##### 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 April 30,
    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)

350 Convention Way

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.

74,332,298 shares of common stock as of
May 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 INCOME (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 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 10.18                



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the Period Ended April 30, 2002


INDEX

|                                  |  |                                                                                           |                                                                                     |      |    |   | 
|--------------------------------- |  | ----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---- | -- | - | 
|                                  |  |                                                                                           |                                                                                     | Page
|                                  |  |                                                                                           |                                                                                     |     
|PART I  FINANCIAL
    INFORMATION
|                                 
|Item 1.                           |  | Financial Statements (unaudited):                                                         |                                                                                     |      |    |  
|                                  |  |                                                                                           | Condensed Consolidated Balance Sheets                                               |      |    | 2 | 
|                                  |  |                                                                                           | Condensed Consolidated Statements of Operations
    and Comprehensive Income (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 |                                                                                     |      | 9  |  
|                                 
|Item 3.                           |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |                                                                                     |      | 25 |  
|PART II  OTHER INFORMATION       
|                                 
|Item 1.                           |  | Legal Proceedings                                                                         |                                                                                     |      | 26 |  
|                                 
|Item 2.                           |  | Changes in Securities and Use of Proceeds                                                 |                                                                                     |      | 26 |  
|                                 
|Item 6.                           |  | Exhibits and Reports on Form 8-K                                                          |                                                                                     |      | 26 |  
|                                  |  | Signature                                                                                 |                                                                                     |      | 27 |  

1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




Item 1.     Financial
Statements

NIKU CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands)


(Unaudited)


|                                         |                                                  |                                                                         |        |             |        |  |        |        |         | 
|---------------------------------------- | ------------------------------------------------ | ----------------------------------------------------------------------- | ------ | ----------- | ------ |  | ------ | ------ | ------- | 
|                                         |                                                  | April 30,                                                               |        | January 31,
|                                         |                                                  | 2002                                                                    |        | 2002       
|                                         |                                                  |                                                                         |        |            
|ASSETS                                  
|Current Assets:                          |                                                  |                                                                         |        |             |        |  |        |       
|                                         | Cash and cash equivalents                        |                                                                         | $      | 43,178      |        |  | $      | 51,585 |        
|                                         | Current portion of restricted cash               |                                                                         |        | 10,965      |        |  |        | 4,665  |        
|                                         |                                                  |                                                                         |        |             |        |  |        |       
|                                         |                                                  | Total cash, cash equivalents and current portion
    of restricted cash |        |             | 54,143 |  |        |        | 56,250  | 
|                                         | Accounts receivable, net                         |                                                                         |        | 7,024       |        |  |        | 12,797 |        
|                                         | Prepaid expenses and other current assets        |                                                                         |        | 4,536       |        |  |        | 5,241  |        
|                                         |                                                  |                                                                         |        |             |        |  |        |       
|                                         |                                                  | Total current assets                                                    |        |             | 65,703 |  |        |        | 74,288  | 
|Restricted cash                          |                                                  |                                                                         | 9,822  |             |        |  | 9,822  |       
|Property and equipment, net              |                                                  |                                                                         | 12,156 |             |        |  | 13,196 |       
|Deposits and other assets                |                                                  |                                                                         | 4,270  |             |        |  | 4,269  |       
|                                         |                                                  |                                                                         |        |             |        |  |        |       
|                                         |                                                  | Total assets                                                            |        | $           | 91,951 |  |        | $      | 101,575 | 
|                                         |                                                  |                                                                         |        |             |        |  |        |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                  |                                                                         |        |             |        |  |        |       
|                                         | Accounts payable                                 |                                                                         | $      | 4,228       |        |  | $      | 3,279  |        
|                                         | Accrued liabilities                              |                                                                         |        | 15,827      |        |  |        | 21,817 |        
|                                         | Bank borrowings and other short-term obligations |                                                                         |        | 27,180      |        |  |        | 27,261 |        
|                                         | Deferred revenue                                 |                                                                         |        | 9,605       |        |  |        | 10,903 |        
|                                         |                                                  |                                                                         |        |             |        |  |        |       
|                                         |                                                  | Total current liabilities                                               |        |             | 56,840 |  |        |        | 63,260  | 
|Long-term restructuring accrual          |                                                  |                                                                         | 6,442  |             |        |  | 6,758  |       
|                                         |                                                  |                                                                         |        |             |        |  |        |       
|                                         |                                                  | Total liabilities                                                       |        |             | 63,282 |  |        |        | 70,018  | 
|Stockholders equity                     |                                                  |                                                                         | 28,669 |             |        |  | 31,557 |       
|                                         |                                                  |                                                                         |        |             |        |  |        |       
|                                         |                                                  | Total liabilities and stockholders equity                              |        | $           | 91,951 |  |        | $      | 101,575 | 
|                                         |                                                  |                                                                         |        |             |        |  |        |       

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

2



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)


(In thousands, except per share
data)


(Unaudited)


