##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549




---

Form 10-Q

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

Commission File Number: 000-28797



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Niku Corporation

(Exact name of registrant as specified in its
charter)


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

305 Main Street

Redwood City, CA 94063


(Address of principal executive
offices)


Telephone: (650) 298-4600

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(l) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.

Yes þ          No o


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

8,762,492 shares of common stock as of
November 30, 2002



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                                   |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                            
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS           
|                              |                                                                                               | NIKU CORPORATION AND SUBSIDIARIES 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. Change in Securities and Use of Proceeds                                             
|                              | Item 4. Submission of Matter to a Vote of Security Holders                                   
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 10.04                
|EXHIBIT 10.05                
|EXHIBIT 99.1                 
|EXHIBIT 99.02                



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q


FOR THE PERIOD ENDED OCTOBER 31,
2002


INDEX

|                             |  |                                                                                           |  |      |    | 
|---------------------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|                             |  |                                                                                           |  | Page
|                             |  |                                                                                           |  |     
|PART I FINANCIAL INFORMATION
|Item 1.                      |  | Financial Statements (unaudited):                                                         |  |      |    | 
|                             |  | Condensed Consolidated Balance Sheets                                                     |  |      | 2  | 
|                             |  | Condensed Consolidated Statements of Operations
    and Comprehensive Loss                |  |      | 3  | 
|                             |  | Condensed Consolidated Statements of Cash Flows                                           |  |      | 4  | 
|                             |  | Notes to Condensed Consolidated Financial
    Statements                                  |  |      | 5  | 
|Item 2.                      |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 13 | 
|Item 3.                      |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 32 | 
|Item 4.                      |  | Controls and Procedures                                                                   |  |      | 32 | 
|PART II OTHER INFORMATION   
|Item 1.                      |  | Legal Proceedings                                                                         |  |      | 33 | 
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                                 |  |      | 33 | 
|Item 4.                      |  | Submission of Matter to a Vote of Security Holders                                        |  |      | 33 | 
|Item 5.                      |  | Other Information                                                                         |  |      | 33 | 
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                          |  |      | 34 | 
|                             |  | Signature                                                                                 |  |      | 35 | 

1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




Item 1.     Financial
Statements

NIKU CORPORATION AND SUBSIDIARIES






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                   |                                                  |                                                                         |        |             |        |  |        |        |         | 
|-------------------------------------------------- | ------------------------------------------------ | ----------------------------------------------------------------------- | ------ | ----------- | ------ |  | ------ | ------ | ------- | 
|                                                   |                                                  | October 31,                                                             |        | January 31,
|                                                   |                                                  | 2002                                                                    |        | 2002       
|                                                   |                                                  |                                                                         |        |            
|                                                   |                                                  |                                                                        
|                                                   |                                                  | (In thousands)                                                         
|                                                   |                                                  | (Unaudited)                                                            
|ASSETS                                            
|Current Assets:                                    |                                                  |                                                                         |        |             |        |  |        |       
|                                                   | Cash and cash equivalents                        |                                                                         | $      | 17,078      |        |  | $      | 51,585 |        
|                                                   | Current portion of restricted cash               |                                                                         |        | 6,178       |        |  |        | 4,665  |        
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total cash, cash equivalents and current portion
    of restricted cash |        |             | 23,256 |  |        |        | 56,250  | 
|                                                   | Accounts receivable, net                         |                                                                         |        | 5,322       |        |  |        | 12,797 |        
|                                                   | Prepaid expenses and other current assets        |                                                                         |        | 1,832       |        |  |        | 5,241  |        
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total current assets                                                    |        |             | 30,410 |  |        |        | 74,288  | 
|Restricted cash                                    |                                                  |                                                                         | 1,314  |             |        |  | 9,822  |       
|Property and equipment, net                        |                                                  |                                                                         | 2,891  |             |        |  | 13,196 |       
|Deposits and other assets                          |                                                  |                                                                         | 1,173  |             |        |  | 4,269  |       
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total assets                                                            |        | $           | 35,788 |  |        | $      | 101,575 | 
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|LIABILITIES AND STOCKHOLDERS
    (DEFICIT) EQUITY
|Current Liabilities:                               |                                                  |                                                                         |        |             |        |  |        |       
|                                                   | Accounts payable                                 |                                                                         | $      | 2,714       |        |  | $      | 3,279  |        
|                                                   | Accrued liabilities                              |                                                                         |        | 6,629       |        |  |        | 16,577 |        
|                                                   | Accrued restructuring                            |                                                                         |        | 15,948      |        |  |        | 5,240  |        
|                                                   | Bank borrowings and other short-term obligations |                                                                         |        | 1,067       |        |  |        | 27,261 |        
|                                                   | Deferred revenue                                 |                                                                         |        | 7,622       |        |  |        | 10,903 |        
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total current liabilities                                               |        |             | 33,980 |  |        |        | 63,260  | 
|Long-term restructuring accrual                    |                                                  |                                                                         | 6,903  |             |        |  | 6,758  |       
|Long-term portion of bank borrowings               |                                                  |                                                                         | 4,000  |             |        |  |       |       
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total liabilities                                                       |        |             | 44,883 |  |        |        | 70,018  | 
|Stockholders (deficit) equity                     |                                                  |                                                                         | (9,095 | )           |        |  | 31,557 |       
|                                                   |                                                  |                                                                         |        |             |        |  |        |       
|                                                   |                                                  | Total liabilities and stockholders
    (deficit) equity                |        | $           | 35,788 |  |        | $      | 101,575 | 
|                                                   |                                                  |                                                                         |        |             |        |  |        |       

The accompanying notes are an integral part of
these

unaudited condensed consolidated financial
statements.


