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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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 April 30, 2003

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



NIKU CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

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

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

The number of shares outstanding of the registrants common stock as of May 31,
2003 was 11,919,617.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                                          |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                   
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                    
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II: OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 4. Submission of Matter to a Vote of Security Holders                                   
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 9.1                  
|EXHIBIT 9.2                  
|EXHIBIT 10.2                 



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NIKU CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED APRIL 30, 2003

INDEX

|                                                                                              |  |                                                                          |    |      |   | 
|--------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | -- | ---- | - | 
|                                                                                              |  |                                                                          |    | Page
|                                                                                              |  |                                                                          |    |     
|PART I                      Financial Information                                             |  |                                                                          |    |     
|Item 1. Financial Statements (unaudited):                                                     |  |                                                                          |    |     
|                                                                                              |  | Condensed Consolidated Balance Sheets                                    |    |      | 3 | 
|                                                                                              |  | Condensed Consolidated Statements of Operations and
Comprehensive Income |    |      | 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 |  |                                                                          | 12 |     
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                          | 29 |     
|Item 4. Controls and Procedures                                                               |  |                                                                          | 29 |     
|PART II                      Other Information                                                |  |                                                                          |    |     
|Item 1. Legal Proceedings                                                                     |  |                                                                          | 30 |     
|Item 2. Changes in Securities and Use of Proceeds                                             |  |                                                                          | 30 |     
|Item 4. Submission of Matter to a Vote of Security Holders                                    |  |                                                                          | 30 |     
|Item 6. Exhibits and Reports on Form 8-K                                                      |  |                                                                          | 31 |     
|Signatures                                                                                    |  |                                                                          | 33 |     
|Certifications                                                                                |  |                                                                          | 34 |     

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PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




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

|                                               |                                                  |                                                                     |       |        |        |           |        |             |        |  |  | 
|---------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------------- | ----- | ------ | ------ | --------- | ------ | ----------- | ------ |  |  | 
|                                               |                                                  |                                                                     |       |        |        | April 30, |        | January 31,
|                                               |                                                  |                                                                     |       |        |        |           |        |            
|                                               |                                                  |                                                                     |       |        |        | 2003      |        | 2003       
|                                               |                                                  |                                                                     |       |        |        |           |        |            
|ASSETS                                         |                                                  |                                                                     |       |        |        |           |        |            
|Current Assets:                                |                                                  |                                                                     |       |        |        |           |        |            
|                                               | Cash and cash equivalents                        |                                                                     | $     | 23,179 |        |           | $      | 16,670      |       
|                                               | Current portion of restricted cash               |                                                                     |       |       |        |           |        | 229         |       
|                                               |                                                  |                                                                     |       |        |        |           |        |             |       
|                                               |                                                  | Total cash, cash equivalents and current portion of restricted cash |       |        | 23,179 |           |        |             | 16,899 | 
|                                               | Accounts receivable, net                         |                                                                     |       | 6,139  |        |           |        | 7,211       |       
|                                               | Prepaid expenses and other current assets        |                                                                     |       | 2,376  |        |           |        | 1,687       |       
|                                               |                                                  |                                                                     |       |        |        |           |        |             |       
|                                               |                                                  | Total current assets                                                |       |        | 31,694 |           |        |             | 25,797 | 
|Restricted cash                                |                                                  |                                                                     | 1,108 |        |        |           | 1,108  |            
|Property and equipment, net                    |                                                  |                                                                     | 2,115 |        |        |           | 2,515  |            
|Deposits and other assets                      |                                                  |                                                                     | 997   |        |        |           | 1,143  |            
|                                               |                                                  |                                                                     |       |        |        |           |        |             |       
|                                               |                                                  | Total assets                                                        |       | $      | 35,914 |           |        | $           | 30,563 | 
|                                               |                                                  |                                                                     |       |        |        |           |        |             |       
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |                                                  |                                                                     |       |        |        |           |        |            
|Current Liabilities:                           |                                                  |                                                                     |       |        |        |           |        |            
|                                               | Accounts payable                                 |                                                                     | $     | 1,652  |        |           | $      | 2,422       |       
|                                               | Accrued liabilities                              |                                                                     |       | 5,828  |        |           |        | 6,180       |       
|                                               | Accrued restructuring                            |                                                                     |       | 2,610  |        |           |        | 5,550       |       
|                                               | Bank borrowings and other short-term obligations |                                                                     |       | 4,531  |        |           |        | 1,051       |       
|                                               | Deferred revenue                                 |                                                                     |       | 8,898  |        |           |        | 9,375       |       
|                                               |                                                  |                                                                     |       |        |        |           |        |             |       
|                                               |                                                  | Total current liabilities                                           |       |        | 23,519 |           |        |             | 24,578 | 
|Long-term accrued restructuring                |                                                  |                                                                     | 5,971 |        |        |           | 6,209  |            
|Long-term portion of bank borrowings           |                                                  |                                                                     |      |        |        |           | 3,750  |            
|                                               |                                                  |                                                                     |       |        |        |           |        |             |       
|                                               |                                                  | Total liabilities                                                   |       |        | 29,490 |           |        |             | 34,537 | 
|Stockholders equity (deficit)                 |                                                  |                                                                     | 6,424 |        |        |           | (3,974 | )          
|                                               |                                                  |                                                                     |       |        |        |           |        |             |       
|                                               |                                                  | Total liabilities and stockholders equity (deficit)                |       | $      | 35,914 |           |        | $           | 30,563 | 
|                                               |                                                  |                                                                     |       |        |        |           |        |             |       

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

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

|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |        |        |     | 
|----------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | -------------------- | ----- | ------------------ | --- | ----- | ------ | ------ | --- | 
|                                                      |                                                                                                                                                       |                                          |                      |       | Three Months Ended
|                                                      |                                                                                                                                                       |                                          |                      |       | April 30,         
|                                                      |                                                                                                                                                       |                                          |                      |       |                   
|                                                      |                                                                                                                                                       |                                          |                      |       | 2003               |     | 2002 
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |      
|Revenue:                                              |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      | License                                                                                                                                               |                                          | $                    | 3,213 |                    |     | $     | 5,691  |       
|                                                      | Services                                                                                                                                              |                                          |                      | 6,626 |                    |     |       | 8,436  |       
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      |                                                                                                                                                       | Total revenue                            |                      |       | 9,839              |     |       |        | 14,127 |    
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|Cost of revenue:                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      | License                                                                                                                                               |                                          |                      | (24   | )                  |     |       | 316    |       
|                                                      | Services (exclusive of stock-based compensation of $1 and ($260)
for the three months ended April 30, 2003 and 2002, respectively)                    |                                          |                      | 2,650 |                    |     |       | 3,766  |       
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      |                                                                                                                                                       | Total cost of revenue                    |                      |       | 2,626              |     |       |        | 4,082  |    
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      |                                                                                                                                                       | Gross profit                             |                      |       | 7,213              |     |       |        | 10,045 |    
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|Operating expenses:                                   |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      | Sales and marketing (exclusive of stock-based compensation of $17 and
($1,950) for the three months ended April 30, 2003 and 2002, respectively)      |                                          |                      | 3,582 |                    |     |       | 8,147  |       
|                                                      | Research and development (exclusive of stock-based compensation
of $8 and ($1,206) for the three months ended April 30, 2003
and 2002, respectively)  |                                          |                      | 1,897 |                    |     |       | 4,029  |       
|                                                      | General and administrative (exclusive of stock-based compensation
of $35 and ($230) for the three months ended April 30, 2003
and 2002, respectively) |                                          |                      | 1,537 |                    |     |       | 2,207  |       
|                                                      | Stock-based compensation                                                                                                                              |                                          |                      | 61    |                    |     |       | (3,646 | )     
|                                                      | Restructuring and other                                                                                                                               |                                          |                      |      |                    |     |       | (838   | )     
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      |                                                                                                                                                       | Total operating expenses                 |                      |       | 7,077              |     |       |        | 9,899  |    
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      |                                                                                                                                                       | Operating income                         |                      |       | 136                |     |       |        | 146    |    
|Interest and other income (expense), net              |                                                                                                                                                       |                                          | (34                  | )     |                    |     | 120   |       
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      |                                                                                                                                                       | Net income                               |                      | $     | 102                |     |       | $      | 266    |    
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |        |       
|Basic net income per share                            |                                                                                                                                                       | $                                        | 0.01                 |       |                    | $   | 0.04  |       
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |        |       
|Shares used in computing basic net income per share   |                                                                                                                                                       |                                          | 10,433               |       |                    |     | 7,386 |       
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|Diluted net income per share                          |                                                                                                                                                       | $                                        | 0.01                 |       |                    | $   | 0.03  |       
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |        |       
|Shares used in computing diluted net income per share |                                                                                                                                                       |                                          | 10,678               |       |                    |     | 7,766 |       
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|Comprehensive income:                                 |                                                                                                                                                       |                                          |                      |       |                    |     |       |       
|                                                      |                                                                                                                                                       | Net income                               |                      | $     | 102                |     |       | $      | 266    |    
|                                                      |                                                                                                                                                       | Foreign currency translation adjustments |                      |       | 7                  |     |       |        | 61     |    
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |        |       
|                                                      |                                                                                                                                                       |                                          | Comprehensive income |       | $                  | 109 |       |        | $      | 327 | 
|                                                      |                                                                                                                                                       |                                          |                      |       |                    |     |       |        |       

