##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended July 31,
    2002                                                
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission File Number: 000-28797



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Niku Corporation

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 77-0473454                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)

305 Main Street

Redwood City, CA 94063


(Address of principal executive
offices)


Telephone: (650) 298-4600

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(l) 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 þ          No o

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practicable date.

73,111,829 shares of common stock as of
August 31, 2002



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                        |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|                              |                                                                                               | 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                           
|PART II: OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Change in Securities and Use of Proceeds                                             
|                              | Item 4. Submission of Matter to a Vote of Security Holders                                   
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 10.19                
|EXHIBIT 10.20                
|EXHIBIT 10.21                
|EXHIBIT 10.22                
|EXHIBIT 99.10                
|EXHIBIT 99.20                
|EXHIBIT 99.30                
|EXHIBIT 99.40                



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended July 31, 2002


INDEX

|                                  |  |                                                                                           |  |      |    | 
|--------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                  |  |                                                                                           |  | Page
|                                  |  |                                                                                           |  |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                           |  | Financial Statements (unaudited):                                                         |  |      |    | 
|                                  |  | Condensed Consolidated Balance Sheets                                                     |  |      | 2  | 
|                                  |  | Condensed Consolidated Statements of Operations
    and Comprehensive Loss                |  |      | 3  | 
|                                  |  | Condensed Consolidated Statements of Cash Flows                                           |  |      | 4  | 
|                                  |  | Notes to Condensed Consolidated Financial
    Statements                                  |  |      | 5  | 
|Item 2.                           |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 12 | 
|Item 3.                           |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 31 | 
|PART II  OTHER INFORMATION       
|Item 1.                           |  | Legal Proceedings                                                                         |  |      | 32 | 
|Item 2.                           |  | Changes in Securities and Use of Proceeds                                                 |  |      | 32 | 
|Item 4.                           |  | Submission of Matter to a Vote of Security Holders                                        |  |      | 32 | 
|Item 5.                           |  | Other Information                                                                         |  |      | 33 | 
|Item 6.                           |  | Exhibits and Reports on Form 8-K                                                          |  |      | 33 | 
|                                  |  | Signature                                                                                 |  |      | 34 | 

1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




Item 1.     Financial
Statements

NIKU CORPORATION AND SUBSIDIARIES






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                   |                                                  |                                                                         |        |             |        |  |        |        |         | 
|-------------------------------------------------- | ------------------------------------------------ | ----------------------------------------------------------------------- | ------ | ----------- | ------ |  | ------ | ------ | ------- | 
|                                                   |                                                  | July 31,                                                                |        | January 31,
|                                                   |                                                  | 2002                                                                    |        | 2002       
|                                                   |                                                  |                                                                         |        |            
|                                                   |                                                  |                                                                        
|                                                   |                                                  | (Unaudited)                                                            
|                                                   |                                                  |                                                                        
|                                                   |                                                  | (In thousands)                                                         
|ASSETS                                            
|Current Assets:                                    |                                                  |                                                                         |        |             |        |  |        |       
|                                                   | Cash and cash equivalents                        |                                                                         | $      | 18,563      |        |  | $      | 51,585 |        
|                                                   | Current portion of restricted cash               |                                                                         |        | 6,203       |        |  |        | 4,665  |        
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total cash, cash equivalents and current portion
    of restricted cash |        |             | 24,766 |  |        |        | 56,250  | 
|                                                   | Accounts receivable, net                         |                                                                         |        | 6,790       |        |  |        | 12,797 |        
|                                                   | Prepaid expenses and other current assets        |                                                                         |        | 2,379       |        |  |        | 5,241  |        
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total current assets                                                    |        |             | 33,935 |  |        |        | 74,288  | 
|Restricted cash                                    |                                                  |                                                                         | 4,306  |             |        |  | 9,822  |       
|Property and equipment, net                        |                                                  |                                                                         | 5,185  |             |        |  | 13,196 |       
|Deposits and other assets                          |                                                  |                                                                         | 1,246  |             |        |  | 4,269  |       
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total assets                                                            |        | $           | 44,672 |  |        | $      | 101,575 | 
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|LIABILITIES AND STOCKHOLDERS
    (DEFICIT) EQUITY
|Current Liabilities:                               |                                                  |                                                                         |        |             |        |  |        |       
|                                                   | Accounts payable                                 |                                                                         | $      | 3,416       |        |  | $      | 3,279  |        
|                                                   | Accrued liabilities                              |                                                                         |        | 28,184      |        |  |        | 21,817 |        
|                                                   | Bank borrowings and other short-term obligations |                                                                         |        | 5,091       |        |  |        | 27,261 |        
|                                                   | Deferred revenue                                 |                                                                         |        | 8,655       |        |  |        | 10,903 |        
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total current liabilities                                               |        |             | 45,346 |  |        |        | 63,260  | 
|Long-term restructuring accrual                    |                                                  |                                                                         | 7,673  |             |        |  | 6,758  |       
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total liabilities                                                       |        |             | 53,019 |  |        |        | 70,018  | 
|Stockholders (deficit) equity                     |                                                  |                                                                         | (8,347 | )           |        |  | 31,557 |       
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total liabilities and stockholders
    (deficit) equity                |        | $           | 44,672 |  |        | $      | 101,575 | 
|                                                   |                                                  |                                                                         |        |             |        |  |        |       

The accompanying notes are an integral part of
these condensed consolidated financial statements.

2



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


AND COMPREHENSIVE LOSS


|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |          |          |  
|----------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ---------------- | ------- | ---- | ------ | -------- | -------- | - | ------ | ------- | ------- | - | ------ | -------- | -------- | -
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                 
|                                                                  |                                                                                                                                                                                                                                         | Three Months Ended                    |        | Six Months Ended
|                                                                  |                                                                                                                                                                                                                                         | July 31,                              |        | July 31,        
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                 
|                                                                  |                                                                                                                                                                                                                                         | 2002                                  |        | 2001             |         | 2002 |        | 2001    
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |         
|                                                                  |                                                                                                                                                                                                                                         |                                      
|                                                                  |                                                                                                                                                                                                                                         | (Unaudited)                          
|                                                                  |                                                                                                                                                                                                                                         | (In thousands, except per share data)
|Revenue:                                                          |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  | License                                                                                                                                                                                                                                 |                                       | $      | 3,961            |         |      | $      | 7,028    |          |   | $      | 9,652   |         |   | $      | 15,083   |         
|                                                                  | Services                                                                                                                                                                                                                                |                                       |        | 6,533            |         |      |        | 10,209   |          |   |        | 14,969  |         |   |        | 19,627   |         
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                         | Total revenue                         |        |                  | 10,494  |      |        |          | 17,237   |   |        |         | 24,621  |   |        |          | 34,710   |  
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|Cost of revenue:                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  | License                                                                                                                                                                                                                                 |                                       |        | 303              |         |      |        | 420      |          |   |        | 619     |         |   |        | 1,074    |         
|                                                                  | Services (exclusive of stock-based compensation
    of ($31) and $274 for the three months ended July 31, 2002
    and 2001 and ($291) and $604 for the six months ended
    July 31, 2002 and 2001, respectively)                      |                                       |        | 3,517            |         |      |        | 6,911    |          |   |        | 7,283   |         |   |        | 16,128   |         
|                                                                  | Impairment of licensed technology                                                                                                                                                                                                       |                                       |        |                 |         |      |        |         |          |   |        |        |         |   |        | 6,789    |         
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                         | Total cost of revenue                 |        |                  | 3,820   |      |        |          | 7,331    |   |        |         | 7,902   |   |        |          | 23,991   |  
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                         | Gross profit                          |        |                  | 6,674   |      |        |          | 9,906    |   |        |         | 16,719  |   |        |          | 10,719   |  
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|Operating expenses:                                               |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  | Sales and marketing (exclusive of stock-based
    compensation of $109 and $951 for the three months ended
    July 31, 2002 and 2001 and ($1,841) and $3,257 for the six
    months ended July 31, 2002 and 2001, respectively)        |                                       |        | 7,414            |         |      |        | 17,181   |          |   |        | 15,561  |         |   |        | 49,585   |         
|                                                                  | Research and development (exclusive of
    stock-based compensation of ($392) and $545 for the three months
    ended July 31, 2002 and 2001 and ($1,598) and $1,595 for
    the six months ended July 31, 2002 and 2001, respectively) |                                       |        | 3,993            |         |      |        | 10,532   |          |   |        | 8,022   |         |   |        | 21,574   |         
|                                                                  | General and administrative (exclusive of
    stock-based compensation of $13 and $418 for the three months
    ended July 31, 2002 and 2001 and ($217) and $1,417 for the
    six months ended July 31, 2002 and 2001, respectively)    |                                       |        | 2,331            |         |      |        | 4,051    |          |   |        | 4,538   |         |   |        | 10,150   |         
|                                                                  | Restructuring and other                                                                                                                                                                                                                 |                                       |        | 30,405           |         |      |        | 7,749    |          |   |        | 29,567  |         |   |        | 10,841   |         
|                                                                  | Asset impairment and other                                                                                                                                                                                                              |                                       |        | 425              |         |      |        | 114,379  |          |   |        | 425     |         |   |        | 138,923  |         
|                                                                  | Stock-based compensation                                                                                                                                                                                                                |                                       |        | (301             | )       |      |        | 2,188    |          |   |        | (3,947  | )       |   |        | 6,873    |         
|                                                                  | Amortization of goodwill and other intangible
    assets                                                                                                                                                                                |                                       |        |                 |         |      |        | 14,505   |          |   |        |        |         |   |        | 27,333   |         
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                         | Total operating expenses              |        |                  | 44,267  |      |        |          | 170,585  |   |        |         | 54,166  |   |        |          | 265,279  |  
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                         | Operating loss                        |        |                  | (37,593 | )    |        |          | (160,679 | ) |        |         | (37,447 | ) |        |          | (254,560 | )
|Interest and other income, net                                    |                                                                                                                                                                                                                                         |                                       | 312    |                  |         |      | 1,071  |          |          |   | 432    |         |         |   | 2,070  |         
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                         | Net loss                              |        | $                | (37,281 | )    |        | $        | (159,608 | ) |        | $       | (37,015 | ) |        | $        | (252,490 | )
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|Basic and diluted net loss per share                              |                                                                                                                                                                                                                                         | $                                     | (0.50  | )                |         | $    | (2.12  | )        |          | $ | (0.50  | )       |         | $ | (3.35  | )       
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|Shares used in computing basic and diluted net
    loss per share |                                                                                                                                                                                                                                         |                                       | 74,135 |                  |         |      | 75,331 |          |          |   | 74,137 |         |         |   | 75,415 |         
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|Comprehensive loss:                                               |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  | Net loss                                                                                                                                                                                                                                |                                       | $      | (37,281          | )       |      | $      | (159,608 | )        |   | $      | (37,015 | )       |   | $      | (252,490 | )       
|                                                                  | Foreign currency translation adjustments                                                                                                                                                                                                |                                       |        | 57               |         |      |        | 30       |          |   |        | 118     |         |   |        | (144     | )       
|                                                                  | Unrealized gain (loss) on short-term
    investments                                                                                                                                                                                    |                                       |        |                 |         |      |        | (24      | )        |   |        |        |         |   |        | 14       |         
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                         | Comprehensive loss                    |        | $                | (37,224 | )    |        | $        | (159,602 | ) |        | $       | (36,897 | ) |        | $        | (252,620 | )
|                                                                  |                                                                                                                                                                                                                                         |                                       |        |                  |         |      |        |          |          |   |        |         |         |   |        |         

The accompanying notes are an integral part of
these condensed consolidated financial statements.

