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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended October 27, 2001

OR

|/ / | 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)

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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 /x/  No / /

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

73,385,914
shares of common stock as of December 1, 2001

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NIKU CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 27, 2001

INDEX

|        |  |                                                                                       |  | Page
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  |  | Financial Information                                                                 |  |     
|Item 1. |  | Financial Statements (unaudited):                                                     |  |     
|        |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|        |  | Condensed Consolidated Statements of Operations and Comprehensive Loss                |  | 4   
|        |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|        |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|Item 2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 27  
|PART II |  | Other Information                                                                     |  |     
|Item 1. |  | Legal Proceedings                                                                     |  | 28  
|Item 2. |  | Changes in Securities and Use of Proceeds                                             |  | 28  
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 28  
|        |  | Signature                                                                             |  | 29  

2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NIKU CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

|                                          |                                           | October 31,
2001                           |        | January 31,
2001
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------ | ----------------
|ASSETS                                    |                                           |                                            |        |                 
|Current Assets:                           |                                           |                                            |        |                 
|                                          | Cash and cash equivalents                 |                                            | $      | 74,422          
|                                          | Short-term investments                    |                                            |        |                
|                                          | Accounts receivable, net                  |                                            |        | 9,527           
|                                          | Prepaid expenses and other current assets |                                            |        | 7,425           
|                                          |                                           |                                            |        |                 
|                                          |                                           | Total current assets                       |        |                 
|Property and equipment, net               |                                           |                                            | 16,178 |                 
|Deposits and other assets                 |                                           |                                            | 4,290  |                 
|Goodwill and other intangible assets, net |                                           |                                            |       |                 
|                                          |                                           |                                            |        |                 
|                                          |                                           | Total assets                               |        | $               
|                                          |                                           |                                            |        |                 
|LIABILITIES AND STOCKHOLDERS' EQUITY      |                                           |                                            |        |                 
|Current Liabilities:                      |                                           |                                            |        |                 
|                                          | Accounts payable                          |                                            | $      | 5,715           
|                                          | Accrued liabilities                       |                                            |        | 26,992          
|                                          | Current portion of long-term obligations  |                                            |        | 26,376          
|                                          | Deferred revenue                          |                                            |        | 10,367          
|                                          |                                           |                                            |        |                 
|                                          |                                           | Total current liabilities                  |        |                 
|Stockholders' equity                      |                                           |                                            | 42,392 |                 
|                                          |                                           |                                            |        |                 
|                                          |                                           | Total liabilities and stockholders' equity |        | $               
|                                          |                                           |                                            |        |                 

The
accompanying notes are an integral part of these financial statements.
For presentation purposes, the condensed consolidated financial statements
and notes refer to the interim periods' calendar month end.

3

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NIKU CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)

|                                                              |                                                                                                                                                                                                                                    | Three Months Ended October 31, |        | Nine Months Ended October 31, |        
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------ | ----------------------------- | -------
|
|Revenue:                                                      |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              | License                                                                                                                                                                                                                            |                                | $      | 6,239                         |        
|                                                              | Services                                                                                                                                                                                                                           |                                |        | 7,873                         |        
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              |                                                                                                                                                                                                                                    | Total revenue                  |        |                               | 14,112 
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|Cost of revenue:                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              | License                                                                                                                                                                                                                            |                                |        | 252                           |        
|                                                              | Services (exclusive of stock-based compensation of $77 and $390 for the three months ended October 31, 2001 and 2000 and $681 and $619 for the nine months ended October 31, 2001 and 2000, respectively)                          |                                |        | 4,224                         |        
|                                                              | Impairment of licensed technology                                                                                                                                                                                                  |                                |        | 2,597                         |        
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              |                                                                                                                                                                                                                                    | Total cost of revenue          |        |                               | 7,073  
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              |                                                                                                                                                                                                                                    | Gross profit                   |        |                               | 7,039  
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|Operating expenses:                                           |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              | Sales and marketing (exclusive of stock-based compensation of $587 and $3,814 for the three months ended October 31, 2001 and 2000 and $3,844 and $13,693 for the nine months ended October 31, 2001 and 2000, respectively)       |                                |        | 12,308                        |        
|                                                              | Research and development (exclusive of stock-based compensation of $173 and $1,404 for the three months ended October 31, 2001 and 2000 and $1,768 and $3,998 for the nine months ended October 31, 2001 and 2000,
respectively)   |                                |        | 8,963                         |        
|                                                              | General and administrative (exclusive of stock-based compensation of $297 and $1,668 for the three months ended October 31, 2001 and 2000 and $1,714 and $4,484 for the nine months ended October 31, 2001 and 2000,
respectively) |                                |        | 3,126                         |        
|                                                              | Asset impairment and other                                                                                                                                                                                                         |                                |        |                              |        
|                                                              | Amortization of goodwill and other intangible assets                                                                                                                                                                               |                                |        |                              |        
|                                                              | Restructuring and exit costs                                                                                                                                                                                                       |                                |        | 4,138                         |        
|                                                              | Stock-based compensation                                                                                                                                                                                                           |                                |        | 1,134                         |        
|                                                              | Merger related expenses                                                                                                                                                                                                            |                                |        |                              |        
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              |                                                                                                                                                                                                                                    | Total operating expenses       |        |                               | 29,669 
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              |                                                                                                                                                                                                                                    | Operating loss                 |        |                               | (22,630
|Interest and other income, net                                |                                                                                                                                                                                                                                    |                                | 395    |                               |        
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              |                                                                                                                                                                                                                                    | Net loss                       |        | $                             | (22,235
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|Basic and diluted net loss per share                          |                                                                                                                                                                                                                                    | $                              | (0.30  | )                             | $      
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|Shares used in computing basic and diluted net loss per share |                                                                                                                                                                                                                                    |                                | 73,753 |                               |        
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|Comprehensive loss:                                           |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              | Net loss                                                                                                                                                                                                                           |                                | $      | (22,235                       | )      
|                                                              | Foreign currency translation adjustments                                                                                                                                                                                           |                                |        | (49                           | )      
|                                                              | Unrealized gain (loss) on short-term investments                                                                                                                                                                                   |                                |        | (40                           | )      
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        
|                                                              |                                                                                                                                                                                                                                    | Comprehensive loss             |        | $                             | (22,324
|                                                              |                                                                                                                                                                                                                                    |                                |        |                               |        

The accompanying notes are an integral part of these financial statements.
For presentation purposes, the condensed consolidated financial statements
and notes refer to the interim periods' calendar month end.