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

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

|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |        |        |  
|-------------------------------------------------- | ---------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------- | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | -
|                                                   |                                          |                                                                                   |                                                |                                                     |        | Three Months Ended
|                                                   |                                          |                                                                                   |                                                |                                                     |        | April 30,         
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                   
|                                                   |                                          |                                                                                   |                                                |                                                     |        | 2003               |        | 2002
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |     
|Cash flows from operating activities:              |                                          |                                                                                   |                                                |                                                     |        |                    |        |     
|                                                   |                                          | Net income                                                                        |                                                | $                                                   | 102    |                    |        | $    | 266    |       
|                                                   |                                          | Adjustments to reconcile net income to net cash used in operating activities:     |                                                |                                                     |        |                    |        |      |        |       
|                                                   |                                          |                                                                                   | Depreciation                                   |                                                     |        | 419                |        |      |        | 1,197  |       
|                                                   |                                          |                                                                                   | Restructuring and other                        |                                                     |        |                   |        |      |        | (771   | )     
|                                                   |                                          |                                                                                   | Stock-based compensation                       |                                                     |        | 61                 |        |      |        | (3,646 | )     
|                                                   |                                          |                                                                                   | Provision for doubtful accounts receivable     |                                                     |        | 54                 |        |      |        |       |       
|                                                   |                                          |                                                                                   | Interest on notes receivable from stockholders |                                                     |        |                   |        |      |        | (20    | )     
|                                                   |                                          |                                                                                   | Issuance of common stock for services received |                                                     |        | 3                  |        |      |        |       |       
|                                                   |                                          |                                                                                   | Changes in operating assets and liabilities:   |                                                     |        |                    |        |      |        |        |       
|                                                   |                                          |                                                                                   |                                                | Accounts receivable                                 |        |                    | 1,018  |      |        |        | 5,738  |  
|                                                   |                                          |                                                                                   |                                                | Prepaid expenses and other current assets           |        |                    | (689   | )    |        |        | 762    |  
|                                                   |                                          |                                                                                   |                                                | Accounts payable                                    |        |                    | (770   | )    |        |        | 949    |  
|                                                   |                                          |                                                                                   |                                                | Accrued liabilities                                 |        |                    | (352   | )    |        |        | (4,442 | )
|                                                   |                                          |                                                                                   |                                                | Accrued restructuring                               |        |                    | (3,178 | )    |        |        | (978   | )
|                                                   |                                          |                                                                                   |                                                | Deferred revenue                                    |        |                    | (477   | )    |        |        | (1,298 | )
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|                                                   |                                          |                                                                                   |                                                | Net cash used in operating activities               |        |                    | (3,809 | )    |        |        | (2,243 | )
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|Cash flows from investing activities:              |                                          |                                                                                   |                                                |                                                     |        |                    |        |     
|                                                   |                                          | Purchases of property and equipment                                               |                                                |                                                     | (15    | )                  |        |      | (219   | )     
|                                                   |                                          | Releases (purchases) of investments of restricted cash, net                       |                                                |                                                     | 229    |                    |        |      | (6,300 | )     
|                                                   |                                          | Deposits and other assets                                                         |                                                |                                                     | 146    |                    |        |      | (1     | )     
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|                                                   |                                          |                                                                                   |                                                | Net cash provided by (used in) investing activities |        |                    | 360    |      |        |        | (6,520 | )
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|Cash flows from financing activities:              |                                          |                                                                                   |                                                |                                                     |        |                    |        |     
|                                                   |                                          | Issuance of common stock                                                          |                                                |                                                     | 9      |                    |        |      | 385    |       
|                                                   |                                          | Issuance of common stock and warrants in connection with a private placement, net |                                                |                                                     | 10,216 |                    |        |      |       |       
|                                                   |                                          | Repayment on bank term loan                                                       |                                                |                                                     | (250   | )                  |        |      |       |       
|                                                   |                                          | Repayment of debt and capital lease obligations                                   |                                                |                                                     | (20    | )                  |        |      | (81    | )     
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|                                                   |                                          |                                                                                   |                                                | Net cash provided by financing activities           |        |                    | 9,955  |      |        |        | 304    |  
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|Net decrease in cash and cash equivalents          |                                          |                                                                                   | 6,506                                          |                                                     |        |                    | (8,459 | )   
|Effect of exchange rate changes                    |                                          |                                                                                   | 3                                              |                                                     |        |                    | 52     |     
|Cash and cash equivalents, beginning of period     |                                          |                                                                                   | 16,670                                         |                                                     |        |                    | 51,585 |     
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|Cash and cash equivalents, end of period           |                                          | $                                                                                 | 23,179                                         |                                                     |        | $                  | 43,178 |     
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|Supplemental disclosures of cash flow information: |                                          |                                                                                   |                                                |                                                     |        |                    |        |     
|                                                   | Cash paid for interest during the period |                                                                                   | $                                              | 38                                                  |        |                    | $      | 16   |       
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|Noncash investing and financing activities:        |                                          |                                                                                   |                                                |                                                     |        |                    |        |     
|                                                   |                                          | Deferred compensation                                                             |                                                | $                                                   | 27     |                    |        | $    |       |       
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       
|                                                   |                                          | Reversal of deferred stock-based compensation                                     |                                                | $                                                   |       |                    |        | $    | 16,284 |       
|                                                   |                                          |                                                                                   |                                                |                                                     |        |                    |        |      |        |       

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

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

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.

Use of Estimates

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

Reclassification

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

Stock Split

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

Stock-Based Compensation

The Company uses the intrinsic-value method to account for all of its
employee stock-based compensation plans prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employeesand FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation. Stock-based compensation is being amortized over the vesting
period of the individual award in a manner consistent with the method described
in Financial Accounting Standards Board (FASB) Interpretation No. 28. The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation
and EITF

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Issue No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.

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

Under the intrinsic-value method used by the Company to account for its
employee stock-based compensation, no compensation cost has been recognized for
any stock options granted or restricted stock sold because the exercise price
of each option or purchase price of each share of restricted stock equaled or
exceeded the fair value of the underlying common stock as of the grant date for
each stock option or purchase date of each restricted stock share, except for
stock options granted and restricted stock sold from January 31, 1998 through
February 28, 2000 prior to the Companys initial public offering and certain
stock options granted in November 2001. With respect to the stock options
granted and restricted stock sold from January 31, 1998 to February 28, 2000
and certain stock options granted in November 2001, the Company recorded
deferred stock compensation for the difference at the grant or issuance date
between the exercise price of each stock option granted or purchase price of
each restricted share sold and the fair value of the underlying common stock
and such difference is being amortized over the vesting period, consistent with
the method described in FASB Interpretation No. 28.

Had compensation costs been recorded by the Company in its consolidated
statements of operations in accordance with SFAS No. 123 for all of the
Companys stock-based compensation plans, net income (loss) and basic and diluted net
income (loss) per share would have been as follows (in thousands, except per
share data):

|                                                                                                                                                |         |   |                    |       |      |   |        |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------- | ------- | - | ------------------ | ----- | ---- | - | ------ | ----- | -
|                                                                                                                                                |         |   | Three Months Ended
|                                                                                                                                                |         |   | April 30,         
|                                                                                                                                                |         |   |                   
|                                                                                                                                                |         |   | 2003               |       | 2002
|                                                                                                                                                |         |   |                    |       |     
|Net income, as reported                                                                                                                         |         | $ | 102                |       |      | $ | 266    |      
|Add: Stock-based employee compensation
expenses included in reported net income,
net of related tax effects                                     |         |   | 61                 |       |      |   | (3,646 | )    
|Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of related tax effects |         |   | (1,257             | )     |      |   | (1,182 | )    
|                                                                                                                                                |         |   |                    |       |      |   |        |      
|Pro forma net loss                                                                                                                              |         | $ | (1,094             | )     |      | $ | (4,562 | )    
|                                                                                                                                                |         |   |                    |       |      |   |        |      
|Net income per share:                                                                                                                           |         |   |                    |       |      |   |        |      
|                                                                                                                                                | Basic   |   | $                  | 0.01  |      |   | $      | 0.04  |  
|                                                                                                                                                |         |   |                    |       |      |   |        |      
|                                                                                                                                                | Diluted |   | $                  | 0.01  |      |   | $      | 0.03  |  
|                                                                                                                                                |         |   |                    |       |      |   |        |      
|Pro forma net loss per share:                                                                                                                   |         |   |                    |       |      |   |        |      
|                                                                                                                                                | Basic   |   | $                  | (0.10 | )    |   | $      | (0.62 | )
|                                                                                                                                                |         |   |                    |       |      |   |        |      
|                                                                                                                                                | Diluted |   | $                  | (0.10 | )    |   | $      | (0.62 | )
|                                                                                                                                                |         |   |                    |       |      |   |        |      

The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model, with no expected dividends and the
following weighted-average assumptions for stock options granted in the first
quarter of fiscal 2004 and 2003, respectively:

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|                        |  |                    |      |      |  |  |      |  
|----------------------- |  | ------------------ | ---- | ---- |  |  | ---- | -
|                        |  | Three Months Ended
|                        |  | April 30,         
|                        |  |                   
|                        |  | 2003               |      | 2002
|                        |  |                    |      |     
|Expected life (years)   |  |                    | 2.0  |      |  |  | 2.0  |  
|Risk-free interest rate |  |                    | 1.51 | %    |  |  | 1.70 | %
|Volatility              |  |                    | 142  | %    |  |  | 158  | %

The fair value of purchase rights under the Employee Stock Purchase Plan
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for shares issued in the first
quarter of fiscal 2003:

|                        |  |              |      |  
|----------------------- |  | ------------ | ---- | -
|                        |  | Three Months
|                        |  | Ended       
|                        |  | April 30,   
|                        |  |             
|                        |  | 2002        
|                        |  |             
|Expected life (years)   |  |              | 1.25 |  
|Risk-free interest rate |  |              | 1.70 | %
|Volatility              |  |              | 158  | %

The Company suspended its Employee Stock Purchase Plan in July 2002 so
there are no weighted-average assumptions for the first quarter of fiscal 2004.
The weighted average fair value of purchase rights granted under the Employee
Stock Purchase Plan was $3.56 per share in the first quarter of fiscal 2003.

2.  Repricing of Stock Options

On November 12, 2001, the Companys board of directors, acting pursuant to
existing terms of the Companys stock option plans, approved the repricing of
approximately 890,000 outstanding stock options with exercise prices above
$7.50. The exercise prices of all such stock options were repriced to $7.50,
which was the fair market value of the Companys stock on November 12, 2001.
There were no changes to the vesting schedules or other terms of the repriced
stock options. Stock options held by the Companys former chief executive
officer, former executive vice president of strategy and planning, board of
directors and non-employees were not repriced. The Company is accounting for
the repriced stock options using variable accounting whereby the aggregate
intrinsic value of the repriced stock options is continuously remeasured and
amortized to stock-based compensation expense over the vesting periods. Based
on the stock price as of April 30, 2003, the Company recorded no stock-based
compensation in the first quarter of
fiscal 2004 relating to these repriced stock options. As of April 30,
2003, deferred stock-based compensation relating to these repriced stock
options was zero, reflecting the intrinsic value of unexercised repriced
options as of April 30, 2003.

In October 2002, the Company cancelled stock options to purchase 55,000
shares of common stock held by its chief executive officer and immediately
thereafter granted him stock options to purchase 150,000 shares of common stock
at a price of $1.50, which was the closing price of its common stock on the
grant date. As a result, based on the closing price of its common stock of
$4.67 on April 30, 2003, the Company recorded $35,000 in stock-based
compensation in the first quarter of fiscal 2004. In May 2003, the Companys
chief executive officer exercised all of his repriced stock options to purchase
55,000 shares of common stock and the Company recorded an additional $56,000 in
stock-based compensation in May 2003. As all repriced options were exercised,
the Company will no longer be required to record additional stock-based
compensation relating to these stock options in the future.