3



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |          |         |        |         |  
|-------------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | ------ | ------ | ------- | -------- | ------- | ------ | ------- | -
|                                                   |                                                                                     |                                                                     
|                                                   |                                                                                     | Six Months Ended                                                    
|                                                   |                                                                                     | July 31,                                                            
|                                                   |                                                                                     |                                                                     
|                                                   |                                                                                     | 2002                                                                 |                                                             | 2001                                     
|                                                   |                                                                                     |                                                                      |                                                             |                                          
|                                                   |                                                                                     |                                                                     
|                                                   |                                                                                     | (Unaudited)                                                         
|                                                   |                                                                                     | (In thousands)                                                      
|Cash flows from operating activities:              |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   | Net loss                                                                            |                                                                      | $                                                           | (37,015                                   | )      |        | $       | (252,490 | )      
|                                                   | Adjustments to reconcile net loss to net cash
    used in operating activities:     |                                                                      |                                                             |                                           |        |        |         |          |        
|                                                   |                                                                                     | Depreciation                                                         |                                                             |                                           | 2,361  |        |         |          | 2,848   |       
|                                                   |                                                                                     | Impairment of licensed technology                                    |                                                             |                                           |       |        |         |          | 5,939   |       
|                                                   |                                                                                     | Restructuring and other                                              |                                                             |                                           | 7,962  |        |         |          | 7,696   |       
|                                                   |                                                                                     | Asset impairment and other                                           |                                                             |                                           |       |        |         |          | 138,923 |       
|                                                   |                                                                                     | Amortization of goodwill and other intangible
    assets             |                                                             |                                           |       |        |         |          | 27,333  |       
|                                                   |                                                                                     | Stock-based compensation                                             |                                                             |                                           | (3,947 | )      |         |          | 6,873   |       
|                                                   |                                                                                     | Provision for doubtful accounts receivable                           |                                                             |                                           | 128    |        |         |          | 8,348   |       
|                                                   |                                                                                     | Forgiveness of notes receivable from stockholder                     |                                                             |                                           |       |        |         |          | 248     |       
|                                                   |                                                                                     | Cancellation of interest from notes receivable
    from stockholders |                                                             |                                           | 116    |        |         |          |        |       
|                                                   |                                                                                     | Interest on notes receivable from stockholders                       |                                                             |                                           | (46    | )      |         |          | 122     |       
|                                                   |                                                                                     | Changes in operating assets and liabilities:                         |                                                             |                                           |        |        |         |          |         |       
|                                                   |                                                                                     |                                                                      | Accounts receivable                                         |                                           |        | 5,844  |         |          |         | 16,952 |        
|                                                   |                                                                                     |                                                                      | Prepaid expenses and other current assets                   |                                           |        | 2,720  |         |          |         | 55     |        
|                                                   |                                                                                     |                                                                      | Deposits and other assets                                   |                                           |        | 756    |         |          |         | 328    |        
|                                                   |                                                                                     |                                                                      | Accounts payable                                            |                                           |        | 137    |         |          |         | (112   | )      
|                                                   |                                                                                     |                                                                      | Accrued liabilities and long-term restructuring
    accrual |                                           |        | 10,416 |         |          |         | (5,240 | )      
|                                                   |                                                                                     |                                                                      | Deferred revenue                                            |                                           |        | (2,248 | )       |          |         | (5,284 | )      
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   |                                                                                     |                                                                      |                                                             | Net cash used in operating activities     |        |        | (12,816 | )        |         |        | (47,461 | )
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|Cash flows from investing activities:              |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   | Purchases of property and equipment                                                 |                                                                      |                                                             | (2,436                                    | )      |        |         | (12,684  | )      
|                                                   | Release of investments for restricted cash, net                                     |                                                                      |                                                             | 3,978                                     |        |        |         |         |        
|                                                   | Sales and maturities of short-term investments,
    net                             |                                                                      |                                                             |                                          |        |        |         | 39,267   |        
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   |                                                                                     |                                                                      |                                                             | Net cash provided by investing activities |        |        | 1,542   |          |         |        | 26,583  |  
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|Cash flows from financing activities:              |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   | Issuance of common stock                                                            |                                                                      |                                                             | 388                                       |        |        |         | 1,520    |        
|                                                   | Treasury stock repurchased                                                          |                                                                      |                                                             |                                          |        |        |         | (1,484   | )      
|                                                   | Repurchase of common stock                                                          |                                                                      |                                                             |                                          |        |        |         | (11      | )      
|                                                   | Repayment on bank borrowings, net                                                   |                                                                      |                                                             | (22,000                                   | )      |        |         |         |        
|                                                   | Repayment of debt and capital lease obligations                                     |                                                                      |                                                             | (170                                      | )      |        |         | (217     | )      
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   |                                                                                     |                                                                      |                                                             | Net cash used in financing activities     |        |        | (21,782 | )        |         |        | (192    | )
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|Net decrease in cash and cash equivalents          |                                                                                     |                                                                      | (33,056                                                     | )                                         |        |        | (21,070 | )       
|Effect of exchange rate changes                    |                                                                                     |                                                                      | 34                                                          |                                           |        |        | (144    | )       
|Cash and cash equivalents, beginning of period     |                                                                                     |                                                                      | 51,585                                                      |                                           |        |        | 108,160 |         
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|Cash and cash equivalents, end of period           |                                                                                     | $                                                                    | 18,563                                                      |                                           |        | $      | 86,946  |         
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|Supplemental disclosures of cash flow information: |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   | Cash paid for interest during the period                                            |                                                                      | $                                                           | 34                                        |        |        | $       | 36       |        
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|Noncash investing and financing activities:        |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   | Reversal of deferred stock-based compensation                                       |                                                                      | $                                                           | 19,224                                    |        |        | $       |         |        
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   | Repurchases of common stock in settlement of
    notes receivable from stockholders |                                                                      | $                                                           | 675                                       |        |        | $       | 2,784    |        
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   | Write-off of property and equipment to goodwill                                     |                                                                      | $                                                           |                                          |        |        | $       | 1,858    |        
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         
|                                                   | Unrealized gain on short-term investments                                           |                                                                      | $                                                           |                                          |        |        | $       | 14       |        
|                                                   |                                                                                     |                                                                      |                                                             |                                           |        |        |         |         

The accompanying notes are an integral part of
these condensed consolidated financial statements.

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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


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, except for adjustments related to
restructuring. 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 generally accepted
accounting principles 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,
2002, included in the Companys fiscal 2002 Annual Report
on Form 10-K.

The 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.

Prior to fiscal 2003, the Company had a fiscal
year that ended on the Saturday preceding January 31 and
fiscal quarters that ended on the Saturday preceding the last
day of the third month of the quarter. In the first quarter of
fiscal 2003, the Company changed its fiscal calendar to a
calendar month end for all periods so the second quarter of
fiscal 2003 ended on July 31, 2002. For presentation
purposes, the condensed consolidated financial statements and
notes for the six months ended July 31, 2001 and the second
quarter of fiscal 2002 refer to that periods calendar
month end.



| |                 
| | ----------------
| | Use of Estimates

The preparation of 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 consolidated financial
statements and reported consolidated results of operations
during the reporting period. Estimates are used for, but are not
limited to, allowance for doubtful accounts, depreciation and
amortization, sales returns, taxes, impairment, accrued
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.

2.     Reimbursement
for Out of Pocket Expenses Incurred

In November 2001, the FASB issued Topic D-103,
Income Statement Characterization of Reimbursements Received
for Out of Pocket Expenses Incurred, which requires the
Company to report reimbursements of out of pocket expenses as
revenue and the corresponding expenses incurred as cost of
revenue within the condensed consolidated statements of
operations. The Company adopted Topic D-103 in the first
quarter of fiscal 2003 and reclassified reimbursable expenses
into services revenue with a corresponding increase in cost of
services revenue. The impact of the reclassification was to
increase services revenue and cost of services

5



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

revenue by $262,000 and $430,000 in the three
months ended July 31, 2002 and 2001, respectively, and
$535,000 and $937,000 in the six months ended July 31, 2002
and 2001, respectively.

3.     Repricing of
Stock Options

On November 12, 2001, the Companys
board of directors, acting pursuant to existing terms of the
Companys stock options plans, approved the repricing of
approximately 8.9 million outstanding stock options with
exercise prices above $0.75. The exercise prices of all such
stock options were repriced to $0.75, which was the fair market
value of the Companys stock on November 12, 2001.
There were no changes to the vesting schedules of the repriced
options. Options held by the Companys chief executive
officer, executive vice president of strategy and planning,
board of directors and non-employees were not repriced. The
Company accounted for the repriced options using variable
accounting whereby the aggregate intrinsic value of the repriced
options is continuously remeasured and amortized to stock-based
compensation expense over the vesting periods. Based on the
stock price of $0.25 as of July 31, 2002, the Company
recorded $684,000 and $4.8 million in recovery of
previously recognized stock-based compensation in the second
quarter of fiscal 2003 and in the six months ended July 31,
2002, respectively, relating to these repriced stock options,
offset by $383,000 and $885,000 in other stock-based
compensation in the second quarter of fiscal 2003 and in the six
months ended July 31, 2002, respectively. Deferred
stock-based compensation relating to these repriced options
decreased $1.3 million in the second quarter of fiscal 2003
and $13.4 million in the six months ended July 31,
2002, respectively. As of July 31, 2002, deferred
stock-based compensation relating to these repriced options was
zero, reflecting the reduced intrinsic value of unexercised
repriced options and the amortization of stock compensation over
the vesting periods.

4.     Restructuring
and Other



| |                              
| | -----------------------------
| | Second Quarter of Fiscal 2003

In the second quarter of fiscal 2003, the Company
implemented a restructuring program. At the end of such quarter,
the Company restructured its operations and reduced its
workforce by approximately 72 employees. These headcount
reductions affected all functional groups of the Company. The
Company is also effecting a further headcount reduction in the
third quarter of fiscal 2003 as part of this restructuring
program (See Note 12).

The Company also vacated certain facilities,
moved back to its former headquarters, which the Company had
previously vacated in August 2001, and engaged in negotiations
to terminate the lease for a significant facility in Redwood
City, California. The $18.9 million in net lease
commitments on vacated facilities recorded in the second quarter
of fiscal 2003 includes $18.8 million in cash and non-cash
costs related to the proposed termination costs for the facility
lease in Redwood City, California and $2.3 million in net
lease commitments for certain other facilities that the Company
vacated and leases the Company terminated, offset by
$2.2 million of previously accrued deferred rent under such
leases. The Companys future liabilities under the Redwood
City, California lease prior to the proposed termination were
approximately $121.7 million. The $18.8 million in
proposed termination costs for such lease include a variety of
cash and non-cash items and are $611,000 higher than the amount
reflected in the Companys press release for the second
quarter of fiscal 2003 as a result of negotiations since the
time of the press release. The Company has not terminated this
lease. The termination costs accrued for this lease are the
Companys best estimate based on current information. To
the extent these proposed termination costs change during its
negotiation process, the ultimate termination costs could vary
from those included herein.

During the quarter, the Company terminated a
facility lease in Danville, California. The Companys
future liabilities under this lease prior to termination
approximated $2.7 million. The consideration for this
termination included the release to the landlord of a $534,000
security deposit, a lease termination payment of $216,000 in
cash and $42,000 in fair value for warrants to purchase 150,000
shares of common stock with an

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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

exercise per share of $0.01. The value of these
warrants was determined using the Black-Scholes options pricing
model with an expected life of five years, risk-free interest
rate of 3.67%, volatility of 150% and expected dividend of 0%.

Subsequent to the end of the quarter, the Company
also reached an agreement in principle to terminate the lease
for a facility in Lincolnshire, Illinois (see Note 4 
Fiscal 2002 and Note 12).

The Company retired $7.1 million in property
and equipment in connection with vacating certain facilities.
The Company also terminated an equipment lease and acquired the
leased assets for $2.0 million. The Companys future
liabilities under this equipment lease prior to termination
approximated $380,000. Of the $2.0 million in purchase
price, $1.1 million was written off as a restructuring cost
due to equipment no longer in use as a result of restructuring.



| |            
| | -----------
| | Fiscal 2002

In fiscal 2002, the Company implemented a
restructuring program. The Company restructured its operations
and reduced its workforce by approximately 665 employees as part
of the restructuring program. The Company also vacated 17 leased
facilities, retired certain property and equipment and other
assets and exited the legal vertical market. These reductions in
workforce affected all functional groups of the Company. The
$2.4 million in net lease commitments on vacated facilities
recorded in the second quarter of fiscal 2003 relating to
restructuring activities in fiscal 2002 included a
$4.3 million decrease in estimated future sublease income
for certain facilities, $1.8 million in settlement of
claims asserted in the lawsuit by the landlord of the
Companys former headquarters, $388,000 in proposed
termination costs for a lease in Lincolnshire, Illinois and
$296,000 in legal fees, offset by $4.4 million for the
reversal of future lease payments that had been previously
accrued, net of estimated sublease income, relating to the
Companys former headquarters and the Lincolnshire,
Illinois lease.

The table below represents the restructuring
activities in the second quarter of fiscal 2003 (in thousands):

|                                                       |                                                                                    |           |        |               |  |              |        |              |   |          |        |        |   |   |        |        |   |   |        |        | 
|------------------------------------------------------ | ---------------------------------------------------------------------------------- | --------- | ------ | ------------- |  | ------------ | ------ | ------------ | - | -------- | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | 
|                                                       |                                                                                    |           |        | Restructuring |  |              |        |              |   |         
|                                                       |                                                                                    |           |        | and Other     |  | Write Offs   |        |              |   |         
|                                                       |                                                                                    |           |        | Charges in    |  | in the       |        | Paid in the  |   |         
|                                                       |                                                                                    | Accrued   |        | Three Months  |  | Three Months |        | Three Months |   | Accrued 
|                                                       |                                                                                    | as of     |        | Ended         |  | Ended        |        | Ended        |   | as of   
|                                                       |                                                                                    | April 30, |        | July 31,      |  | July 31,     |        | July 31,     |   | July 31,
|                                                       |                                                                                    | 2002      |        | 2002          |  | 2002         |        | 2002         |   | 2002    
|                                                       |                                                                                    |           |        |               |  |              |        |              |   |         
|Restructuring in the second quarter of fiscal
    2003 |                                                                                    |           |        |               |  |              |        |              |   |          |        |        |   |   |        |        |   |   |        |       
|                                                       | Loss on retirement of property and equipment and
    other assets no longer in use |           | $      |              |  |              | $      | 8,201        |   |          | $      | (8,201 | ) |   | $      |       |   |   | $      |       | 
|                                                       | Severance                                                                          |           |        |              |  |              |        | 1,303        |   |          |        |       |   |   |        | (426   | ) |   |        | 877    | 
|                                                       | Net lease commitments on vacated facilities                                        |           |        |              |  |              |        | 18,924       |   |          |        | (764   | ) |   |        | (759   | ) |   |        | 17,401 | 
|                                                       | Other exit costs                                                                   |           |        |              |  |              |        | 80           |   |          |        | (80    | ) |   |        |       |   |   |        |       | 
|                                                       | Stock-based compensation adjustment                                                |           |        |              |  |              |        | (337         | ) |          |        | 337    |   |   |        |       |   |   |        |       | 
|Restructuring in fiscal 2002                           |                                                                                    |           |        |               |  |              |        |              |   |          |        |        |   |   |        |        |   |   |        |       
|                                                       | Severance                                                                          |           |        | 121           |  |              |        |             |   |          |        |       |   |   |        | (53    | ) |   |        | 68     | 
|                                                       | Net lease commitments on vacated facilities                                        |           |        | 9,845         |  |              |        | 2,375        |   |          |        | (25    | ) |   |        | (2,749 | ) |   |        | 9,446  | 
|                                                       | Exit costs for business line                                                       |           |        | 396           |  |              |        | (141         | ) |          |        |       |   |   |        | (37    | ) |   |        | 218    | 
|                                                       | Other exit costs                                                                   |           |        | 220           |  |              |        |             |   |          |        |       |   |   |        | (213   | ) |   |        | 7      | 
|                                                       |                                                                                    |           |        |               |  |              |        |              |   |          |        |        |   |   |        |        |   |   |        |       
|                                                       |                                                                                    | $         | 10,582 |               |  | $            | 30,405 |              |   | $        | (8,733 | )      |   | $ | (4,237 | )      |   | $ | 28,017 |       
|                                                       |                                                                                    |           |        |               |  |              |        |              |   |          |        |        |   |   |        |        |   |   |        |       

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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company expects that of the restructuring and
other charges accrued as of July 31, 2002, severance costs
will be paid by the fourth quarter of fiscal 2003. Exit costs
for business line will be paid no later than May 2004 and net
lease commitments on vacated facilities will be paid no later
than February 2011. The adjustment for stock-based compensation
relates to the reversal of previously recorded stock-based
compensation expenses for employees terminated pursuant to the
restructuring program.