2



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


AND COMPREHENSIVE LOSS


|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |          |          |  
|----------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ----- | ----------------- | ------ | ---- | ----- | ------- | ------- | - | ----- | ------- | ------- | - | ------ | -------- | -------- | -
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                  
|                                                                  |                                                                                                                                                                                                                                                 | Three Months Ended                    |       | Nine Months Ended
|                                                                  |                                                                                                                                                                                                                                                 | October 31,                           |       | October 31,      
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                  
|                                                                  |                                                                                                                                                                                                                                                 | 2002                                  |       | 2001              |        | 2002 |       | 2001   
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |        
|                                                                  |                                                                                                                                                                                                                                                 |                                      
|                                                                  |                                                                                                                                                                                                                                                 | (In thousands, except per share data)
|                                                                  |                                                                                                                                                                                                                                                 |                                      
|                                                                  |                                                                                                                                                                                                                                                 | (Unaudited)                          
|Revenue:                                                          |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  | License                                                                                                                                                                                                                                         |                                       | $     | 4,857             |        |      | $     | 6,239   |         |   | $     | 14,509  |         |   | $      | 21,322   |         
|                                                                  | Services                                                                                                                                                                                                                                        |                                       |       | 6,917             |        |      |       | 8,237   |         |   |       | 21,886  |         |   |        | 27,864   |         
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                                 | Total revenue                         |       |                   | 11,774 |      |       |         | 14,476  |   |       |         | 36,395  |   |        |          | 49,186   |  
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|Cost of revenue:                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  | License                                                                                                                                                                                                                                         |                                       |       | 179               |        |      |       | 252     |         |   |       | 798     |         |   |        | 1,326    |         
|                                                                  | Services (exclusive of stock-based compensation
    of $2 and $77 for the three months ended October 31, 2002
    and 2001 and $(289) and $681 for the nine months ended
    October 31, 2002 and 2001, respectively)                           |                                       |       | 2,871             |        |      |       | 4,588   |         |   |       | 10,154  |         |   |        | 20,716   |         
|                                                                  | Impairment of licensed technology                                                                                                                                                                                                               |                                       |       |                  |        |      |       | 2,597   |         |   |       |        |         |   |        | 9,386    |         
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                                 | Total cost of revenue                 |       |                   | 3,050  |      |       |         | 7,437   |   |       |         | 10,952  |   |        |          | 31,428   |  
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                                 | Gross profit                          |       |                   | 8,724  |      |       |         | 7,039   |   |       |         | 25,443  |   |        |          | 17,758   |  
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|Operating expenses:                                               |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  | Sales and marketing (exclusive of stock-based
    compensation of $54 and $587 for the three months ended
    October 31, 2002 and 2001 and $(1,787) and $3,844 for the
    nine months ended October 31, 2002 and 2001, respectively)          |                                       |       | 3,438             |        |      |       | 12,308  |         |   |       | 18,999  |         |   |        | 61,893   |         
|                                                                  | Research and development (exclusive of
    stock-based compensation of $46 and $173 for the three months
    ended October 31, 2002 and 2001 and $(1,552) and $1,768 for
    the nine months ended October 31, 2002 and 2001,
    respectively) |                                       |       | 1,967             |        |      |       | 8,963   |         |   |       | 9,989   |         |   |        | 30,537   |         
|                                                                  | General and administrative (exclusive of
    stock-based compensation of $63 and $297 for the three months
    ended October 31, 2002 and 2001 and $(154) and $1,714 for
    the nine months ended October 31, 2002 and 2001,
    respectively) |                                       |       | 2,232             |        |      |       | 3,126   |         |   |       | 6,770   |         |   |        | 13,276   |         
|                                                                  | Restructuring and other                                                                                                                                                                                                                         |                                       |       | 7,469             |        |      |       | 4,138   |         |   |       | 37,036  |         |   |        | 14,979   |         
|                                                                  | Stock-based compensation                                                                                                                                                                                                                        |                                       |       | 165               |        |      |       | 1,134   |         |   |       | (3,782  | )       |   |        | 8,007    |         
|                                                                  | Asset impairment and other                                                                                                                                                                                                                      |                                       |       | 75                |        |      |       |        |         |   |       | 500     |         |   |        | 138,923  |         
|                                                                  | Amortization of goodwill and other intangible
    assets                                                                                                                                                                                        |                                       |       |                  |        |      |       |        |         |   |       |        |         |   |        | 27,333   |         
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                                 | Total operating expenses              |       |                   | 15,346 |      |       |         | 29,669  |   |       |         | 69,512  |   |        |          | 294,948  |  
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                                 | Operating loss                        |       |                   | (6,622 | )    |       |         | (22,630 | ) |       |         | (44,069 | ) |        |          | (277,190 | )
|Interest and other income, net                                    |                                                                                                                                                                                                                                                 |                                       | 184   |                   |        |      | 395   |         |         |   | 616   |         |         |   | 2,465  |         
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                                 | Net loss                              |       | $                 | (6,438 | )    |       | $       | (22,235 | ) |       | $       | (43,453 | ) |        | $        | (274,725 | )
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|Basic and diluted net loss per share                              |                                                                                                                                                                                                                                                 | $                                     | (0.88 | )                 |        | $    | (3.01 | )       |         | $ | (5.89 | )       |         | $ | (36.70 | )       
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|Shares used in computing basic and diluted net
    loss per share |                                                                                                                                                                                                                                                 |                                       | 7,312 |                   |        |      | 7,375 |         |         |   | 7,380 |         |         |   | 7,486  |         
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|Comprehensive loss:                                               |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  | Net loss                                                                                                                                                                                                                                        |                                       | $     | (6,438            | )      |      | $     | (22,235 | )       |   | $     | (43,453 | )       |   | $      | (274,725 | )       
|                                                                  | Foreign currency translation adjustments                                                                                                                                                                                                        |                                       |       | (46               | )      |      |       | (49     | )       |   |       | 72      |         |   |        | (193     | )       
|                                                                  | Unrealized gain (loss) on short-term
    investments                                                                                                                                                                                            |                                       |       |                  |        |      |       | (40     | )       |   |       |        |         |   |        | (26      | )       
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         
|                                                                  |                                                                                                                                                                                                                                                 | Comprehensive loss                    |       | $                 | (6,484 | )    |       | $       | (22,324 | ) |       | $       | (43,381 | ) |        | $        | (274,944 | )
|                                                                  |                                                                                                                                                                                                                                                 |                                       |       |                   |        |      |       |         |         |   |       |         |         |   |        |         

The accompanying notes are an integral part of
these

unaudited condensed consolidated financial
statements.