3.  Stock Options Exchange Program

On April 15, 2003, the Company announced a voluntary stock option exchange
program for its employees. Under the program, the Companys employees were
given the opportunity to exchange outstanding stock options previously granted
to them with an exercise price greater than or equal to $7.50 per share for a
new stock option exercisable for 1.15 shares for each share subject to the
tendered stock options, to be granted at a future date, at least six months and
a day from the cancellation date. The exercise

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price of these new stock options
will be equal to the fair market value of the Companys common stock on the
date of grant. On the grant date, the new stock options will be vested as to
the number of stock options that would have been vested on such date had the
old stock options not been tendered plus the number of shares that would have
been vested had the old stock option been exercisable for 15% more shares. The
Companys chief executive officer, chief financial officer and members of the
board of directors were not eligible to participate in the program. The stock
option exchange program did not result in any additional compensation charges
or variable plan accounting. On April 15, 2003, stock options for 622,511
shares of common stock were eligible to be exchanged. On May 13, 2003, the
Companys employees tendered stock options for 525,031 shares of common stock.
The Company expects to grant its employees stock options to purchase 603,785
shares of common stock at least six months and a day from May 13, 2003. As a
result of this stock option exchange program, the Company will no longer incur
stock-based compensation for outstanding stock options for approximately
298,000 shares of common stock that were previously repriced in November 2001.
The Company will continue to incur stock-based compensation for outstanding
stock options for approximately 73,000 shares of common stock that were
previously repriced in November 2001 that were not tendered pursuant to the
stock option exchange program to the extent that the Companys stock price
increases above $7.50.

4.  Restructuring and Other

There were no restructuring charges in the first quarter of fiscal 2004
(quarter ended April 30, 2003). In the first quarter of fiscal 2004, the
Company made the final lease termination payment of $2.0 million for the
termination of a significant lease in Redwood City, California. The table
below represents restructuring activities in the first quarter of fiscal 2004
(in thousands):

|                                       |                                                  |   |                  |       |                    |   |                |        |   |   |       |       | 
|-------------------------------------- | ------------------------------------------------ | - | ---------------- | ----- | ------------------ | - | -------------- | ------ | - | - | ----- | ----- | 
|                                       |                                                  |   | Accrued          |       | Paid in the        |   | Accrued       
|                                       |                                                  |   | as of            |       | Three Months Ended |   | as of         
|                                       |                                                  |   | January 31, 2003 |       | April 30, 2003     |   | April 30, 2003
|                                       |                                                  |   |                  |       |                    |   |               
|Restructuring initiated in fiscal 2003 |                                                  |   |                  |       |                    |   |                |        |   |   |       |      
|                                       | Severance                                        |   | $                | 1,031 |                    |   | $              | (483   | ) |   | $     | 548   | 
|                                       | Net lease commitment costs on vacated facilities |   |                  | 3,635 |                    |   |                | (2,364 | ) |   |       | 1,271 | 
|                                       | Computer and car leases                          |   |                  | 303   |                    |   |                | (97    | ) |   |       | 206   | 
|                                       | Other exit costs                                 |   |                  | 588   |                    |   |                | (47    | ) |   |       | 541   | 
|Restructuring initiated in fiscal 2002 |                                                  |   |                  |       |                    |   |                |        |   |   |       |      
|                                       | Net lease commitment costs on vacated facilities |   | 6,029            |       |                    |   | (187           | )      |   |   | 5,842 |      
|                                       | Exit costs for business line                     |   |                  | 173   |                    |   |                |       |   |   |       | 173   | 
|                                       |                                                  |   |                  |       |                    |   |                |        |   |   |       |      
|                                       |                                                  | $ | 11,759           |       |                    | $ | (3,178         | )      |   | $ | 8,581 |      
|                                       |                                                  |   |                  |       |                    |   |                |        |   |   |       |      

The Company expects that of the restructuring and other charges accrued as
of April 30, 2003, severance costs will be paid by the second quarter of fiscal
2004, exit costs for business line (related to Legal vertical market) will be
paid no later than May 2004, and the net lease commitments on vacated leased
facilities will be paid no later than February 2011.

In the first quarter of fiscal 2003, the Company recorded a credit of
$806,000 in restructuring and other charges related primarily to the value of
40,518 shares of our common stock released from escrow accounts in which they
had been placed in conjunction with the acquisitions of ABT Corporation,
Proamics Corporation and 600 Monkeys Inc. in fiscal 2001. The table below
represents restructuring activities in the first quarter of fiscal 2003 (in
thousands):

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

5. Net Income Per Share

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The following reconciles the numerators and denominators of basic and
diluted net income per share:

|                       |                                  |   |                                       |        |      |   |     |       | 
|---------------------- | -------------------------------- | - | ------------------------------------- | ------ | ---- | - | --- | ----- | 
|                       |                                  |   | Three
Months Ended                   
|                       |                                  |   | April 30,                            
|                       |                                  |   |                                      
|                       |                                  |   | 2003                                  |        | 2002
|                       |                                  |   |                                       |        |     
|                       |                                  |   | (in thousands, except per share data)
|Numerator - net income |                                  | $ | 102                                   |        |      | $ | 266 |      
|                       |                                  |   |                                       |        |      |   |     |      
|Denominator - shares:  |                                  |   |                                       |        |      |   |     |      
|                       | Basic weighted-average shares    |   |                                       | 10,433 |      |   |     | 7,386 | 
|                       | Effect of dilutive stock options |   |                                       | 222    |      |   |     | 380   | 
|                       | Effect of dilutive warrants      |   |                                       | 23     |      |   |     |      | 
|                       |                                  |   |                                       |        |      |   |     |      
|                       | Diluted weighted-average shares  |   |                                       | 10,678 |      |   |     | 7,766 | 
|                       |                                  |   |                                       |        |      |   |     |      
|Net
income per share:  |                                  |   |                                       |        |      |   |     |      
|                       | Basic                            |   | $                                     | 0.01   |      |   | $   | 0.04  | 
|                       |                                  |   |                                       |        |      |   |     |      
|                       | Diluted                          |   | $                                     | 0.01   |      |   | $   | 0.03  | 
|                       |                                  |   |                                       |        |      |   |     |      

The
computation of diluted net income for the quarters ended April 30, 2003 and
2002, excludes stock options to purchase 1,170,000 and 2,448,000 shares of
common stock and warrants to purchase 383,000 and 46,000 shares of common
stock, respectively. The shares were excluded as the exercise prices for such
options and warrants were greater than the average market price of the
Companys common stock for the
respective period, and their inclusion would be antidilutive. The
weighted-average exercise price of anti-dilutive options outstanding as of
April 30, 2003 and 2002 was $6.67 and $48.30 per share, respectively. The
weighted-average exercise price of anti-dilutive warrants as of April 30, 2003
and 2002 was $4.70 and $115.80 per share, respectively.

6. Common Stock Financing

In February 2003, the Company entered into a common stock and warrant
purchase agreement with various investors led by Walden VC, providing for the
issuance of 3,088,230 shares of its common stock at a price of $3.35 per share
and warrants to purchase 386,034 shares of common stock at a price of $0.40 per
warrant in connection with a private placement. The warrants have an exercise
price of $3.40. In February 2003, the Company issued 1,549,735 shares of our
common stock and warrants to purchase 193,720 shares of common stock in
connection with initial closing of this private placement. In April 2003, the
Companys stockholders approved the issuance of the remaining 1,538,495 shares
of its common stock and warrants to purchase 192,314 shares of common stock.
Following this approval, the Company completed the subsequent closing of this
private placement and issued such remaining common stock and warrants. Total
estimated net proceeds from the private placement approximated $10.2 million.

7. Debt

The Company has a term loan for $5.0 million from a financial institution.
The Company entered into this loan in September 2002. The term loan is secured
by the Companys tangible and intangible assets, accrues interest at 7.50% per
annum and matures on February 15, 2004. The Company is required to make
quarterly payments of principal and interest on a five-year amortization
schedule. We have repaid $750,000 plus interest through June 2003. On the
maturity date, the remaining principal balance of $3.8 million will be due.
This term loan has certain financial covenants, including covenants requiring
1) cash on hand of $10.5 million as of April 30, 2003, 2) minimum revenue of
$11.5 million for the quarter ended April 30, 2003, 3) operating expenses not
to exceed $11.0 million for the quarter ended April 30, 2003 and 4) the ratio
of cash and cash equivalents to outstanding balance of the term loan shall at
all time be equal to 1.25 or higher. The Company received a waiver for the
minimum revenue covenant prior to April 30, 2003 therefore as of April 30, 2003
the Company was in compliance with all financial covenants. Starting May 1,
2003, the Company is no longer subject to the financial covenants relating to
cash on hand, revenue and operating expenses.

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8. Notes Receivable from Stockholder

In November 1999, the Company loaned $1,250,000 to its then president,
vertical markets, Joshua Pickus, who is now its chief executive officer,
secured by a stock pledge agreement and personal assets, in connection with his
purchase of 125,000 shares of the Companys restricted common stock. The loan
initially accrued interest at 6.08% and was to mature in November 2002. In May
2002, the Company extended the maturity date of the loan to November 2004 and
reduced the interest rate to 3.21%. In July 2002, the Company repurchased these
125,000 shares of common stock from Mr. Pickus for $675,000, the fair market
value of the common stock at that time, and Mr. Pickus used all of this
consideration to repay the equivalent principal amount of the note. In
connection with this repayment, the Company cancelled $116,000 in accrued
interest, which was recorded as compensation expense. The remaining amount of
the loan of $674,000, including $99,000 in accrued interest, was reclassified
to other assets in the second quarter of fiscal 2003 as there was no longer
common stock to secure the loan. This loan remains secured by the personal
assets of Mr. Pickus. On March 16, 2003, Mr. Pickus made a $150,000 payment
against this loan which reduced the interest outstanding as of the date of
payment to zero and reduced the principal outstanding to $537,000. On June 2,
2003, Mr. Pickus made a $120,000 payment against this loan which reduced the
interest outstanding as of the date of payment to zero and reduced the
principal outstanding to $421,000.

9. Segment Reporting

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

The Companys chief operating decision makers are considered to be the
chief executive officer and the chief financial officer. The chief executive
officer and the chief financial officer review financial information presented
on a consolidated basis for purposes of making operating decisions and
assessing financial performance. The Company operates in a single segment:
software.