5.     Net Loss Per
Share

Basic net loss per share is computed using the
weighted-average number of outstanding shares of common stock,
excluding shares of restricted stock subject to repurchase,
summarized below. Diluted net loss per share is computed using
the weighted-average number of shares of common stock
outstanding and, when dilutive, potential common shares from
options and warrants to purchase common stock and unvested
restricted stock using the treasury stock method. The following
potential common shares have been excluded from the computation
of diluted net loss per share because the effect would have been
antidilutive (in thousands):

|                                                 |  |          |        |      |  |  |        | 
|------------------------------------------------ |  | -------- | ------ | ---- |  |  | ------ | 
|                                                 |  |         
|                                                 |  | July 31,
|                                                 |  |         
|                                                 |  | 2002     |        | 2001
|                                                 |  |          |        |     
|Shares issuable under stock options              |  |          | 12,170 |      |  |  | 14,271 | 
|Shares of restricted stock subject to repurchase |  |          |       |      |  |  | 662    | 
|Shares issuable under warrants                   |  |          | 196    |      |  |  | 56     | 

The weighted-average exercise price of
anti-dilutive options outstanding as of July 31, 2002 and
2001 was $1.54 and $7.10 per share, respectively. The
weighted-average purchase price of restricted stock subject to
repurchase as of July 31, 2001 was $1.59 per share. The
weighted-average exercise price of warrants as of July 31,
2002 and 2001 was $2.72 and $9.68 per share.

6.     Segment
Reporting

The Company operates in a single
segment: software.

Disaggregated information is as follows (in
thousands):

|          |             |                    |       |                  |  |      |        |       |  |   |        |       |  |   |        |        | 
|--------- | ----------- | ------------------ | ----- | ---------------- |  | ---- | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ------ | 
|          |             |                    |       |                 
|          |             | Three Months Ended |       | Six Months Ended
|          |             | July 31,           |       | July 31,        
|          |             |                    |       |                 
|          |             | 2002               |       | 2001             |  | 2002 |        | 2001 
|          |             |                    |       |                  |  |      |        |      
|Services: |             |                    |       |                  |  |      |        |       |  |   |        |       |  |   |        |       
|          | Consulting  |                    | $     | 2,226            |  |      | $      | 4,785 |  |   | $      | 5,680 |  |   | $      | 9,396  | 
|          | Maintenance |                    |       | 4,307            |  |      |        | 5,424 |  |   |        | 9,289 |  |   |        | 10,231 | 
|          |             |                    |       |                  |  |      |        |       |  |   |        |       |  |   |        |       
|          |             | $                  | 6,533 |                  |  | $    | 10,209 |       |  | $ | 14,969 |       |  | $ | 19,627 |       
|          |             |                    |       |                  |  |      |        |       |  |   |        |       |  |   |        |       

International sales are primarily to customers in
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 |        | Six Months Ended
|                                            |  | July 31,           |        | July 31,        
|                                            |  |                    |        |                 
|                                            |  | 2002               |        | 2001             |  | 2002 |        | 2001
|                                            |  |                    |        |                  |  |      |        |     
|United States                               |  | $                  | 7,150  |                  |  | $    | 8,334  |      |  | $ | 15,024 |  |  | $ | 18,191 | 
|United Kingdom                              |  |                    | 1,563  |                  |  |      | 4,314  |      |  |   | 4,261  |  |  |   | 7,404  | 
|Europe (excluding United Kingdom) and other |  |                    | 1,781  |                  |  |      | 4,589  |      |  |   | 5,336  |  |  |   | 9,115  | 
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|                                            |  | $                  | 10,494 |                  |  | $    | 17,237 |      |  | $ | 24,621 |  |  | $ | 34,710 | 
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 

8



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

No customers individually represented more than
10% of gross accounts receivables as of July 31, 2002 and
January 31, 2002, respectively. No customer represented
more than 10% of total revenue in the second quarter of fiscal
2003 and 2002, respectively, nor in the six months ended
July 31, 2002 and 2001, respectively.

7.     Notes
Receivable from Stockholder

In November 1999, the Company loaned $1,250,000
to its chief financial officer secured by a stock pledge
agreement and personal assets, in connection with his purchase
of 1,250,000 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%. On July 16, 2002, the Company
repurchased the 1,250,000 shares of common stock from its chief
financial officer at $0.54 per share, which was the closing
price of the Companys common stock on the Nasdaq Stock
Market on that date, in exchange for the cancellation of an
amount in principal under the loan equal to the aggregate
repurchase price of $675,000. The Company also cancelled
$116,000 in accrued interest related to the cancelled principal
amount, which amount was recorded as compensation expense. The
remaining amount of the loan of $674,000, including $99,000 in
accrued interest, has been reclassified to other assets in the
accompanying condensed consolidated balance sheets as there is
no longer common stock to secure the loan. This loan remains
secured by the personal assets of the Companys chief
financial officer.

8.     Asset
Impairment and Other

The Company regularly performs an impairment
assessment of a $500,000 strategic equity investment it made in
a private company in April 2000. In performing an impairment
assessment, the Company considers 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 second quarter of fiscal 2003, the Company determined
that there was an impairment of $425,000 associated with the
investment and recorded such amount in asset impairment and
other in the accompanying condensed consolidated statement of
operations and comprehensive loss in the second quarter of
fiscal 2003.

9.     Bank Line of
Credit

In October 2001, the Company entered into two
loan agreements with a financial institution secured generally
by certain of the Companys tangible and intangible assets
and providing lines of credit of up to $30.0 million, of
which a $5.0 million line of credit is secured by
qualifying accounts receivable. Interest on each of these lines
accrues at a rate of 7.0% per annum. These lines of credit were
to expire according to their terms in July 2002. On
July 31, 2002, the Company entered into an amendment to the
lines of credit that, among other things, extended the maturity
date to May 2003 and modified certain financial covenants. The
Company had borrowings of $5.0 million as of July 31,
2002, which were fully repaid in August 2002. As of
July 31, 2002, the Company was in compliance with all
financial covenants.

On September 9, 2002, the Company entered
into a term loan for $5.0 million with the same financial
institution and terminated the amended lines of credit described
above. This term loan is secured by the Companys tangible
and intangible assets, accrues interest at 7.50% per annum and
matures on February 15, 2004. The Company is required to
make quarterly payments of principal and interest on a five-year
amortization schedule. This term loan has certain financial
covenants, including covenants relating to cash on hand, revenue
and operating expenses.

10.     Litigation

In August 2001, the Company, as well as certain
of its 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 IPO). Various underwriters

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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the IPO also are named as defendants in the
actions. The complaints 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 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 Company shares in the aftermarket at
pre-determined prices. On August 8, 2001 the Court ordered
that these actions, along with hundreds of IPO allocation cases
against other issuers, be transferred to Judge Scheindlin for
coordinated pre-trial proceedings. At a status conference held
on September 7, 2001, Judge Scheindlin adjourned all
defendants time to respond to the complaints until further
order of the Court. In July 2002, omnibus motions to dismiss the
complaints based on common legal issues were filed on behalf of
all issuers (and underwriters). The Court has not issued a
decision on any of those motions. These cases remain at a
preliminary stage and no discovery proceedings have taken place.
The Company believes that the claims asserted against it in
these cases are without merit and the Company intends to defend
vigorously against them. These actions seek compensatory damages
in unspecified amounts as well as other relief.

In December 2001, Brugger Corporation, the lessor
of the Companys former headquarters, filed suit in the
Superior Court of California for San Mateo County alleging that
the Company breached the lease agreement for such facility.
Brugger sought damages for breach of written lease, declaratory
relief, and rescission. The Company denied liability and filed a
cross-complaint for various forms of affirmative relief against
Brugger. In March and May 2002, Bruggers motion to dismiss
the Companys cross-complaint was denied with respect to a
majority of the Companys claims, allowing such claims to
proceed, and in April 2002, Bruggers motion for a writ of
attachment in the amount of $6.3 million was granted. The
Company provided security in the amount of $6.3 million in
the form of a bond in lieu of attachment. On July 29, 2002,
the Company settled the litigation by moving back to its former
headquarters, paying $1.8 million in settlement of claims
asserted in the lawsuit, amending the lease to reduce the
monthly rental rate and establishing a $1.1 million letter
of credit under the lease. In exchange, the $6.3 million
bond, classified in the Companys condensed consolidated
balance sheet as of April 30, 2002 as current portion of
restricted cash, was released to the Company.

In November 2001, Deborah Donoghue filed a suit
against the Company and two of its officers, Farzad Dibachi and
Rhonda Dibachi, in United States District Court for the Southern
District of New York. The Complaint alleges a violation of
Section 16(b) of the securities laws for certain trades
made by Mr. and Mrs. Dibachi and trades made by
Florence V, LLC, a Minnesota Limited Liability
Company. The Company investigated these claims prior to the
filing of the lawsuit and concluded it had no merit because,
among other things, Mr. and Mrs. Dibachi did not have the
ability to take part in, participate in, vote on, or control any
decisions regarding Florence V, LLCs purchase or
sale of any of the Companys securities. Mr. and
Mrs. Dibachi challenged venue in New York, and the
matter has been transferred to the Northern District of
California. The parties are in the preliminary stage of
discovery. Mr. and Mrs. Dibachi believe these claims are
without merit, and they intend to vigorously defend against
these claims.

On August 12, 2002, the Company filed a suit
against Business Engine Corporation (Business
Engine), a San Francisco-based software developer, in the
United States District Court in San Francisco for alleged theft
of trade secrets, computer fraud and other activities directed
at the Company. The Company is seeking immediate cessation of
these activities and unspecified damages. On August 15,
2002, the Court entered a temporary restraining order against
Business Engine, which among other things, prevents Business
Engine from continuing to access or attempting to access the
Companys internal computer system, using or disclosing any
information or documents gained from such access, or destroying,
altering, deleting or tampering with any such documents or
information derived from such access. In addition, Business
Engine is required to provide notice to all of its employees,
customers, prospective customers and partners of the temporary
restraining order

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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and post such order on its website. The Court
also granted the Companys expedited discovery request and
the parties are currently in discovery.

11.     Employee
Stock Purchase Plan

On July 31, 2002, the Company suspended its
employee stock purchase plan. The Companys board of
directors has the authority to reinstate the plan in the future.
Withholdings under the plan since the last purchase period in
February 2002 have been refunded to the Companys employees.

12.     Subsequent
Events

Subsequent to the end of the second quarter of
fiscal 2003, the Company continued its restructuring plan by
reducing headcount by approximately 28 employees which
affected all functional groups of the Company. The severance and
related charges of approximately $821,000 will be recorded as
restructuring costs in the third quarter of fiscal 2003 (see
Note 4).

Subsequent to the end of the second quarter of
fiscal 2003, the Company reached an agreement in principle to
terminate the lease for a facility in Lincolnshire, Illinois.
The Companys future liabilities under this lease prior to
the proposed termination were approximately $692,000, net of
estimated sublease income. Relative to the amounts reflected in
the Companys press release for the second quarter of
fiscal 2003, the proposed termination costs included an increase
of $388,000 in cash and other consideration for the
Lincolnshire, Illinois lease, offset by a $692,000 reversal of
future lease payments, net of estimated sublease income, for
such lease (see Note 4).

On September 9, 2002, the Company entered
into a term loan with a financial institution (see Note 9).

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 for the fiscal year ended
January 31, 2002. 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, 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 for the year ended
January 31, 2002. These forward-looking statements speak
only as of the date of this quarterly report. We do not plan or
undertake a duty to update them and we caution you not to rely
on these statements without also considering the risks and
uncertainties associated with these statements and our business
as addressed elsewhere in this quarterly report and in our
annual report on Form 10-K for the fiscal year ended
January 31, 2002 and subsequent filings.