3



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##### Table of Contents






NIKU CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |          |         |        |         |  
|-------------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ------ | ------ | ------- | -------- | ------- | ------ | ------- | -
|                                                   |                                                                                     |                                                         
|                                                   |                                                                                     | Nine Months Ended                                       
|                                                   |                                                                                     | October 31,                                             
|                                                   |                                                                                     |                                                         
|                                                   |                                                                                     | 2002                                                     |                                           | 2001                                     
|                                                   |                                                                                     |                                                          |                                           |                                          
|                                                   |                                                                                     |                                                         
|                                                   |                                                                                     | (In thousands)                                          
|                                                   |                                                                                     | (Unaudited)                                             
|Cash flows from operating activities:              |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   | Net loss                                                                            |                                                          | $                                         | (43,453                                   | )      |        | $       | (274,725 | )      
|                                                   | Adjustments to reconcile net loss to net cash
    used in operating activities:     |                                                          |                                           |                                           |        |        |         |          |        
|                                                   |                                                                                     | Depreciation                                             |                                           |                                           | 2,994  |        |         |          | 4,142   |       
|                                                   |                                                                                     | Impairment of licensed technology                        |                                           |                                           |       |        |         |          | 8,536   |       
|                                                   |                                                                                     | Restructuring and other                                  |                                           |                                           | 15,294 |        |         |          | 9,188   |       
|                                                   |                                                                                     | Asset impairment and other                               |                                           |                                           | 500    |        |         |          | 138,923 |       
|                                                   |                                                                                     | Amortization of goodwill and other intangible
    assets |                                           |                                           |       |        |         |          | 27,333  |       
|                                                   |                                                                                     | Stock-based compensation                                 |                                           |                                           | (3,782 | )      |         |          | 8,007   |       
|                                                   |                                                                                     | Provision for doubtful accounts receivable               |                                           |                                           | (72    | )      |         |          | 9,275   |       
|                                                   |                                                                                     | Forgiveness of notes receivable from stockholder         |                                           |                                           | 116    |        |         |          | 248     |       
|                                                   |                                                                                     | Interest on notes receivable from stockholders           |                                           |                                           | (46    | )      |         |          | 94      |       
|                                                   |                                                                                     | Changes in operating assets and liabilities:             |                                           |                                           |        |        |         |          |         |       
|                                                   |                                                                                     |                                                          | Accounts receivable                       |                                           |        | 7,512  |         |          |         | 20,744 |        
|                                                   |                                                                                     |                                                          | Prepaid expenses and other current assets |                                           |        | 3,225  |         |          |         | 1,490  |        
|                                                   |                                                                                     |                                                          | Deposits and other assets                 |                                           |        | 329    |         |          |         | 512    |        
|                                                   |                                                                                     |                                                          | Accounts payable                          |                                           |        | (565   | )       |          |         | (3,446 | )      
|                                                   |                                                                                     |                                                          | Accrued liabilities                       |                                           |        | (7,730 | )       |          |         | (4,806 | )      
|                                                   |                                                                                     |                                                          | Accrued restructuring                     |                                           |        | 11,777 |         |          |         | (935   | )      
|                                                   |                                                                                     |                                                          | Deferred revenue                          |                                           |        | (3,281 | )       |          |         | (8,800 | )      
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   |                                                                                     |                                                          |                                           | Net cash used in operating activities     |        |        | (17,182 | )        |         |        | (64,220 | )
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|Cash flows from investing activities:              |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   | Purchases of property and equipment                                                 |                                                          |                                           | (2,480                                    | )      |        |         | (13,208  | )      
|                                                   | Releases (purchases) of investments for
    restricted cash, net                    |                                                          |                                           | 6,934                                     |        |        |         | (14,487  | )      
|                                                   | Sales and maturities of short-term investments,
    net                             |                                                          |                                           |                                          |        |        |         | 45,193   |        
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   |                                                                                     |                                                          |                                           | Net cash provided by investing activities |        |        | 4,454   |          |         |        | 17,498  |  
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|Cash flows from financing activities:              |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   | Issuance of common stock                                                            |                                                          |                                           | 392                                       |        |        |         | 1,626    |        
|                                                   | Repurchase of common stock                                                          |                                                          |                                           |                                          |        |        |         | (3,586   | )      
|                                                   | Proceeds (repayment) from bank line of
    credit, net                              |                                                          |                                           | (27,000                                   | )      |        |         | 1,000    |        
|                                                   | Proceeds from bank term loan                                                        |                                                          |                                           | 5,000                                     |        |        |         |         |        
|                                                   | Repayment of debt and capital lease obligations                                     |                                                          |                                           | (194                                      | )      |        |         | (350     | )      
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   |                                                                                     |                                                          |                                           | Net cash used in financing activities     |        |        | (21,802 | )        |         |        | (1,310  | )
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|Net decrease in cash and cash equivalents          |                                                                                     |                                                          | (34,530                                   | )                                         |        |        | (48,032 | )       
|Effect of exchange rate changes                    |                                                                                     |                                                          | 23                                        |                                           |        |        | (193    | )       
|Cash and cash equivalents, beginning of period     |                                                                                     |                                                          | 51,585                                    |                                           |        |        | 108,160 |         
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|Cash and cash equivalents, end of period           |                                                                                     | $                                                        | 17,078                                    |                                           |        | $      | 59,935  |         
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|Supplemental disclosures of cash flow information: |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   | Cash paid for interest during the period                                            |                                                          | $                                         | 48                                        |        |        | $       | 165      |        
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|Noncash investing and financing activities:        |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   | Reversal of deferred stock-based compensation                                       |                                                          | $                                         | 19,263                                    |        |        | $       |         |        
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   | Repurchases of common stock in settlement of
    notes receivable from stockholders |                                                          | $                                         | 675                                       |        |        | $       | 2,886    |        
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         
|                                                   | Write-off of property and equipment to goodwill                                     |                                                          | $                                         |                                          |        |        | $       | 1,858    |        
|                                                   |                                                                                     |                                                          |                                           |                                           |        |        |         |         

The accompanying notes are an integral part of
these

unaudited condensed consolidated financial
statements.


4



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


1.     Significant
Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements have been prepared by Niku Corporation (the
Company) and reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation of
the interim periods presented. Such adjustments are of a normal
recurring nature, except for adjustments related to
restructuring. The condensed consolidated results of operations
for the interim periods presented are not necessarily indicative
of the results for any future interim period or for the entire
fiscal year. Certain information and footnote disclosures
normally included in the annual consolidated financial
statements prepared in accordance with generally accepted
accounting principles have been omitted, although the Company
believes that the disclosures included are adequate to make the
information presented not misleading. The unaudited condensed
consolidated financial statements and notes included herein
should be read in conjunction with the consolidated financial
statements and notes for the fiscal year ended January 31,
2002, included in the Companys fiscal 2002 Annual Report
on Form 10-K.