Disaggregated product information is as follows (in thousands):

|          |             |  |  |       |                    |       |      |       |       |        | 
|--------- | ----------- |  |  | ----- | ------------------ | ----- | ---- | ----- | ----- | ------ | 
|          |             |  |  |       | Three Months Ended
|          |             |  |  |       | April 30,         
|          |             |  |  |       |                   
|          |             |  |  |       | 2003               |       | 2002
|          |             |  |  |       |                    |       |     
|License   |             |  |  | $     | 3,213              |       |      | $     | 5,691 |       
|Services: |             |  |  |       |                    |       |      |       |       |       
|          | Consulting  |  |  | 2,475 |                    |       |      | 3,454 |      
|          | Maintenance |  |  | 4,151 |                    |       |      | 4,982 |      
|          |             |  |  |       |                    |       |      |       |       |        | 
|          |             |  |  |       | $                  | 9,839 |      |       | $     | 14,127 | 
|          |             |  |  |       |                    |       |      |       |       |        | 

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

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|                |  |                    |       |      |  |   |        | 
|--------------- |  | ------------------ | ----- | ---- |  | - | ------ | 
|                |  | Three Months Ended
|                |  | April 30,         
|                |  |                   
|                |  | 2003               |       | 2002
|                |  |                    |       |     
|United States   |  | $                  | 5,525 |      |  | $ | 7,874  | 
|The Netherlands |  |                    | 1,549 |      |  |   | 746    | 
|United Kingdom  |  |                    | 1,212 |      |  |   | 2,698  | 
|France          |  |                    | 1,074 |      |  |   | 1,348  | 
|Europe Others   |  |                    | 479   |      |  |   | 1,461  | 
|                |  |                    |       |      |  |   |        | 
|                |  | $                  | 9,839 |      |  | $ | 14,127 | 
|                |  |                    |       |      |  |   |        | 

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

There were no customers individually representing more than 10% of gross
accounts receivables (including unbilled accounts receivable) as of April 30,
2003 and 2002, respectively. There were no customers individually representing
more than 10% of total revenue in the first quarter of fiscal 2004. One
customer represented 10.8% of total revenue in the first quarter of fiscal
2003.

10. Litigation

In August 2001, Goldman, Sachs and Co., Dain Rauscher Wessels, U.S.
Bancorp Piper Jaffray and Thomas Weisel Partners, the managing underwriters of
the Companys initial public offering (IPO), the Company, and certain of the
Companys officers and directors, were named as defendants in a number of
purported securities class actions in United States District Court for the
Southern District of New York arising out of the Companys initial public
offering in February 2000. The complaints in these actions allege, among other
things, that the registration statement and prospectus filed with the
Securities and
Exchange Commission for purposes of the IPO were false and misleading
because they failed to disclose that the managing underwriters allegedly (i)
solicited and received commissions from certain investors in exchange for
allocating to them shares of Company stock in connection with the IPO and (ii)
entered into agreements with their customers to allocate such stock to those
customers in exchange for the customers agreeing to purchase additional shares
of the Company in the aftermarket at pre-determined prices. On August 8, 2001
the Court ordered that these actions, along with hundreds of IPO allocation
cases against other issuers, underwriters and directors and officers, be
transferred to one judge for coordinated pre-trial proceedings. In July 2002,
omnibus motions to dismiss the complaints based on common legal issues were
filed on behalf of all issuers, underwriters and directors and officers. By
order dated October 8, 2002, the Court dismissed the Companys officers and
directors from the case without prejudice. In an opinion issued on February 19,
2003, the Court granted in part and denied in part the motions to dismiss. The
complaints against the Company and the other issuers and underwriters were not
dismissed as a matter of law. These cases remain at a preliminary stage and no
discovery proceedings have taken place in relation to the issuers. The Company
believes that the claims asserted against it in these cases are without merit
and the Company intends to defend vigorously against them. These cases seek
compensatory damages in unspecified amounts as well as other relief.




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, 2003 and in our other filings with the Securities and
Exchange Commission. This discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. Any statements herein that are not statements of
historical fact may be deemed to be forward-looking statements. We may identify
these statements by the use of words such as believe, expect, anticipate,
intend, 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"

12



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herein and
in our annual report on Form 10-K for the year ended January 31, 2003 and in
our other filings with the Securities and Exchange Commission. These
forward-looking statements speak only as of the date of this quarterly report.
We do not assume any duty to update them.

Overview

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

Critical Accounting Policies, Methods and Estimates

Accounting policies, methods and estimates are an integral part of the
consolidated financial statements prepared by management and are based upon
managements current judgments. Those judgments are normally based on knowledge
and experience with regard to past and current events and assumptions about
future events. Certain accounting policies, methods and estimates are
particularly sensitive because of their significance to the financial
statements and because of the possibility that future events affecting them may
differ markedly from managements current judgments. While there are a number
of accounting policies, methods and estimates affecting our financial
statements, areas that are
particularly significant include revenue recognition, allowance for
doubtful accounts, impairment of long-lived assets and restructuring reserves
for vacated leased facilities.

Revenue Recognition

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

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

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

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

The fee is fixed or determinable. We negotiate the fees for our products
at the outset of an arrangement. In these arrangements, the majority of the
licenses are perpetual and related fees are nonrefundable. The fees are
generally due within six months or less. We consider fees relating to

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arrangements with payment terms extending beyond six months not to be fixed or
determinable. If the fee is not fixed or determinable, revenue is recognized as
payments become due from the customer.

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

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

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

We have never engaged in a transaction in which we provided product
licenses or services to a customer in exchange for an equity interest. We
recognized no revenue under any type of reciprocal arrangements in the first
quarter of fiscal 2004, fiscal 2003 or in fiscal 2002.

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

Accounts Receivable

Accounts receivable are recorded net of allowances for doubtful accounts
and totaled $6.1 million and $7.2 million as of April 30, 2003 and January 31,
2003, respectively. The allowances for doubtful accounts were $1.0 million and
$1.0 million as of April 30, 2003 and January 31, 2003, respectively. We
regularly review the adequacy of our allowance for doubtful accounts after
considering the amount of the aged accounts receivable, the age of each
invoice, each customers expected ability to pay and our collection history
with each customer. We review any invoice greater than 30 days past due to
determine if an allowance is appropriate based on the risk category using the
factors discussed above. In addition, we maintain a reserve for all invoices by
applying a percentage to aging categories based on historical loss experience.
The allowance for doubtful accounts represents our best estimate, but changes
in circumstances such as our customers financial positions may result in a
requirement for additional allowances in the future.

Impairment Assessment

We evaluate our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable. Factors we consider important that

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

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

Restructuring Reserves for Vacated Leased Facilities

We have recorded restructuring charges in connection with vacating certain
leased facilities pursuant to our restructuring program. Costs associated with
vacated leased facilities include remaining lease liabilities and brokerage
fees, offset by estimated sublease income. Estimated sublease income is
determined by taking into consideration the type and condition of the subject
property, information regarding the local commercial real estate market and
expectations about time to obtain a sublessee provided by local commercial real
estate brokerages. We regularly review these estimates in the second quarter
and fourth quarter of each year or anytime we have persuasive evidence that a
change in estimate has occurred. To the extent that these estimates change due
to changes in market conditions, the ultimate restructuring expenses for
vacated leases could vary by material amounts.

Future lease payments, net of estimated sublease income, relating to
facilities that we vacated pursuant to our restructuring program, amount to
$1.5 million, $681,000, $968,000, $942,000 and $1.3 million for the twelve
months ending April 30, 2004, 2005, 2006, 2007 and 2008, respectively, and $2.1
million thereafter.

Private Placement of Common Stock and Warrants to Purchase Common Stock

In February 2003, we entered into a common stock and warrant purchase
agreement with various investors led by Walden VC, providing for the issuance
of 3,088,230 shares of our common stock at a price of $3.35 per share and
warrants to purchase 386,034 shares of common stock at a price of $0.40 per
warrant in connection with a private placement. The warrants have an exercise
price of $3.40. In February 2003, we issued 1,549,735 shares of our common
stock and warrants to purchase 193,720 shares of common stock in connection
with initial closing of this private placement. In April 2003, our stockholders
approved and we subsequently issued the remaining 1,538,495 shares of our
common stock and warrants to purchase 192,314 shares of common stock.
Following this approval, we completed the subsequent closing of this private
placement and issued such remaining common stock and warrants. Total estimated
net proceeds from the private placement approximated $10.2 million.

Reverse Stock Split

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

Repricing of Stock Options

On November 12, 2001, our board of directors, acting pursuant to existing
terms of our stock option plans, approved the repricing of approximately
890,000 outstanding stock options with exercise prices above $7.50. The
exercise prices of all such stock options were repriced to $7.50, which was the
fair market value of our stock on November 12, 2001. There were no changes to
the vesting schedules of the repriced options or other terms. Stock options
held by our former chief executive officer, former executive vice president of
strategy and planning, board of directors and non-employees were not repriced.
We are accounting for the repriced stock options using variable accounting
whereby the aggregate intrinsic value of the repriced stock options is
continuously remeasured and amortized to stock-based compensation expense over
the vesting periods. Based on the stock price as of April 30, 2003, we recorded
no stock-based compensation in the first quarter of fiscal 2004 relating to
these repriced stock options. As of April 30, 2003, deferred stock-based
compensation relating to these repriced stock options was zero, reflecting the
intrinsic value of unexercised repriced stock options as of April 30, 2003. To
the extent that our stock price increases above $7.50 in future periods for
options that were repriced but not tendered pursuant to the voluntary stock
option exchange program described below, we will need to record additional
stock-based compensation expense.

In October 2002, we cancelled stock options to purchase 55,000 shares of
common stock held by our chief executive officer and immediately thereafter
granted him stock options to purchase 150,000 shares of common stock at a price
of $1.50, which was the closing price of our common stock on the grant date. As
a result, based on the closing price of our common stock of $4.67 on April 30,
2003, we recorded $35,000 in stock-based compensation in the first quarter of
fiscal 2003. In May 2003, our chief executive officer exercised all of his
repriced stock options to purchase 55,000 shares of common stock and we
recorded an additional $56,000 in stock-based compensation in May 2003. As all
repriced options were exercised, we will no longer be required to record
additional stock-based compensation relating to these stock options in the
future.

On April 15, 2003, we announced a voluntary stock option exchange program
for our employees. Under the program, our employees were given the opportunity
to exchange outstanding stock options previously granted to them with an
exercise price greater than or equal to $7.50 per share for a new stock option
exercisable for 1.15 shares for each share subject to the tendered stock
options, to be granted at a future date, at least six months and a day from the
cancellation date. The exercise price of these new stock options will be equal
to the fair market value of our common stock on the date of grant. On the grant
date, the new stock options will be vested as to the number of stock options
that would have been vested on such date had the old stock options not been
tendered plus the number of shares that would have been vested had the old
stock option been exercisable for 15% more shares. Our chief executive officer,
chief financial officer and members of the board of directors are not eligible
to participate in the program. The stock option exchange program did not result
in any additional compensation charges or variable plan accounting. On April
15, 2003, stock options for 622,511 shares of common stock were eligible to be
exchanged. On May 13, 2003, our employees tendered stock options for 525,031
shares of common stock. We expect to grant our employees stock options to
purchase 603,785 shares of common stock at least six months and a day from May
13, 2003. As a result of this stock option exchange program, we will no longer
incur stock-based compensation for outstanding stock options for approximately
298,000 shares of common stock that were previously repriced in November 2001.
We will continue to incur stock-based compensation for outstanding stock
options for approximately 73,000 shares of common stock that were previously
repriced in November 2001 that were not tendered pursuant to the stock option
exchange program to the extent that our stock price increases above $7.50.