Overview

We provide application software for service
organizations in large enterprises. These organizations include
the information technology, consulting, and research and
development groups as well as other organizations rendering
services for the enterprise. Our software enables customers to
reduce costs, increase productivity and gain visibility and
control over strategic initiatives. Our software achieves these
results by allowing users to collaborate, allocate resources,
manage initiatives, account for activities and capture and reuse
knowledge using one integrated system.

Critical Accounting Policies and
Estimates

Accounting policies, methods and estimates are an
integral part of the 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 financial statements, areas that are particularly
significant include revenue recognition, allowance for doubtful
accounts, impairment of long-lived assets and restructuring
reserves for vacated leased facilities.



| |                    
| | -------------------
| | Revenue Recognition

We derive our revenue principally from licenses
of our products, maintenance and support, and delivery of
implementation services. We offer our products primarily through
our direct sales force. In certain international markets, we
also offer our products indirectly through channel partners.

Revenue from license fees is recognized in
accordance with Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2),as amended by
SOP 98-9, which permits revenue recognition when
(1) persuasive evidence of an arrangement exists,
(2) delivery of the product has occurred and no significant
obligations from us with regard to implementation remain,
(3) the fee is fixed or determinable, and
(4) collectibility is probable. Sales to channel partners
are generally 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.It is our customary practice 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 license agreement 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 the following criteria as set
forth in the revenue contract: 1) the shipment of the
product, 2) notification of receipt of the product by the
customer or 3) notification by the customer of acceptance.
If undelivered products or services exist in an arrangement that
are essential to the functionality of the delivered product,
delivery is not considered to have occurred until 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 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 for purchase order is generally required with each
arrangement. 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
consulting services is based on the objective evidence of the
fair value of each element that is specific to us. Our
determination of 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 revenue to the maintenance
and support services and consulting 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 consulting services
separately and have established VSOE on this 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 consulting service organizations to provide
these services. Therefore, our consulting services are not
considered essential to the functionality of the other elements
of the arrangement. The revenue allocable to the consulting
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.

We have never engaged in a transaction in which
we provided product licenses or services to a customer in
exchange for an equity interest. We recognized no revenue under
any type of reciprocal arrangements in the six months ended
July 31, 2002 or in fiscal 2002.

Deferred revenue includes amounts billed to
customers for which revenue has not been recognized. Deferred
revenue generally results from the following:
(1) maintenance and support; (2) consulting services
not yet rendered for which we have been paid; (3) amounts
billed to customers with extended payment terms, which amounts
are not yet due; and (4) transactions in which one of the
four revenue recognition criteria has not been met.



| |                    
| | -------------------
| | Accounts Receivable

Accounts receivable are recorded net of
allowances for doubtful accounts and totaled $6.8 million
and $12.8 million as of July 31, 2002 and
January 31, 2002, respectively. The allowances for doubtful
accounts were $1.7 million and $3.0 million as of
July 31, 2002 and January 31, 2002, respectively. 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

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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 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, including
goodwill and identifiable intangibles, for impairment whenever
events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. Factors we
consider important which 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.

In the first quarter of fiscal 2002, we performed
an impairment assessment of our goodwill and other intangible
assets recorded in connection with our acquisitions of Legal
Anywhere, bSource.com, 600 Monkeys and Alyanza Software due
to a change in our product plan related to certain acquired
technologies. This assessment was based on the expected future
cash flows from goodwill and intangible assets over their
remaining useful lives. As a result of this assessment, we
recorded $24.5 million in asset impairment charges. This
amount included $21.7 million to write down the net book
value of certain goodwill and other intangible assets from our
acquisitions of Legal Anywhere, bSource, 600 Monkeys and Alyanza
to zero except for the carrying value of Legal Anywheres
goodwill and customer lists which was reduced to their estimated
fair value of $1.8 million. In the second quarter of fiscal
2002, we performed an additional impairment assessment of
goodwill and other intangible assets recorded in connection with
our acquisitions of ABT, Proamics and Legal Anywhere. This
assessment was performed primarily due to a significant decline
in our stock price which resulted in the net book value of our
assets significantly exceeding our market capitalization. As a
result of this assessment, we recorded $114.4 million in
asset impairment charges in the second quarter of fiscal 2002
which reduced the fair value of goodwill and other intangible
assets related to our acquisitions of ABT, Proamics and Legal
Anywhere to zero. The estimate of the fair value was based on
the estimated future discounted cash flows for the remaining
life of the goodwill and other intangible assets with a discount
rate of 25% and an estimated terminal value. The assumptions
supporting the estimated cash flows, including the discount rate
and an estimated terminal value, reflect managements best
estimates. The discount rate was based upon the weighted average
cost of capital for comparable companies. In the six months
ended July 31, 2001, we recorded $138.9 million in
asset impairment charges, consisting of $136.1 million as a
result of the above two assessments, $1.9 million in
accelerated depreciation for internally used software and
$874,000 to write off fixed assets that we no longer utilized.
There were no asset impairment and other charges in the second
quarter of fiscal 2003 and in the six months ended July 31,
2002 except for an impairment charge of our strategic equity
investment described below.

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 consider 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 second quarter of
fiscal 2002, we determined that there was an impairment of
$425,000 in the investment. Due to the rapid changes occurring
in the business sector in which our strategic investment
operates and the inherent risk associated with investments in
early stage technology companies, it is possible

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that we may have to record an impairment charge
relating to the remaining balance of this investment in the
future.


We regularly perform an impairment assessment of
our prepaid royalties for the right to third-party licensed
technology. In performing an impairment assessment, we consider
the future inclusion of third-party technology in our products
and anticipated usage under the applicable contract. Based on an
analysis of these factors, we recorded $6.8 million in
impairment of licensed technology in the first quarter of fiscal
2002. There was no impairment of licensed technology in the
second quarter of fiscal 2003 and in the six months ended
July 31, 2002. As of July 31, 2002, we had $49,000 in
prepaid royalties. Due to the rapid changes in technology, it is
possible that we may have to record impairment charges relating
to the remaining balance of these prepaid royalties in the
future.



| |                                                         
| | --------------------------------------------------------
| | Restructuring Reserves for Vacated Leased
    Facilities

We have recorded significant restructuring
charges in connection with vacating certain leased facilities
pursuant to our restructuring program. Costs associated with
vacated leased facilities include remaining lease liabilities,
brokerage fees, offset by estimated sublease income. Estimated
sublease income is determined by taking into consideration the
type and condition of the subject property, and information
regarding the local commercial real estate market and
expectations about time to obtain a sublessee provided by local
commercial real estate brokerages. We regularly review these
estimates and to the extent that these assumptions change due to
changes in the market, the ultimate restructuring expenses for
vacated leases could vary by material amounts. Future minimum
lease payments and brokerage fees relating to facilities that we
vacated pursuant to our restructuring programs, net of estimated
sublease income, amounted to $15.6 million,
$1.2 million, $1.2 million $900,000, and $965,000 for
the twelve months ended July 31, 2003, 2004, 2005, 2006 and
2007, respectively, and $3.4 million thereafter. The
$15.6 million for the twelve months ended July 31,
2003 included certain amounts for the cash portion of the
proposed termination payments for leases in Redwood City,
California and Lincolnshire, Illinois. Relative to the amounts
reflected in our press release for the second quarter of fiscal
2003, the proposed termination costs included an increase of
$611,000 in cash for the Redwood City, California lease and an
increase of $388,000 in cash and other consideration for the
Lincolnshire, Illinois lease, offset by a $692,000 reversal of
future lease payments, net of estimated sublease income, for the
Lincolnshire, Illinois lease. We have not terminated these
leases. The termination costs accrued for these leases are our
best estimate based on current information. To the extent that
the proposed termination costs change during our negotiation
process, the ultimate termination payments could vary from those
included herein.

Repricing of Stock Options

On November 12, 2001, our board of
directors, acting pursuant to existing terms of our stock
options plans, approved the repricing of approximately
8.9 million outstanding stock options with exercise prices
above $0.75. The exercise prices of all such stock options were
repriced to $0.75, which was the fair market value of our stock
on November 12, 2001. There were no changes to the vesting
schedules of the repriced options. Options held by our chief
executive officer, executive vice president of strategy and
planning, board of directors and non-employees were not
repriced. We accounted for the repriced options using variable
accounting whereby the aggregate intrinsic value of the repriced
options is continuously remeasured and amortized to stock-based
compensation expense over the vesting periods. Based on the
stock price of $0.25 as of July 31, 2002, we recorded
$684,000 and $4.8 million in recovery of previously
recognized stock-based compensation in the second quarter of
fiscal 2003 and in the six months ended July 31, 2002,
respectively, relating to these repriced stock options, offset
by $383,000 and $885,000 in other stock-based compensation in
the second quarter of fiscal 2003 and in the six months ended
July 31, 2002, respectively. Deferred stock-based
compensation relating to these repriced options decreased
$1.3 million in the second quarter of fiscal 2003 and
$13.4 million in the six months ended July 31, 2002,
respectively. As of July 31, 2002, deferred stock-based
compensation relating to these repriced options was zero,
reflecting the reduced intrinsic value of unexercised repriced
options and the amortization of stock compensation over the
vesting periods.

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Pro Forma Financial Results

We prepare and release quarterly unaudited
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(US GAAP). We also disclose and discuss certain pro
forma financial information in the quarterly and annual
financial results press release and investor conference call.
This pro forma financial information excludes certain non-cash
and special charges, consisting primarily of stock-based
compensation, restructuring and other charges, impairment
charges and amortization of goodwill and other intangible
assets. We believe the disclosure of the pro forma financial
information helps investors evaluate the results of our ongoing
operations. However, we urge investors to carefully review the
US 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 our quarterly and
annual financial results press releases, which compare US GAAP
financial information with the pro forma financial results, and
read the associated reconciliation.

Results of Operations

The following table sets forth certain items in
our condensed consolidated statements of operations for the
three months and six months ended July 31, 2002 and 2001
expressed as a percentage of total revenue:

|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |       |        |   
|------------------------------ | -------------------------------------------------------- | ------------------------ | --- | ---------------- | ------ | ---- | --- | ----- | ------ | -- | --- | ----- | ------ | -- | --- | ----- | ------ | --
|                               |                                                          |                          |     |                 
|                               |                                                          | Three Months Ended       |     | Six Months Ended
|                               |                                                          | July 31,                 |     | July 31,        
|                               |                                                          |                          |     |                 
|                               |                                                          | 2001                     |     | 2000             |        | 2001 |     | 2000 
|                               |                                                          |                          |     |                  |        |      |     |      
|Revenue:                       |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               | License                                                  |                          |     | 37.7             | %      |      |     | 40.8  | %      |    |     | 39.2  | %      |    |     | 43.5  | %     
|                               | Services                                                 |                          |     | 62.3             |        |      |     | 59.2  |        |    |     | 60.8  |        |    |     | 56.5  |       
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               |                                                          | Total revenue            |     |                  | 100.0  |      |     |       | 100.0  |    |     |       | 100.0  |    |     |       | 100.0  |   
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|Cost of revenue:               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               | License                                                  |                          |     | 2.9              |        |      |     | 2.4   |        |    |     | 2.5   |        |    |     | 3.1   |       
|                               | Services                                                 |                          |     | 33.5             |        |      |     | 40.1  |        |    |     | 29.6  |        |    |     | 46.5  |       
|                               | Impairment of licensed technology                        |                          |     |                 |        |      |     |      |        |    |     |      |        |    |     | 19.5  |       
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               |                                                          | Total cost of revenue    |     |                  | 36.4   |      |     |       | 42.5   |    |     |       | 32.1   |    |     |       | 69.1   |   
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               |                                                          | Gross profit             |     |                  | 63.6   |      |     |       | 57.5   |    |     |       | 67.9   |    |     |       | 30.9   |   
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|Operating expenses:            |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               | Sales and marketing                                      |                          |     | 70.6             |        |      |     | 99.7  |        |    |     | 63.2  |        |    |     | 142.9 |       
|                               | Research and development                                 |                          |     | 38.1             |        |      |     | 61.1  |        |    |     | 32.6  |        |    |     | 62.2  |       
|                               | General and administrative                               |                          |     | 22.2             |        |      |     | 23.5  |        |    |     | 18.4  |        |    |     | 29.2  |       
|                               | Restructuring and other                                  |                          |     | 289.7            |        |      |     | 45.0  |        |    |     | 120.1 |        |    |     | 31.2  |       
|                               | Asset impairment and other                               |                          |     | 4.0              |        |      |     | 663.6 |        |    |     | 1.7   |        |    |     | 400.2 |       
|                               | Stock-based compensation                                 |                          |     | (2.8             | )      |      |     | 12.6  |        |    |     | (16.0 | )      |    |     | 19.9  |       
|                               | Amortization of goodwill and other intangible
    assets |                          |     |                 |        |      |     | 84.2  |        |    |     |      |        |    |     | 78.7  |       
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               |                                                          | Total operating expenses |     |                  | 421.8  |      |     |       | 989.7  |    |     |       | 220.0  |    |     |       | 764.3  |   
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               |                                                          | Operating loss           |     |                  | (358.2 | )    |     |       | (932.2 | )  |     |       | (152.1 | )  |     |       | (733.4 | ) 
|Interest and other income, net |                                                          |                          | 2.9 |                  |        |      | 6.2 |       |        |    | 1.8 |       |        |    | 6.0 |      
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      
|                               |                                                          | Net loss                 |     |                  | (355.3 | )%   |     |       | (926.0 | )% |     |       | (150.3 | )% |     |       | (727.4 | )%
|                               |                                                          |                          |     |                  |        |      |     |       |        |    |     |       |        |    |     |      

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Comparison of Three and Six Months Ended
July 31, 2002 and 2001



| |        
| | -------
| | Revenue

License.License
revenue consists of revenue from licenses of our software
products. License revenue was $4.0 million and
$7.0 million in the second quarter of fiscal 2003 and 2002,
respectively, decreasing 43.6%. License revenue was
$9.7 million and $15.1 million in the six months ended
July 31, 2002 and 2001, respectively, decreasing 36.0%. The
decrease in license revenue in absolute dollars in each period
was primarily attributable to a slowdown in corporate
information technology spending.

