We were incorporated in January 1998 and began licensing our software in
December 1998. Until recently, we experienced GAAP losses for almost every
quarter of our history, and have not yet been profitable on an annual basis.
We had net loss of $37.8 million in the year ended January 31, 2003. We had an
accumulated deficit of $500.8 million as of October 31, 2003. Although our
financial results have improved recently, these improvements may not continue,
and we may incur losses in the future. Additional losses will reduce the cash
available to us to run our business, and unless financing is available to us
from other sources, we may become unable to implement our business plan.

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Our quarterly financial results have fluctuated significantly in the past, and
if our future results are below the expectations of our investors, the price of
our common stock would likely decline.

Our quarterly operating results have fluctuated significantly in the past and
may continue to fluctuate in the future. Our quarterly operating results are
likely to be particularly affected by the number of customers licensing our
products during any quarter and the size of such licensing transactions. For
example, in the quarter ended October 31, 2003, we completed one especially
large licensing transaction which favorably impacted our operating results. In
addition, we may be unable to accurately forecast our operating results because
our business and the market in which we operate are changing rapidly.

We have limited visibility into our future revenue, especially license
revenue, which often has been heavily concentrated in the third month of each
quarter due to traditional buying patterns in the software industry in which
customers often defer purchases until the third month of a vendors fiscal
quarter. Since we forecast our expenses based in part on future revenue
projections, our operating results would be adversely affected if we cannot
meet those revenue projections.

Other factors that could affect our quarterly operating results include:



| |  |  | changes in the pricing of our products and services or those of our
competitors or the announcement or introduction of new products or
services by us or our competitors;                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the renewal or non-renewal of annual maintenance contracts to our
customers, especially the renewal or non-renewal of annual maintenance
contracts on legacy products which continue to represent a material
portion of our maintenance revenue;
|
| |  |  | the demand for professional services to implement our products and
our efficiency in rendering such services;                                                                                                                                   
|
| |  |  | variability in the mix of our product and services revenue in any quarter;                                                                                                                                                                      
|
| |  |  | the amount and timing of operating expenses and capital expenditures relating to the business;                                                                                                                                                  
|
| |  |  | the application of variable accounting to stock options that were
previously repriced but not exchanged by our employees pursuant to our
stock option exchange program;                                                                         
|
| |  |  | changes in foreign exchange rates; and                                                                                                                                                                                                          
|
| |  |  | changes in restructuring accruals based on changes in sublease estimates for lease facilities we vacated.                                                                                                                                       

Due to these and other factors, we believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of our future performance. If we are unable to meet
the expectations of investors with regard to our future operating results, the
price of our common stock would likely decline.

The decline in spending on information technology has decreased the demand for
our products and services, has adversely affected our revenue and may continue
to adversely affect our revenue in the future.

Our total revenue was $32.4 million in the nine-month period ended October
31, 2003, compared to $36.4 million in the corresponding period of prior year.
Our license revenue was $12.4 million in the nine-month period ended October
31, 2003, compared to $14.5 million in the corresponding period of prior year.
While total revenue and license revenue for the three-month period ended
October 31, 2003 exceeded that in the corresponding period in the prior year,
the year-to-date revenues remain below those of the prior year. We cannot
specifically correlate the impact of macro-economic conditions on our sales
activities, but we believe that the economic conditions have contributed to a
decrease in demand in our market, and in particular, have increased the average
length of our sales cycles and decreased the size of our license transactions.
To the extent that the current economic climate remains depressed or worsens,
the demand for our products and services, and therefore future revenue, may be
further reduced. We may not be able to respond to future revenue reductions in
a sufficiently timely manner to avoid future losses. Even if economic
conditions improve, corporations may not increase their information technology
spending in our market and we may be unable to maintain or improve revenue
levels.

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Our products have a long sales cycle, which increases the cost of completing
sales and renders completion of sales less predictable.

The sales cycle for our products is long, typically from six to nine
months, making it difficult to predict the quarter in which we may recognize
revenue from a sale, if at all. Our lengthy sales cycle increases our costs
and may cause license revenue and other operating results to vary significantly
from period to period. Our products often are part of significant strategic
decisions by our customers regarding their information systems. Accordingly,
the decision to license our products typically requires significant
pre-purchase evaluation. We spend substantial time providing information to
prospective customers regarding the use and benefits of our products. During
this evaluation period, we may expend significant funds in sales and marketing
efforts. If anticipated sales from a specific customer for a particular quarter
are not realized in that quarter, our operating results may be adversely
affected.