4

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NIKU CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                     |                                                                                                          | Nine Months Ended
October 31,                                                              |                                          
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -----------------------------------------
|
|Cash flows from operating activities:                |                                                                                                          |                                                                                            |                                          
|                                                     | Net loss                                                                                                 |                                                                                            | $                                        
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities:                              |                                                                                            |                                          
|                                                     |                                                                                                          | Depreciation                                                                               |                                          
|                                                     |                                                                                                          | Impairment of licensed technology                                                          |                                          
|                                                     |                                                                                                          | Restructuring and exit costs                                                               |                                          
|                                                     |                                                                                                          | Asset impairment and other                                                                 |                                          
|                                                     |                                                                                                          | Amortization of debt discount                                                              |                                          
|                                                     |                                                                                                          | Amortization of goodwill and other intangible assets                                       |                                          
|                                                     |                                                                                                          | Stock-based compensation                                                                   |                                          
|                                                     |                                                                                                          | Provision for doubtful accounts receivable                                                 |                                          
|                                                     |                                                                                                          | Revenue resulting from nonmonetary exchanges for computer equipment, software and services |                                          
|                                                     |                                                                                                          | Expense resulting from nonmonetary exchanges for services                                  |                                          
|                                                     |                                                                                                          | Forgiveness of notes receivable from stockholder                                           |                                          
|                                                     |                                                                                                          | Interest on notes receivable from stockholders                                             |                                          
|                                                     |                                                                                                          | Changes in operating assets and liabilities:                                               |                                          
|                                                     |                                                                                                          |                                                                                            | Accounts receivable                      
|                                                     |                                                                                                          |                                                                                            | Prepaid expenses and other current assets
|                                                     |                                                                                                          |                                                                                            | Deposits and other assets                
|                                                     |                                                                                                          |                                                                                            | Accounts payable                         
|                                                     |                                                                                                          |                                                                                            | Accrued liabilities                      
|                                                     |                                                                                                          |                                                                                            | Deferred revenue                         
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|Cash flows from investing activities:                |                                                                                                          |                                                                                            |                                          
|                                                     | Purchases of property and equipment                                                                      |                                                                                            |                                          
|                                                     | Sales and maturities (purchases) of short-term investments, net                                          |                                                                                            |                                          
|                                                     | Acquisitions, net of cash received                                                                       |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|Cash flows from financing activities:                |                                                                                                          |                                                                                            |                                          
|                                                     | Proceeds from initial public offering of common stock, net                                               |                                                                                            |                                          
|                                                     | Issuance of common stock                                                                                 |                                                                                            |                                          
|                                                     | Repurchase of common stock                                                                               |                                                                                            |                                          
|                                                     | Proceeds from payment of notes receivable                                                                |                                                                                            |                                          
|                                                     | Proceeds from bank borrowings, net                                                                       |                                                                                            |                                          
|                                                     | Repayment of debt and capital lease obligations                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|Net (decrease) increase in cash and cash equivalents |                                                                                                          |                                                                                            | (33,545                                  
|Effect of exchange rate on cash and cash equivalents |                                                                                                          |                                                                                            | (193                                     
|Cash and cash equivalents, beginning of period       |                                                                                                          |                                                                                            | 108,160                                  
|                                                     |                                                                                                          |                                                                                            |                                          
|Cash and cash equivalents, end of period             |                                                                                                          | $                                                                                          | 74,422                                   
|                                                     |                                                                                                          |                                                                                            |                                          
|Supplemental disclosures of cash flow information:   |                                                                                                          |                                                                                            |                                          
|                                                     | Cash paid for interest during the period                                                                 |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|Noncash investing and financing activities:          |                                                                                                          |                                                                                            |                                          
|                                                     | Repurchases of common stock in settlement of notes receivable from stockholders                          |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Common stock issued for notes receivable                                                                 |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Deferred revenue resulting from nonmonetary exchanges for computer equipment, software and services      |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Prepaid expenses resulting from nonmonetary exchanges for services                                       |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Deferred stock-based compensation                                                                        |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Common stock and redeemable convertible preferred stock issued and stock options assumed for acquisition |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Conversion of redeemable convertible preferred stock to common stock                                     |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Write-off of property and equipment to goodwill                                                          |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          

The accompanying notes are an integral part of these financial statements.
For presentation purposes, the condensed consolidated financial statements
and notes refer to the interim periods' calendar month end.

5

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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 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, 2001, included in the Company's fiscal 2001 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.

The
Company has a fiscal year that ends on the Saturday nearest January 31. For presentation purposes, the condensed consolidated financial statements and notes refer to the
interim periods' 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. ASSET IMPAIRMENT AND OTHER AND IMPAIRMENT OF LICENSED TECHNOLOGY

The Company reviews its goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. In the first quarter of fiscal 2002, the Company performed an impairment assessment of its goodwill and other intangible assets recorded in connection with its various acquisitions
due to a change in the Company's 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, the Company recorded $24.5 million in asset impairment charges. This amount included $21.7 million to write

6

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down the net book value of certain goodwill and other intangible assets from its acquisitions of Legal Anywhere, Inc. (Legal Anywhere), bSource.com, Inc. (bSource), 600 Monkeys,
Inc. (600 Monkeys) and Alyanza Software Corporation (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. Other asset impairment charges included $1.9 million in accelerated depreciation for internally used software and $874,000 to write off fixed assets that the
Company no longer utilized. The net book value of the goodwill and other intangible assets written off by the Company as asset impairment charges by acquisition during the first quarter of fiscal 2002
were as follows (in thousands):

Legal Anywhere

$
9,269bSource


8,150600 Monkeys


4,134Alyanza


164$
21,717


In
the second quarter of fiscal 2002, the Company performed an additional impairment assessment of goodwill and other intangible assets recorded in connection with its acquisitions of
ABT Corporation (ABT), Proamics Corporation (Proamics) and Legal Anywhere. This assessment was performed primarily due to a significant decline in the Company's stock price which resulted in the net
book value of assets significantly exceeding the Company's market capitalization. As a result of this assessment, the Company recorded $114.4 million in asset impairment charges in the second
quarter of fiscal 2002 which reduced the fair value of goodwill and other intangible assets related to its acquisitions of ABT, Proamics and Legal Anywhere to zero. The estimate of the fair value was
based on the estimated future discounted cash flows for the remaining life of the goodwill and other intangible assets using a discount rate of 25% and an estimated terminal value. The assumptions
supporting the estimated cash flows, including the discount rate and an estimated terminal value, reflect management's best estimates. The discount rate was based upon the weighted average cost of
capital for comparable companies. The net book value of the goodwill and other intangible assets written off by the Company as asset impairment charges by acquisition during the second quarter of
fiscal 2002 were as follows (in thousands):