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

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



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

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial
statements and reported consolidated results of operations
during the reporting period. Estimates are used for, but are not
limited to, 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.



| |                                                     
| | ----------------------------------------------------
| | Impairment of Long-Lived Assets and Other
    Assets

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.SFAS No. 144 superseded
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed ofand the
accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions.SFAS No. 144 established a single accounting model
for impairment or disposal by sale of long-lived assets. The
provisions of SFAS No. 144 became effective for fiscal
years beginning after December 15, 2001. The adoption of
SFAS No. 144 in the nine months ended October 31,
2002 did not have a material impact on the Companys
financial position or results of operations.

5



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

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

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 loss per share amounts have been restated
within this Form 10-Q to reflect the reverse stock split.
See Note 11  Subsequent Events.

2.     Reimbursement
for Out of Pocket Expenses Incurred

In November 2001, the FASB issued Emerging Issues
Task Force Issue (EITF) No. 01-14, Income
Statement Characterization of Reimbursements Received for Out of
Pocket Expenses Incurred,which requires the Company to
report reimbursements of out of pocket expenses as revenue and
the corresponding expenses incurred as cost of revenue within
the condensed consolidated statements of operations. The Company
adopted EITF No. 01-14 in the first quarter of fiscal
2003 and reclassified reimbursable expenses into services
revenue with a corresponding increase in cost of services
revenue. The impact of the reclassification was to increase
services revenue and cost of services revenue by $366,000 and
$364,000 in the three months ended October 31, 2002 and
2001, respectively, and $901,000 and $1,301,000 in the nine
months ended October 31, 2002 and 2001, respectively.

3.     Repricing of
Stock Options

On November 12, 2001, the Companys
board of directors, acting pursuant to existing terms of the
Companys stock 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 of the repriced
options. 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 accounted for the repriced options using
variable accounting whereby the aggregate intrinsic value of the
repriced options is continuously remeasured and amortized to
stock-based compensation expense over the vesting periods. Based
on the stock price as of October 31, 2002, the Company
recorded zero and $4.8 million in recovery of previously
recognized stock-based compensation relating to these repriced
stock options in the third quarter of fiscal 2003 and the nine
months ended October 31, 2002, respectively, offset by
$165,000 and $1.0 million in other stock-based compensation
in the third quarter of fiscal 2003 and the nine months ended
October 31, 2002, respectively. As of October 31,
2002, deferred stock-based compensation relating to these
repriced options was zero, reflecting the intrinsic value of
unexercised repriced options as of October 31, 2002.

6



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Restructuring
and Other

In the third quarter of fiscal 2003, the Company
continued its restructuring program and reduced its workforce by
approximately 40 employees. This action affected all functional
groups of the Company. The Company recorded $2.2 million in
severance costs, of which $1.0 million related to the
severance and related charges for the Companys former
chief executive officer and former executive vice president of
planning and strategy. The Company also retired
$1.5 million in property and equipment for assets no longer
in use.

The Company also vacated and terminated leases
for certain facilities, including the termination of a major
lease in Redwood City, California. The Company recorded
$3.3 million in net lease commitment costs on vacated
leases in the third quarter of fiscal 2003, of which $995,000
related to additional cash consideration for the termination of
the Redwood City lease beyond that previously recorded,
$2.0 million related to an increase in valuation beyond
that previously recorded for a warrant for 1,445,000 shares of
common stock issued in connection with the termination of the
Redwood City lease, and $247,000 related to net lease commitment
costs for certain other vacated facilities. The total
termination costs for the Redwood City lease amounted to
$21.8 million, offset by $2.2 million for the reversal
of previously recorded deferred rent. The $21.8 million in
termination costs include lease termination payments of
$7.4 million, the release to the landlord of cash securing
a $5.9 million letter of credit classified as restricted
cash, the release of a $2.9 million security deposit and
$5.6 million in estimated fair value for a warrant issued
for 1,445,000 shares of common stock with an exercise price of
$0.001, offset by $2.2 million in previously recorded
deferred rent relating to the lease. The estimated fair value of
the warrant was determined using the Black-Scholes options
pricing model with a contractual life of five years, risk-free
interest rate of 3.67%, volatility of 150% and expected dividend
of 0%. Of the total $21.8 million in termination costs,
$18.8 million was accrued in the second quarter of fiscal
2003. The Companys future commitments under the Redwood
City lease prior to the termination were approximately
$121.7 million.

The Company also terminated a lease for a
facility in Atlanta, Georgia for $481,000, consisting of lease
termination payment of $181,000 and the release to the landlord
of cash securing a $300,000 letter of credit classified as
restricted cash, offset by $569,000 for the reversal of future
lease payments that had been previously accrued, net of
estimated sublease income, relating to the lease. The Company
also terminated a lease for a facility in Bellevue, Washington
for $10,000, offset by $80,000 for the reversal of future lease
payments that had been previously accrued relating to the lease.

In addition to these restructuring costs, the
Company recorded $500,000 in net lease commitment costs on
vacated facilities in the third quarter of fiscal 2003 related
to restructuring activities in fiscal 2002 primarily due to
adjustments to estimated future sublease income for certain
facilities vacated in fiscal 2002. The Company also terminated a
lease for a facility in Lincolnshire, Illinois for $388,000,
consisting of lease termination payment of $63,000 and the
release to the landlord of cash securing a $325,000 letter of
credit classified as restricted cash that had been previously
accrued in the second quarter of fiscal 2003. The Companys
future commitments under this lease prior to termination were
approximately $692,000, net of estimated sublease income.