We experience seasonality in our sales both in the United States and in our
European operations, which could cause our quarterly operating results to
fluctuate and could deplete our cash reserves.

We experience seasonality in the licensing of our products and sales of
our services. For example, revenue historically has been lower in our first
fiscal quarter due to patterns in the capital budgeting and purchasing cycles
of our current and prospective customers. We also expect that revenue may
decline during July and August, particularly in European markets. These
seasonal variations in our revenue are likely to lead to fluctuations in our
quarterly operating results.

Implementation of our products may be costly and time-consuming, and customers
may become dissatisfied with the implementation time, expense or personnel
requirements, which could harm our reputation and adversely affect market
acceptance of our products.

Implementation of our products may be costly and time-consuming. Customers
could become dissatisfied with our products if implementation requires more
time, expense or personnel than they expected. Additionally, our losses could
increase if, for customer satisfaction and reputation reasons, we do not bill
our customers for time and expenses we incur in connection with these
implementation issues, which would adversely affect our operating results. As
part of the implementation, our products must integrate with many of our
customers existing computer systems and software programs. Integrating with a
number of computer systems and software programs can be time consuming and
expensive and could lead to customer dissatisfaction and increased expenses.
In the event that customers become dissatisfied with this process, our
reputation may be harmed and the acceptance of our products by the market may
decrease.

Because the application of our product is complex, our products, including our
flagship product Niku 6, may contain undetected defects and errors which could
result in loss of or delay in revenue, failure to achieve market acceptance and
increased costs and liabilities.

Products as complex as those we offer or are developing, including our
flagship product Niku 6, may contain undetected defects or errors. Despite
internal testing and testing by our customers or potential customers, defects
or errors may occur in our existing or future products and services. Such
errors could result in additional development costs, diversion of technical and
other resources from our other development efforts, or the loss of credibility
with our current and prospective customers. In the future, if we are not able
to detect and correct errors prior to release, we may experience a loss of or
delay in revenue, failure to achieve market acceptance and increased costs to
correct errors, any of which could significantly harm our business.

Defects or errors could also result in tort or warranty claims. Warranty
disclaimers and liability limitation clauses in our customer agreements may not
be enforceable. Furthermore, our errors and omissions insurance may not
adequately cover us for claims. If a court were to refuse to enforce the
liability-limiting provisions of our contracts for any reason, or if
liabilities arose that were not contractually limited or adequately covered by
insurance, our business could be harmed.

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Market acceptance of our products and services may suffer if we are unable to
enhance our products to meet the rapid technological changes in our industry.

Rapidly changing technology and standards may impede market acceptance of
our products and services. Our business relies primarily on our licensing the
rights to our products, particularly Niku 6, and their components. Niku 6 has
been designed based upon currently prevailing technologies such as extensible
markup language (XML), extensible stylesheet language (XSL), Java Two Platform
Enterprise Edition (J2EE) and Simple Object Access Protocol (SOAP). If new
technologies emerge that are incompatible with one or both of our products, our
products could become obsolete and our existing and potential customers might
seek alternatives. We may not be able to adapt quickly to a new technology.

Additionally, we design our products to work with databases such as Oracle
Database Server and SQL Server, operating systems such as Sun Solaris,
Microsoft Windows and HP UX, and application servers such as Orion, Weblogic
and Websphere. Any changes to those databases, operating systems, or
application servers, or increasing popularity of other databases, operating
systems, or application servers, might require us to modify one or both of our
products or services and could cause us to delay releasing future products and
enhancements. As a result, the timing and nature of new product introductions
or product modifications, and increases and decreases in the market acceptance
of databases, operating systems and application servers, as well as web servers
and other enterprise and Internet-based applications, could delay our product
development, increase our research and development expenses and cause customers
to delay evaluation, purchase and deployment of our products.

Because a significant part of our revenues comes from our international
operations, we are subject to risks inherent in doing business in foreign
countries that could impair our results of operations.

As a percentage of total revenues, international revenues were 54% and 45%
for the three- and nine-month periods ended October 31, 2003 compared to 31%
and 36% for the corresponding prior year periods, respectively. International
activities are a significant part of our business.