ABT

$
84,625Proamics


28,530Legal Anywhere


1,224$
114,379


In
the first quarter of fiscal 2002, the Company determined that the carrying value of certain royalties that the Company had prepaid for the right to third party licensed technology
will not be realized. The Company recorded $6.8 million in cost of revenue for impairment of licensed technology in the first quarter of fiscal 2002, including $5.9 million from prepaid
royalties on third-party technologies and $850,000 from future royalties on third-party technologies which the Company will not be including with its products at all or at the rate required under the
applicable contracts due to a change in the Company's product plan. In the third quarter of fiscal 2002, based on information available to the Company at such

7

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time, the Company further reduced the carrying value of certain prepaid royalties and recorded $2.6 million in cost of revenue for impairment of licensed technology for the same reasons.

3. BUSINESS COMBINATIONS

The Company acquired four companies in fiscal 2001. Each acquisition was accounted for as a purchase, with the results of each acquired company's operations
included in the Company's results of operations from the date of its acquisition. On August 5, 2000, the Company acquired ABT, a
privately-held company located in New York City, New York. ABT was a provider of enterprise project management solutions for information technology organizations. On July 6, 2000,
the Company acquired bSource, a privately-held company in San Francisco, California. bSource was a provider of a virtual marketplace for services such as web development, law and public
relations. On May 17, 2000, the Company acquired 600 Monkeys, a privately-held company in Cleveland, Ohio. 600 Monkeys was a provider of Internet solutions for advertising and
public relations agencies. On January 31, 2000, the Company acquired Legal Anywhere, a privately-held company in Portland, Oregon. Legal Anywhere provided Internet-based
collaborative tools to law firms and corporate legal departments.

The
following summary, prepared on an unaudited pro forma basis, combines the Company's consolidated results of operations in the third quarter of fiscal 2001 and the nine months
ended October 31, 2000 with ABT's, bSource's, and 600 Monkeys' results of operations as if each company had been acquired as of February 1, 2000 (in thousands, except per share data):

Three Months
Ended October 31,
2000

Nine Months
Ended October 31,
2000Revenues

$
21,008

$
71,204Net loss

$
(39,603
)
$
(123,913
)Basic and diluted net loss per share

$
(0.54
)
$
(1.84
)Shares used in pro forma per share calculation


73,978


67,319


The
pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the period presented.

In
connection with the acquisition of ABT, the Company recorded deferred stock-based compensation in the amount of $5.1 million, of which $2.0 million is being amortized
over the vesting period of 24 months, $2.8 million was amortized over the vesting period of 12 months and $300,000 was amortized over the vesting period of three months, in a
manner consistent with FIN 28. The Company also issued 418,800 shares of common stock in August 2001 to former ABT employees.

4. RESTRUCTURING AND EXIT COSTS

In the first quarter of fiscal 2002, the Company approved a restructuring plan. The Company restructured its operations and reduced its workforce by
approximately 260 employees. The Company also vacated two leased facilities and exited the vertical legal market. In the second quarter of fiscal 2002, the Company further reduced its workforce by
approximately 150 employees. The Company also retired

8

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certain property and equipment and other assets and vacated seven leased facilities. The Company recorded $3.1 million and $7.7 million in restructuring and exit costs in the first and
second quarters of fiscal 2002, respectively. In the third quarter of fiscal 2002, the Company continued its restructuring plan by reducing its workforce by approximately 45 employees and also retired
certain property and equipment and other assets that are not associated with, and do not benefit activities of, the Company's ongoing operations. The Company recorded $4.1 million in
restructuring and exit costs in the third quarter of fiscal 2002. The Company effected a further headcount reduction in the fourth quarter of fiscal 2002 (See Note 10). These reductions in
workforce affected all functional groups of the Company.
The restructuring and exit costs for the third quarter of fiscal 2002 consisted of the following (in thousands):

|                                                              |  | Accrued as of
July 31, 2001 |       | Restructuring and Exit Costs in the
Three Months
Ended
October 31, 2001 |   | Reclassifications and Losses in the
Three Months Ended
October 31, 2001 |   | Paid in the Three Months Ended
October 31, 2001 |        | Accrued as of
October 31, 2001
|------------------------------------------------------------- |  | --------------------------- | ----- | ----------------------------------------------------------------------- | - | ----------------------------------------------------------------------- | - | ----------------------------------------------- | ------ | ------------------------------
|Loss on retirement of property and equipment and other assets |  | $                           |      |                                                                         | $ | 3,332                                                                   |   | $                                               | 3,332  |                               
|Severance                                                     |  |                             | 1,493 |                                                                         |   | 512                                                                     |   |                                                 |       |                               
|Lease termination costs                                       |  |                             | 6,148 |                                                                         |   | 317                                                                     |   |                                                 |       |                               
|Exit costs for business line                                  |  |                             | 755   |                                                                         |   | 206                                                                     |   |                                                 |       |                               
|Other exit costs                                              |  |                             |      |                                                                         |   | 1,119                                                                   |   |                                                 |       |                               
|Stock-based compensation adjustment                           |  |                             |      |                                                                         |   | (1,348                                                                  | ) |                                                 | (1,348 | )                             
|                                                              |  |                             |       |                                                                         |   |                                                                         |   |                                                 |        |                               
|                                                              |  | $                           | 8,396 |                                                                         | $ | 4,138                                                                   |   | $                                               | 1,984  |                               
|                                                              |  |                             |       |                                                                         |   |                                                                         |   |                                                 |        |                               

The above $3.3 million in loss on retirement of property and equipment and other assets consisted primarily of $1.3 million for
the retirement of certain marketing software and $1.2 million write-off of certain prepaid amounts associated with a consulting service arrangement due to the reduction in
headcount. The Company also accrued $568,000 to terminate this consulting service arrangement and this amount is included in other exit costs.

The
Company expects that of the restructuring and exit costs accrued as of October 31, 2001, severance costs will be paid by the fourth quarter of fiscal 2002, other exit costs
will be paid by the first quarter of fiscal 2003, exit costs for business lines will be paid no later than May 2004 and lease termination costs will be paid no later than April 2009. The
above stock-based compensation adjustment related to the reversal of previously recorded stock-based compensation expenses for employees terminated pursuant to the restructuring plan.