7



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                           |                                                                                    |          |        |               |  |                   |       |              |   |             |        |        |   |   |        |        |   |   |        |        | 
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | -------- | ------ | ------------- |  | ----------------- | ----- | ------------ | - | ----------- | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | 
|                                                                           |                                                                                    |          |        |               |  | Reclassifications |       |              |   |            
|                                                                           |                                                                                    |          |        | Restructuring |  | and               |       |              |   |            
|                                                                           |                                                                                    |          |        | and Other     |  | Write Offs        |       |              |   |            
|                                                                           |                                                                                    |          |        | Charges in    |  | in the            |       | Paid in the  |   |            
|                                                                           |                                                                                    | Accrued  |        | Three Months  |  | Three Months      |       | Three Months |   | Accrued    
|                                                                           |                                                                                    | as of    |        | Ended         |  | Ended             |       | Ended        |   | as of      
|                                                                           |                                                                                    | July 31, |        | October 31,   |  | October 31,       |       | October 31,  |   | October 31,
|                                                                           |                                                                                    | 2002     |        | 2002          |  | 2002              |       | 2002         |   | 2002       
|                                                                           |                                                                                    |          |        |               |  |                   |       |              |   |            
|Restructuring initiated in the second and third
    quarter of fiscal 2003 |                                                                                    |          |        |               |  |                   |       |              |   |             |        |        |   |   |        |        |   |   |        |       
|                                                                           | Loss on retirement of property and equipment and
    other assets no longer in use |          | $      |              |  |                   | $     | 1,483        |   |             | $      | (1,706 | ) |   | $      | 223    |   |   | $      |       | 
|                                                                           | Severance                                                                          |          |        | 877           |  |                   |       | 2,203        |   |             |        |        |   |   |        | (1,607 | ) |   |        | 1,473  | 
|                                                                           | Net lease commitment costs on vacated facilities                                   |          |        | 17,401        |  |                   |       | 3,253        |   |             |        | (5,695 | ) |   |        | (471   | ) |   |        | 14,488 | 
|                                                                           | Stock-based compensation adjustment                                                |          |        |              |  |                   |       | (69          | ) |             |        | 69     |   |   |        |       |   |   |        |       | 
|Restructuring initiated in fiscal 2002                                     |                                                                                    |          |        |               |  |                   |       |              |   |             |        |        |   |   |        |        |   |   |        |       
|                                                                           | Severance                                                                          |          |        | 68            |  |                   |       |             |   |             |        |       |   |   |        | (68    | ) |   |        |       | 
|                                                                           | Net lease commitment costs on vacated facilities                                   |          |        | 9,446         |  |                   |       | 500          |   |             |        |       |   |   |        | (3,350 | ) |   |        | 6,596  | 
|                                                                           | Exit costs for business line                                                       |          |        | 218           |  |                   |       | 76           |   |             |        |       |   |   |        |       |   |   |        | 294    | 
|                                                                           | Other exit costs                                                                   |          |        | 7             |  |                   |       | 23           |   |             |        |       |   |   |        | (30    | ) |   |        |       | 
|                                                                           |                                                                                    |          |        |               |  |                   |       |              |   |             |        |        |   |   |        |        |   |   |        |       
|                                                                           |                                                                                    | $        | 28,017 |               |  | $                 | 7,469 |              |   | $           | (7,332 | )      |   | $ | (5,303 | )      |   | $ | 22,851 |       
|                                                                           |                                                                                    |          |        |               |  |                   |       |              |   |             |        |        |   |   |        |        |   |   |        |       

The Company expects that of the restructuring and
other charges accrued as of October 31, 2002, severance
costs will be paid by the second quarter of fiscal 2004. Exit
costs for business line will be paid no later than May 2004 and
net lease commitment costs on vacated facilities will be paid no
later than February 2011. The adjustment for stock-based
compensation relates to the reversal of previously recorded
stock-based compensation expenses for employees terminated
pursuant to the restructuring program as opposed to the reversal
of stock-based compensation due to a decrease in the intrinsic
value of options repriced.



|   |                   
|-- | ------------------
|5. | Net Loss Per Share

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

|                                                 |  |                |       |      |  |  |       | 
|------------------------------------------------ |  | -------------- | ----- | ---- |  |  | ----- | 
|                                                 |  |               
|                                                 |  | October 31,   
|                                                 |  |               
|                                                 |  | 2002           |       | 2001
|                                                 |  |                |       |     
|                                                 |  |               
|                                                 |  | (In thousands)
|Shares issuable under stock options              |  |                | 1,492 |      |  |  | 1,251 | 
|Shares of restricted stock subject to repurchase |  |                |      |      |  |  | 45    | 
|Shares issuable under warrants                   |  |                | 1,465 |      |  |  | 6     | 

8



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted-average exercise price of
anti-dilutive options outstanding as of October 31, 2002
and 2001 was $11.52 and $72.22 per share, respectively. The
weighted-average purchase price of restricted stock subject to
repurchase as of October 31, 2001 was $17.75 per share. The
weighted-average exercise price of warrants as of
October 31, 2002 and 2001 was $0.36 and $96.79 per share.



|   |                  
|-- | -----------------
|6. | Segment Reporting

The Company operates in a single segment:
software.

Disaggregated information is as follows (in
thousands):

|          |             |                    |       |                   |  |      |       |       |  |   |        |        |  |   |        |        | 
|--------- | ----------- | ------------------ | ----- | ----------------- |  | ---- | ----- | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|          |             |                    |       |                  
|          |             | Three Months Ended |       | Nine Months Ended
|          |             | October 31,        |       | October 31,      
|          |             |                    |       |                  
|          |             | 2002               |       | 2001              |  | 2002 |       | 2001 
|          |             |                    |       |                   |  |      |       |      
|Services: |             |                    |       |                   |  |      |       |       |  |   |        |        |  |   |        |       
|          | Consulting  |                    | $     | 2,596             |  |      | $     | 2,950 |  |   | $      | 8,276  |  |   | $      | 12,346 | 
|          | Maintenance |                    |       | 4,321             |  |      |       | 5,287 |  |   |        | 13,610 |  |   |        | 15,518 | 
|          |             |                    |       |                   |  |      |       |       |  |   |        |        |  |   |        |       
|          |             | $                  | 6,917 |                   |  | $    | 8,237 |       |  | $ | 21,886 |        |  | $ | 27,864 |       
|          |             |                    |       |                   |  |      |       |       |  |   |        |        |  |   |        |       