|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |         |         |  
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------ | ------ | ------ | - | ------ | ------- | ------- | -
|                                                                 |                                                                                                                                                                  |                            
|                                                                 |                                                                                                                                                                  | Three Months Ended         
|                                                                 |                                                                                                                                                                  | April 30,                  
|                                                                 |                                                                                                                                                                  |                            
|                                                                 |                                                                                                                                                                  | 2002                        |        | 2001  
|                                                                 |                                                                                                                                                                  |                             |        |       
|Revenue:                                                         |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 | License                                                                                                                                                          |                             | $      | 5,691  |        |   | $      | 8,055   |        
|                                                                 | Services                                                                                                                                                         |                             |        | 8,436  |        |   |        | 9,418   |        
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 |                                                                                                                                                                  | Total revenue               |        |        | 14,127 |   |        |         | 17,473  |  
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|Cost of revenue:                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 | License                                                                                                                                                          |                             |        | 316    |        |   |        | 654     |        
|                                                                 | Services (exclusive of stock-based compensation
    of ($260) and $330 for the three months ended April 30,
    2002 and 2001, respectively)                     |                             |        | 3,766  |        |   |        | 9,217   |        
|                                                                 | Impairment of licensed technology                                                                                                                                |                             |        |       |        |   |        | 6,789   |        
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 |                                                                                                                                                                  | Total cost of revenue       |        |        | 4,082  |   |        |         | 16,660  |  
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 |                                                                                                                                                                  | Gross profit                |        |        | 10,045 |   |        |         | 813     |  
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|Operating expenses:                                              |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 | Sales and marketing (exclusive of stock-based
    compensation of ($1,950) and $2,306 for the three months ended
    April 30, 2002 and 2001, respectively)      |                             |        | 8,147  |        |   |        | 32,404  |        
|                                                                 | Research and development (exclusive of
    stock-based compensation of ($1,206) and $1,050 for the three
    months ended April 30, 2002 and 2001, respectively) |                             |        | 4,029  |        |   |        | 11,042  |        
|                                                                 | General and administrative (exclusive of
    stock-based compensation of ($230) and $999 for the three months
    ended April 30, 2002 and 2001, respectively)   |                             |        | 2,207  |        |   |        | 6,099   |        
|                                                                 | Stock-based compensation                                                                                                                                         |                             |        | (3,646 | )      |   |        | 4,685   |        
|                                                                 | Restructuring and other                                                                                                                                          |                             |        | (838   | )      |   |        | 3,092   |        
|                                                                 | Asset impairment and other                                                                                                                                       |                             |        |       |        |   |        | 24,544  |        
|                                                                 | Amortization of goodwill and other intangible
    assets                                                                                                         |                             |        |       |        |   |        | 12,828  |        
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 |                                                                                                                                                                  | Total operating expenses    |        |        | 9,899  |   |        |         | 94,694  |  
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 |                                                                                                                                                                  | Operating income (loss)     |        |        | 146    |   |        |         | (93,881 | )
|Interest and other income, net                                   |                                                                                                                                                                  |                             | 120    |        |        |   | 999    |        
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 |                                                                                                                                                                  | Net income (loss)           |        | $      | 266    |   |        | $       | (92,882 | )
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|Basic net income (loss) per share                                |                                                                                                                                                                  | $                           | 0.00   |        |        | $ | (1.23  | )      
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|Shares used in computing basic net income
    (loss) per share   |                                                                                                                                                                  |                             | 73,860 |        |        |   | 75,504 |        
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|Diluted net income (loss) per share                              |                                                                                                                                                                  | $                           | 0.00   |        |        | $ | (1.23  | )      
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|Shares used in computing diluted net income
    (loss) per share |                                                                                                                                                                  |                             | 77,664 |        |        |   | 75,504 |        
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|Comprehensive income (loss):                                     |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 | Net income (loss)                                                                                                                                                |                             | $      | 266    |        |   | $      | (92,882 | )      
|                                                                 | Foreign currency translation adjustments                                                                                                                         |                             |        | 61     |        |   |        | (174    | )      
|                                                                 | Unrealized gain (loss) on short-term
    investments                                                                                                             |                             |        |       |        |   |        | 38      |        
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        
|                                                                 |                                                                                                                                                                  | Comprehensive income (loss) |        | $      | 327    |   |        | $       | (93,018 | )
|                                                                 |                                                                                                                                                                  |                             |        |        |        |   |        |        

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

3



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


(Unaudited)


|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |         |        |        |         |  
|-------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------- | -
|                                                   |                                                                                          |                                                         
|                                                   |                                                                                          | Three Months Ended                                      
|                                                   |                                                                                          | April 30,                                               
|                                                   |                                                                                          |                                                         
|                                                   |                                                                                          | 2002                                                     |                                           | 2001                                                   
|                                                   |                                                                                          |                                                          |                                           |                                                        
|Cash flows from operating activities:              |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Net income (loss)                                                                        |                                                          | $                                         | 266                                                     |        |        | $      | (92,882 | )     
|                                                   | Adjustments to reconcile net income (loss) to net
    cash used in operating activities: |                                                          |                                           |                                                         |        |        |        |         |       
|                                                   |                                                                                          | Depreciation                                             |                                           |                                                         | 1,197  |        |        |         | 1,477  |       
|                                                   |                                                                                          | Impairment of licensed technology                        |                                           |                                                         |       |        |        |         | 5,939  |       
|                                                   |                                                                                          | Restructuring and other                                  |                                           |                                                         | (771   | )      |        |         |       |       
|                                                   |                                                                                          | Asset impairment and other                               |                                           |                                                         |       |        |        |         | 24,544 |       
|                                                   |                                                                                          | Amortization of goodwill and other intangible
    assets |                                           |                                                         |       |        |        |         | 12,828 |       
|                                                   |                                                                                          | Stock-based compensation                                 |                                           |                                                         | (3,646 | )      |        |         | 4,685  |       
|                                                   |                                                                                          | Provision for doubtful accounts receivable               |                                           |                                                         |       |        |        |         | 7,353  |       
|                                                   |                                                                                          | Interest on notes receivable from stockholders           |                                           |                                                         | (20    | )      |        |         | 78     |       
|                                                   |                                                                                          | Changes in operating assets and liabilities:             |                                           |                                                         |        |        |        |         |        |       
|                                                   |                                                                                          |                                                          | Accounts receivable                       |                                                         |        | 5,738  |        |         |        | 16,019 |        
|                                                   |                                                                                          |                                                          | Prepaid expenses and other current assets |                                                         |        | 762    |        |         |        | (403   | )      
|                                                   |                                                                                          |                                                          | Deposits and other assets                 |                                                         |        | (1     | )      |         |        | 179    |        
|                                                   |                                                                                          |                                                          | Accounts payable                          |                                                         |        | 949    |        |         |        | (1,643 | )      
|                                                   |                                                                                          |                                                          | Accrued liabilities                       |                                                         |        | (5,420 | )      |         |        | 1,591  |        
|                                                   |                                                                                          |                                                          | Deferred revenue                          |                                                         |        | (1,298 | )      |         |        | (2,321 | )      
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   |                                                                                          |                                                          |                                           | Net cash used in operating activities                   |        |        | (2,244 | )       |        |        | (22,556 | )
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|Cash flows from investing activities:              |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Purchases of property and equipment                                                      |                                                          |                                           | (219                                                    | )      |        |        | (9,978  | )     
|                                                   | Purchases of investments for restricted cash                                             |                                                          |                                           | (6,300                                                  | )      |        |        |        |       
|                                                   | Sales and maturities of short-term investments,
    net                                  |                                                          |                                           |                                                        |        |        |        | 23,073  |       
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   |                                                                                          |                                                          |                                           | Net cash (used in) provided by investing
    activities |        |        | (6,519 | )       |        |        | 13,095  |  
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|Cash flows from financing activities:              |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Issuance of common stock                                                                 |                                                          |                                           | 385                                                     |        |        |        | 1,509   |       
|                                                   | Treasury stock repurchased                                                               |                                                          |                                           |                                                        |        |        |        | (500    | )     
|                                                   | Repurchase of common stock                                                               |                                                          |                                           |                                                        |        |        |        | (11     | )     
|                                                   | Repayment of debt and capital lease obligations                                          |                                                          |                                           | (81                                                     | )      |        |        | (129    | )     
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   |                                                                                          |                                                          |                                           | Net cash provided by financing activities               |        |        | 304    |         |        |        | 869     |  
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|Net decrease in cash and cash equivalents          |                                                                                          |                                                          | (8,459                                    | )                                                       |        |        | (8,592 | )      
|Effect of exchange rate changes                    |                                                                                          |                                                          | 52                                        |                                                         |        |        | (174   | )      
|Cash and cash equivalents, beginning of period     |                                                                                          |                                                          | 51,585                                    |                                                         |        |        | 93,673 |        
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|Cash and cash equivalents, end of period           |                                                                                          | $                                                        | 43,178                                    |                                                         |        | $      | 84,907 |        
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|Supplemental disclosures of cash flow information: |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Cash paid for interest during the period                                                 |                                                          | $                                         | 16                                                      |        |        | $      | 36      |       
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|Noncash investing and financing activities:        |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Reversal of deferred stock-based compensation                                            |                                                          | $                                         | 16,284                                                  |        |        | $      |        |       
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Repurchases of common stock in settlement of
    notes receivable from stockholders      |                                                          | $                                         |                                                        |        |        | $      | 2,599   |       
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Deferred stock-based compensation                                                        |                                                          | $                                         |                                                        |        |        | $      | 48      |       
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Write-off of property and equipment to goodwill                                          |                                                          | $                                         |                                                        |        |        | $      | 1,858   |       
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        
|                                                   | Unrealized gain on short-term investments                                                |                                                          | $                                         |                                                        |        |        | $      | 38      |       
|                                                   |                                                                                          |                                                          |                                           |                                                         |        |        |        |        