5. NET LOSS PER SHARE

Basic net loss per share is computed using the weighted-average number of outstanding shares of common stock, excluding shares of restricted stock subject to
repurchase summarized below. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potential common shares from options and
warrants to purchase common stock and unvested restricted stock using the treasury stock method. The following potential common shares have

9

---

been excluded from the computation of diluted net loss per share because the effect would have been anti-dilutive (in thousands):

October 31,2001

2000Shares issuable under stock options

12,512

8,671Shares of restricted stock subject to repurchase

452

2,175Shares issuable under warrants

56




The
weighted-average exercise price of stock options was $7.22 and $10.95 per share as of October 31, 2001 and 2000, respectively. The weighted-average purchase price of
restricted stock subject to repurchase was $1.77 and $2.32 per share as of October 31, 2001 and 2000, respectively. The weighted-average exercise price of warrants outstanding as of
October 31, 2001 was $9.68 per share. See Note 10.

6. SEGMENT REPORTING

The Company operates in a single segment: software.

Disaggregated
services revenue information is as follows (in thousands):

Three Months
Ended October 31,

Nine Months
Ended October 31,2001

2000

2001

2000Services:Consulting

$
2,586

$
4,641

$
11,045

$
8,752Maintenance


5,287


3,165


15,518


4,401$
7,873

$
7,806

$
26,563

$
13,153


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

Three Months
Ended October 31,

Nine Months
Ended October 31,2001

2000

2001

2000United States

$
7,588

$
17,455

$
25,048

$
38,590Europe and other


6,524


3,553


22,837


3,553$
14,112

$
21,008

$
47,885

$
42,143


No
customers individually represented more than 10% of gross accounts receivable as of October 31, 2001 and January 31, 2001, respectively. No customer individually
represented more than 10% of total revenue in the third quarter of fiscal 2002 and 2001, respectively, and in the nine months ended October 31, 2001 and 2000, respectively.

10

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7. COMMON SHARE REPURCHASE PROGRAM

In March 2001, the Company's Board of Directors authorized the Company, from time to time and as business conditions warrant, with no expiration date,
to repurchase shares of common stock at market price having an aggregate value of up to $10.0 million in open market, negotiated or block transactions. In the third quarter of fiscal 2002 and
in the nine months ended October 31, 2001, the Company repurchased 3,617,100 and 4,541,664 shares of common stock at an average price per share of $0.58 and $0.79, respectively.

8. DEBT

In October 2001, the Company entered into two loan agreements with a financial institution secured generally by certain of the Company's tangible and
intangible assets and providing revolving lines of credit up to $30.0 million, of which a $5.0 million line of credit is secured by qualifying accounts receivables. As of
October 31, 2001, the Company had $26.0 million outstanding under these lines of credit. 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 October 31, 2001, the Company was in compliance with all financial covenants. These lines of credit were repaid in full in November 2001.

9. LITIGATION

The Company, as well as certain of its officers and directors, has been named as a defendant in a number of purported securities class actions in United States
District Court for the Southern District of New York, arising out of the Company's initial public offering in February 2000 (the "IPO"). Various underwriters 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, 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.

10. SUBSEQUENT EVENTS

In November 2001, the Company continued its restructuring plan by reducing its headcount by approximately 210 employees which affected all functional
groups of the Company. The severance charges will be recorded as restructuring costs in the fourth quarter of fiscal 2002.

On
November 12, 2001, the Company's board of directors, acting pursuant to existing terms of the Company's stock options plans, approved a re-pricing of outstanding
stock options with exercise prices above $0.75 other than options held by the Company's chief executive officer, executive vice president, strategy and planning, board of directors and
non-employees. The exercise prices of all such stock options

11

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were re-priced to $0.75, which was the fair market value of the Company' stock on November 12, 2001. The Company re-priced approximately 8.0 million options with
no changes to vesting schedule. The Company will account for the repriced options under variable accounting whereby stock-based compensation for the options will be remeasured quarterly and recorded
in the consolidated statements of operations for each reporting period.

12

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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, 2001. 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, 2001 and on Form 10-Q for the quarters ended April 30, 2001 and July 31, 2001. 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, 2001 and the quarterly reports on Form 10-Q for the quarters ended April 30, 2001 and July 31, 2001.

Overview

We design, develop and market enterprise applications software for service organizations of Global 2000 companies. Service organizations include information
technology departments, research and development organizations, consulting groups and other organizations rendering services inside and outside the enterprise. Our software automates the core
processes of service organizations in one integrated application suite, allowing teams within these organizations to manage people and projects, to capture and reuse knowledge and to account for
project-related activities. Our software also connects partners, customers and outside contractors to service organizations through extranet and collaboration capabilities, extending the effectiveness
of teams beyond the enterprise. Our software provides executives and managers with visibility into and metrics for projects, project portfolios and businesses, enabling informed decision-making. We
believe that our software enables service organizations to deliver results more efficiently and effectively, thereby securing a competitive advantage.

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Results of Operations

The following table sets forth our results of operations as a percentage of total revenue:

|                               |                                                      | Three Months Ended
October 31, |      | Nine Months Ended
October 31, |     
|------------------------------ | ---------------------------------------------------- | ------------------------------ | ---- | ----------------------------- | ----
|
|Revenue:                       |                                                      |                                |      |                               |     
|                               | License                                              |                                | 44.2 | %                             | 62.8
|                               | Services                                             |                                | 55.8 |                               | 37.2
|                               |                                                      |                                |      |                               |     
|                               |                                                      | Total revenue                  |      | 100.0                         |     
|                               |                                                      |                                |      |                               |     
|Cost of revenue:               |                                                      |                                |      |                               |     
|                               | License                                              |                                | 1.8  |                               | 3.4 
|                               | Services                                             |                                | 29.9 |                               | 27.5
|                               | Impairment of licensed technology                    |                                | 18.4 |                               |    
|                               |                                                      |                                |      |                               |     
|                               |                                                      | Total cost of revenue          |      | 50.1                          |     
|                               |                                                      |                                |      |                               |     
|                               |                                                      | Gross profit                   |      | 49.9                          |     
|                               |                                                      |                                |      |                               |     
|Operating expenses:            |                                                      |                                |      |                               |     
|                               | Sales and marketing                                  |                                | 87.2 |                               | 89.5
|                               | Research and development                             |                                | 63.5 |                               | 55.5
|                               | General and administrative                           |                                | 22.2 |                               | 18.4
|                               | Asset impairment and other                           |                                |     |                               |    
|                               | Amortization of goodwill and other intangible assets |                                |     |                               | 62.0
|                               | Restructuring and exit costs                         |                                | 29.3 |                               |    
|                               | Stock-based compensation                             |                                | 8.1  |                               | 34.7
|                               | Merger related expenses                              |                                |     |                               | 11.2
|                               |                                                      |                                |      |                               |     
|                               |                                                      | Total operating expenses       |      | 210.3                         |     
|                               |                                                      |                                |      |                               |     
|                               |                                                      | Operating loss                 |      | (160.4                        | )   
|Interest and other income, net |                                                      | 2.8                            |      | 13.7                          |     
|                               |                                                      |                                |      |                               |     
|                               |                                                      | Net loss                       |      | (157.6)                       | %   
|                               |                                                      |                                |      |                               |     