International sales are primarily to customers in
Europe. Revenue is attributed to the location of the customers.
Geographic information regarding the Companys revenue is
as follows (in thousands):

|                                            |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                            |  |                    |        |                  
|                                            |  | Three Months Ended |        | Nine Months Ended
|                                            |  | October 31,        |        | October 31,      
|                                            |  |                    |        |                  
|                                            |  | 2002               |        | 2001              |  | 2002 |        | 2001
|                                            |  |                    |        |                   |  |      |        |     
|United States                               |  | $                  | 7,514  |                   |  | $    | 7,791  |      |  | $ | 23,176 |  |  | $ | 25,981 | 
|United Kingdom                              |  |                    | 2,102  |                   |  |      | 2,386  |      |  |   | 6,416  |  |  |   | 9,925  | 
|Europe (excluding United Kingdom) and other |  |                    | 2,158  |                   |  |      | 4,299  |      |  |   | 6,803  |  |  |   | 13,280 | 
|                                            |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|                                            |  | $                  | 11,774 |                   |  | $    | 14,476 |      |  | $ | 36,395 |  |  | $ | 49,186 | 
|                                            |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 

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



|   |                           
|-- | --------------------------
|7. | Asset Impairment and Other

In the first quarter of fiscal 2002, the Company
performed an impairment assessment of its goodwill and other
intangible assets recorded in connection with its acquisitions
of Legal Anywhere, bSource.com, 600 Monkeys and Alyanza
Software due to a change in the Companys product plan
related to certain acquired technologies. This assessment was
based on the expected future cash flows from goodwill and
intangible assets over their remaining useful lives. As a result
of this assessment, the Company recorded $24.5 million in
asset impairment charges. This amount included
$21.7 million to write down the net book value of certain
goodwill and other intangible assets from our acquisitions of
Legal Anywhere, bSource, 600 Monkeys and Alyanza to zero
except for the carrying value of Legal Anywheres goodwill
and customer lists which was reduced to their estimated fair
value of $1.8 million. In the second quarter of fiscal
2002, the Company performed an additional impairment assessment
of goodwill and other intangible assets recorded in connection
with its acquisitions of ABT, Proamics and Legal Anywhere. This
assessment was performed primarily due to a significant decline
in the Companys stock price, which resulted in the net
book value of its assets significantly exceeding its market
capitalization. As a result of this assessment, the Company
recorded $114.4 million in asset impairment charges in the
second quarter of fiscal 2002, which reduced the fair value of

9



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

goodwill and other intangible assets related to
its acquisitions of ABT, Proamics and Legal Anywhere to zero.
The estimate of the fair value was based on the estimated future
discounted cash flows for the remaining life of the goodwill and
other intangible assets with a discount rate of 25% and an
estimated terminal value. The assumptions supporting the
estimated cash flows, including the discount rate and an
estimated terminal value, reflect managements best
estimates. The discount rate was based upon the weighted average
cost of capital for comparable companies. In the nine months
ended October 31, 2001, the Company recorded
$138.9 million in asset impairment charges, consisting of
$136.1 million as a result of the above two assessments
relating to goodwill and other intangible assets,
$1.9 million in accelerated depreciation for internally
used software and $874,000 to write off fixed assets that the
Company no longer utilized. There were no asset impairment and
other charges in the third quarter of fiscal 2003 and in the
nine months ended October 31, 2002 except for an impairment
charge of the Companys strategic equity investment
described below.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which supersedes
APB Opinion No. 17, Intangible Assets. SFAS
No. 142 requires that goodwill and other intangibles with
an indefinite useful life not be amortized, but be tested for
impairment at least annually by applying a fair-value-based
test. Also, if the benefit of an intangible asset is obtained
through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented or exchanged,
the intangible asset should be separately recognized and
amortized over its estimated useful life. The Company adopted
SFAS No. 142 in the nine months ended October 31,
2002. The adoption of SFAS No. 142 did not have a material
effect on the Companys consolidated financial position or
results of operations. To facilitate comparison with prior
periods, the following table shows the Companys results
for the third quarter of fiscal 2003 and 2002 and in the nine
months ended October 31, 2002 and 2001, if goodwill and
other intangible assets with indefinite useful lives were not
amortized for those periods (in thousands, except per share
data):

|                                                  |                                                                                       |                    |        |                   |  |      |         |      |  |   |         |   |  |   |          |        | 
|------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------ | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | -------- | ------ | 
|                                                  |                                                                                       |                    |        |                  
|                                                  |                                                                                       | Three Months Ended |        | Nine Months Ended
|                                                  |                                                                                       | October 31,        |        | October 31,      
|                                                  |                                                                                       |                    |        |                  
|                                                  |                                                                                       | 2002               |        | 2001              |  | 2002 |         | 2001
|                                                  |                                                                                       |                    |        |                   |  |      |         |     
|Net loss, as reported                             |                                                                                       | $                  | (6,438 | )                 |  | $    | (22,235 | )    |  | $ | (43,453 | ) |  | $ | (274,725 | )     
|Adjustment:                                       |                                                                                       |                    |        |                   |  |      |         |      |  |   |         |   |  |   |          |       
|                                                  | Amortization of goodwill and other intangible
    assets with indefinite useful lives |                    |        |                  |  |      |         |     |  |   |         |  |  |   |          | 13,082 | 
|                                                  |                                                                                       |                    |        |                   |  |      |         |      |  |   |         |   |  |   |          |       
|Net loss, as adjusted                             |                                                                                       | $                  | (6,438 | )                 |  | $    | (22,235 | )    |  | $ | (43,453 | ) |  | $ | (261,643 | )     
|                                                  |                                                                                       |                    |        |                   |  |      |         |      |  |   |         |   |  |   |          |       
|Basic and diluted net loss per share, as reported |                                                                                       | $                  | (0.88  | )                 |  | $    | (3.01   | )    |  | $ | (5.89   | ) |  | $ | (36.70   | )     
|                                                  |                                                                                       |                    |        |                   |  |      |         |      |  |   |         |   |  |   |          |       
|Basic and diluted net loss per share, as adjusted |                                                                                       | $                  | (0.88  | )                 |  | $    | (3.01   | )    |  | $ | (5.89   | ) |  | $ | (34.95   | )     
|                                                  |                                                                                       |                    |        |                   |  |      |         |      |  |   |         |   |  |   |          |       

The Company regularly performs an impairment
assessment of a $500,000 strategic equity investment it made in
a private company in April 2000. In performing an impairment
assessment, the Company considers the private companys
current solvency, future access to capital and recent equity
transactions. Based on an analysis of these factors, at the end
of the second quarter of fiscal 2003, the Company determined
that there was an impairment of $425,000 associated with the
investment and recorded such amount in asset impairment and
other in the accompanying unaudited condensed consolidated
statement of operations and comprehensive loss in the second
quarter of fiscal 2003. At the end of the third quarter of
fiscal 2003, the Company determined that the remaining balance
of $75,000 was impaired and recorded that amount in asset
impairment and other in the accompanying unaudited condensed
consolidated statement of operations and comprehensive loss in
the third quarter of fiscal 2003. The carrying value of the
Companys strategic equity investment was zero as of
October 31, 2002.