Pro Forma Financial Results

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

Results of Operations

The following table sets forth certain items in our condensed consolidated
statements of operations for the three months ended April 30, 2003 and 2002
expressed as a percentage of total revenue:

|                               |                            |                          |      |                    |       |      |     |       |       |  
|------------------------------ | -------------------------- | ------------------------ | ---- | ------------------ | ----- | ---- | --- | ----- | ----- | -
|                               |                            |                          |      | Three Months Ended
|                               |                            |                          |      | April 30,         
|                               |                            |                          |      |                   
|                               |                            |                          |      | 2003               |       | 2002
|                               |                            |                          |      |                    |       |     
|Revenue:                       |                            |                          |      |                    |       |      |     |      
|                               | License                    |                          |      | 32.7               | %     |      |     | 40.3  | %    
|                               | Services                   |                          |      | 67.3               |       |      |     | 59.7  |      
|                               |                            |                          |      |                    |       |      |     |       |      
|                               |                            | Total revenue            |      |                    | 100.0 |      |     |       | 100.0 |  
|                               |                            |                          |      |                    |       |      |     |       |      
|Cost of revenue:               |                            |                          |      |                    |       |      |     |      
|                               | License                    |                          |      | (0.2               | )     |      |     | 2.2   |      
|                               | Services                   |                          |      | 26.9               |       |      |     | 26.7  |      
|                               |                            |                          |      |                    |       |      |     |       |      
|                               |                            | Total cost of revenue    |      |                    | 26.7  |      |     |       | 28.9  |  
|                               |                            |                          |      |                    |       |      |     |       |      
|                               |                            | Gross profit             |      |                    | 73.3  |      |     |       | 71.1  |  
|                               |                            |                          |      |                    |       |      |     |       |      
|Operating expenses:            |                            |                          |      |                    |       |      |     |      
|                               | Sales and marketing        |                          |      | 36.4               |       |      |     | 57.7  |      
|                               | Research and development   |                          |      | 19.3               |       |      |     | 28.5  |      
|                               | General and administrative |                          |      | 15.6               |       |      |     | 15.6  |      
|                               | Stock-based compensation   |                          |      | 0.6                |       |      |     | (25.8 | )    
|                               | Restructuring and other    |                          |      |                   |       |      |     | (5.9  | )    
|                               |                            |                          |      |                    |       |      |     |       |      
|                               |                            | Total operating expenses |      |                    | 71.9  |      |     |       | 70.1  |  
|                               |                            |                          |      |                    |       |      |     |       |      
|                               |                            | Operating income         |      |                    | 1.4   |      |     |       | 1.0   |  
|Interest and other income, net |                            |                          | (0.4 | )                  |       |      | 0.9 |      
|                               |                            |                          |      |                    |       |      |     |       |      
|                               |                            | Net income               |      |                    | 1.0   | %    |     |       | 1.9   | %
|                               |                            |                          |      |                    |       |      |     |       |      

Comparison of Three Months Ended April 30, 2003 and 2002

Revenue

License.License revenue consists of revenue from licenses of our software
products. License revenue was $3.2 million and $5.7 million in the first
quarter of fiscal 2004 and 2003, respectively, decreasing 43.5% period over
period. We believe the decrease in license revenue in absolute dollars in the
first quarter of fiscal 2004 from the first quarter of fiscal 2003 was
primarily attributable to a slowdown in corporate information technology
spending and also restructuring program we implemented in fiscal 2003 in
response to such slowdown in spending that reduced the number of revenue
producing account executives. The slowdown in corporate information
technology spending was primarily due to deteriorating results of our
customers and a decline in the average size of license sales in part
as a result of fewer seats being purchased and in part as a reduction
in per seat price.

Services.Services revenue consists of revenue from the delivery of
implementation services and maintenance and support contracts. Services revenue
from implementation services was $2.5 million and $3.4 million in the first
quarter of fiscal 2004 and 2003, respectively, decreasing 28.3% period over
period. The decrease in services revenue from implementation services in
absolute dollars in the first quarter of fiscal 2004 from the first quarter of
fiscal 2003 was primarily attributable to a decrease in the size of the

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implementation services organization pursuant to the restructuring program we
implemented in fiscal 2003 which reduced revenue generating implementation
services consultants and a decrease in license revenue that led to a decrease
in demand for implementation services. Service revenue from maintenance and
support contracts was $4.1 million and $5.0 million in the first quarter of
fiscal 2004 and 2003, respectively, decreasing 16.7% period over period. The
decrease in services revenue from maintenance and support in absolute dollars
in the first quarter of fiscal 2004 from the first quarter of fiscal 2003 was
primarily attributable to a decrease in the number of supported users for
maintenance renewals and no amortization in the first quarter of fiscal 2004
compared to $378,000 in the first quarter of fiscal 2003 for deferred
maintenance revenue we assumed from the ABT acquisition in August
2000. We believe a decrease in license revenue will cause service
revenue to decrease.

Cost of Revenue

Cost of license revenue.Cost of license revenue includes royalties due to
third parties for embedding their technologies in our products, product
packaging, documentation and shipping costs. Cost of license revenue was
($24,000) and $316,000 in the first quarter of fiscal 2004 and 2003,
respectively, representing (0.7%) and 5.6% of total license revenue in the
respective period. The decrease in cost of license revenue in absolute dollars
in the first quarter of fiscal 2004 from the first quarter of fiscal 2003 was primarily attributable to a decline in license revenue and the reversal of
$110,000 in royalties previous accrued for a third party vendor as a result of
a settlement during the first quarter of fiscal 2004 with such third party
vendor. Royalties were calculated and paid quarterly based on among other things, percentage of
total license revenue, number of seats sold or number of servers on which our
customers have our product installed. There were no significant changes in
the number of third party technologies we embedded in our products in the first
quarter of fiscal 2004, compared to the first quarter of fiscal 2003.

Cost of services revenue.Cost of services revenue includes salaries and
related expenses for our implementation services, maintenance and support
personnel and the costs of third parties contracted to provide implementation
services to our customers. Cost of services revenue was $2.7 million and $3.8
million in the first quarter of fiscal 2004 and 2003, respectively. The
decrease in cost of services revenue in absolute dollars in the first quarter
of fiscal 2004 from the first quarter of fiscal 2003 was primarily attributable
to a $588,000 decrease in facility and IT department costs and a $327,000
reduction in salaries and benefits resulting from reductions in headcount
effected pursuant to the restructuring program we implemented in fiscal 2003.

Operating Expenses

Sales and marketing.Sales and marketing expenses consist primarily of
salaries and benefits, marketing costs, commissions, bonuses, travel and bad debt expense.
Sales and marketing expenses were $3.6 million and $8.1 million in the first
quarter of fiscal 2004 and 2003, respectively, representing 36.4% and 57.7% of
total revenue in each respective period. The decrease in sales and marketing
expenses in absolute dollars in the first quarter of fiscal 2004 from the first
quarter of fiscal 2003 was primarily attributable to a $2.0 million reduction
in salaries and benefits resulting from reductions in headcount effected
pursuant to the restructuring program we implemented in fiscal 2003, a $1.6
million decrease in facility and IT department costs and a $448,000 decrease in
commissions.

Research and development.Research and development expenses consist
primarily of salaries and benefits associated with the development of
new products, the enhancement of existing products and quality assurance and
testing costs. Research and development expenses were $1.9 million and $4.0
million in the first quarter of fiscal 2004 and 2003, respectively,
representing 19.3% and 28.5% of total revenue in each respective period. The
decrease in research and development expenses in absolute dollars in the first
quarter of fiscal 2004 from the first quarter of fiscal 2003 was primarily
attributable to a $1.2 million decrease in facility and IT department costs and
a $786,000 decrease in salaries and benefits resulting from reductions in
headcount effected pursuant to the restructuring program we implemented in
fiscal 2003.

General and administrative.General and administrative expenses consist
primarily of salaries and benefits and other related costs for finance, human resource,
information technology and legal department employees, as

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well as professional services fees. General and administrative expenses were $1.5 million and $2.2
million in the first quarter of fiscal 2004 and 2003, respectively,
representing 15.6% of total revenue in each respective period. The decrease in
general and administrative expenses in absolute dollars in the first quarter of
fiscal 2004 from the first quarter of fiscal 2003 was primarily attributable to
a $321,000 decrease in facility and IT department costs, a $132,000 decrease
in legal fees, a $69,000 decrease in outside services and a $52,000 decrease in
other employee related costs.

Stock-based compensation.Amortization of stock-based compensation was
$61,000 and ($3.6 million) in the first quarter of fiscal 2004 and 2003,
respectively. The stock-based compensation in the first quarter of fiscal 2004
related to the remeasurement of stock options granted to our chief executive
officer that were repriced in October 2002 and the amortization of stock
options granted below fair market value prior to our initial public offering in
February 2000. The recovery of stock-based compensation in the first quarter
of fiscal 2003 was attributable to variable accounting applied to our stock
options that were repriced in the fourth quarter of fiscal 2002, which resulted
in $4.8 million in recovery of stock-based compensation in the first quarter of
fiscal 2003, offset by $1.2 million in other stock-based compensation. As a
result of a stock option exchange program we initiated in May 2003, we will no
longer incur stock-based compensation for outstanding stock options for
approximately 298,000 shares of common stock that were previously repriced in November 2001. We will continue to incur
stock-based compensation for outstanding stock options for approximately 73,000
shares of common stock that were previously repriced in November 2001 that were
not tendered pursuant to the stock option exchange program to the extent that
our stock price increases above $7.50.

Stock-based compensation by functional group for the first quarter of
fiscal 2004 and 2003 are as follows (in thousands):

|                           |                    |           |    |  |  |   |        |  
|-------------------------- | ------------------ | --------- | -- |  |  | - | ------ | -
|                           | Three Months Ended
|                           |                    | April 30,
|                           |                   
|Services                   |                    | $         | 1  |  |  | $ | (260   | )
|Sales and marketing        |                    |           | 17 |  |  |   | (1,950 | )
|Research and development   |                    |           | 8  |  |  |   | (1,206 | )
|General and administrative |                    |           | 35 |  |  |   | (230   | )
|                           |                    |           |    |  |  |   |        |  
|                           |                    | $         | 61 |  |  | $ | (3,646 | )
|                           |                    |           |    |  |  |   |        |  

Restructuring and other.There were no restructuring charges in the first
quarter of fiscal 2004. In the first quarter of fiscal 2003, we recorded a
credit of $806,000 in restructuring and other charges related primarily to the
value of 40,518 shares of our common stock released from escrow accounts in
which they had been placed in conjunction with the acquisitions of ABT
Corporation, Proamics Corporation and 600 Monkeys Inc. in fiscal 2001.