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

4



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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. 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 nearest January 31. In the
first quarter of fiscal 2003, the Company changed its fiscal
calendar to a calendar month end so the first quarter of fiscal
2003 ended on April 30, 2002. For presentation purposes,
the condensed consolidated financial statements and notes for
the first quarter of fiscal 2002 refer to that periods
calendar month end.



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

The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles 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 not limited to accounting for doubtful accounts,
depreciation and amortization, sales returns, taxes, impairment,
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.     Adoption of
Accounting Pronouncement

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 revenue by
$273,000 in the three months ended April 30, 2002 and
$507,000 in the three months ended April 30, 2001.

5



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


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, 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 $1.02 as of April 30, 2002, the Company
recorded $4.2 million in recovery of stock-based
compensation in the first quarter of fiscal 2003 relating to
these repriced stock options. Deferred stock-based compensation
relating to these repriced options decreased $12.1 million
in the first quarter of fiscal 2003 to $1.3 million
reflecting the reduced intrinsic value of unexercised repriced
options and the amortization of stock compensation over the
vesting periods.

4.     Restructuring
and Other

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. Restructuring activities diminished significantly in
the first quarter of fiscal 2003. The table below represents the
restructuring activities in the first quarter of fiscal 2003 (in
thousands):

|                             |  |             |        |                |  |                       |      |             |  |           |      |   |  |   |       |  |  |   |        | 
|---------------------------- |  | ----------- | ------ | -------------- |  | --------------------- | ---- | ----------- |  | --------- | ---- | - |  | - | ----- |  |  | - | ------ | 
|                             |  |             |        | Restructuring  |  |                       |      |             |  |          
|                             |  |             |        | and Other      |  | Reclassifications     |      | Paid in the |  |          
|                             |  |             |        | Charges in the |  | and Write Offs in the |      | Three       |  |          
|                             |  | Accrued     |        | Three Months   |  | Three Months          |      | Months      |  | Accrued  
|                             |  | as of       |        | Ended          |  | Ended                 |      | Ended       |  | as of    
|                             |  | January 31, |        | April 30,      |  | April 30,             |      | April 30,   |  | April 30,
|                             |  | 2002        |        | 2002           |  | 2002                  |      | 2002        |  | 2002     
|                             |  |             |        |                |  |                       |      |             |  |          
|Severance                    |  | $           | 265    |                |  | $                     | 91   |             |  | $         |     |   |  | $ | 235   |  |  | $ | 121    | 
|Lease termination costs      |  |             | 10,666 |                |  |                       | (59  | )           |  |           |     |   |  |   | 761   |  |  |   | 9,846  | 
|Exit costs for business line |  |             | 643    |                |  |                       | (98  | )           |  |           |     |   |  |   | 149   |  |  |   | 396    | 
|Other exit costs             |  |             | 424    |                |  |                       | 34   |             |  |           | 35   |   |  |   | 204   |  |  |   | 219    | 
|Escrow shares adjustment     |  |             |       |                |  |                       | (806 | )           |  |           | (806 | ) |  |   |      |  |  |   |       | 
|                             |  |             |        |                |  |                       |      |             |  |           |      |   |  |   |       |  |  |   |        | 
|                             |  | $           | 11,998 |                |  | $                     | (838 | )           |  | $         | (771 | ) |  | $ | 1,349 |  |  | $ | 10,582 | 
|                             |  |             |        |                |  |                       |      |             |  |           |      |   |  |   |       |  |  |   |        | 

The Company expects that of the restructuring and
other charges accrued as of April 30, 2002, severance costs
and other exit costs will be paid by the second quarter of
fiscal 2003, exit costs for business line will be paid no later
than May 2004 and lease termination costs will be paid no later
than February 2011. The escrow shares adjustment related to the
value of 390,524 shares of the Companys 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. The
Company valued these shares based on its stock price on the date
these shares were recovered. The weighted-average price per
share for these escrow shares was $2.06.