As we operate internationally, we are exposed to risks that we would not
face if we conducted our operations only in the United States. These include:



| |  |  | currency exchange rate fluctuations, particularly in countries
where we sell our products in denominations other than U.S. dollars,
such as in the United Kingdom and the euro zone or have exposures in
intercompany accounts denominated in foreign currencies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | seasonal fluctuations in purchasing patterns in other countries,
particularly declining sales during July and August in European
markets;                                                                                                                        
|
| |  |  | difficulties in collecting accounts receivable in foreign
countries, particularly European countries in which collections take
considerably more time than the United States and collections are more
difficult to effect;                                       
|
| |  |  | the burdens of complying with a wide variety of foreign laws and
reduced protection for intellectual property rights in some countries;                                                                                                                          
|
| |  |  | the need to develop internationalized versions of our products and marketing and sales materials; and                                                                                                                                                            
|
| |  |  | tariffs, export controls and other trade barriers.                                                                                                                                                                                                               

Our market is highly competitive and characterized by rapid technological
change which could make it difficult for us to attract customers, cause us to
reduce prices and result in reduced gross margins or loss of market share.

The market for our products and services is competitive, dynamic and
subject to frequent technological changes. We expect the intensity of
competition and the pace of change to increase in the future. Our products
compete with products of varying functionality offered by competing software
vendors and products that have been developed by potential customers in-house
developments and IT organizations. The primary competitive factors include
price, product functionality, product installation, product integration,
ability to scale, worldwide sales infrastructure, worldwide support
infrastructure, and worldwide professional services infrastructure. Some of our
competitors include:

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| |  |  | providers of project management, portfolio management and portfolio
analysis software; and                    
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | enterprise software providers such as Lawson, Mercury Interactive,
Microsoft, Oracle, Peoplesoft, and SAP; and
|
| |  |  | providers of professional services automation software.                                                       

A number of companies offer products that provide some of the
functionality of our products. We may not be able to maintain our competitive
position against current or potential competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other resources. Competitors with greater resources may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to potential employees, distributors, resellers or
other strategic partners. We expect additional competition from other
established and emerging companies as the market for our software continues to
develop. We may not be able to compete successfully against current and future
competitors.

If we are unable to protect and enforce our intellectual property rights, our
competitors might be able to use our technologies to develop their own
products, which would harm our ability to compete.

We regard substantial elements of our products as proprietary and protect
them by relying on copyright, trade secrets, patent, trademark and service mark
laws and restrictions, as well as non-disclosure agreements and confidentiality
procedures and contractual provisions. Any steps we take to protect our
intellectual property may be inadequate, time-consuming and expensive. We may
be unable to prevent third parties from infringing upon or misappropriating our
intellectual property, which could harm our business and our ability to
compete.

We rely to a large degree on copyright laws with respect to our software,
but we have not made any copyright registration with any government entity with
respect to our products. Although registration is not required to obtain
protection under copyright laws, our failure to register may limit our ability
to seek certain remedies available under such laws. We have received approval
for one patent and are waiting for the patent to issue. We received U.S.
registration of the trademarks Niku, the Niku logo, and Do What Matters. These
registrations may not provide us with significant protection for our
trademarks. Once our patent issues, it may not provide us with any competitive
advantages over, or may be challenged by, third parties.

The copyright and trade secret laws, which are the principal source of
protection for our intellectual property, offer only limited protection. In
addition, legal standards relating to the validity, enforceability and scope of
protection of intellectual property rights in software are uncertain and still
evolving, and the future viability or value of any of our intellectual property
rights is uncertain. Effective trademark, copyright and trade secret
protection may not be available in every country in which our products are
distributed or made available.

Although we have taken precautionary measures to maintain our proprietary
information, others may acquire equivalent information or otherwise gain access
to or disclose our proprietary information. In the event that we are unable to
meaningfully protect our rights to our proprietary information, our ability to
compete will likely be harmed.

We indemnify our customers against infringement claims involving our products,
which could require us to incur substantial costs defending our rights and the
interests of our customers.

Our standard product licenses provide that we agree to indemnify our
customers against claims that our products infringe upon the intellectual
property rights of others. These claims, even if not meritorious, could be
expensive and divert managements attention from operating our business. We
could incur substantial costs in defending ourselves and our customers against
infringement claims. If we become liable to third parties for infringement of
their intellectual property rights, we could be required to pay a substantial
damage award and to develop non-infringing technology, obtain one or more
licenses for us and our customers from third parties or cease selling the
products that contain the infringing intellectual property. We may be unable
to develop non-infringing technology or obtain a license at a reasonable cost,
or at all. If we are unable to license our technology, we would be unable to
support our operations.

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Because our stock price is volatile and the trading volume is low, you may not
be able to resell your shares at or above the price that you paid, or at all.