Interest and Other Income (Expense), Net

Interest income and other income (expense), net.Interest income and other
income (expense), net, consists of interest income, interest expense and other
non-operating expenses. Interest income and other income (expense), net was
($34,000) and $120,000 in the first quarter of fiscal 2004 and 2003,
respectively. The change to a net interest expense and other expense in the
first quarter of fiscal 2004 from a net interest income and other income in the
first quarter of fiscal 2003 was primarily attributable to lower invested cash
balance, which yielded lower interest income, and interest expense from the
$5.0 million bank borrowings under a term loan.

Liquidity and Capital Resources

Since inception, we have financed our operations through private and
public sales of our capital stock, bank loans, equipment leases, and cash from
sales of our products and delivery of related services. The cash from these
sources is used for working capital for our business. As of April 30, 2003, we
had cash and cash equivalents of $23.2 million. We also had restricted cash in
the amount of $1.1 million in the form of a certificate of deposit securing a
letter of credit for a leased facility. We had bank borrowings under a

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term loan of $4.5 million as of April 30, 2003, of which $250,000 plus interest was
repaid in June 2003. As of April 30, 2003, we had working capital of $8.2
million, compared to working capital of $1.2 million as of January 31, 2003.
The increase in working capital as of April 30, 2003 was primarily attributable
to increases in cash and cash equivalents in connection with our recent private
placement described below and an increase in prepaid expenses and a decrease in
accrued restructuring, offset in part by a reclassification of long-term
portion of bank borrowings to short-term bank borrowings and a
decrease in net accounts receivable. We believe that cash from
operations and existing cash, including the $10.2 million net
proceeds from the private placement, will be sufficient to meet our
current expectations for working capital and expense requirements for
at least the next twelve months. As of April 30, 2003, we had no
material commitments for capital expenditures.

In February 2003, we entered into a common stock and warrant purchase
agreement with various investors led by Walden VC, providing for the issuance
of 3,088,230 shares of our common stock at a price of $3.35 per share and
warrants to purchase 386,034 shares of common stock at a price of $0.40 per
warrant in connection with a private placement. The warrants have an exercise
price of $3.40. In February 2003, we issued 1,549,735 shares of our common
stock and warrants to purchase 193,720 shares of common stock in connection
with initial closing of this private placement. In April 2003, our stockholders
approved and we subsequently issued the remaining 1,538,495 shares of our
common stock and warrants to purchase 192,314 shares of common stock.
Following this approval, we completed the subsequent closing of this private
placement and issued such remaining common stock and warrants. Total net
proceeds from the private placement approximated $10.2 million.

Net cash used in operating activities was $3.8 million and $2.2 million in
the first quarter of fiscal 2004 and 2003, respectively. Net cash used in
operating activities in the first quarter of fiscal 2004 was primarily
attributable to decreases in accrued restructuring and accounts payable and an
increase in prepaid expenses and other current assets, offset in part by a
decrease in accounts receivable. In the first quarter of fiscal 2004, we made
the final lease termination payment of $2.0 million for the termination of a
significant lease in Redwood City, California. Net cash used in operating
activities in the first quarter of fiscal 2003 was primarily attributable to a
decrease in accrued liabilities, stock-based compensation credit and a decrease
in deferred revenue, offset in part by a decrease in accounts receivable.

Net cash provided by (used in) investing activities was $360,000 and $(6.5
million) in the first quarter of fiscal 2004 and 2003, respectively. Net cash
provided by investing activities in the first quarter of fiscal 2004 was
primarily attributable to a release of investments of restricted cash and a
decrease in deposits and other assets. Net cash used in investing activities
in the first quarter of fiscal 2003 was primarily attributable net purchases of
investments for restricted cash.

Net cash provided by financing activities was $10.0 million and $304,000
in the first quarter of fiscal 2004 and 2003, respectively. Net cash provided
by financing activities in the first quarter of fiscal 2004 was primarily
attributable to net proceeds from the issuance of common stock and warrants in
connection with the private placement, offset in part by a $250,000 repayment
in bank borrowings. Net cash provided by financing activities in the first
quarter of fiscal 2003 was primarily attributable to issuance of common stock
from stock options exercised.

In fiscal 2003, we terminated a lease for a significant facility in
Redwood City, California. We entered into the lease for this facility in March
2000. The lease term commenced upon possession of the facility in August 2001
and had a term of 15 years. Prior to its termination, the agreement required us
to hold a letter of credit drawable by the lessor totaling approximately $5.9
million and $2.9 million in security deposits. We vacated this facility in July
2002 and terminated the lease on October 31, 2002. The total termination costs
amounted to $21.8 million, offset by $2.2 million for the reversal of
previously recorded deferred rent. Our future commitments under the Redwood
City lease prior to the termination were approximately $121.7 million. As of
February 2003, we had paid all termination costs related to the lease.

We currently have a term loan for $5.0 million from a financial
institution. We entered into this loan in September 2002. The term loan is
secured by our tangible and intangible assets, accrues interest at 7.50% per
annum and matures on February 15, 2004. We are required to make quarterly
payments of principal and interest on a five-year amortization schedule. We
have repaid $750,000 plus interest through June 2003. On the maturity date,
the remaining principal balance of $3.8 million will be due. This term

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loan has certain financial covenants, including covenants requiring 1) cash on hand of
$10.5 million as of April 30, 2003, 2) minimum revenue of $11.5 million for the
quarter ended April 30, 2003, 3) operating expenses not to exceed $11.0 million
for the quarter ended April 30, 2003 and 4) the ratio of cash and cash
equivalents to outstanding balance of the term loan shall at all time be
equal to 1.25 or higher. We received a waiver for the revenue covenants prior
to April 30, 2003 therefore as of April 30, 2003 we were in compliance with all
financial covenants. Starting May 1, 2003, we are no longer subject to the
financial covenants relating to cash on hand, revenue and operating expenses.

Future minimum lease and termination payments under operating leases and
payments under bank borrowings are as follows as of April 30, 2003 (in
thousands):

|                              |  |           |        |            |  |       |       |  |  |   |        | 
|----------------------------- |  | --------- | ------ | ---------- |  | ----- | ----- |  |  | - | ------ | 
|                              |  | Operating |        | Bank       |  |       |       | 
|Twelve Months Ended April 30, |  | Leases    |        | Borrowings |  | Total
|                              |  |           |        |            |  |      
|2004                          |  | $         | 4,029  |            |  | $     | 4,500 |  |  | $ | 8,529  | 
|2005                          |  |           | 2,719  |            |  |       |      |  |  |   | 2,719  | 
|2006                          |  |           | 1,727  |            |  |       |      |  |  |   | 1,727  | 
|2007                          |  |           | 1,265  |            |  |       |      |  |  |   | 1,265  | 
|2008                          |  |           | 1,434  |            |  |       |      |  |  |   | 1,434  | 
|Thereafter                    |  |           | 2,240  |            |  |       |      |  |  |   | 2,240  | 
|                              |  |           |        |            |  |       |       |  |  |   |        | 
|Total payments                |  | $         | 13,414 |            |  | $     | 4,500 |  |  | $ | 17,914 | 
|                              |  |           |        |            |  |       |       |  |  |   |        | 

Lease payments above, net of estimated sublease income, relating to
facilities that we have vacated pursuant to our restructuring program, amount
to $1.5 million, $681,000, $968,000, $942,000 and $1.3 million for the twelve
months ended April 30, 2004, 2005, 2006, 2007 and 2008, respectively, and $2.1
million thereafter. We regularly review the estimates for sublease income in
the second and fourth quarter of each year or anytime we have persuasive
evidence that a change of estimate has occurred. To the extent that these
estimates change due to changes in market condition, the ultimate restructuring
payments could vary by material amounts.

We have working capital of $8.2 million as of April 30, 2003. We believe
that cash from operations and existing cash will be sufficient to meet our
current expectations for working capital and expense requirements for at least
the next twelve months based on, among other things, our current revenue and
expense projections. However, we may require additional financing in the
future. If we were unable to raise capital in the event of ongoing losses and
depletion of our available cash resources, the absence of funding would have a
material adverse effect on our business. If we issue additional equity
securities, stockholders will experience additional dilution and the new equity
securities may have rights, preferences or privileges senior to those of the
then existing holders of our common stock.

Recent Accounting Pronouncements

In October 2001, the Financial Accounting Standard Board, or FASB, issued
Statement of Financial Accounting Standards 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 is effective for fiscal
years beginning after June 15, 2002. The adoption of SFAS No. 143 in the first
quarter of fiscal 2004 did not have a material effect on our financial position
or results of operations.

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in aRestructuring). This
Statement requires that a liability for costs associated with an exit or
disposal activity be recognized and measured at fair value only when the
liability is initially incurred. SFAS

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No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of
SFAS No. 146 on January 1, 2003 did not have a material effect on our financial
position or results of operations.

In November 2002, FASB issued FASB Interpretation No. 45, or FIN No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN No. 45 provides expanded
accounting guidance surrounding liability recognition and disclosure
requirements related to guarantees, as defined by this Interpretation. We had
no existing guarantees as of April 30, 2003, and the adoption of FIN No. 45 did
not have a material effect on our financial position or results of operations.
Indemnification and warranty provisions within our customer license and service
agreements are generally consistent with those prevalent in our industry. The
duration of our product warranties generally does not exceed 90 days following
delivery of our products. We have not incurred significant obligations under
customer indemnification or warranty provision historically. Accordingly, we do
not maintain accruals for potential customer indemnification or
warranty-related obligations.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities.FIN No. 46 expands upon existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN No. 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entitys activities or is
entitled to receive a majority of the entitys residual returns or both. The
consolidation requirements of FIN No. 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply
to older entities in the first fiscal year or interim period beginning after
June 15, 2003. We do not have any ownership in any variable interest entities
as of April 30, 2003. We will apply the consolidation requirement of FIN No.
46 in future periods if we should own any interest in any variable interest
entity.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

We have a limited operating history, a history of losses and an accumulated
deficit of $499.6 million. Continued losses could deplete our cash resources
and may cause us to be unable to implement our business plan.