6



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


5.     Net Income
(Loss) Per Share

Basic net income (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 income (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 income (loss) per share because
the effect would have been antidilutive (in thousands):

|                                                 |  |           |       |      |  |  |        | 
|------------------------------------------------ |  | --------- | ----- | ---- |  |  | ------ | 
|                                                 |  |          
|                                                 |  | April 30,
|                                                 |  |          
|                                                 |  | 2002      |       | 2001
|                                                 |  |           |       |     
|Shares issuable under stock options              |  |           | 2,448 |      |  |  | 13,411 | 
|Shares of restricted stock subject to repurchase |  |           |      |      |  |  | 900    | 
|Shares issuable under warrants                   |  |           | 46    |      |  |  | 46     | 

The weighted-average exercise price of
anti-dilutive options outstanding as of April 30, 2002 and
2001 was $4.83 and $8.59 per share, respectively. The
weighted-average purchase price of restricted stock subject to
repurchase as of April 30, 2001 was $1.79 per share. The
weighted-average exercise price of warrants as of April 30,
2002 and 2001 was $11.58 per share.

6.     Segment
Reporting

Disaggregated information is as follows (in
thousands):

|          |             |                    |       |       |  |   |       |       | 
|--------- | ----------- | ------------------ | ----- | ----- |  | - | ----- | ----- | 
|          |             |                   
|          |             | Three Months Ended
|          |             | April 30,         
|          |             |                   
|          |             | 2002               |       | 2001 
|          |             |                    |       |      
|Services: |             |                    |       |       |  |   |       |      
|          | Consulting  |                    | $     | 3,454 |  |   | $     | 4,611 | 
|          | Maintenance |                    |       | 4,982 |  |   |       | 4,807 | 
|          |             |                    |       |       |  |   |       |      
|          |             | $                  | 8,436 |       |  | $ | 9,418 |      
|          |             |                    |       |       |  |   |       |      

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
|                 |  | April 30,         
|                 |  |                   
|                 |  | 2002               |        | 2001
|                 |  |                    |        |     
|United States    |  | $                  | 7,874  |      |  | $ | 9,857  | 
|Europe and other |  |                    | 6,253  |      |  |   | 7,616  | 
|                 |  |                    |        |      |  |   |        | 
|                 |  | $                  | 14,127 |      |  | $ | 17,473 | 
|                 |  |                    |        |      |  |   |        | 

There were no customers individually representing
more than 10.0% of gross accounts receivables as of
April 30, 2002 and January 31, 2002, respectively. One
customer represented 10.8% of total revenue in the first quarter
of fiscal 2003. One customer represented 11.2% of total revenue
in the first quarter of fiscal 2002.

7.     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

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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


York, arising out of the Companys initial
public offering in February 2000 (the IPO). Various
underwriters 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. 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 for such facility. Brugger seeks
damages for breach of written lease, declaratory relief, and
rescission. The Company has denied liability and filed a
cross-complaint for various forms of affirmative relief against
Brugger. The disposition of the principal motions in the case to
date is as follows: (i) 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.
(ii) In April 2002, Bruggers motion for a writ of
attachment in the amount of $6.3 million was granted. The
grant of this writ provides Brugger with security in the event
it prevails in the case. The Company provided security in the
amount of $6.3 million in the form of a bond in lieu of
attachment. While such an instrument is in place, the
Companys access to the funds covered thereby is
restricted. Discovery in the case has begun and is ongoing. No
trial date has yet been set in the case. The Company believes
Bruggers claims are without merit, and it intends to
vigorously defend against them. The Company believes its
cross-complaint is meritorious, and it intends to vigorously
prosecute such cross-complaint. The $6.3 million for a writ
of attachment is included in the current portion of restricted
cash in the condensed consolidated balance sheets as of
April 30, 2002.

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 parties have now stipulated that the
matter may be transferred to the Northern District of
California. Mr. and Mrs. Dibachi believe these claims are
without merit, and they intend to vigorously defend against
these claims.

8



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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.

Overview

We provide application software for service
organizations in large enterprises. These service 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 and increase productivity in their service
organizations 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.

9



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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 the earlier of shipment of the product,
notification of receipt of the product or 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
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. Maintenance and
support revenue is deferred and recognized on a straight-line
basis over the contractual service period, which is typically
one year. 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.

We have never engaged in a transaction in which
we provided product licenses or services to a customer in
exchange for an equity interest.

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 $7.0 million
and $12.6 million as of April 30, 2002 and
January 31, 2002, respectively. The allowances for doubtful
accounts was $2.4 million and $3.0 million as of
April 30, 2002 and January 31, 2002, respectively. We
regularly review the adequacy of our accounts receivable
allowance after considering the amount of the aged accounts
receivable, the age of each invoice, each customers
expected ability to pay and our collection history with each
customer. We review any invoice greater than 30 days past
due to determine if an allowance is appropriate based on the
risk category using the factors discussed above. In addition, we
maintain a general

10



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##### Table of Contents



reserve for all invoices by applying a percentage
to each aging category. 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 in
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 determined that our
goodwill and certain other identifiable intangibles acquired
from our acquisitions and other assets were impaired, resulting
in a charge of $24.5 million. There were no asset
impairment and other charges in the first quarter of fiscal 2003.

We regularly perform an impairment assessment of
a $500,000 strategic equity investment we made in a private
company. In performing an impairment assessment, we consider the
business current solvency, future access to capital and
recent equity transactions. Based on an analysis of these
factors, we determined that there was no impairment of such
investment as of April 30, 2002. 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
that we may have to record an impairment charge related to 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. As of April 30, 2002, we had $235,000 in prepaid
royalties. There was no impairment of licensed technology in the
first quarter of fiscal 2003.



| |                                                         
| | --------------------------------------------------------
| | 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 and the impairment of leasehold improvements,
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, net of estimated sublease income relating to
facilities that we vacated pursuant to the restructuring program
amount to $3.6 million, $1.3 million,
$1.3 million $693,000, and $600,000 for the periods ended
April 30, 2003, 2004, 2005, 2006, and 2007, respectively,
and $2.6 million thereafter.