Services.Services
revenue consists of revenue from implementation services and
maintenance and support contracts. Services revenue from
implementation services was $2.2 million and
$4.8 million in the second quarter of fiscal 2003 and 2002,
respectively, decreasing 53.5%. Services revenue from
implementation services was $5.7 million and
$9.4 million in the six months ended July 31, 2002 and
2001, respectively, decreasing 39.5%. The decrease in services
revenue from implementation services in absolute dollars was
primarily attributable to a decrease in license revenue, a
decrease in the size of the implementation services organization
pursuant to the restructuring program we implemented in fiscal
2002 and management difficulties in the professional services
organization. Services revenue from maintenance and support
contracts was $4.3 million and $5.4 million in the
second quarter of fiscal 2003 and 2002, respectively, decreasing
20.6%. Services revenue from maintenance and support contracts
was $9.3 million and $10.2 million in the six months
ended July 31, 2002 and 2001, respectively, decreasing
9.2%. The decrease in services revenue in each period from
maintenance and support contracts in absolute dollars was
primarily attributed to a decrease in the number of supported
users for maintenance renewals and a decrease in amortization of
deferred maintenance revenue we assumed from the ABT acquisition
in August 2000.



| |                
| | ---------------
| | Cost of Revenue

Cost of license revenue.Cost of license revenue includes
royalties due to third parties, product packaging, documentation
and shipping costs. Cost of license revenue was $303,000 and
$420,000 in the second quarter of fiscal 2003 and 2002,
respectively, representing 7.6% and 6.0% of license revenue in
the respective periods. Cost of license revenue was $619,000 and
$1.1 million in the six months ended July 31, 2002 and
2001, respectively, representing 6.4% and 7.1% of license
revenue in the respective periods. The decrease in cost of
license revenue in each period in absolute dollars was primarily
attributable to a decline in license revenue and the
introduction of Niku 6, which requires lower royalty payments to
third parties than certain prior products.

Cost of services revenue.Cost of services revenue includes
salaries and 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 revenue was $3.5 million and
$6.9 million in the second quarter of fiscal 2003 and 2002,
respectively, representing 53.8% and 67.7% of services revenue
in the respective periods. Cost of services revenue was
$7.3 million and $16.1 million in the six months ended
July 31, 2002 and 2001, respectively, representing 48.7%
and 82.2% of services revenue in the respective periods. The
decrease in cost of services revenue in absolute dollars and as
a percentage of services revenue in each period was primarily
attributable to reductions in headcount pursuant to the
restructuring program we implemented in fiscal 2002 and a
reduction in costs for third parties contracted to implement our
products.

Impairment of licensed technology.There was no impairment of licensed
technology in the second quarter of fiscal 2003 and the six
months ended July 31, 2002. In the first quarter of fiscal 2002,
we determined that the carrying value of certain prepaid
royalties for the right to third party licensed technology would
not be realized. We recorded $6.8 million in impairment of
licensed technology, including $5.9 million from prepaid
royalties and $850,000 from royalties paid in fiscal 2002. In
each case we determined that the third-party technologies would
not be included in our products at all or to the extent required
under the applicable contracts due to a change in our product
plan.

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| |                   
| | ------------------
| | Operating Expenses

Sales and marketing.Sales and marketing expenses consist
primarily of salaries, commissions, bonuses, travel, advertising
and bad debt expense. Sales and marketing expenses were
$7.4 million and $17.2 million in the second quarter
of fiscal 2003 and 2002, respectively, representing 70.6% and
99.7% of total revenue in the respective periods. Sales and
marketing expenses were $15.6 million and
$49.6 million in the six months ended July 31, 2002
and 2001, respectively, representing 63.2% and 142.9% of total
revenue in the respective periods. The decrease in sales and
marketing expenses in absolute dollars in the second quarter of
fiscal 2003 from the second quarter of fiscal 2002 was primarily
attributable to a $5.5 million reduction in salaries, benefits
and other employee related costs resulting from reductions in
headcount and salary reductions effected pursuant to the
restructuring program we implemented in fiscal 2002, a decrease
of $1.3 million in commissions and bonuses, a decrease of
$762,000 in bad debt expense and a decrease of $666,000 in
advertising. The decrease in sales and marketing expenses in
absolute dollars in the six months ended July 31, 2002 from
the six months ended July 31, 2001 was primarily
attributable to an $11.8 million reduction in salaries,
benefits and other employee related costs resulting from
reductions in headcount and salary reductions, a decrease of
$8.2 million in bad debt expense, a decrease of
$4.8 million in commissions and bonuses and a decrease of
$3.2 million in advertising.

Research and development.Research and development expenses
consist primarily of personnel and related expenses associated
with the development of new products, the enhancement of
existing products and quality assurance and testing costs.
Research and development expenses were $4.0 million and
$10.5 million in the second quarter of fiscal 2003 and 2002,
respectively, representing 38.1% and 61.1% of total revenue in
the respective periods. Research and development expenses were
$8.0 million and $21.6 million in the six months ended
July 31, 2002 and 2001, respectively, representing 32.6%
and 62.2% of total revenue in the respective periods. The
decrease in research and development expenses in absolute
dollars in the second quarter of fiscal 2003 from the second
quarter of fiscal 2002 was primarily attributable to a $4.1
million reduction in salaries and benefits resulting from
reductions in headcount and salary reductions effected pursuant
to the restructuring program we implemented in fiscal 2002 and a
decrease of $1.0 million in outside services primarily
related to third-party development services. The decrease in
research and development expenses in absolute dollars in the six
months ended July 31, 2002 from the six months ended
July 31, 2001 was primarily attributable to an
$8.8 million reduction in salaries and benefits resulting
from reductions in headcount and salary reductions and a
decrease of $1.9 million in outside services primarily related
to third-party development services.

General and administrative.General and administrative expenses
consist primarily of salaries and other related costs for
finance, human resource, information technology and legal
employees, as well as professional services fees. General and
administrative expenses were $2.3 million and
$4.1 million in the second quarter of fiscal 2003 and 2002,
respectively, representing 22.2% and 23.5% of total revenue in
the respective periods. General and administrative expenses were
$4.5 million and $10.2 million in the six months ended
July 31, 2002 and 2001, respectively, representing 18.4%
and 29.2% of total revenue in the respective periods. The
decrease in general and administrative expenses in absolute
dollars in the second quarter of fiscal 2003 from the second
quarter of fiscal 2002 was primarily attributable to a reduction
of $1.4 million in salaries and benefits resulting from
reductions in headcount and salary reductions effected pursuant
to the restructuring program we implemented in fiscal 2002 and a
decrease of $425,000 in professional services. The decrease in
general and administrative expenses in absolute dollars in the
six months ended July 31, 2002 from the six months ended
July 31, 2001 was primarily attributable to a $4.0 million
reduction of salaries and benefits resulting from reductions of
headcount and salary reductions, a decrease of $1.4 million
in professional services and a decrease of $1.1 million in
bonuses.

Restructuring and other.In the second quarter of fiscal 2003,
we implemented a restructuring program. At the end of such
quarter, we restructured our operations and reduced our
workforce by approximately 72 employees. These headcount
reductions affected all of our functional groups. We are also
effecting a further headcount reduction in the third quarter of
fiscal 2003 as part of this restructuring program. In August
2002, we reduced our headcount by approximately 28 employees
which affected all of our functional groups. The severance and
related charges of approximately $821,000 will be recorded as
restructuring costs in the third quarter of fiscal 2003.

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We also vacated certain facilities, moved back to
our former headquarters, which we had previously vacated in
August 2001, and engaged in negotiations to terminate the lease
for a significant facility in Redwood City, California. The
$18.9 million in net lease commitments on vacated
facilities recorded in the second quarter of fiscal 2003
includes $18.8 million in cash and non-cash costs related
to the proposed termination costs for the facility lease in
Redwood City, California and $2.3 million in net lease
commitments for certain other facilities that we vacated and
leases we terminated, offset by $2.2 million of previously
accrued deferred rent under such leases. Our future liabilities
under the Redwood City, California lease prior to the proposed
termination were approximately $121.7 million. The
$18.8 million in proposed termination costs for such lease
include a variety of cash and non-cash items and are $611,000
higher than the amount reflected in our press release for the
second quarter of fiscal 2003 as a result of negotiations since
the time of the press release. We have not terminated this
lease. The termination costs accrued for this lease are our best
estimate based on current information. To the extent these
proposed termination costs change during our negotiation
process, the ultimate termination costs could vary from those
included herein.

During the second quarter of fiscal 2003, we also
terminated a facility lease in Danville, California. Our future
liabilities under this lease prior to termination approximated
$2.7 million. The consideration for this termination
included the release to the landlord of a $534,000 security
deposit, a lease termination payment of $216,000 and $42,000 in
fair value for warrants to purchase 150,000 shares of common
stock at an exercise price of $0.01 per share.

We retired $7.1 million in property and
equipment in connection with vacating certain facilities. We
also terminated an equipment lease and acquired the leased
assets for $2.0 million. Our future liabilities under this
equipment lease prior to termination approximated $380,000. Of
the $2.0 million in purchase price, $1.1 million was
written off as a restructuring cost due to equipment no longer
in use as a result of restructuring.

The $2.4 million in net lease commitments on
vacated facilities recorded in the second quarter of fiscal 2003
relating to restructuring activities in fiscal 2002 included a
$4.3 million decrease in estimated future sublease income
for certain facilities, $1.8 million in settlement of
claims asserted in the lawsuit with the landlord of our former
headquarters, $388,000 in proposed termination costs for a lease
in Lincolnshire, Illinois and $296,000 in legal fees, offset by
$4.4 million for the reversal of future lease payments that
had been previously accrued, net of estimated sublease income,
relating to our former headquarters and the Lincolnshire,
Illinois lease. Subsequent to the end of the second quarter of
fiscal 2003, we reached an agreement in principle to terminate
the lease for a facility in Lincolnshire, Illinois. Our future
liabilities under this lease prior to the proposed termination
were approximately $692,000, net of estimated sublease income.
Relative to the amounts reflected in our press release for the
second quarter of fiscal 2003, the proposed termination costs
included an increase of $388,000 in cash and other consideration
for the Lincolnshire, Illinois lease, offset by a $692,000
reversal of future lease payments, net of estimated sublease
income, for such lease.

In the first quarter of fiscal 2003, we recorded
a credit of $838,000 in restructuring and other charges
primarily related to the value of 390,524 shares of our common
stock recovered from escrow accounts in which such shares had
been placed in conjunction with acquisitions of ABT Corporation,
Proamics Corporation and 600 Monkeys Inc. in fiscal 2001. We
valued these escrow shares based on our stock price on the date
these shares were recovered. The weighted average price per
share for these escrow shares was $2.06. We recorded $30.4
million and $29.6 million in restructuring and other
charges in the second quarter of fiscal 2003 and in the six
months ended July 31, 2002, respectively.

In the first quarter of fiscal 2002, we incurred
restructuring and other charges of $3.1 million related to
a reduction of our workforce, elimination of certain excess
leased facilities and the exit of a business line. The total
restructuring and other charges included $2.0 million
related to employee termination costs primarily consisting of
the cost of severance packages, $493,000 to vacate two leased
facilities, which included future lease payments on these
leases, net of estimated sublease income, and $591,000 to exit
the legal vertical market, which consisted primarily of
termination fees and future lease payments for a hosting
arrangement and a leased facility. In the second quarter of
fiscal 2002, we further reduced our workforce and incurred
$2.1 million in severance costs and $5.4 million in
vacating seven leased facilities. We also retired
$6.1 million

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in property and equipment and other assets. We
recorded $7.7 million and $10.8 million in
restructuring and other charges in the second quarter of fiscal
2002 and in the six months ended July 31, 2001, respectively.


We expect that of the restructuring and other
charges accrued as of July 31, 2002, severance and other exit
costs will be paid by the fourth quarter of fiscal 2003. Exit
costs for business line will be paid no later than May 2004 and
net lease commitments on vacated facilities costs will be paid
no later than February 2011.

Asset impairment and other.In the second quarter of fiscal 2003,
we performed an impairment assessment of a $500,000 strategic
investment we made in a private company in April 2000. 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 second quarter of
fiscal 2003, we determined that there was an impairment of
$425,000 in the investment.