We were incorporated in January 1998 and began licensing our software in
December 1998. Until recently, we experienced GAAP losses for almost every
quarter of our history, and have not yet been profitable on an annual basis.
We had net loss of $37.8 million in the year ended January 31, 2003. We had an
accumulated deficit of $499.6 million as of April 30, 2003. Although our
financial results have improved recently, these improvements may not continue,
and we may incur losses in the future. Additional losses will reduce the cash
available to us to run our business, and unless financing is available to us
from other sources, we may become unable to implement our business plan.

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

Our quarterly operating results have fluctuated significantly in the past
and may continue to fluctuate in the future. Our quarterly operating results
are likely to be particularly affected by the number of customers licensing our
products during any quarter and the size of such licensing transactions which
could be impacted during a new release cycle. In addition, we may be unable to
accurately forecast our operating results because our operating history is
limited and our business and the market in which we

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operate is changing rapidly and we have limited visibility into our future revenue, especially license
revenue, because revenue historically has been heavily concentrated in the
third month of each quarter. If we fail to meet expectations, our stock price
will likely decline.

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

Other factors that could affect our quarterly operating results include:



| |  |  | changes in the pricing of our products and services or those
of our competitors or the announcement or introduction of new
products or services by us or our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the renewal or non-renewal of annual maintenance contracts to
our customers;                                                                                             
|
| |  |  | the demand for professional services to implement our
products and our efficiency in rendering such services;                                                            
|
| |  |  | variability in the mix of our product and services revenue in
any quarter;                                                                                               
|
| |  |  | the amount and timing of operating expenses and capital
expenditures relating to the business; and                                                                       
|
| |  |  | changes in restructuring accruals based on changes in
sublease estimates for lease facilities we vacated.                                                                

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

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

Our total revenue was $9.8 million in the first quarter of fiscal 2004,
compared to $14.1 million in the first quarter of fiscal 2003. Our license
revenue was $3.2 million in the first quarter of fiscal 2004, compared to $5.7
million in the first quarter of fiscal 2003. While we cannot specifically
correlate the impact of macro-economic conditions on our sales activities, we
believe that the economic conditions and international conflicts have
contributed to a decrease in demand in our market, and in particular, have
increased the average length of our sales cycles and decreased the size of our
license transactions. To the extent that the current economic climate remains
depressed or worsens, or international conflicts develop or worsen, the demand
for our products and services, and therefore future revenue, may be further
reduced. We may not be able to respond to future revenue reductions in a
sufficiently timely manner to avoid future losses. Even if economic conditions
improve and international conflicts diminish, corporations may not increase
their information technology spending in our market and we may be unable to
maintain or improve revenue levels.

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

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

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

We experience seasonality in the licensing of our products and sales of
our services. For example, revenue historically has been lower in our first
fiscal quarter due to patterns in the capital budgeting and purchasing cycles
of our current and prospective customers. We also expect that revenue may
decline during July and August, particularly in European markets, such as
France, Germany, the United Kingdom and the Netherlands. These seasonal
variations in our revenue are likely to lead to fluctuations in our quarterly
operating results depleting our cash reserves and adversely affecting our
ability to pursue business opportunities.

Because the application of our
product is complex, our products, including our recently released
Niku 6.1, may contain
undetected defects and errors which could result in loss of or delay in
revenue, failure to achieve market acceptance or increased costs and
liabilities.

Products
as complex as those we offer or are developing, including our
recently released Niku 6.1, may contain
undetected defects or errors. Despite internal testing and testing by our
customers or potential customers, defects or errors may occur in our existing
or future products and services. From time to time in the past, versions of our
software that have been delivered to customers have contained errors.
Such errors could result in additional development costs, diversion
of technical and other resources from our other development efforts,
or the loss of credibility with our current and prospective
customers. In the
future, if we are not able to detect and correct errors prior to release, we
may experience a loss of or delay in revenue, failure to achieve market
acceptance and increased costs to correct errors, any of which could
significantly harm our business.

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

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

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

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

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

Additionally, we design our products to work with databases such as Oracle
Database Server and SQL Server and operating systems such as Sun Solaris,
Microsoft Windows and HP UX. Any changes to those databases or operating
systems, or increasing popularity of other databases or operating systems,

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might require us to modify one or both of our products or services and could
cause us to delay releasing future products and enhancements. As a result, the
timing and nature of new product introductions or product modifications, and
increases and decreases in the market acceptance of databases and operating
systems, as well as web servers and other enterprise and Internet-based
applications could delay our product development, increase our research and
development expenses and cause customers to delay evaluation, purchase and
deployment of our products.

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

In the first quarter of fiscal 2004, international revenue represented
43.8% of our total revenue, compared to 44.3% in the first quarter of fiscal
2003. International license revenue represented 45.4% of our total license
revenue in the first quarter of fiscal 2004, compared to 33.2% in the first
quarter of fiscal 2003. International activities are a significant part of our
business.

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



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

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

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



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

A number of companies offer products that provide some of the
functionality of our products. We may not be able to maintain our competitive
position against current or potential competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other resources. Competitors with greater resources may be able to undertake
more extensive marketing campaigns, adopt

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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 have recently experienced a leadership transition. If the transition is not
completed successfully or if any of the key employees leave, our
business operations could be adversely affected.

In November 2002, Joshua Pickus, our chief financial officer, succeeded
Farzad Dibachi as our president and chief executive officer. In November 2002,
our executive vice president of strategy and planning who was the wife our
former chief executive officer, also resigned. In January 2003, we hired
Michael Shahbazian as our new chief financial officer. Our success will depend
to a significant extent on the ability of these executives to function
effectively in their new roles and on our ability to retain the services of Mr.
Pickus, Mr. Shahbazian and other key employees. We do not have employment
contracts for a defined term with our employees. If we lose the services of
one or more of our executives or key employees, including if one or more of our
executives or key employees decided to join a competitor or otherwise compete
directly or indirectly with us, this could harm our business.

If we deplete our limited working capital we may not
be able to raise additional funds in the future and might be unable
to execute our business plan.

As of April 30, 2003, we had cash and cash equivalents of $23.2 million.
This amount includes net proceeds of approximately $10.2 million from a private
placement we completed in April 2003 and $4.5 million in bank borrowings under
a term loan, of which $250,000 plus interest was repaid in June 2003. We
believe that cash from operations and existing cash will be sufficient to meet
our current expectations for working capital and expense requirements for at
least the next twelve months based on, among other things, our current revenue
and expense projections. However, we may require additional financing. If we were unable to raise capital in the event of ongoing
losses and depletion of our available cash resources, the absence of funding
would have a material adverse effect on our business. If we issue additional
equity securities, stockholders will experience additional dilution and the new
equity securities may have rights, preferences or privileges senior to those of
the then existing holders of our common stock.

As a result of the repricing of our options, we may continue to incur
stock-based compensation expense in future periods, which would adversely
affect our results of operation.

We may continue to incur stock-based compensation expense in future
periods, which represents non-cash charges incurred as a result of the
repricing of our stock options and the issuance of stock and stock options
below fair market value. On November 12, 2001, our board of directors, acting
pursuant to existing terms of our stock option plans, approved the repricing of
approximately 890,000 outstanding stock options with exercise prices above
$7.50. The exercise prices of all such stock options were repriced to $7.50,
which was the fair market value of our stock on November 12, 2001. There were
no changes to the vesting schedules or other terms of the repriced stock
options. Options held by our former chief executive officer, former executive
vice president of strategy and planning, board of directors and non-employees
were not repriced. We are accounting for the repriced stock options using
variable accounting whereby the aggregate intrinsic value of the repriced stock
options is continuously remeasured and amortized to stock-based compensation
expense over the vesting periods. Based on the stock price as of April 30,
2003, we recorded no stock-based compensation in the first quarter of fiscal
2004 relating to these repriced stock options. As of April 30, 2003, deferred
stock-based compensation relating to these repriced stock options was zero,
reflecting the intrinsic value of unexercised repriced options as of April 30,
2003. To the extent that our stock price increases above $7.50 in future
periods for options that were repriced but not tendered pursuant to the stock
exchange program described below, we will need to record additional stock-based
compensation expense.

In October 2002, we cancelled stock options to purchase 55,000 shares of
common stock held by our chief executive officer and immediately thereafter
granted him stock options to purchase 150,000

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shares of common stock at a price of $1.50, which was the closing price of our common stock on the grant date.
As a result, based on the closing price of our common stock of $4.67 on April
30, 2003, we recorded $35,000 in stock-based compensation in the first quarter
of fiscal 2004. In May 2003, our chief executive officer exercised all of his
repriced stock options to purchase 55,000 shares of common stock and we
recorded an additional $56,000 in stock-based compensation in May 2003. As all
repriced options held by our chief executive officer were exercised, we will no
longer be required to record additional stock-based compensation relating to
these stock options in the future.

On April 15, 2003, we announced a voluntary stock option exchange program
for our employees. Under the program, our employees was given the opportunity
to exchange outstanding stock options previously granted to them with an
exercise price greater than or equal to $7.50 per share for a new stock option
exercisable for 1.15 shares for each share subject to the tendered stock
options, to be granted at a future date, at least six months and a day from the
cancellation date. The exercise price of these new stock options will be equal
to the fair market value of our common stock on the date of grant. On the
grant date, the new stock options will be vested as to the number of stock
options that would have been vested on such date had the old stock options not
been tendered plus the number of shares that would have been vested had the old
option been exercisable for 15% more shares. Our chief executive officer,
chief financial officer and members of the board of directors are not eligible
to participate in the program. The stock option exchange program did not
result in any additional compensation charges or variable plan accounting. On
April 15, 2003, stock options for 622,511 shares of common stock were eligible
to be exchanged. On May 13, 2003, our employees tendered stock options for
525,031 shares of common stock. We expect to grant our employees stock options
to purchase 603,785 shares of common stock at least six months and a day from
May 13, 2003. As a result of this stock option exchange program, we will no
longer incur stock-based compensation for outstanding stock options for
approximately 298,000 shares of common stock that were previously repriced in
November 2001. We will continue to incur stock-based compensation for
outstanding stock options for approximately 73,000 shares of common stock that
were previously repriced in November 2001 that were not tendered pursuant to the stock option
exchange program to the extent that our stock price increases above $7.50.

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

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

We rely to a large degree on copyright laws with respect to our software,
but we have not made any copyright registration with any government entity with
respect to our products. Although registration is not required to obtain
protection under copyright laws, our failure to register may limit our ability
to seek certain remedies available under such laws. We are currently pursuing
one patent application but no patent has issued. We received U.S.
registration of the trademarks Niku, the Niku logo, and Do What Matters. These
registrations may not provide us with significant protection for our
trademarks. 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.