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

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$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, 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 $1.02 as of April 30, 2002, we recorded
$4.2 million in recovery of stock-based compensation in the
first quarter of fiscal 2003 relating to these repriced stock
options. Deferred stock-based compensation relating to these
repriced options decreased $12.1 million in the first
quarter of fiscal 2003 to $1.3 million reflecting the reduced
intrinsic value of unexercised repriced options and the
amortization of stock compensation over the vesting periods.


Pro Forma Financial Results

We prepare and release quarterly unaudited
financial statements prepared in accordance with generally
accepted accounting principles (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 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 GAAP financial information with the pro forma financial
results and read the associated reconciliation.

12



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##### Table of Contents



Results of Operations

The following table sets forth certain items in
our condensed consolidated statements of operations for the
three months ended April 30, 2002 and 2001 expressed as a
percentage of total revenue:

|                               |                                                          |                          |     |       |       |   |     |       |        |   
|------------------------------ | -------------------------------------------------------- | ------------------------ | --- | ----- | ----- | - | --- | ----- | ------ | --
|                               |                                                          |                         
|                               |                                                          | Three Months Ended      
|                               |                                                          | April 30,               
|                               |                                                          |                         
|                               |                                                          | 2002                     |     | 2001 
|                               |                                                          |                          |     |      
|Revenue:                       |                                                          |                          |     |       |       |   |     |      
|                               | License                                                  |                          |     | 40.3  | %     |   |     | 46.1  | %     
|                               | Services                                                 |                          |     | 59.7  |       |   |     | 53.9  |       
|                               |                                                          |                          |     |       |       |   |     |      
|                               |                                                          | Total revenue            |     |       | 100.0 |   |     |       | 100.0  |   
|                               |                                                          |                          |     |       |       |   |     |      
|Cost of revenue:               |                                                          |                          |     |       |       |   |     |      
|                               | License                                                  |                          |     | 2.2   |       |   |     | 3.7   |       
|                               | Services                                                 |                          |     | 26.7  |       |   |     | 52.7  |       
|                               | Impairment of licensed technology                        |                          |     |      |       |   |     | 38.9  |       
|                               |                                                          |                          |     |       |       |   |     |      
|                               |                                                          | Total cost of revenue    |     |       | 28.9  |   |     |       | 95.3   |   
|                               |                                                          |                          |     |       |       |   |     |      
|                               |                                                          | Gross profit             |     |       | 71.1  |   |     |       | 4.7    |   
|                               |                                                          |                          |     |       |       |   |     |      
|Operating expenses:            |                                                          |                          |     |       |       |   |     |      
|                               | Sales and marketing                                      |                          |     | 57.7  |       |   |     | 185.5 |       
|                               | Research and development                                 |                          |     | 28.5  |       |   |     | 63.2  |       
|                               | General and administrative                               |                          |     | 15.6  |       |   |     | 34.9  |       
|                               | Stock-based compensation                                 |                          |     | (25.8 | )     |   |     | 26.8  |       
|                               | Restructuring and other                                  |                          |     | (5.9  | )     |   |     | 17.7  |       
|                               | Asset impairment and other                               |                          |     |      |       |   |     | 140.5 |       
|                               | Amortization of goodwill and other intangible
    assets |                          |     |      |       |   |     | 73.4  |       
|                               |                                                          |                          |     |       |       |   |     |      
|                               |                                                          | Total operating expenses |     |       | 70.1  |   |     |       | 542.0  |   
|                               |                                                          |                          |     |       |       |   |     |      
|                               |                                                          | Operating income (loss)  |     |       | 1.0   |   |     |       | (537.3 | ) 
|Interest and other income, net |                                                          |                          | 0.9 |       |       |   | 5.7 |      
|                               |                                                          |                          |     |       |       |   |     |      
|                               |                                                          | Net income (loss)        |     |       | 1.9   | % |     |       | (531.6 | )%
|                               |                                                          |                          |     |       |       |   |     |      

Comparison of Three Months Ended
April 30, 2002 and 2001



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

License.License
revenue consists of revenue from licenses of our software
products. License revenue was $5.7 million and
$8.1 million in the first quarter of fiscal 2003 and 2002,
respectively, decreasing 29.3% period over period. The decrease
in license revenue in absolute dollars in the first quarter of
fiscal 2003 from fiscal 2002 was primarily attributable to a
slowdown in corporate information technology spending,
especially in Europe.

Services.Services
revenue consists of revenue from the implementation services and
maintenance and support contracts. Services revenue from
implementation services in the first quarter of fiscal 2003 and
2002 was $3.5 million and $4.6 million, respectively,
decreasing 25.1% period over period. The period over period
decrease in services revenue from implementation services in
absolute dollars was primarily attributable to a decrease in the
size of the implementation services organization pursuant to the
restructuring program we implemented in fiscal 2002 and a
decrease in license revenue. Services revenue from
implementation services increased to $3.5 million in the
first quarter of fiscal 2003 from $2.5 million in the
fourth quarter of fiscal 2002 as a result of increased demand
for our implementation services in the first quarter of fiscal
2003. Service revenue from maintenance and support contracts was
$5.0 million and $4.8 million in the first quarter of
fiscal

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2003 and 2002, respectively, increasing 3.6%
period over period. The period over period increase in services
revenue from maintenance and support contracts in absolute
dollars was primarily attributed to new maintenance contracts
and maintenance renewals relating to our larger installed base.




| |                
| | ---------------
| | 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 $316,000 and
$654,000 in the first quarter of fiscal 2003 and 2002,
respectively, representing 5.6% and 8.1% of license revenue in
the respective periods. The decrease in cost of license revenue
in absolute dollars in the first quarter of fiscal 2003 from the
first quarter of fiscal 2002 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 $3.8 million and
$9.2 million in the first quarter of fiscal 2003 and 2002,
respectively, representing 44.6% and 97.9% 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 the first quarter of fiscal 2003 from the first
quarter of fiscal 2002 was primarily attributable to reductions
in headcount pursuant to the restructuring program we
implemented in fiscal 2002, reduction in costs for third parties
contracted to implement our products and increased efficiencies
within the implementation services organization.