The market price of our common stock is extremely volatile and has ranged
from over $100 per share to less than $1.00 per share since February 2000 and
typically has a low trading volume. We cannot predict the extent to which
investor interest in our stock will create or sustain an active trading market.
If a more active market does develop, the price of our stock may be highly
volatile. The sale of a larger block of our shares could depress the price of
our shares to a greater degree than a company that typically has a higher
volume of trading in its securities. As a result, the investors in our stock
may not be able to liquidate their investment without considerable delay, if at
all.

Provisions of Delaware law, our certificate of incorporation and bylaws,
certain voting agreements and the concentration of stock ownership could delay
or prevent a change of control, even if doing so would benefit our
stockholders.

Provisions of Delaware law, our certificate of incorporation and bylaws,
certain voting agreements of our stockholders and the concentration of
ownership of our stock could have the effect of delaying or preventing a change
in control, even if a change in control would presumably be beneficial to our
stockholders. Relevant provisions include:



| |  |  | authorizing the issuance of preferred stock without stockholder approval;                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | prohibiting cumulative voting in the election of directors;                                                                            
|
| |  |  | requiring two-thirds of the outstanding shares to approve
amendments to some provisions of our certificate of incorporation and
bylaws;
|
| |  |  | requiring a majority of the stockholders to call stockholders meetings; and                                                            
|
| |  |  | prohibiting stockholder actions by written consent.                                                                                    

In addition, Farzad and Rhonda Dibachi, our former Chief Executive Officer
and Executive Vice President of Strategy and Planning, and Limar Realty Corp.
#30, the landlord for a significant facility in Redwood City, California, whose
lease we terminated in fiscal 2003, have entered into voting agreements in
which they have agreed, in the case of the Dibachis, to vote as recommended
unanimously by the board and, in the case of Limar, to vote as recommended by
the board or in the same proportion as other votes cast on a given matter
(excluding votes by the Dibachis). These provisions could delay or prevent an
attempt to replace or remove our management and may make it more difficult for
another party to take over our company without the approval of our board.

Further, WaldenVC and its related funds beneficially own 21% of our
outstanding common stock. This concentration of ownership gives Walden
significant power to effect the outcome of matters requiring shareholder
approval, including the election of directors or to delay or prevent a change
of control of the business that may be in the best interests of other
stockholders.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and market our products primarily
in North America and Europe. As a result, our financial results may be affected
by primarily factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Approximately 45% and 36% of our total
revenue was made in currencies other than U.S. dollars in the nine-month
periods ended October 31, 2003 and 2002, respectively. Our exposures to
foreign exchange rate fluctuations also arise in part from intercompany
accounts with our foreign subsidiaries. These intercompany accounts are
typically denominated in the local currency of the foreign subsidiary. We
expect that exchange rate fluctuations will affect our financial results in the
future. As of October 31, 2003, we had a deposit of approximately
1.3 million Euros to minimize our exposures from
intercompany accounts with foreign subsidiaries. We will continue to assess
whether there is a need to utilize financial instruments to hedge currency
exposures in the future.

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Our exposure to market risk for changes in interest rates relates
primarily to our cash and cash equivalents and outstanding debt obligations.
We do not use derivative financial instruments for speculative or trading
purposes. Our cash and cash equivalents consist primarily of demand deposits,
certificates of deposits and money market accounts that mature in three months
or less. Due to the short-term nature of our cash and cash equivalents, we
believe that there is no material market or interest rate risk exposure on our
cash and cash equivalents. We do not believe that we have interest rate
exposure on our line of credit because the interest rate adjusted varies with
the prime rate of U.S. We do not believe an immediate 10% increase or decrease
in interest rate would have a material effect on our consolidated financial
position and results of operations.




ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer has evaluated the effectiveness of our disclosure
controls and procedures (pursuant to Rules 13a-15(e) and 15d-15(e) of the
Securities and Exchange Act of 1934, as amended) as of the end of the period
covered by this report. Based on such evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that as of the end of such period our
disclosure controls and procedures are effective and timely.

Changes in Internal Controls Over Financial Reporting

There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that
materially affected or is reasonably likely to materially affect our internal
control over financial reporting.