Comparison of Three and Nine Months Ended October 31, 2001 and 2000

Revenue

License.License revenue consists of revenue from licenses of our software products. License revenue was
$6.2 million and $13.2 million in the third quarter of fiscal 2002 and 2001, respectively, decreasing 52.7% period over period. License revenue was $21.3 million and
$29.0 million in the nine months ended October 31, 2001 and 2000, respectively, decreasing 26.5% period over period. The decrease in license revenue in absolute dollars was primarily
attributable to a slowdown in corporate information technology spending, product development cycles and sales force tenure.

Services.Services revenue consists of revenue from the delivery of implementation services and maintenance and support
contracts. Services revenue from implementation services in the third quarter of fiscal 2002 decreased 44.3% to $2.6 million from $4.6 million in the third quarter of fiscal 2001.
Services revenue from implementation services in the nine months ended October 31, 2001 increased 26.2% to $11.0 million from $8.8 million in the nine months ended
October 31, 2000. Services revenue from maintenance and support contracts in the third quarter of fiscal 2002 increased 67.0% to $5.3 million from $3.2 million in the third
quarter of fiscal 2001. Service revenue from maintenance and support contracts in the nine months ended October 31, 2001 increased 252.6% to $15.5 million from $4.4 million in the
nine months ended October 31, 2000. The decrease in services revenue from implementation services in the third quarter of fiscal 2002 from the third quarter of fiscal 2001 in absolute dollars
was primarily

14

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attributable to a reduction in headcount within our implementation services group. The increase in services revenue from implementation services in the nine months ended October 31, 2001 from
the nine months ended October 31, 2000 in absolute dollars was primarily attributable to an increase in customer implementations in the first six months of fiscal 2002 compared to the first six
months of fiscal 2001. The increase in services revenue from maintenance and support contracts in absolute dollars was primarily attributed to new maintenance contracts and maintenance renewals
relating to larger installed bases. In the fourth quarter of fiscal 2002, we expect services revenue in absolute dollars to decrease modestly from the third quarter of fiscal 2002.

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 $252,000 and $700,000 in the third quarter of fiscal 2002 and 2001, respectively, representing 4.0% and 5.3% of total license revenue in
the respective periods. Cost of license revenue was $1.3 million and $2.1 million in the nine months ended
October 31, 2001 and 2000, respectively, representing 6.2% and 7.2% of total license revenue in the respective periods. The decrease in cost of license revenue in absolute dollars was primarily
attributable to a decline in license revenue that decreased royalties due to third parties.

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 $4.2 million and
$5.8 million in the third quarter of fiscal 2002 and 2001, respectively, representing 53.7% and 74.1% of total services revenue in the respective periods. Cost of services revenue was
$19.4 million and $10.5 million in the nine months ended October 31, 2001 and 2000, respectively, representing 73.1% and 79.9% of total services revenue in the respective periods.
The decrease in cost of services revenue in absolute dollars in the third quarter of fiscal 2002 from the third quarter of fiscal 2001 was primarily attributable to a reduction in headcount within our
implementation services and maintenance and support groups. The increase in cost of services revenue in absolute dollars in the nine months ended October 31, 2001 from the nine months ended
October 31, 2000 was primarily attributable to an increase in costs for third parties contracted to implement our products and increases in personnel and personnel-related expenses in the first
six months of fiscal 2002 compared to the first six months of fiscal 2001, offset in part by later reductions in headcount.

Impairment of licensed technology.In the first quarter of fiscal 2002, we recorded $6.8 million in impairment
of licensed technology, including $5.9 million from prepaid royalties on third-party technologies and $850,000 from future royalties on third-party technologies which we will not be including
with our products at all or at the rate required under the applicable contracts due to a change in our product plan. In the third quarter of fiscal 2002, based on information available to us at such
time, we further reduced the carrying value of certain prepaid royalties by recording $2.6 million in impairment of licensed technology for the same reasons.

Operating Expenses

Sales and marketing.Sales and marketing expenses consist primarily of salaries, advertising, commissions, bonuses,
travel and bad debt expense. Sales and marketing expenses were $12.3 million and $18.8 million in the third quarter of fiscal 2002 and 2001, respectively, representing 87.2% and 89.5% of
total revenue in the respective periods. Sales and marketing expenses were $61.9 million and $44.7 million in the nine months ended October 31, 2001 and 2000, respectively,
representing 129.3% and 106.0% of total revenue in the respective periods. The decrease in sales and marketing expenses in absolute dollars in the third quarter of fiscal 2002 from the third quarter
of fiscal 2001 was primarily attributable to decreases in advertising and travel. The increase in sales and marketing expenses in absolute dollars in the nine months ended October 31, 2001 from
the nine months ended October 31, 2000 was primarily attributable

15

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to increases in bad debt expenses, personnel and personnel-related expenses, commissions and bonuses. In the fourth quarter of fiscal 2002, we expect sales and marketing expenses in absolute dollars
to decrease from the third quarter of fiscal 2002 as a result of decreases in headcount and other cost-control measures including salary reductions for domestic employees.

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 $9.0 million and
$11.7 million in the third quarter of fiscal 2002 and 2001, respectively, representing 63.5% and 55.5% of total revenue in the respective periods. Research and development expenses were
$30.5 million and $26.1 million in the nine months ended October 31, 2001 and 2000, respectively, representing 63.8% and 61.9% of total revenue in the respective periods. The
decrease in research and development expenses in absolute dollars in the third quarter of fiscal 2002 from the third quarter of fiscal 2001 was primarily attributed to a decrease in personnel and
personnel related costs due to headcount reductions. The increase in research and development in absolute dollars in the nine months ended October 31, 2001 from the nine months ended
October 31, 2000 was primarily attributable to an increase in personnel and personnel-related expenses in the first six months of fiscal 2002 compared to the first six months of fiscal 2001. In
the fourth quarter of fiscal 2002, we expect research and development expenses in absolute dollars to decrease from the third quarter of fiscal 2002 as a result of decrease in headcount and other
cost-control measures including salary reductions for domestic employees.