Impairment of licensed technology.There were no impairment of licensed
technology in the first quarter of fiscal 2003. In the first
quarter of fiscal 2002, we determined that the carrying value of
certain royalties that we had prepaid 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 on third-party
technologies which we will not be including with our products at
all or at the extent required under the applicable contracts due
to a change in our product plan.



| |                   
| | ------------------
| | 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
$8.1 million and $32.4 million in the first quarter of
fiscal 2003 and 2002, respectively, representing 57.7% and
185.5% of total revenue in the respective periods. The decrease
in sales and marketing expenses in absolute dollars in the first
quarter of fiscal 2003 from the first quarter of fiscal 2002 was
primarily attributable to a $7.4 million decrease in bad
debt expenses resulting from increased collection rates and a
$5.1 million reduction in salaries and benefits resulting
from reductions in headcount pursuant to the restructuring
program we implemented in fiscal 2002. Sales and marketing
expenses also decreased due to a $3.4 million decrease in
commissions and bonuses, a $2.6 million decrease in
advertising and a $2.3 million decrease in outside services.

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
$11.0 million in the first quarter of fiscal 2003 and 2002,
respectively, representing 28.5% and 63.2% of total revenue in
the respective periods. The decrease in research and development
expenses in absolute dollars in the first quarter of fiscal 2003
from the first quarter of fiscal 2002 was primarily attributable
to a $4.7 million reduction in salaries and benefits
resulting from reductions in headcount pursuant to the
restructuring program we implemented in fiscal 2002 and a
$941,000 decrease 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 $2.2 million and
$6.1 million, respectively, representing 15.6% and 34.9% of
total revenue in the respective periods. The decrease in general
and administrative

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expenses in absolute dollars in the first quarter
of fiscal 2003 from the first quarter of fiscal 2002 was
primarily attributable to a reduction of $2.6 million in
salaries and benefits resulting from reductions in headcount
pursuant to the restructuring program we implemented in fiscal
2002, a $1.3 million decrease in bonuses and a $946,000
decrease in professional services fees, offset in part by an
increase in facilities expenses.


Stock-based compensation.Amortization of stock-based
compensation was $(3.7) million and $4.7 million in
the first quarter of fiscal 2003 and 2002, respectively. The
recovery of stock-based compensation in the first quarter of
fiscal 2003 was attributed to variable accounting applied to our
stock options that were repriced in the fourth quarter of fiscal
2002, which resulted in $4.2 million in recovery of
stock-based compensation, offset by $502,000 in other
stock-based compensation.

Restructuring and other.Restructuring and other charges
decreased in the first quarter of fiscal 2003 from the first
quarter of fiscal 2002. In the first quarter of fiscal 2003, we
incurred restructuring and other credit of $838,000 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. 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 terminate 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. We expect that of the
restructuring and other charges accrued as of April 30,
2002, severance and other exit costs will be paid by the second
quarter of fiscal 2003, exit costs for business line will be
paid no later than May 2004 and lease termination costs will be
paid no later than February 2011.

Asset impairment and other.There were no impairment and other
charges in the first quarter of fiscal 2003. In the first
quarter of fiscal 2002, we performed an impairment assessment of
our goodwill and other intangible assets recorded in connection
with our various acquisitions 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 which was subsequently written off in the
second quarter of fiscal 2002. Other asset impairment charges
included $1.9 million in accelerated depreciation due to
the reduction in expected useful life of certain internally used
software and $874,000 to write off fixed assets that we no
longer utilized.

Amortization of goodwill and other intangible
assets.There was no amortization of
goodwill and other intangible assets in the first quarter of
fiscal 2003 because all goodwill and other intangible assets
were written off in fiscal 2002. Amortization of goodwill and
other intangible assets was $12.8 million in the first
quarter of fiscal 2002 and included approximately
$3.3 million in amortization of developed and core
technologies.



| |                                   
| | ----------------------------------
| | 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
income (expense), net were $120,000 and $999,000 in the first
quarter of fiscal 2003 and fiscal 2002, respectively. The net
decrease in absolute dollars in the first quarter of fiscal 2003
from the first quarter of fiscal 2002 was primarily attributable
to lower average invested cash and short-term investment
balances, which yielded lower interest income in the first
quarter of fiscal 2003, compared to the first quarter of fiscal
2002.

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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 our operations. The cash
from these sources is used for working capital for our business.
As of April 30, 2002, we had cash and cash equivalents of
$43.2 million. We also had restricted cash in the amount of
$20.8 million in the form of certain certificates of
deposit and bond securing letters of credit for various leased
facilities, equipment and litigation. We had borrowings under
bank lines of credit of $27.0 million as of April 30,
2002. These borrowings were repaid in full in May 2002. As of
April 30, 2002, we had working capital of
$8.9 million. The decrease in working capital as of
April 30, 2002 from $11.0 million as of
January 31, 2002 was primarily attributed to decreases in
cash and cash equivalents and net accounts receivable, offset in
part by a decrease in accrued liabilities. Our liquidity could
be negatively impacted by factors discussed under Factors
That May Affect Future Results.

Net cash used in operating activities was
$2.2 million and $22.6 million in the first quarter of
fiscal 2003 and 2002, respectively. Net cash used in operating
activities in the first quarter of fiscal 2003 was primarily
attributed to a decrease in accrued liabilities, stock-based
compensation and a decrease in deferred revenue, offset in part
by a decrease in net accounts receivable. Net cash used in
operating activities in the first quarter of fiscal 2002 was
primarily attributed to a net loss of $92.9 million, offset
in part by impairment charges, a decrease in accounts
receivable, amortization of goodwill and intangible assets and
provision for doubtful accounts receivable.