10



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                
|-- | ---------------
|8. | Bank Borrowings

On September 9, 2002, the Company entered
into a term loan for $5.0 million with a financial
institution. This term loan is secured by the Companys
tangible and intangible assets, accrues interest at 7.50% per
annum and matures on February 15, 2004. The Company is
required to make quarterly payments of principal and interest on
a five-year amortization schedule. The Company repaid $250,000
plus interest in December 2002. This term loan has certain
financial covenants, including covenants relating to cash on
hand, revenue and operating expenses. As of October 31,
2002, the Company was in compliance with all financial covenants.



|   |                                  
|-- | ---------------------------------
|9. | Notes Receivable from Stockholder

In November 1999, the Company loaned $1,250,000
to its chief financial officer, secured by a stock pledge
agreement and personal assets, in connection with his purchase
of 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 its chief
financial officer for $675,000, the fair market value of the
common stock at that time, and the chief financial officer used
all of this consideration to repay the equivalent principal
amount of the note. In exchange for 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 the
borrower, who is now the Companys chief executive officer.



|    |           
|--- | ----------
|10. | Litigation

In August 2001, various underwriters of the
Companys initial public offering (the IPO),
the Company, as well as certain of its officers and directors,
were named as defendants in a number of purported securities
class actions in United States District Court for the Southern
District of New York, arising out of the Companys
initial public offering in February 2000. The complaints allege,
among other things, that the registration statement and
prospectus filed with the Securities and Exchange Commission for
purposes of the IPO were false and misleading because they
failed to disclose that the underwriters allegedly
(i) solicited and received commissions from certain
investors in exchange for allocating to them shares of Company
stock in connection with the IPO and (ii) entered into
agreements with their customers to allocate such stock to those
customers in exchange for the customers agreeing to purchase
additional Company shares in the aftermarket at pre-determined
prices. On August 8, 2001 the Court ordered that these
actions, along with hundreds of IPO allocation cases against
other issuers, be transferred to Judge Scheindlin for
coordinated pre-trial proceedings. By Order dated
October 12, 2001, Judge Scheindlin adjourned all
defendants time to respond to the complaints until further
order of the Court. In July 2002, omnibus motions to dismiss the
complaints based on common legal issues were filed on behalf of
all issuers (and underwriters). The Court has not issued a
decision on any of those motions. By Order dated October 8,
2002, Judge Scheindlin dismissed the Companys officers and
directors without prejudice. This case remains at a preliminary
stage and no discovery proceedings have taken place. The Company
believes that the claims asserted against it in these cases are
without merit and the Company intends to defend vigorously
against them. These actions seek compensatory damages in
unspecified amounts as well as other relief.

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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On August 12, 2002, the Company filed a suit
against Business Engine Corporation (Business
Engine), a San Francisco-based software developer, in the
United States District Court in San Francisco for alleged
theft of trade secrets, computer fraud and other activities
directed at the Company. On August 15, 2002, the Court
entered a temporary restraining order against Business Engine,
which among other things, prevented Business Engine from
continuing to access or attempting to access the Companys
internal computer system, using or disclosing any information or
documents gained from such access, or destroying, altering,
deleting or tampering with any such documents or information
derived from such access. On November 27, 2002, the Company
and Business Engine entered into a settlement agreement. The
agreement provides for a payment to the Company of
$5.0 million, an injunction against Business Engine
prohibiting it from continuing to access or attempting to access
the Companys internal computer system and from using or
disclosing any information or documents gained from any
unauthorized access, a one year inspection procedure whereby a
jointly appointed neutral expert will ensure protection of Niku
intellectual property, and mutual releases.



|    |                  
|--- | -----------------
|11. | Subsequent Events

On November 14, 2002, Joshua Pickus, the
Companys chief financial officer, succeeded Farzad Dibachi
as the Companys president and chief executive officer. The
Company is conducting a search for a new chief financial
officer. Mr. Pickus will remain the Companys chief
financial officer until a candidate has been selected to succeed
him.

On November 21, 2002, the Company effected a
one-for-ten reverse stock split of its outstanding common stock.
The Companys shareholders authorized the reverse stock
split at a Special Shareholders Meeting held on October 10,
2002 and the Companys Board of Directors approved a
one-for-ten reverse stock split ratio effective
November 21, 2002. All information regarding common stock,
stock options, warrants and loss per share amounts have been
restated within this Form 10-Q to reflect the reverse stock
split.

On November 27, 2002, a warrant was
exercised to purchase 1,445,000 shares of common stock
issued in connection with the termination of a facility lease in
Redwood City, California.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with the condensed consolidated financial statements
and related notes contained herein and the information contained
in our annual report on Form 10-K for the fiscal year ended
January 31, 2002 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 herein and in our annual report
on Form 10-K for the year ended January 31, 2002 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 application software for service
organizations in large enterprises. These organizations include
the information technology, consulting, and research and
development groups as well as other organizations rendering
services for the enterprise. Our software enables customers to
reduce costs, increase productivity and gain visibility and
control over strategic initiatives. Our software allows users to
collaborate, allocate resources, manage initiatives, account for
activities and capture and reuse knowledge using one integrated
system.

Critical Accounting Policies and
Estimates

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



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

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

Revenue from license fees is recognized in
accordance with Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2),as amended by SOP 98-9,
which permits revenue recognition when (1) persuasive
evidence of an arrangement exists, (2) delivery of the
product has occurred and no significant obligations 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 generally recognized
upon sell-through to the end-user customer. We define each of
the four criteria above as follows:

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

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

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revenue contract: (1) the shipment of the
product, (2) notification of receipt of the product by the
customer or (3) notification by the customer of acceptance.
If undelivered products or services exist in an arrangement that
are essential to the functionality of the delivered product,
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 arrangements with payment
terms extending beyond six months not to be fixed or
determinable. If the fee is not fixed or determinable, revenue
is recognized as payments become due from the customer.