In the first quarter of fiscal 2002, we performed
an impairment assessment of our goodwill and other intangible
assets recorded in connection with our acquisitions of Legal
Anywhere, bSource.com, 600 Monkeys and Alyanza Software due to a
change in our product plan related to certain acquired
technologies. This assessment was based on the expected future
cash flows from goodwill and intangible assets over their
remaining useful lives. As a result of this assessment, we
recorded $24.5 million in asset impairment charges. This
amount included $21.7 million to write down the net book
value of certain goodwill and other intangible assets from our
acquisitions of Legal Anywhere, bSource, 600 Monkeys and Alyanza
to zero except for the carrying value of Legal Anywheres
goodwill and customer lists which was reduced to their estimated
fair value of $1.8 million. In the second quarter of fiscal
2002, we performed an additional impairment assessment of
goodwill and other intangible assets recorded in connection with
our acquisitions of ABT, Proamics and Legal Anywhere. This
assessment was performed primarily due to a significant decline
in our stock price which resulted in the net book value of our
assets significantly exceeding our market capitalization. As a
result of this assessment, we recorded $114.4 million in
asset impairment charges in the second quarter of fiscal 2002
which reduced the fair value of goodwill and other intangible
assets related to our acquisitions of ABT, Proamics and Legal
Anywhere to zero. The estimate of the fair value was based on
the estimated future discounted cash flows for the remaining
life of the goodwill and other intangible assets with a discount
rate of 25% and an estimated terminal value. The assumptions
supporting the estimated cash flows, including the discount rate
and an estimated terminal value, reflect managements best
estimates. The discount rate was based upon the weighted average
cost of capital for comparable companies. In the six months
ended July 31, 2001, we recorded $138.9 million in
asset impairment charges, consisting of $136.1 million as a
result of the above two assessments, $1.9 million in
accelerated depreciation for internally used software and
$874,000 to write off fixed assets that we no longer utilized.

Stock-based compensation.Amortization of stock-based
compensation was ($301,000) and $2.2 million in the second
quarter of fiscal 2003 and 2002 and ($3.9) million and
$6.9 million in the six months ended July 31, 2002 and
2001, respectively. The recovery of stock-based compensation in
the second quarter of fiscal 2003 and in the six months ended
July 31, 2002 was primarily attributed to variable
accounting applied to our stock options that were repriced in
the fourth quarter of fiscal 2002, which resulted in $684,000
and $4.8 million in recovery of stock-based compensation in
the second quarter of fiscal 2003 and in the six months ended
July 31, 2002, respectively, offset by $383,000 and
$885,000 in other stock-based compensation in the second quarter
of fiscal 2003 and in the six months ended July 31, 2002,
respectively.

Amortization of goodwill and other intangible
assets.There was no amortization of
goodwill and other intangible assets in the second quarter of
fiscal 2003 and in the six months ended July 31, 2002
because all goodwill and identifiable intangible assets were
written off in fiscal 2002. Amortization of goodwill and
identifiable intangible assets was $14.5 million and
$27.3 million in the second quarter of fiscal 2002 and in
the six months ended July 31, 2001, respectively, and
included approximately $3.2 million and $6.5 million
in amortization of developed and core technologies, respectively.

Interest and
Other Income, Net

Interest income and other income (expense),
net.Interest income and other income
(expense), net, consists of interest income, interest expense
and other non-operating expenses. Interest income and other

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income (expense), net were $312,000 and
$1.1 million in the second quarter of fiscal 2003 and
fiscal 2002, respectively, and $432,000 and $2.1 million in
the six months ended July 31, 2002 and 2001, respectively.
The net decrease in absolute dollars in the second quarter of
fiscal 2003 from the second quarter of fiscal 2002 and in the
six months ended July 31, 2002 from the six months ended
July 31, 2001 was primarily attributable to lower average
invested cash and short-term investment balances, which yielded
lower interest income.


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 July 31,
2002, we had cash and cash equivalents of $18.6 million. We
also had current portion of restricted cash and restricted cash
in the amount of $6.2 million and $4.3 million,
respectively, in the form of certain certificates of deposit
securing letters of credit for various leased facilities.
Relative to the amount reflected in the press release for the
second quarter of fiscal 2003, current portion of
restricted cash is $6.2 million higher and restricted cash
is lower in the same amount due to proposed terminations of the
leases in Redwood City, California and Lincolnshire, Illinois
and release of letters of credit secured by certificates of
deposit in connection therewith. We had borrowings under bank
lines of credit of $5.0 million as of July 31, 2002.
These borrowings were repaid in full in August 2002. As of
July 31, 2002, we had a working capital deficit of
$11.4 million, compared to a working capital of
$11.0 million as of January 31, 2002. The working
capital deficit as of July 31, 2002 was primarily
attributed to decreases in cash and cash equivalents, net
accounts receivable and an increase in accrued liabilities as a
result of restructuring, offset in part by a decrease in bank
borrowings from January 31, 2002. Our liquidity could be
negatively impacted by factors discussed under Factors
That May Affect Future Results.

Net cash used in operating activities was
$12.8 million and $47.5 million in the six months
ended July 31, 2002 and 2001, respectively. Net cash used
in operating activities in the six months ended July 31,
2002 was primarily attributed to a net loss of
$37.0 million, offset in part by an increase in accrued
liabilities, non-cash restructuring charges and a decrease in
net accounts receivable. Net cash used in operating activities
in the six months ended July 31, 2001 was primarily
attributed to a net loss of $252.5 million, offset in part
by impairment charges, amortization of goodwill and intangible
assets, a decrease in accounts receivable, provision for
doubtful accounts receivable and restructuring charges.

Net cash provided by investing activities was
$1.5 million and $26.6 million in the six months ended
July 31, 2002 and 2001, respectively. Net cash provided by
investing activities in the six months ended July 31, 2002
was primarily attributed to a net release of $4.0 million
in restricted cash, offset by purchases of property and
equipment. Net cash provided by investing activities in the six
months ended July 31, 2001 was primarily attributed to net
sales and maturities of short-term investments, offset by
purchases of property and equipment.

Net cash used in financing activities was
$21.8 million and $192,000 in the six months ended
July 31, 2002 and 2001, respectively. Net cash used in
financing activities in the six months ended July 31, 2002
was primarily attributed to the net repayment of our bank lines
of credit, which were to expire according to its term in July
2002. Net cash used in financing activities in the six months
ended July 31, 2001 was primarily attributed to the
repurchase of treasury stock, offset in part by the proceeds
from the issuance of our common stock.

In March 2000, we entered into a lease agreement
for our worldwide headquarters. The lease term commenced upon
possession of the facility in August 2001 and has a term of
15 years. As part of this agreement, we are required to
hold a letter of credit drawable by the lessor totaling
approximately $5.9 million and $2.9 million in
security deposits. In July 2002, we vacated this facility and
recorded $18.8 million in proposed cash and non-cash
termination costs. Our future liabilities under the Redwood
City, California lease prior to the proposed termination were
approximately $121.7 million. The $18.8 million in
proposed termination costs for such lease include a variety of
cash and non-cash items and are $611,000 higher than the amount
reflected in our press release for the second quarter of fiscal
2003 as a result of negotiations since the time of the press
release. We have not terminated this lease. The termination
costs accrued for this lease are

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our best estimate based on current information.
To the extent these proposed termination costs change during our
negotiation process, the ultimate termination costs could vary
from those included herein. We also have other noncancellable
operating facility leases with various expiration dates through
2011 that required letters of credit drawable by the lessor for
$4.6 million.


In October 2001, we entered into two loan
agreements with a financial institution secured generally by
certain of our tangible and intangible assets and providing
revolving lines of credit of up to $30.0 million, of which
a $5.0 million line of credit is based on qualifying
accounts receivables. Interest on each of these lines of credit
accrues at the rate of 7.00% per annum. These lines of credit
were to expire in July 2002 according to their terms. On
July 31, 2002, we entered into an amendment to the lines of
credit that, among other things, extended the maturity date to
May 2003 and modified certain financial covenants. We had
borrowings of $5.0 million as of July 31, 2002, which
were repaid in August 2002. As of July 31, 2002, we were in
compliance with all financial covenants.

On September 9, 2002, we entered into a term
loan for $5.0 million with the same financial institution
and terminated the amended lines of credit described above. This
term loan is secured by our tangible and intangible assets,
accrues interest at 7.50% per annum and matures on
February 15, 2004. We are required to make quarterly
payments of principal and interest on a five-year amortization
schedule. This term loan has certain financial covenants,
including covenants relating to cash on hand, revenue and
operating expenses.

Future minimum lease and proposed termination
payment under operating leases and payments under bank lines of
credit are as follows as of July 31, 2002 (in thousands):

|                             |  |           |        |            |  |       |       |  |  |   |        | 
|---------------------------- |  | --------- | ------ | ---------- |  | ----- | ----- |  |  | - | ------ | 
|                             |  | Operating |        | Bank Lines |  |      
|Twelve Months Ended July 31, |  | Leases    |        | of Credit  |  | Total
|                             |  |           |        |            |  |      
|2003                         |  | $         | 19,074 |            |  | $     | 5,000 |  |  | $ | 24,074 | 
|2004                         |  |           | 4,024  |            |  |       |      |  |  |   | 4,024  | 
|2005                         |  |           | 3,358  |            |  |       |      |  |  |   | 3,358  | 
|2006                         |  |           | 1,565  |            |  |       |      |  |  |   | 1,565  | 
|2007                         |  |           | 1,255  |            |  |       |      |  |  |   | 1,255  | 
|Thereafter                   |  |           | 3,672  |            |  |       |      |  |  |   | 3,672  | 
|                             |  |           |        |            |  |       |       |  |  |   |        | 
|Total payments               |  | $         | 32,948 |            |  | $     | 5,000 |  |  | $ | 37,948 | 
|                             |  |           |        |            |  |       |       |  |  |   |        | 

Lease payments above, net of estimated sublease
income, relating to facilities that we vacated pursuant to the
restructuring program, amounted to $15.6 million,
$1.2 million, $1.2 million $900,000, and $965,000 for
the twelve months ended July 31, 2003, 2004, 2005, 2006 and
2007, respectively, and $3.4 million thereafter. We
regularly review the estimates for sublease income and to the
extent that these estimates change due to changes in the market,
the ultimate restructuring payments could vary by material
amounts. The $15.6 million for the twelve months ended
July 31, 2003 included certain amounts for the cash portion
of the proposed termination payments for leases in Redwood City,
California and Lincolnshire, Illinois. Relative to the amounts
reflected in our press release for the second quarter of fiscal
2003, the proposed termination costs included an increase of
$611,000 in cash for the Redwood City, California lease and an
increase of $352,000 in cash for the Lincolnshire, Illinois
lease, offset by a $692,000 reversal of future lease payments,
net of estimated sublease income, for the Lincolnshire, Illinois
lease. We have not terminated these leases. The termination
costs accrued for these leases are our best estimate based on
current information. To the extent that the proposed termination
costs change during our negotiation process, the ultimate
termination payments could vary from those included herein.
These amounts relating to restructuring were recorded in accrued
liabilities and long-term restructuring accrual as of
July 31, 2002. The table above includes $5.0 million
in bank lines of credit repaid in August 2002 but does not
include the $5.0 million future repayment of our term loan
as such term loan was not entered until after the end of the
second quarter of fiscal 2003.

We have a working capital deficit of
$11.4 million as of July 31, 2002. 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

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expense projections. However, there is no
assurance that additional financing will not be required in the
future. While we significantly reduced our cash usage over the
course of fiscal 2002 and in the first six months of fiscal
2003, capital is critical to our business, and our inability to
raise capital in the event of ongoing losses would have a
significant adverse effect on our business. If we issue
additional equity securities, stockholders may experience
additional dilution or 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 July 2001, the FASB issued SFAS No. 141,
Business Combinationsand SFAS No. 142, Goodwill
and Other Intangible Assets.SFAS No. 141 is effective
for all business combinations initiated after June 30, 2001
and requires the use of the purchase method of accounting,
includes criteria for the recognition of intangible assets
separately from goodwill, and mandates that all goodwill created
after June 30, 2001 will not be amortized. SFAS
No. 142 became effective for fiscal years beginning after
December 15, 2001 at which time all goodwill amortization
must be discontinued, and instead goodwill must be tested for
impairment on at least an annual basis using a fair value
method. In addition, separately identified and recognized
intangible assets resulting from business combinations completed
before July 1, 2001 that do not meet the new criteria for
separate recognition of intangible assets would be reclassified
as goodwill at the effective date of SFAS No. 142. Those
intangible assets not reclassified to goodwill must be
reassessed and amortized over revised useful lives in accordance
with SFAS No. 142. Because we have not acquired a business
since June 30, 2001, and we have no goodwill or other
intangible assets, there was no effect in adopting SFAS
No. 141 and No. 142.

In October 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations.SFAS No. 143 requires that the fair value of retirement
obligations be recognized as a liability when they are incurred
and that the associated retirement costs be capitalized as a
long-term asset and expensed over its useful life. The
provisions of SFAS No. 143 will be effective for fiscal
years beginning after June 15, 2002. We do not expect that
the adoption of SFAS No. 143 will have a significant effect
on our financial position or results of operations.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.SFAS No. 144 superseded SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed ofand the accounting and
reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions.SFAS No. 144 established a single
accounting model for impairment or disposal by sale of
long-lived assets. The provisions of SFAS No. 144 became
effective for fiscal years beginning after December 15,
2001. The adoption of SFAS No. 144 did not have a material
impact on our financial position or the results of operations.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections.The provisions of SFAS No. 145 relating to
the rescission of SFAS No. 4 are effective for financial
statements issued for fiscal years beginning after May 15,
2002, and the provisions relating to SFAS No. 13 are
effective for transactions occurring after May 15, 2002.
SFAS No. 145 rescinds SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of
that Statement, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements.SFAS No. 145
also rescinds SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers, and amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. We are evaluating this new standard
but expect that the effects of adoption, if any, would relate
solely to exit or disposal activities undertaken in the future.