Net cash (used in) provided by investing
activities was $(6.5) million and $13.1 million in the
first quarter of fiscal 2003 and 2002, respectively. Net cash
used in investing activities in the first quarter of fiscal 2003
was primarily attributed to a $6.3 million purchase of
investments for restricted cash relating to the provision of
security for a writ of attachment recently granted in legal
proceedings. Net cash provided by investing activities in the
first quarter of fiscal 2002 was primarily attributed to net
sales and maturities of short-term investments, offset in part
by purchases of property and equipment.

Net cash provided by financing activities was
$304,000 and $869,000 in the first quarter of fiscal 2003 and
2002, respectively. Net cash provided by financing activities in
the first quarter of fiscal 2003 was primarily attributed to the
proceeds from the issuance of our common stock pursuant to stock
options exercises, offset by repayment of debt and capital lease
obligations. Net cash provided by financing activities in the
first quarter of fiscal 2002 was primarily attributed to the
proceeds from the issuance of our common stock, offset in part
by the repurchase of our common stock.

In March 2000, we entered into a facility 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. Lease payments will be made on an
escalating basis and the total future minimum lease payments
amount to approximately $127.3 million over the lease term.
As part of this agreement, we are required to hold a letter of
credit drawable by the lessor totaling approximately
$5.9 million, secured by an equal amount of cash deposits.
We also have other facilities and equipment leases under various
noncancellable operating leases with various expiration dates
through 2011 that required letters of credit drawable by lessor
for $8.6 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 up to $30.0 million, of which a
$5.0 million line of credit is based on qualifying accounts
receivables. As of April 30, 2002, we had
$27.0 million outstanding under these lines of credit.
These lines of credit were repaid in full in May 2002. Interest
on each of these lines of credit accrues at the rate of 7.00%
per annum. These lines of credit will expire in July 2002. As of
April 30, 2002, we were in compliance with all financial
covenants.

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Future minimum lease payments under
noncancellable operating leases and payments under bank lines of
credit are as follows as of April 30, 2002 (in thousands):

|                       |  |           |         |            |  |       |        |  |  |   |         | 
|---------------------- |  | --------- | ------- | ---------- |  | ----- | ------ |  |  | - | ------- | 
|                       |  | Operating |         | Bank Lines |  |      
|Period Ended April 30, |  | Leases    |         | of Credit  |  | Total
|                       |  |           |         |            |  |      
|2003                   |  | $         | 14,455  |            |  | $     | 27,000 |  |  | $ | 41,455  | 
|2004                   |  |           | 11,205  |            |  |       |       |  |  |   | 11,205  | 
|2005                   |  |           | 10,937  |            |  |       |       |  |  |   | 10,937  | 
|2006                   |  |           | 9,717   |            |  |       |       |  |  |   | 9,717   | 
|2007                   |  |           | 8,574   |            |  |       |       |  |  |   | 8,574   | 
|Thereafter             |  |           | 90,653  |            |  |       |       |  |  |   | 90,653  | 
|                       |  |           |         |            |  |       |        |  |  |   |         | 
|Total payments         |  | $         | 145,541 |            |  | $     | 27,000 |  |  | $ | 172,541 | 
|                       |  |           |         |            |  |       |        |  |  |   |         | 

Lease payments above, net of estimated sublease
income and brokerage fees, relating to facilities that we
vacated pursuant to the restructuring plan amounted to
$3.6 million, $1.3 million, $1.3 million
$693,000, and $600,000 for the periods ended April 30,
2003, 2004, 2005, 2006 and 2007, respectively, and
$2.6 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. These amounts were
recorded in accrued liabilities and long-term restructuring
accrual as of April 30, 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, in the long-term, we may need
to raise additional funds in order to fund our business, expand
our sales activities, develop new or enhance existing products,
respond to competitive pressures and satisfy new obligations
that may arise. We may also need to raise funds in the future to
meet our working capital needs. In the near-term, we may raise
additional capital to increase our cash reserves. Additional
financing may not be available on terms favorable to us, or at
all. While we significantly reduced our cash usage over the
course of fiscal 2002 and in the first quarter 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 will be effective for fiscal years beginning after
December 15, 2001 at which time all goodwill amortization
will 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 will 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, we anticipate 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.

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In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes 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 establishes a single
accounting model for impairment or disposal by sale of
long-lived assets. The provisions of SFAS No. 144 will be
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.

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.

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 or impossible 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.

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
$461.7 million as of April 30, 2002. We had net income
of $266,000 in the first quarter of fiscal 2003, however, this
includes a recovery of stock-based compensation of
$4.2 million due to variable accounting applied to our
repriced options.

We will need to increase our revenue to achieve
and maintain profitability. Our revenue in the first quarter of
fiscal 2003 decreased from both the fourth quarter of fiscal
2002 and the first quarter of fiscal 2002. Our license revenue
also decreased in the first quarter of fiscal 2003 from both the
fourth quarter of fiscal 2002 and the first 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.

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;  

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| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | the announcement or introduction of new products
    or services by us or our competitors;        
|
| |  | 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 analysts and investors in the future, the price
of our common stock would likely decline.

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.

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.

If the market does not accept Niku 6 or if we
are unable to continue to introduce new products on a timely
basis, our business will suffer.

We introduced a new release of our software
called Niku 6 at the end of the third quarter of fiscal 2002.
While the initial market acceptance of Niku 6 has been
positive, we may experience delays in market penetration. In
addition, we may experience delays in market acceptance of new
products or product

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enhancements as we engage in marketing to our
user base regarding the advantages and system requirements for
the new version and as existing customers evaluate the
advantages and disadvantages of upgrading to the new version.
Further, the market for our products is new and likely to change
rapidly. Our future success will depend on our ability to
anticipate changing customer requirements effectively and in a
timely manner and to offer products that meet these demands. The
development of new or enhanced software products is a complex
and uncertain process. We may experience design, development,
testing and other difficulties that could delay or prevent the
introduction of future products or product enhancements and
could increase research and development costs.


We are uncertain of our ability to obtain
additional financing for our future needs.