PART II: OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

In August 2001, Goldman, Sachs and Co., Dain Rauscher Wessels, U.S.
Bancorp Piper Jaffray and Thomas Weisel Partners, the managing underwriters of
the Companys initial public offering, the Company, and certain of the
Companys officers and directors, were named as defendants in a number of
purported securities class actions in United States District Court for the
Southern District of New York arising out of the Companys initial public
offering in February 2000. The complaints in these actions allege, among other
things, that the registration statement and prospectus filed with the
Securities and Exchange Commission for purposes of the IPO were false and
misleading because they failed to disclose that the managing underwriters
allegedly (i) solicited and received commissions from certain investors in
exchange for allocating to them shares of Company stock in connection with the
IPO and (ii) entered into agreements with their customers to allocate such
stock to those customers in exchange for the customers agreeing to purchase
additional shares of the Company in the aftermarket at pre-determined prices.
The Company believes that the claims asserted against it in these cases are
without merit. On August 8, 2001 the Court ordered that these actions, along
with hundreds of IPO allocation cases against other issuers, underwriters and
directors and officers, be transferred to one judge for coordinated pre-trial
proceedings. In July 2002, omnibus motions to dismiss the complaints based on
common legal issues were filed on behalf of all issuers, underwriters and
directors and officers. By order dated October 8, 2002, the Court dismissed the
Companys officers and directors from the case without prejudice. In an opinion
issued on February 19, 2003, the Court granted in part and denied in part the
motions to dismiss. The complaints against the Company and the other issuers
and underwriters were not dismissed as a matter of law. The plaintiffs and the
issuer defendants signed a Memorandum of Understanding, dated as of June 5,
2003, agreeing to settle the cases. Final settlement papers are in the process
of being negotiated and approved.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)     Exhibits

The following exhibits are filed as part of, or incorporated by reference
into, this quarterly report on Form 10-Q.

|        |  |                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------
|Number  |  | Exhibit Title                                                                                              
|        |  |                                                                                                            
|3.1 (1) |  | Amended and Restated Certificate of Incorporation                                                          
|        |  |                                                                                                            
|3.2 (2) |  | Certificate of Amendment to the Amended and Restated
Certificate of Incorporation dated November 20, 2002. 
|        |  |                                                                                                            
|3.3     |  | Certificate of Amendment to the Amended and Restated Certification
of Incorporation dated December 3, 2003.
|        |  |                                                                                                            
|3.4 (3) |  | Registrants Amended and Restated Bylaws.                                                                  
|        |  |                                                                                                            
|31.1    |  | Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.              
|        |  |                                                                                                            
|31.2    |  | Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.              
|        |  |                                                                                                            
|32.1    |  | Certificate of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.                
|        |  |                                                                                                            
|32.2    |  | Certificate of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.                



|(1) |  | Incorporated by reference to the Registrants Fiscal 2000 Annual Report
on Form 10-K filed on April 28, 2000.                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to the Current Report on Form 8-K filed on
November 21, 2002.                                                              
|   
|(3) |  | Incorporated by reference to the Registrants Fiscal 2003 Annual Report
on Form 10-K filed on April 15, 2003.                                        
|   
|(4) |  | Incorporated by reference to the Registrants Quarterly Report for the
quarterly period ended July 31, 2003 on Form 10-Q filed on September 12,
2003.

(b)     Reports on Form 8-K

On August 21, 2003, the Company filed a current report on Form 8-K to
announce its financial results for the quarter ended July 31, 2003.

On November 19, 2003, the Company filed a current report on Form 8-K to
announce its financial results for the quarter ended October 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Redwood City, County of San Mateo,
State of California, on the 15th day of December 2003.

| |  |                              |  |                                   
| |  | ---------------------------- |  | ----------------------------------
| |  | NIKU CORPORATION(Registrant)
| |  |                              |  |                                   
| |  | By:                          |  |                                   
| |  |                              |  |                                   
| |  | /s/                          |  | Joshua Pickus                     
| |  |                             
| |  |                              |  | Joshua Pickus                     
| |  |                              |  | President, Chief Executive Officer
| |  |                              |  |                                   
| |  | /s/                          |  | Michael Shahbazian                
| |  |                             
| |  |                              |  | Michael Shahbazian                
| |  |                              |  | Chief Financial Officer           

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##### Table of Contents



NIKU CORPORATION

EXHIBITS TO FORM 10-Q QUARTERLY REPORT
For the Quarter Ended October 31, 2003

|       |  |                                                                                                           
|------ |  | ----------------------------------------------------------------------------------------------------------
|Number |  | Exhibit Title                                                                                             
|3.3    |  | Certificate of Amendment to the Amended and Restated Certification of Incorporation dated
December 3, 2003
|       |  |                                                                                                           
|31.1   |  | Certificate of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.               
|       |  |                                                                                                           
|31.2   |  | Certificate of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.               
|       |  |                                                                                                           
|32.1   |  | Certificate of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.               
|       |  |                                                                                                           
|32.2   |  | Certificate of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.               

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