In June 2002, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting
Standards No. 146, or SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal

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Activities. SFAS
No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This Statement requires
that a liability for costs associated with an exit or disposal
activity be recognized and measured at fair value only when the
liability is initially incurred. SFAS No. 146 will be
effective for exit or disposal activities that are initiated
after December 31, 2002. We are currently evaluating the
impact of SFAS No. 146, if any, on our financial position
or results of operations.


Factors That May Affect Future
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.



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| | Due to our limited operating history, it is
    difficult to predict our future operating results.

We were incorporated in January 1998 and began
licensing our software in December 1998. Due to our limited
operating history, it is difficult for us to predict our future
operating results. We cannot forecast operating results based on
our historical results because our operating history is limited
and our business is changing rapidly. For example, in fiscal
2002, we introduced a major new release of our software and
implemented a restructuring program. In particular, we have
limited visibility into our future revenue. 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.



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| | --------------------------------------------------------------------------------------------------------
| | We have incurred losses throughout our
    operating history, and we may incur losses in the
    future.

We have experienced operating losses in each
quarterly and annual period since we were formed, and we may
incur losses in the future. We had an accumulated deficit of
$498.9 million as of July 31, 2002. We had net loss of
$37.3 million and $37.0 million in the second quarter
of fiscal 2003 and in the six months ended July 31, 2002,
respectively. We had $11.4 million in working capital
deficit as of July 31, 2002.

We will need to increase our revenue to achieve
and maintain profitability. Our revenue in the second quarter of
fiscal 2003 decreased from both the first quarter of fiscal 2003
and the second quarter of fiscal 2002. Our license revenue also
decreased in the second quarter of fiscal 2003 from both the
first quarter of fiscal 2003 and the second quarter of fiscal
2002. We cannot assure you of any future revenue growth, and our
revenue could further decline. Our failure to increase our
revenue would seriously harm our business and operating results,
and would among other things, require a continued depletion of
our limited cash resources to fund operating losses.



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| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly financial results are subject
    to significant fluctuations, and if our future results are below
    the expectations of investors, the price of our common stock
    would likely decline.

Our operating results have in the past and could
in the future vary significantly from quarter to quarter. 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.
Other factors that could affect our quarterly operating results
include:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | our ability to attract new customers and retain
    and sell additional products and services to current customers;
|
| |  | our ability to upgrade current customers to new
    versions of our products;                                      
|
| |  | the renewal or non-renewal of annual maintenance
    contracts by our customers;                                   
|
| |  | the demand for professional services to implement
    our products and our efficiency in rendering such services;  
|
| |  | the announcement or introduction of new products
    or services by us or our competitors;                         

24



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| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | changes in the pricing of our products and
    services or those of our competitors;              
|
| |  | variability in the mix of our product and
    services revenue in any quarter; and                
|
| |  | the amount and timing of operating expenses and
    capital expenditures relating to the business.

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 in the future, the price of our common
stock would likely decline.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | We have a significant working capital
    deficit and are uncertain of our ability to obtain additional
    financing for our future needs.

As of July 31, 2002, we had cash and cash
equivalents of $18.6 million. We also had current portion
of restricted cash and restricted cash in the amount of
$6.2 million and $4.3 million, respectively, in the
form of certain certificates of deposit securing letters of
credit required for various leased facilities. Relative to the
amount reflected in the press release for the second quarter of
fiscal 2003, current portion of restricted cash is
$6.2 million higher and restricted cash is lower in the
same amount due to proposed terminations of the leases in
Redwood City, California and Lincolnshire, Illinois and release
of letters of credit secured by certificates of deposit in
connection therewith. We also had borrowings under bank lines of
credit of $5.0 million as of July 31, 2002. These
borrowings were repaid in full in August 2002. 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, these is no assurance that additional financing will
not be required in the future. While we significantly reduced
our cash usage in the course of fiscal 2002 and in the first six
months of fiscal 2003, capital is critical to our business, and
our inability to raise capital in the event of ongoing losses
would have a material adverse effect on our business. If we
issue additional equity securities, stockholders may experience
additional dilution or the new equity securities may have
rights, preferences or privileges senior to those of the then
existing holders of our common stock.



| |                                                              
| | -------------------------------------------------------------
| | Our stock could be delisted from the Nasdaq
    Stock Market.

In order for our common stock to continue to be
quoted on the Nasdaq Stock Market, we must satisfy various
listing maintenance standards established by Nasdaq. Among other
things, we are required to have either
(i) stockholders equity of at least $10 million,
(ii) a market capitalization of $50 million, or
(iii) total assets of $50 million and total revenue of
$50 million. In addition, our common stock must have a
minimum bid price of $1.00 per share (if we satisfy requirement
(i) above) or $3.00 per share (if we do not satisfy
requirement (i) above). The bid price for our stock has
closed below $1.00 per share for almost 120 days and we
have a stockholders deficit of $8.3 million as of
July 31, 2002. Our board of directors has authorized us to
seek stockholder approval for a reverse stock split with an
exchange ratio of 1-for-10, 1-for-15 and 1-for-20, with the
final ratio to be determined by the board. This action requires
the approval of our stockholders and we can provide no assurance
that our stockholders will approve such action. Delisting on the
Nasdaq Stock Market may, among other things, limit the liquidity
and adversely affect the trading price of our stock. Because we
currently do not satisfy any of requirements (i), (ii) or
(iii) above, we expect that our common stock may not
continue to be quoted on the Nasdaq Stock Market, even if a
reverse stock split is approved.

For listing on the Nasdaq SmallCap Market, we are
required to have either (i) stockholders equity of
$2.5 million, (ii) a market capitalization of
$35 million, or (iii) net income from continuing
operations (in the latest fiscal year or in two of the last
three fiscal years) of $500,000. In addition, our common stock
must have a minimum bud price of $1.00 per share. Because we
currently do not satisfy any of these requirements (i),
(ii) or (iii), we expect to request an extension by Nasdaq
so as to enable us to come into compliance with one of these
requirements for continued listing on the Nasdaq SmallCap
Market. In the event that we do not obtain this extension or are
otherwise unable to promptly meet one of these requirements, we
will be delisted from the Nasdaq SmallCap Market and will be
required to trade on the OTC Bulletin Board, even if a reverse
split is approved.

25



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The reverse split will not satisfy any of the
other listing requirements described above, but will address
Nasdaqs minimum bid price requirement, which is a
condition of continued listing on both the Nasdaq Stock Market
and the Nasdaq SmallCap Market.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The decline in spending on information
    technology has impacted demand for our products and services and
    may adversely affect future revenue.

While the most recent economic indicators,
including gross domestic product figures, reflect a possible
turn around in economic activity from prior periods, many
reports have indicated that spending by corporations in the area
of information technology, the overall market in which we
participate, will recover more slowly if at all. While we cannot
specifically correlate the impact of macro-economic conditions
on our sales activities, we believe that the economic conditions
have resulted in decreased 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 worsens or that the
global economy fails to improve or information technology
spending in our market does not increase, 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 increases in
future losses. Even if the current decline abates, we cannot
assure you that corporations will increase their information
technology spending or that we will be able to maintain or
improve revenue levels.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | We expect to experience seasonality in our
    sales, which could cause our quarterly operating results to
    fluctuate.

We expect to experience seasonality in the
licensing of our products and sales of our services. For
example, revenue is typically lower in our first fiscal quarter
due to patterns in the capital budgeting and purchasing cycles
of our current and prospective customers, as well as our sales
commission structure. We also expect that revenue may decline
during summer months, particularly in European markets. These
seasonal variations in our revenue are likely to lead to
fluctuations in our quarterly operating results.



| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products have a long sales cycle, which
    makes it difficult to predict our quarterly operating results
    and may cause these results to vary significantly.

The sales cycle for our products is long,
typically from three 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 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.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Failure to collect our accounts receivable
    would adversely affect our cash flows.

Our cash flows are dependent upon the collection
of our accounts receivable. As of July 31, 2002, our
accounts receivable, net of allowance for doubtful accounts, was
$6.8 million and our allowance for doubtful accounts was
$1.7 million. While we significantly improved our
collection of accounts receivable in fiscal 2002 and in the six
months ended July 31, 2002, the failure by our customers to
pay or the delay by our customers in making payments would
adversely affect our cash flows, which could have a material
adverse effect on our business.

26



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| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Defects in our products could result in
    loss of or delay in revenue, failure to achieve market
    acceptance and increased costs.

Products as complex as those we offer or are
developing frequently 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. From time to time in the past,
versions of our software that have been delivered to customers
have contained errors. 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.



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To date, few customers have deployed the
    new version of our software on a large scale, and we may
    experience customer dissatisfaction and lost revenue if this
    version does not accommodate large-scale
    deployments.

Our software products must be able to accommodate
substantial increases in the number of people using them. Our
new products have not been tested in large-scale customer
implementations by many customers. If our customers cannot
successfully implement large-scale deployments, we could lose
some or all of our existing customers and be unable to obtain
new customers.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Implementation of our products is
    difficult, costly and time-consuming, and customers could become
    dissatisfied if the implementation requires more time, expense
    or personnel than expected.

Implementation of our products may be difficult,
costly and time-consuming. Because we are one of the first
companies to offer an applications suite for services
organizations, many customers will be facing these
implementation issues for the first time in the context of such
software. 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.



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 new
products have been designed based upon currently prevailing
technologies such as extensible markup language, or XML, or
extensible stylesheet language, or XSL. If new technologies
emerge that are incompatible with 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 Enterprise Server and SQL Server and
operating systems such as Sun Solaris, Windows 2000 and NT.
Any changes to those databases or systems, or increasing
popularity of other databases or systems, might require us to
modify our products or services and could cause us to delay
releasing future products and enhancements. As a result,
uncertainties related to the timing and nature of new product
announcements or introductions or modifications by vendors of
databases, operating systems, web servers and other enterprise
and Internet-based applications could delay

27



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our product development, increase our research
and development expenses and cause customers to delay
evaluation, purchase and deployment of our products.




| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | International activities expose us to
    additional operational challenges that we might not otherwise
    face.

In the second quarter of fiscal 2003,
international revenue represented 31.9% of total revenue,
compared to 52.3% of total revenue in the second quarter of
fiscal 2002. International license revenue represented 20.9% of
total license revenue in the second quarter of fiscal 2003,
compared to 48.1% in the second quarter of fiscal 2002. Even
with these reductions in the percentage of international revenue
and international license revenue, international activities
remain a significant part of our business.

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



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | currency exchange rate fluctuations, particularly
    if we sell our products in denominations other than U.S. dollars;                        
|
| |  | longer sales cycles in international markets;                                                                                                  
|
| |  | seasonal fluctuations in purchasing patterns in
    other countries, particularly declining sales during summer
    months in European markets;
|
| |  | tariffs, export controls and other trade barriers;                                                                                             
|
| |  | difficulties in collecting accounts receivable in
    foreign countries;                                                                       
|
| |  | the burdens of complying with a wide variety of
    foreign laws;                                                                              
|
| |  | reduced protection for intellectual property
    rights in some countries, particularly in Asia; and                                           
|
| |  | the need to develop internationalized versions of
    our products and marketing and sales materials.                                          



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There is competition in our market, which
    could make it difficult 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 that have been developed by potential customers
in-house developers and IT departments and by a number of
competitors offering products and services that vary in
functionality. These include:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | enterprise software providers such as Oracle,
    Peoplesoft, SAP, Siebel Systems, Microsoft, Lawson and JD
    Edwards;
|
| |  | providers of project management software; and                                                                           
|
| |  | providers of professional services automation
    software.                                                             

A number of companies offer products that provide
some of the functionality of our products. We do not believe
that any one company has a dominant position in our market as a
whole. However, 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.

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| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on implementation, marketing and
    technology relationships; if our current and future
    relationships are not successful, our business might be
    harmed.

We rely on implementation, marketing and
technology relationships with a variety of companies. These
implementation, marketing and technology relationships include
relationships with:



| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | consulting firms;                                                                                                                                                                                                                                                                                           
|
| |  | third-party hardware vendors, such as Sun; and                                                                                                                                                                                                                                                              
|
| |  | third-party software vendors, such as Actuate,
    Ironflare, Mainsoft, Microsoft, Oracle, Sun and Verity, whose
    products or technologies, such as reporting engines, application
    servers, operating systems, databases, and search engines, we
    incorporate into or integrate with our products.

We depend on these companies to implement our
products for customers, promote our products, provide our direct
sales force with customer leads and provide enhanced
functionality to our products. Some of these relationships are
not documented in writing, or are governed by agreements that
can be terminated by either party with little or no penalty or
prior notice and do not provide for minimum payments to us.
Companies with which we have an implementation, marketing or
technology relationship may promote products or services of
several different companies, including, in some cases, products
or services that compete with our products and services. These
companies may not devote adequate resources to selling or
promoting our products and services. We may not be able to
maintain these relationships or enter into additional
relationships in the future.



| |                                                          
| | ---------------------------------------------------------
| | Our recent personnel reduction may harm our
    business.

In connection with our efforts to continue
streamline our operations and reduce costs, we implemented a new
restructuring program in the second quarter of fiscal 2003.
There were significant costs associated with this personnel
reduction related to severance and other employee-related costs.
In addition, our ability to respond to unexpected challenges may
be impaired, and we may be unable to take advantage of new
opportunities. The personnel reduction may also reduce employee
morale and create concern among existing employees about job
security, which would lead to increased turnover. Further, this
reduction in workforce may subject us to the risk of litigation.
Reductions at senior levels may adversely affect management of
our business.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | We will continue to incur stock-based
    compensation expense in future periods.