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 fees. General and administrative expenses were $3.1 million and $3.9 million in the third
quarter of fiscal 2002 and 2001, respectively, representing 22.2% and 18.4% of total revenue in the respective periods. General and administrative expenses were $13.3 million and
$9.0 million in the nine months ended October 31, 2001 and 2000, respectively, representing 27.7% and 21.4% of total revenue in the respective periods. The decrease in general and
administrative expenses in absolute dollars in the third quarter of fiscal 2002 from the third quarter of fiscal 2001 was primarily attributable to decreases in professional fees and bonuses. The
increase in general and administrative expenses in absolute dollars in the nine months ended October 31, 2001 from the nine months ended October 31, 2000 was primarily attributable to
increases in personnel and personnel-related expenses in the first six months of fiscal 2002 compared to the first six months of fiscal 2001. In the fourth quarter of fiscal 2002, we expect general
and administrative expenses in absolute dollars to decrease from the second quarter of fiscal 2002 as a result of decrease in headcount and other cost-control measures including salary
reductions for domestic employees.

Asset impairment and other.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. Other asset impairment charges included
$1.9 million in accelerated depreciation for internally used software and $874,000 to write off fixed assets that we no longer utilized.

In
the second quarter of fiscal 2002, we performed an additional impairment assessment of goodwill and other intangible assets recorded in connection with our acquisitions of ABT,
Proamics and Legal Anywhere. This assessment was performed primarily due to a significant decline in our stock price which resulted in the net book value of our assets significantly exceeding our
market capitalization. As a result of

16

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this assessment, we recorded $114.4 million in asset impairment charges in the second quarter of fiscal 2002 which reduced the fair value of goodwill and other intangible assets related to our
acquisitions of ABT, Proamics and Legal Anywhere to zero. The estimate of the fair value was based on the estimated future discounted cash flows for the remaining life of the goodwill and other
intangible assets with a discount rate of 25% and an estimated terminal value. The assumptions supporting the estimated cash flows, including the discount rate and an estimated terminal value, reflect
management's best estimates. The discount rate was based upon the weighted average cost of capital for comparable companies.

Amortization of goodwill and other intangible assets.Amortization of goodwill and other intangible assets were $0 and
$13.0 million in the third quarter of fiscal 2002 and 2001, respectively, and $27.3 million and $23.6 million in the nine months ended October 31, 2001 and 2000,
respectively. There was no amortization of goodwill and other intangible assets in the third quarter of fiscal 2002 as all goodwill and other intangibles assets were written off in the second quarter
of fiscal 2002. Amortization of goodwill and other intangible assets included amortization of developed and core technologies of approximately $3.3 million in the third quarter of fiscal 2001
and $6.5 million and $6.8 million in the nine months ended October 31, 2001 and 2000, respectively.

Restructuring and exit costs.In the first quarter of fiscal 2002, we approved a restructuring plan. We restructured
our operations and reduced our workforce by approximately 260 employees. We also vacated two leased facilities and exited the vertical legal market. In the second quarter of fiscal 2002, we further
reduced our workforce by approximately 150 employees. We also retired certain property and equipment and vacated seven leased facilities. In the third quarter of fiscal 2002, we continued our
restructuring plan by reducing our workforce by approximately 45 employees and also retired certain property and equipment and other assets. These reductions in force affected all of our functional
groups. We recorded $4.1 million and $15.0 million in restructuring and exit costs that are not associated with, and do not benefit activities of, our ongoing operations in the third
quarter of fiscal 2002 and in the nine months ended October 31, 2001, respectively. The $3.3 million in loss on retirement of property and equipment and other assets (See Note 4)
consisted primarily of $1.3 million for the retirement of a marketing software and $1.2 million write-off of certain prepaids for a consulting service arrangement due to the
reduction in headcount. We also accrued $568,000 to terminate this consulting service arrangement and this amount is included in other exit costs (See Note 4). We expect that of the
restructuring and exit costs accrued as of October 31, 2001, severance costs will be paid by the fourth quarter of fiscal 2002, other exit costs will be paid by the first 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 April 2009.

Stock-based compensation.Amortization of stock-based compensation was $1.1 million and $7.3 million in
the third quarter of fiscal 2002 and 2001, respectively, and $8.0 million and $22.8 million in the nine months ended October 31, 2001 and 2000, respectively. The decrease in
amortization of stock-based compensation was primarily attributed to employee terminations and the effects of having applied Financial Accounting Standard Board (FASB) Interpretation No. 28
that allowed for an accelerated amortization of stock-based compensation in previous periods.

Merger Related Expenses.Merger related expenses of $2.4 million in the third quarter of fiscal 2001 and in the
nine months ended October 31, 2000 were incurred in conjunction with the acquisition and integration of ABT.

Interest and Other Income, Net

Interest and other income, net.Interest and other income, net, consists of interest income, interest expense and other
non-operating expenses. The net decrease in the third quarter of fiscal 2002 from the third quarter of fiscal 2001 and the net decrease in the nine months ended October 31, 2001
from the nine months ended October 31, 2000 was primarily attributable to lower average invested cash and short-term investment balances, which yielded lower interest income.

17

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Liquidity and Capital Resources

Since inception, we have financed our operations through private sales of our capital stock prior to our initial public offering with net proceeds of
$68.0 million, through our initial public offering of common stock in February 2000 with net proceeds of $202.5 million and from bank loans and equipment leases. These proceeds
are used for working capital for our business. As of October 31, 2001, we had cash, cash equivalents and short-term investments of $74.4 million and $21.9 million in
working capital. The decrease in working capital as of October 31, 2001 from $135.6 million as of January 31, 2001 primarily resulted from the use of cash, cash equivalents and
short-term investments in our operations and decreases in net accounts receivable and prepaid expenses and other current assets.

Net
cash used in operating activities was $64.2 million and $51.2 million in the nine months ended October 31, 2001 and 2000, respectively. Net cash used in
operating activities in the nine months ended October 31, 2001 primarily resulted from a net loss of $274.7 million, offset in part by impairment
charges, amortization of goodwill and other intangible assets and a decrease in accounts receivable. Net cash used in operating activities in the nine months ended October 31, 2000 primarily
resulted from a net loss of $91.1 million and increases in accounts receivable and prepaid expenses and other current assets, offset in part by amortization of goodwill and other intangible
assets, stock-based compensation and an increase in accrued liabilities.