As of April 30, 2002, we had cash and cash
equivalents of $43.2 million. We also had restricted cash
in the amount of $20.8 million in the form of certain
certificates of deposit and bond securing letters of credit
required for various leased facilities, equipment and
litigation. We also had borrowings under bank lines of credit of
$27.0 million as of April 30, 2002. These borrowings
were repaid in full in May 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, in the long-term, we may need to raise additional funds
in order to fund our business, expand our sales activities,
develop new or enhance existing products, respond to competitive
pressures and satisfy new obligations that may arise. We may
also need to raise funds in the future to meet our working
capital needs. In the near-term, we may raise additional capital
to increase our cash reserves. Additional financing may not be
available on terms favorable to us, or at all. While we
significantly reduced our cash usage in the course of fiscal
2002 and in the first quarter 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.

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 April 30, 2002, our
accounts receivable, net of allowance for doubtful accounts, was
$7.0 million and our allowance for doubtful accounts was
$2.4 million. While we significantly improved our
collection of accounts receivable in fiscal 2002 and in the
first quarter of fiscal 2003, 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.

The results of legal proceedings could
adversely affect our business.

We are engaged in several legal proceedings. If
the ultimate disposition of one or more of these proceedings is
adverse to us, we could be required to pay substantial sums to
other parties. Interim rulings in the proceedings could also
adversely affect us. On April 15, 2002, a writ of
attachment in the amount of $6.3 million was granted in
legal proceedings relating to our former headquarters facility
to provide the owner of such facility with security in the event
it prevails in the case. We provided security in the amount of
$6.3 million in the form of a bond in lieu of attachment.
While such instrument is in place, our access to the funds
covered thereby is restricted. Even if we ultimately prevail in
the legal proceedings in which we are engaged, the costs of
these proceedings could increase our expenses and materially and
adversely affect our operating results. See Part II,
Item 1  Legal Proceedings.

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

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

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

In the first quarter of fiscal 2003,
international revenue represented 44.3% of total revenue,
compared to 43.6% of total revenue in the first quarter of
fiscal 2002. International license revenue represented 33.2% of
total license revenue in the first quarter of fiscal 2003,
compared to 48.9% in the first 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, 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
    Hewlett-Packard; and                                                                                                                                                                                                                            
|
| |  | third-party software vendors, such as Actuate,
    Ironflare, 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.

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, 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 $1.02 as of April 30, 2002, we recorded
$4.2 million in recovery of stock-based compensation in the
first quarter of fiscal 2003 relating to these repriced stock
options. Deferred stock-based compensation relating to these
repriced options decreased $12.1 million in the first
quarter of fiscal 2003 to $1.3 million 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.

Our stock could be delisted from the Nasdaq
National Market.

The Nasdaq National Market typically requires
that our stock maintain a minimum bid price of $1.00. While we
are in compliance with all other Nasdaq National Market listing
requirements such as, but not limited to, over
$10.0 million in shareholders equity, over 750,000
common shares outstanding and over $5.0 million in market
value of public float, the bid price for our stock has recently
closed below $1.00 per share. If the bid price for our stock
remains below $1.00 for 30 trading days, we would expect to
receive a delisting notification from Nasdaq. After the initial
30-day trading period, we have a 90-day probationary period in
which our stock must meet the $1.00 minimum bid price
requirement. If our stock price does not trade above $1.00 for
at least ten consecutive days during the 90-day probationary
period, we would be entitled to a hearing before the Nasdaq
National Market. However, we can provide no assurance regarding
the outcome of that hearing and our stock could be delisted from
the Nasdaq National Market following such hearing. We may
consider a reverse stock split to increase our stock price, but
such action requires the

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approval of our stockholders. Delisting on the
Nasdaq National Market may, among other things, limit the
liquidity and adversely affect the trading price of our stock.


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;                       
|
| |  | changes in market valuations of comparable
    companies;                                      
|
| |  | developments in litigations 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 National 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.

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

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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. In the first quarter of fiscal 2003, approximately
55.7% of our total revenue was made in U.S. dollars. 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 as our operating expenses in each of our
foreign subsidiaries is the local 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.

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.

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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 for such facility. Brugger seeks damages for breach of
written lease, declaratory relief, and rescission. We have
denied liability and filed a cross-complaint for various forms
of affirmative relief against Brugger. The disposition of the
principal motions in the case to date is as follows: (i) 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. (ii) In April
2002, Bruggers motion for a writ of attachment in the
amount of $6.3 million was granted. The grant of this writ
provides Brugger with security in the event it prevails in the
case. We provided security in the amount of $6.3 million in
the form of a bond in lieu of attachment. While such an
instrument is in place, our access to the funds covered thereby
is restricted. Discovery in the case has begun and is ongoing.
No trial date has yet been set in the case. We believe
Bruggers claims are without merit, and we intend to
vigorously defend against them. We believe our cross-complaint
is meritorious, and we intend to vigorously prosecute such
cross-complaint. See Factors That May Affect Future
Results  The Results of Legal Proceedings Could
Adversely Affect Our Business.






Item 2.Change
in Securities and Use of Proceeds


(c)Sale of Unregistered Securities

In February 2002, we issued 400,000 shares of our
common stock to settle an arbitration with the founders of ABT
Corporation. These shares were valued at $2.18 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 April 9, we filed a Registration Statement
on Form S-3 (No 333-85918) to register these shares, as
amended on May 23, 2002. The Securities and Exchange
Commission declared the Registration Statement effective on
June 4, 2002.

(d)Use of Proceeds

The shares of our common stock sold in the
initial public offering were registered under the Securities Act
of 1933, as amended, on a Registration Statement on
Form S-1 (No. 333-93439). The Securities and Exchange
Commission declared the Registration Statement effective on
February 28, 2000. All of the net proceeds of
$202.5 million have been used for working capital purposes,
capital expenditures, repayment of debt and capital lease
obligations, acquisitions of other businesses and repurchases of
common stock.






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.                                                                                           
|       | 10.18 |               |  | Amended and Restated Secured Full Recourse
    Promissory Note, dated May 15, 2002, by and between Joshua
    Pickus and Registrant.



---



|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(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

None

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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: June 13, 2002 |  | By: /s/ JOSHUA PICKUSJoshua PickusChief Financial Officer

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EXHIBIT INDEX

|      |  |                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------
|10.18 |  | Amended and Restated Secured Full Recourse
    Promissory Note, dated May 15, 2002, by and between Joshua
    Pickus and Registrant.