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

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

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

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

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

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

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

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



| |  |  | authorizing the issuance of preferred stock without stockholder approval;
| | - |  | -------------------------------------------------------------------------
|
| |  |  | prohibiting cumulative voting in the election of directors;              

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| |  |  | requiring two-thirds of the outstanding shares to approve
amendments to some provisions of our certificate of incorporation and
bylaws;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | requiring a majority of the stockholders to call stockholders meetings; and                                                            
|
| |  |  | prohibiting stockholder actions by written consent.                                                                                    

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

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

A large percentage of our stock is concentrated with a few
shareholders. If any one of those shareholders or a combination of
multiple shareholders elected to sell a substantial amount of our
common stock it could cause our stock price to decline.

A significant amount
of our outstanding stock is now owned by one institution and a few
individual investors and will become eligible for immediate resale to
the public upon effectiveness of the related registration statement.
Any sales of substantial amounts of our common stock in the public
market, or the perception that such sales might occur, could harm the
market price of our common stock.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

We develop products in the United States and market our products in North
America and Europe and to a lesser degree in Asia. As a result, our financial
results may be affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Approximately 43.8%
of our total revenue was made in currencies other than U.S. dollars in the
first quarter of fiscal 2004. Our exposures to foreign exchange rate
fluctuations also arise in part from intercompany accounts with our foreign
subsidiaries. These intercompany accounts are typically denominated in the
local currency of the foreign subsidiary. We expect that exchange rate
fluctuations will affect our financial results in the future. We currently do
not use financial instruments to hedge operating expenses of our European
subsidiaries. Historically, we have not utilize financial instruments for
hedging purpose. Starting in the second quarter of fiscal 2004, we started
hedging our intercompany accounts denominated in foreign currency. We will
continue to assess the need to further utilize financial instruments to hedge
currency exposures on an ongoing basis. The effect of foreign exchange rate
fluctuations in the first quarter of fiscal 2004 was not material.

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




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended (Exchange Act)) as of a date within 90 days prior to the
filing date of this quarterly report on Form 10-Q (Evaluation Date). Based on
such evaluation, they have concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in alerting management on a
timely basis to material information relating to the Company required to be
included in our reports filed or submitted under the Exchange Act.

29



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Changes in Internal Controls

Since the Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could affect such controls.




PART II: OTHER INFORMATION




Item 1. Legal Proceedings

In August 2001, Goldman, Sachs and Co., Dain Rauscher Wessels, U.S.
Bancorp Piper Jaffray and Thomas Weisel Partners, the managing underwriters of
the Companys initial public offering (IPO), the Company, and certain of the
Companys officers and directors, were named as defendants in a number of
purported securities class actions in United States District Court for the
Southern District of New York arising out of the Companys initial public
offering in February 2000. The complaints in these actions allege, among other
things, that the registration statement and prospectus filed with the
Securities and Exchange Commission for purposes of the IPO were false and
misleading because they failed to disclose that the managing underwriters
allegedly (i) solicited and received commissions from certain investors in
exchange for allocating to them shares of Company stock in connection with the
IPO and (ii) entered into agreements with their customers to allocate such
stock to those customers in exchange for the customers agreeing to purchase
additional shares of ours in the aftermarket at pre-determined prices. On
August 8, 2001 the Court ordered that these actions, along with hundreds of IPO
allocation cases against other issuers, underwriters and directors and
officers, be transferred to one judge for coordinated pre-trial proceedings. In
July 2002, omnibus motions to dismiss the complaints based on common legal
issues were filed on behalf of all issuers, underwriters and directors and
officers. By order dated October 8, 2002, the Court dismissed the Companys officers and directors from the case without
prejudice. In an opinion issued on February 19, 2003, the Court granted in part
and denied in part the motions to dismiss. The complaints against the Company
and the other issuers and underwriters were not dismissed as a matter of law.
These cases remain at a preliminary stage and no discovery proceedings have
taken place in relation to the issuers. The Company believes that the claims
asserted against it in these cases are without merit and the Company intends to
defend vigorously against them. These cases seek compensatory damages in
unspecified amounts as well as other relief.




Item 2. Changes in Securities and Use of Proceeds

In February 2003, we entered into a common stock and warrant purchase
agreement with various investors led by Walden VC, providing for the issuance
of 3,088,230 shares of our common stock at a price of $3.35 per share and
warrants to purchase 386,034 shares of common stock at a price of $0.40 per
warrant in connection with a private placement. The warrants have an exercise
price of $3.40. In February 2003, we issued 1,549,735 shares of our common
stock and warrants to purchase 193,720 shares of common stock in connection
with initial closing of this private placement. In April 2003, our stockholders
approved and we subsequently issued the remaining 1,538,495 shares of our
common stock and warrants to purchase 192,314 shares of common stock.
Following this approval, we completed the subsequent closing of this private
placement and issued such remaining common stock and warrants. These shares and
warrants were issued in a private placement exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) and Regulation D of the Act.
The aggregate offering price for the securities was approximately $10.5 million
and total net proceeds from the private placement were approximately $10.2
million.




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

A Special Meeting of our Stockholders was held on April 10, 2003, during
which the following two proposals were voted upon as follows:

Proposal 1:The issuance and sale of 1,538,495 shares of common stock and
warrants to purchase 192,314 shares of common stock, including the issuance of
1,117,302 shares of common stock and warrants to purchase 139,664 shares of common stock to Walden VC.

30



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|          |  |         |        |         |  |  |           | 
|--------- |  | ------- | ------ | ------- |  |  | --------- | 
|For       |  | Against |        | Abstain
|5,157,364 |  |         | 38,995 |         |  |  | 1,541,586 | 

Proposal 2:The issuance and sale of 29,412 shares of common stock and
warrants to purchase 3,677 shares of common stock to Mr. Ravi Chiruvolu, a
member of our board of directors.

|          |  |         |        |         |  |  |           | 
|--------- |  | ------- | ------ | ------- |  |  | --------- | 
|For       |  | Against |        | Abstain
|5,148,044 |  |         | 48,166 |         |  |  | 1,541,735 | 




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

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



|       |         |               |  |                                                                                                                          
|------ | ------- | ------------- |  | -------------------------------------------------------------------------------------------------------------------------
|Number |         | Exhibit Title
|       | 3.1 (1) |               |  | Registrants Amended and Restated Certificate of Incorporation.                                                          
|       |         |               |  |                                                                                                                          
|       | 3.2 (2) |               |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation dated
November 20, 2002.               
|       |         |               |  |                                                                                                                          
|       | 3.3 (3) |               |  | Registrants Amended and Restated Bylaws.                                                                                
|       |         |               |  |                                                                                                                          
|       | 4.1 (4) |               |  | Form of Warrant to Purchase Common Stock of the Registrant, dated February 12, 2003.                                     
|       |         |               |  |                                                                                                                          
|       | 4.2 (4) |               |  | Registration Rights Agreement by and between various Investor and the Registrant, dated
February 12, 2003.               
|       |         |               |  |                                                                                                                          
|       | 10.1(4) |               |  | Common Stock and Warrant Purchase Agreement by and between various Investors and the
Registrant, dated February 12, 2003.
|       |         |               |  |                                                                                                                          
|       | 10.2    |               |  | Offer Letter for Michael Shahbazian.                                                                                     
|       |         |               |  |                                                                                                                          
|       | 99.1    |               |  | Certificate of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.                              
|       |         |               |  |                                                                                                                          
|       | 99.2    |               |  | Certificate of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.                              



---



|(1) | Incorporated by reference to the Registrants Fiscal 2000 Annual Report
on Form 10-K filed on April 28, 2000.
|--- | -------------------------------------------------------------------------------------------------------------
|   
|(2) | Incorporated by reference to the Current Report on Form 8-K filed on
November 21, 2002.                      
|   
|(3) | Incorporated by reference to the Registrants Fiscal 2003 Annual Report
on Form 10-K filed on April 15, 2003.
|   
|(4) | Incorporated by reference to the Registrants Current Report on Form 8-K
filed on April 14, 2003.            

(b)  Reports on Form 8-K

On February 18, 2003, we filed a current report on Form 8-K to announce a
$10.5 million common stock financing.

On April 15, 2003, we filed a current report on Form 8-K to announce the
closing of the $10.5 million common stock financing.

On May 5, 2003, we filed a current report on Form 8-K to announce our
preliminary financial results for the quarter ended April 30, 2003.

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On May 15, 2003, we filed a current report on Form 8-K to announce our
financial results for the quarter ended April 30, 2003.

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SIGNATURE

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

|                    |     |                                                    |                        
|------------------- | --- | -------------------------------------------------- | -----------------------
|                    |     |                                                    | NIKU CORPORATION       
|                    |     |                                                    |                        
|Date: June 16, 2003 | By: |                                                    | /s/ JOSHUA PICKUS      
|                    |     |                                                    |                        
|                    |     |                                                    | Joshua
Pickus          
|                    |     |                                                    | Chief Executive Officer
|                    |     |                                                    |                        
|Date: June 16, 2003 | By: |                                                    | /s/ MICHAEL SHAHBAZIAN 
|                    |     |                                                    |                        
|                    |     |                                                    | Michael Shahbazian     
|                    |     | Chief Financial Officer
(Chief Accounting Officer)

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CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

I, Joshua Pickus, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Niku Corporation;

2.      Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.      Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.      The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)      Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

(b)      Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

(c)      Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.      The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

(a)      All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

(b)      Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.      The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |               |  |                        
|----- |  | ------------- |  | -----------------------
|Date: |  | June 16, 2003 |  |                        
|      |  |               |  | /s/ JOSHUA PICKUS      
|      |  |               |  | Joshua Pickus          
|      |  |               |  | Chief Executive Officer

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CERTIFICATION OF CHIEF FINANCIAL
OFFICER

I, Michael Shahbazian, certify that:

1.      I have reviewed this quarterly report on Form
10-Q of Niku Corporation;

2.      Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.      Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.      The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(b)      Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

(c)      Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

(d)      Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.      The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors
and the audit committee of registrants board of directors (or persons
performing the equivalent function):

(e)      All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

(f)      Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.      The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |               |  |                                                   
|----- |  | ------------- |  | --------------------------------------------------
|Date: |  | June 16, 2003 |  |                                                   
|      |  |               |  | /s/ MICHAEL SHAHBAZIAN                            
|      |  |               |  | Michael Shahbazian                                
|      |  |               |  | Chief Financial
Officer
(Chief Accounting Officer)

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Exhibit Index



|       |      |               |  |                                                                                            
|------ | ---- | ------------- |  | -------------------------------------------------------------------------------------------
|Number |      | Exhibit Title
|       | 9.1  |               |  | Certificate of Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.
|       |      |               |  |                                                                                            
|       | 9.2  |               |  | Certificate of Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.
|       |      |               |  |                                                                                            
|       | 10.2 |               |  | Offer Letter for Michael Shahbazian.                                                       

36