Net
cash provided by (used in) investing activities was $32.0 million and ($84.5) million in the nine months ended October 31, 2001 and 2000, respectively. Net cash
provided by investing activities in the nine months ended October 31, 2001 resulted from net sales and maturities of short-term investments, offset by purchases of property and
equipment. Net cash used in investing activities in the nine months ended October 31, 2000 primarily resulted from net purchases of short-term investments.

Net
cash (used in) provided by financing activities was ($1.3) million and $201.3 million in the nine months ended October 31, 2001 and 2000, respectively. Net cash used
in financing activities in the nine months ended October 31, 2001 resulted from the repurchase of our common stock pursuant to our common share repurchase program, offset in part by the
issuance of our common stock and net proceeds from our bank borrowings. Net cash provided by financing activities in the nine months ended October 31, 2000 primarily resulted from net proceeds
from our initial public offering.

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 secured by qualifying accounts receivables. As of October 31, 2001, we had $26.0 million
outstanding under these lines of credit. 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
October 31, 2001, we were in compliance with all financial covenants. These lines of credit were repaid in full in November 2001.

We
anticipate that our cash resources will continue to decline in order to fund operating expenses, as well as planned capital expenditures. We believe that cash from operations and
existing cash will be sufficient to meet our working capital and expense requirements for at least the next twelve months.

Recent Accounting Pronouncements

In October 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This statement supersedes and replaces the guidance in
Statement 125,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 provides accounting
and reporting guidance for transfers and servicing for financial assets and liabilities. The provisions of SFAS No. 140 became effective for transactions entered into after March 31,
2001. The adoption of SFAS No. 140 did not have a material effect on our financial statements.

18

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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 company 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.

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. We are currently evaluating the potential impact, if any, that the adoption of SFAS No. 144 will have on our financial position and results of
operation.

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 already experienced a significant decline in recent periods, could continue to decline and you might lose all or part of your investment.

We are an early stage company, which makes it difficult to evaluate our current business

We were incorporated in January 1998 and began licensing our software in December 1998. Therefore, we have only a limited history upon which to
base an evaluation of our current business and prospects.

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

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 business is changing rapidly. For example, we have recently introduced a major new release of our software and are continuing to implement a restructuring plan.
We also 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 can not
meet those revenue projections.

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We have incurred losses throughout our operating history and expect to incur losses for the foreseeable future

We have experienced operating losses in each quarterly and annual period since we were formed, and we expect to incur losses in the future. As of
October 31, 2001, we had an accumulated deficit of $445.1 million. We had net losses of $274.7 million in the nine months ended October 31, 2001. In addition, 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 prior to our initial public offering on February 28, 2000, and subsequently. In addition, on November 12, 2001, our board of directors approved a re-pricing of stock
options to the fair market value of our common stock on November 12, 2001 which could result in substantial stock-based compensation expense in future periods.

We
will need to increase our revenue significantly to achieve and maintain profitability. Our revenue in the third quarter of fiscal 2002 decreased from our revenue in the second
quarter of fiscal 2002 and our license revenue also declined in the third quarter of fiscal 2002 relative to the second quarter of fiscal 2002. We can not 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 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 further

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, the size of such licensing transactions and maintenance renewals. 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 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. It is possible that, in some future periods, our revenue performance, expense levels, cash usage or other operating results will be below the expectations of
investors. If this occurs, the price of our common stock could decline further.

The current economic downturn has impacted demand for our products and services and may adversely affect future revenue

Recent economic indicators, including gross domestic product figures, reflect a continuing slowdown in economic activity in the United States and Europe from
prior periods. Many reports have indicated an even more significant decline in spending by corporations in the area of information technology, the overall market in which we participate. 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 target 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 downturn continues or increases in severity, or
results in a similar downturn worldwide, we believe demand for our products

20

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and services, and therefore future revenue, will be reduced. We may not be able to respond to future revenue reductions in a sufficiently timely manner to avoid corresponding increases in future
losses. Even if the current downturn improves, we can not assure you that corporations will increase their information technology spending or that we will be able to maintain or improve revenue
levels.

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

We expect to experience seasonality in the licensing of our products and sales of our services. For example, we anticipate that revenue may be 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.

If we fail to improve the productivity of our sales organization, our ability to generate revenue will be limited

We need to increase the productivity (revenue per sales representative) of our sales organization. Our failure to do so will harm our ability to generate
revenue. The average tenure of our sales team is over eight months. If new sales personnel do not become effective in a timely manner, our revenue will be harmed.

Failure to collect our accounts receivable would adversely affect our cash flows and operating results

Our financial results are dependent upon the collection of our accounts receivable. As of October 31, 2001, our accounts receivable, net of allowance
for doubtful accounts, was $9.5 million and our allowance for doubtful accounts was $5.3 million. The failure by our customers to pay or the delay by our customers in making payments
would adversely affect our cash flows and operating results.

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

We introduced a new version of our software in the third quarter of fiscal 2002. We may experience delays in market acceptance of new products or product
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

21

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introduction of future products or product enhancements and could increase research and development costs.

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 XML/XSL. If new technologies emerge that are incompatible with our products, our key products and services 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 NT and HP/UX. 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 operating systems, databases, web servers and
other enterprise and Internet-based applications could delay our product development, increase our research and development expenses or cause customers to delay evaluation, purchase and deployment of
our products.

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

Products as complex as those we offer or are developing frequently contain undetected defects or errors. Despite internal testing and testing by our customers
or potential customers, defects or errors may occur in our existing or future products and services. From time to time in the past, versions of our software that have been delivered to customers have
contained errors. In the future, if we are not able to detect and correct errors prior to release, we may experience a loss of or delay in revenue, failure to achieve market acceptance and increased
costs to correct errors, any of which could significantly harm our business.

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

To date, customers have not 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. 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

22

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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.

Our recent expense reductions may harm our business

In connection with our efforts to streamline our operations and reduce costs, in the nine months ended October 31, 2001, we restructured our
organization with substantial headcount reductions and other cost-control measures. In addition, in November 2001, we further reduced our headcount. As a result of these headcount
reductions and cost-control measures, our ability to respond to unexpected challenges may be impaired, and we may be unable to take advantage of new opportunities. The personnel reduction
may reduce employee morale and productivity and create concern among existing employees about job security, which would lead to increased turnover. Further, this reduction in workforce may subject us
to the risk of litigation.