We will continue to incur stock-based
compensation expense in future periods, which represents
non-cash charges incurred as a result of the issuance of stock
and stock options below fair market value and the repricing of
our stock options. On November 12, 2001, our board of
directors, acting pursuant to existing terms of our stock
options plans, approved the repricing of approximately
8.9 million outstanding stock options with exercise prices
above $0.75. The exercise prices of all such stock options were
repriced to $0.75, which was the fair market value of our stock
on November 12, 2001. There were no changes to the vesting
schedules of the repriced options. Options held by our chief
executive officer, executive vice president of strategy and
planning, board of directors and non-employees were not
repriced. We accounted for the repriced options using variable
accounting whereby the aggregate intrinsic value of the repriced
options is continuously remeasured and amortized to stock-based
compensation expense over the vesting periods. Based on the
stock price of $0.25 as of July 31, 2002, we recorded
$684,000 and $4.8 million in recovery of stock-based
compensation in the second quarter of fiscal 2003 and in the six
months ended July 31, 2002, respectively, relating to these
repriced stock options, respectively. Deferred stock-based
compensation relating to these repriced options decreased
$1.3 million in the second quarter of fiscal 2003 and
$13.4 million in the six months ended July 31, 2002,
respectively. As of July 31, 2002, deferred stock-based
compensation relating to these repriced options was zero,
reflecting the reduced intrinsic value of unexercised repriced
options and the amortization of stock compensation over the
vesting periods. To the extent that our stock price increases in
future periods, we will need to record additional stock-based
compensation expense.

29



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| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | The market price for our common stock is
    volatile and could result in a decline in the value of your
    investment.

The market price of our common stock is extremely
volatile. The value of your investment in our common stock could
decline due to the impact of any of the following factors upon
the market price of our common stock:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | variation in our quarterly operating results,
    including our inability to increase revenues;
|
| |  | changes in our cash flows;                                                                     
|
| |  | announcements of new product or service offerings
    by us or our competitors;                
|
| |  | announcement of new customer relationships by us
    or our competitors;                       
|
| |  | delisting from the Nasdaq Stock Market;                                                        
|
| |  | changes in market valuations of comparable
    companies;                                      
|
| |  | developments in litigation in which we are
    involved;                                       
|
| |  | additions to, or departures of, our executive
    officers; and                                
|
| |  | conditions and trends in the software and
    information technology industries.               

Further, the stock markets, particularly the
Nasdaq Stock Market on which our common stock is listed, have
experienced substantial price and volume fluctuations. These
fluctuations have particularly affected the market prices of
equity securities of many technology companies and have often
been unrelated or disproportionate to the operating performance
of these companies.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | We might not be able to protect and enforce
    our intellectual property rights.

We regard substantial elements of our products as
proprietary and attempt to protect them by relying on patent,
trademark, service mark, copyright and trade secret laws and
restrictions, as well as 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.

It is possible that no patents will issue from
our current or future patent applications. Any patents that do
issue may not provide us with any competitive advantages over,
or may be challenged by, third parties. We have applied for, but
have not received, registration of, among other marks, the Niku
logo with the U.S. Patent and Trademark Office. We rely on
copyright laws with respect to our software, but we have not
registered any copyright with any government entity with respect
to our software.

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. Furthermore, our
competitors may independently develop similar technologies that
substantially limit the value of our intellectual property or
design around patents issued to us.

On August 12, 2002, we filed a suit against
Business Engine Corporation (Business Engine), a San
Francisco-based software developer, in the United States
District Court in San Francisco for alleged theft of trade
secrets, computer fraud and other activities directed at us. We
are seeking immediate cessation of these activities and
unspecified damages. On August 15, 2002, the Court entered
a temporary restraining order against Business Engine, which
among other things, prevents Business Engine from continuing to
access or attempting to access our internal computer system,
using or disclosing any information or documents gained from
such access, or destroying, altering, deleting or tampering with
any such documents or information derived from such access. In
addition, Business Engine is required to provide notice to all
of its employees, customers, prospective customers and partners
of the temporary restraining order and post such order on its
website. The Court also granted us expedited discovery request
and the parties are currently in discovery.

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##### Table of Contents





| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Third parties might bring infringement
    claims against us or our customers that could harm our
    business.

In recent years, there has been significant
litigation in the United States involving patents and other
intellectual property rights, particularly in the software
industry. We could become subject to intellectual property
infringement claims as the number of our competitors grows and
our products and services increasingly overlap with competitive
offerings. In addition, as part of our product licenses, 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.



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of Delaware law, our certificate
    of incorporation and bylaws could delay or prevent a takeover of
    us, even if doing so would benefit our
    stockholders.

Provisions of Delaware law, our certificate of
incorporation and bylaws could have the effect of delaying or
preventing a third party from acquiring us, even if a change in
control would be beneficial to our stockholders. These
provisions include:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorizing the issuance of preferred stock
    without stockholder approval;                                                                  
|
| |  | providing for a classified board of directors
    with staggered, three-year terms;                                                            
|
| |  | 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.                                                                                        



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | The issuance of preferred stock could
    adversely affect the rights of holders of our common
    stock.

We are authorized, subject to limitations imposed
by Delaware law, to issue preferred stock in one or more series,
to establish from time to time the number of shares to be
included in each series, and to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any
of its qualifications, limitations or restrictions. Our board of
directors can also increase or decrease the number of shares of
any series, but not below the number of shares of such series
then outstanding, without any further vote or action by the
stockholders. Our board may authorize the issuance of preferred
stock with voting, conversion or liquidation rights that could
adversely affect the rights of the holders of our common stock
and could also adversely affect the market price of our common
stock.




Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

We develop products in the United States and
market our products in North America, Europe and, to a lesser
extent, the Asia-Pacific region. As a result, our financial
results may be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign
markets. Approximately 68.1% and 61.0% of our total revenue was
made in U.S. dollars in the second quarter of fiscal 2003 and in
the six months ended July 31, 2002, respectively.
Therefore, a strengthening of the dollar may make our products
less competitive in foreign markets. We do not expect any
material adverse effect on our consolidated financial position,
results of operations or cash flows due to movements in any
specific foreign currency. We currently do not use financial
instruments to hedge operating expenses of our European and
Asia-Pacific subsidiaries. We will continue to assess the need
to utilize financial instruments to hedge currency exposures on
an ongoing basis.

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##### Table of Contents



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 and the
short-term features and fixed interest rate of our indebtedness,
we believe that there is no material market or interest rate
risk exposure.






PART II:     OTHER
INFORMATION





Item 1.     Legal
Proceedings

In December 2001, Brugger Corporation, the lessor
of our former headquarters, filed suit in the Superior Court of
California for San Mateo County alleging that we breached the
lease agreement for such facility. Brugger sought damages for
breach of written lease, declaratory relief, and rescission. We
had denied liability and filed a cross-complaint for various
forms of affirmative relief against Brugger. In March and May
2002, Bruggers motion to dismiss our cross-complaint was
denied with respect to a majority of our claims, allowing such
claims to proceed, and in April 2002, Bruggers motion for
a writ of attachment in the amount of $6.3 million was
granted. We provided security in the amount of $6.3 million
in the form of a bond in lieu of attachment. On July 29,
2002, we settled the litigation by moving back to our former
headquarters, paying $1.8 million in settlement of claims
asserted in the lawsuit, amending the lease to reduce the
monthly rental rate and establishing a $1.1 million letter
of credit under the lease. In exchange, the $6.3 million
bond, classified in the Companys condensed consolidated
balance sheet as of April 30, 2002 as current portion of
restricted cash, was released to us.

On August 12, 2002, we filed a suit against
Business Engine Corporation (Business Engine), a San
Francisco-based software developer, in the United States
District Court in San Francisco for alleged theft of trade
secrets, computer fraud and other activities directed at us. We
are seeking immediate cessation of these activities and
unspecified damages. On August 15, 2002, the Court entered
a temporary restraining order against Business Engine, which
among other things, prevents Business Engine from continuing to
access or attempting to access our internal computer system,
using or disclosing any information or documents gained from
such access, or destroying, altering, deleting or tampering with
any such documents or information derived from such access. In
addition, Business Engine is required to provide notice to all
of its employees, customers, prospective customers and partners
of the temporary restraining order and post such order on its
website. The Court also granted us expedited discovery request
and the parties are currently in discovery.






Item 2.     Change
in Securities and Use of Proceeds


(c) Sale of Unregistered Securities

In May 2002, we issued 48,405 shares of our
common stock to settle litigation with former employees of
Proamics Corporation, a company we acquired in December 1998.
These shares were valued at $0.77 per share based on our stock
price on the date of their issuance. These shares were issued in
a private placement exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) of the Act.
On June 11, we filed a Registration Statement on
Form S-3 (No 333-90224) to register these shares. The
Securities and Exchange Commission declared the Registration
Statement effective on June 28, 2002.






Item 4.     Submission
of Matter to a Vote of Security Holders


The annual meeting of Niku Corporation was held
on June 26, 2002, during which the following two proposals
were voted on as follow:



| |                                      
| | -------------------------------------
| | Proposal I: Election of
    Directors

|                   |  |     |            |          |  |  |         | 
|------------------ |  | --- | ---------- | -------- |  |  | ------- | 
|                   |  | For |            | Withheld
|                   |  |     |            |         
|Edward F. Thompson |  |     | 58,024,202 |          |  |  | 145,424 | 
|Val E. Vaden       |  |     | 58,030,019 |          |  |  | 139,607 | 

32



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##### Table of Contents





| |                                                      
| | -----------------------------------------------------
| | Proposal II: Ratification of Independent
    Auditors

|           |  |         |        |         |  |  |        | 
|---------- |  | ------- | ------ | ------- |  |  | ------ | 
|For        |  | Against |        | Abstain
|           |  |         |        |        
|58,088,718 |  |         | 27,177 |         |  |  | 53,731 | 




Item 5.     Other
Information

On August 14, 2002, our board of directors
authorized us to seek stockholder approval for a reverse stock
split with an exchange ratio of 1-for-10, 1-for-15 and 1-for-20,
with the final ratio to be determined by the board. We are
holding a Special Meeting of Stockholders on October 10,
2002 to approve the proposal.




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  | .01(1)        |  | Registrants Amended and Restated
    Certificate of Incorporation.                                                                                                                                               
|       | 3  | .02(1)        |  | Registrants Amended and Restated Bylaws.                                                                                                                                                                         
|       | 10 | .19           |  | Settlement Agreement and Mutual Release, dated
    July 29, 2002, by and between Brugger Corporation and
    Registrant.                                                                                          
|       | 10 | .20           |  | Amendment to Lease, dated July 29, 2002,
    dated July 29, 2002, by and between Brugger Corporation and
    Registrant.                                                                                          
|       | 10 | .21           |  | First Amendment to Loan Documents, dated
    July 31, 2002, by and between Mid Peninsula Bank and
    Registrant.                                                                                                 
|       | 10 | .22           |  | Business Loan Agreement, Commercial Security
    Agreement and Promissory Note dated September 9, 2002, by
    and between Mid Peninsula Bank and Registrant.                                                     
|       | 99 | .10           |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                   
|       | 99 | .20           |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                   
|       | 99 | .30           |  | Certification Pursuant to Section 240.13a-14
    and Section 240.15d-14 of Title 17, Chapter II, of the Code
    of Federal Regulations, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.
|       | 99 | .40           |  | Certification Pursuant to Section 240.13a-14
    and Section 240.15d-14 of Title 17, Chapter II, of the Code
    of Federal Regulations, as adopted pursuant to Section 302
    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.

(b) Reports on Form 8-K

On July 12, 2002, we filed a current report
on 8-K regarding the vacating of our headquarters at 350
Convention Way, Redwood City and certain other leases.

33



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##### Table of Contents






SIGNATURE

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



| |                 
| | ----------------
| | NIKU CORPORATION

Date: September 12, 2002

| |     |                   
| | --- | ------------------
| | By: | /s/ FARZAD DIBACHI

| |                        
| | -----------------------
| |                        
| | Farzad Dibachi         
| | Chief Executive Officer



| |     |                  
| | --- | -----------------
| | By: | /s/ JOSHUA PICKUS

| |                        
| | -----------------------
| |                        
| | Joshua Pickus          
| | Chief Financial Officer

34



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##### Table of Contents






EXHIBIT INDEX

|       |       |               |  |                                                                                                                                                                                                                   
|------ | ----- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       | Exhibit Title
|       |       |              
|       | 10.19 |               |  | Settlement Agreement and Mutual Release, dated
    July 29, 2002, by and between Brugger Corporation and
    Registrant.                                                                                          
|       | 10.20 |               |  | Amendment to Lease, dated July 29, 2002,
    dated July 29, 2002, by and between Brugger Corporation and
    Registrant.                                                                                          
|       | 10.21 |               |  | First Amendment to Loan Documents, dated
    July 31, 2002, by and between Mid Peninsula Bank and
    Registrant.                                                                                                 
|       | 10.22 |               |  | Business Loan Agreement, Commercial Security
    Agreement and Promissory Note dated September 9, 2002, by
    and between Mid Peninsula Bank and Registrant.                                                     
|       | 99.10 |               |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                   
|       | 99.20 |               |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                   
|       | 99.30 |               |  | Certification Pursuant to Section 240.13a-14
    and Section 240.15d-14 of Title 17, Chapter II, of the Code
    of Federal Regulations, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.
|       | 99.40 |               |  | Certification Pursuant to Section 240.13a-14
    and Section 240.15d-14 of Title 17, Chapter II, of the Code
    of Federal Regulations, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.

35