We may be unable to effect planned expense reductions

We have announced targets for reductions of our quarterly expenses. We may be unable to achieve these reductions in a timely manner or at all. Failure to
achieve these reductions would seriously harm our operating results and would among other things require a continued depletion of our cash resources to fund operating losses.

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

In the third quarter of fiscal 2002, international revenue represented 46.2% of total revenue, compared to 52.3% of total revenue in the second quarter of
fiscal 2002. International license revenue represented 47.0% of total license revenue in the third quarter of fiscal 2002, compared to 48.1% in the second quarter of fiscal 2002.

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

23

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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 resource planning software companies such as Oracle, Peoplesoft, SAP and Siebel Systems;
| | - |  | ---------------------------------------------------------------------------------------------------
| |  |  | developers of project management software; and                                                     
| |  |  | developers 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.

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, Microsoft, Oracle, Sun and Verity, whose products or technologies, such as reporting engines, search engines, application servers, databases and operating systems, 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 are uncertain of our ability to obtain additional financing for our future needs

We believe that cash from operations and existing cash will be sufficient to meet our working capital and expense requirements for at least the next twelve
months. However, we may need to raise additional funds in order to fund our business, expand our sales activities, develop new or enhance existing products and respond to competitive pressures. We may
also need to raise funds in the future to meet our working capital needs. As of October 31, 2001, we had cash and cash equivalents of $74.4 million. However, included in this amount are
certain certificates of deposit securing letters of credit required for our various leased facilities and equipment. Our working capital decreased to $21.9 million as of October 31, 2001
from $135.6 million as of January 31, 2001. Additional financing may not be available on terms favorable to us, or at all. If we issue additional equity securities, stockholders may
experience additional dilution or the

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new equity securities may have rights, preferences or privileges senior to those of the then existing holders of our common 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, like that of many other early-stage software companies 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;
| | - |  | -------------------------------------------------------------------------------------------
| |  |  | 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;                                      
| |  |  | additions to, or departures of, our executive officers; and                                
| |  |  | conditions and trends in the Internet and electronic commerce 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.

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 other Nasdaq National
Market listing requirements, the bid price for our stock has in the recent past been below $1.00. The Nasdaq National Market has suspended its rules regarding the minimum bid price through
December 31, 2001 but is expected to re-initiate such rules on January 2, 2002. If the bid price for our stock drops below $1.00 again, we could be subject to delisting by
the Nasdaq National Market.

We depend on the continued services of our executive officers

Our future success depends upon the continued service of our executive officers, particularly Farzad Dibachi, our founder and chief executive officer. None of
our executive officers is bound by an employment agreement for any specific term that prevents him or her from terminating his or her employment at any time. Mr. Dibachi is not currently
receiving a salary for his services to the Company. Our business would be seriously harmed if we lost the services of one or more of our executive officers or if one or more of them decided to join a
competitor or otherwise compete directly or indirectly with us.

Pending litigation could harm our business

We, as well as certain of our officers and directors, have been named as a defendant in a number of purported securities class actions in United States
District Court for the Southern District of New York, arising out of the Company's initial public offering in February 2000 (the "IPO"). Various underwriters 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 our 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, the Court ordered that these actions, along with hundreds of IPO allocation
cases against other issuers, be transferred to Judge Scheindlin for coordinated

25

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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. We believe that the claims asserted against us in these cases are without merit and we intend to defend
vigorously against them.

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 and Do What Matters 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 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.

Acquisitions may present risks to our business

We have acquired six companies. Past and potential future acquisitions create and could create risks and expenses for us, including:

| |  |  | difficulties in assimilating the acquired personnel, operations, technologies or products;       
| | - |  | -------------------------------------------------------------------------------------------------
| |  |  | changes relating to the impairment of acquired assets;                                           
| |  |  | the inability to market and license our products effectively to the acquired company's customers;
| |  |  | unanticipated costs associated with the acquisitions;                                            
| |  |  | the need to manage geographically dispersed operations;                                          
| |  |  | diversion of management's attention from other business concerns;                                

26

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| |  |  | the inability to retain the acquired employees; and                              
| | - |  | ---------------------------------------------------------------------------------
| |  |  | adverse effects on our or the acquired company's existing business relationships.

To
varying degrees, these risks have been evident in our acquisitions to date. If we experience ongoing difficulties in assimilating acquired businesses, products or technologies, our
business could be disrupted, our management and employees could be distracted and we could incur increased expenses. Furthermore, we may issue equity securities to pay for any future acquisitions,
which could be dilutive to our existing stockholders. We may also incur debt or assume unknown liabilities in connection with acquisitions.

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.                                                                                    

Rising energy costs and power system shortages in California may result in increased operating expenses and harm to our operations due to power loss

California has experienced significant power shortages. While energy costs in California, including those for natural gas and electricity, appear to have
stabilized after having risen significantly over the past summer relative to the rest of the United States, we can not predict whether these prices will remain stable or will rise again. Because our
principal operating facilities are located in California, increased
power prices could increase our operating expenses significantly. In addition, a sustained or frequent power failure could disrupt our operations, which would limit our ability to provide our products
and services to our customers, harm our customer relationships and have an adverse effect on our operating results.

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. As a majority of our sales are currently
made in U.S. dollars, 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 by our European and Asia-Pacific subsidiaries. We intend 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 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.

We, as well as certain of our officers and directors, have been named as a defendant in a number of purported securities class actions in United States
District Court for the Southern District of New York, arising out of the Company's initial public offering in February 2000 (the "IPO"). Various underwriters 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
our 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, 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. We believe that the claims asserted against us
in these cases are without merit and we intend to defend vigorously against them.

Item 2. Change in Securities and Use of Proceeds.

| | (d) |  | Use of Proceeds
| | --- |  | ---------------



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

| | (a) |  | Exhibits
| | --- |  | --------
| |     |  |         

|Number |  | Exhibit Title                                                                                                                                                             
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.24  |  | Business Loan Agreement, Promissory Note and Amended and Restated Commercial Security Agreement, dated October 19, 2001, by and between Mid-Peninsula Bank and Registrant.
|10.25  |  | Business Loan Agreement and Promissory Note (Asset Based), dated October 19, 2001, by and between Mid-Peninsula Bank and Registrant.                                      

| | (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: December 7, 2001 |  | By:             

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