Collectibility is probable.Collectibility is evaluated on a
customer-by-customer basis. A customers purchase order or
waiver for purchase order is generally required with each
arrangement. 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
implemenation 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 implemenation 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 nine months ended
October 31, 2002 or in fiscal 2002.

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



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

Accounts receivable are recorded net of
allowances for doubtful accounts and totaled $5.3 million
and $12.8 million as of October 31, 2002 and
January 31, 2002, respectively. The allowances for doubtful
accounts were $1.2 million and $3.0 million as of
October 31, 2002 and January 31, 2002, respectively.
We regularly review the adequacy of our allowance for doubtful
accounts after considering the amount of the aged accounts
receivable, the age of each invoice, each customers
expected ability to pay and our collection history with 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

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all invoices by applying a percentage to aging
categories based on historical loss experience. The allowance
for doubtful accounts represents our best estimate, but changes
in circumstances such as our customers financial positions
may result in a requirement for additional allowances in the
future.




| |                      
| | ---------------------
| | Impairment Assessment

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

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

We regularly perform an impairment assessment of
a $500,000 strategic equity investment we made in a private
company in April 2000. In performing an impairment assessment,
we consider the private companys current solvency, future
access to capital and recent equity transactions. Based on an
analysis of these factors, at the end of the second quarter of
fiscal 2003, we determined that there was an impairment of
$425,000 associated with the investment. At the end of the third
quarter of fiscal 2003, we determined that the remaining balance
of $75,000 was impaired. The carrying value of our strategic
equity investment was zero as of October 31, 2002.

15



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

We have recorded significant restructuring
charges in connection with vacating certain leased facilities
pursuant to our restructuring program. Costs associated with
vacated leased facilities include remaining lease liabilities
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 and 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 or terminated
(but had not yet paid as of October 31, 2002) pursuant to
our restructuring program, amounted to $14.3 million,
$259,000, $1.1 million, $1.0 million and
$1.0 million for the twelve months ending October 31,
2003, 2004, 2005, 2006 and 2007, respectively, and
$3.5 million thereafter. The $14.3 million net lease
payments for the twelve months ending October 31, 2003
include $7.4 million in cash payments and cash securing a
$5.9 million letter of credit relating to the termination
of a major lease in Redwood City, California. Of the
$7.4 million in cash payments, we paid $5.6 million to
the landlord of the Redwood City lease in November 2002 and
expect to pay the balance in February 2003. The full amount of
the cash securing the letter of credit, reflected as current
restricted cash as of October 31, 2002, was also released
to the landlord in November 2002.

Reverse Stock Split

On November 21, 2002, we effected a
one-for-ten reverse stock split of our outstanding common stock.
Our shareholders authorized the reverse stock split at a Special
Shareholders Meeting held on October 10, 2002 and our Board
of Directors approved the one-for-ten reverse stock split ratio
effective November 21, 2002. All information regarding
common stock, stock options, warrants and loss per share amounts
have been restated within this Form 10-Q to 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. 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 accounted for the repriced options using
variable accounting whereby the aggregate intrinsic value of the
repriced options is continuously remeasured and amortized to
stock-based compensation expense over the vesting periods. Based
on the stock price as of October 31, 2002, we recorded zero
and $4.8 million in recovery of previously recognized
stock-based compensation relating to these repriced stock
options in the third quarter of fiscal 2003 and the nine months
ended October 31, 2002, respectively, offset by $165,000
and $1.0 million in other stock-based compensation in the
third quarter of fiscal 2003 and the nine months ended
October 31, 2002, respectively. As of October 31,
2002, deferred stock-based compensation relating to these
repriced options was zero, reflecting the intrinsic value of
unexercised repriced options as of October 31, 2002.

Pro Forma Financial Results

We prepare and release quarterly unaudited
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(US GAAP). We also disclose and discuss certain
pro forma financial information in the quarterly and annual
financial results press release and investor conference call.
This pro forma financial information excludes certain non-cash
and special charges, consisting primarily of stock-based
compensation, restructuring and other charges, impairment
charges and amortization of goodwill and other intangible
assets. We believe the disclosure of the pro forma financial
information helps

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investors evaluate the results of our ongoing
operations. However, we urge investors to carefully review the
US GAAP financial information included as part of our quarterly
reports on Form 10-Q and our annual reports on
Form 10-K. The investors should also read the portions of
our quarterly and annual financial results press releases which
compare US GAAP financial information with the pro forma
financial results, and include a reconciliation of the US 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 and nine months ended October 31, 2002 and
2001 expressed as a percentage of total revenue:

|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |       |        |   
|------------------------------ | -------------------------------------------------------- | ------------------------ | --- | ----------------- | ----- | ---- | --- | ---- | ------ | -- | --- | ----- | ------ | -- | --- | ----- | ------ | --
|                               |                                                          |                          |     |                  
|                               |                                                          | Three Months Ended       |     | Nine Months Ended
|                               |                                                          | October 31,              |     | October 31,      
|                               |                                                          |                          |     |                  
|                               |                                                          | 2002                     |     | 2001              |       | 2002 |     | 2001
|                               |                                                          |                          |     |                   |       |      |     |     
|Revenue:                       |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               | License                                                  |                          |     | 41.3              | %     |      |     | 43.1 | %      |    |     | 39.9  | %      |    |     | 43.3  | %     
|                               | Services                                                 |                          |     | 58.7              |       |      |     | 56.9 |        |    |     | 60.1  |        |    |     | 56.7  |       
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               |                                                          | Total revenue            |     |                   | 100.0 |      |     |      | 100.0  |    |     |       | 100.0  |    |     |       | 100.0  |   
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|Cost of revenue:               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               | License                                                  |                          |     | 1.5               |       |      |     | 1.7  |        |    |     | 2.2   |        |    |     | 2.7   |       
|                               | Services                                                 |                          |     | 24.4              |       |      |     | 31.7 |        |    |     | 27.9  |        |    |     | 42.1  |       
|                               | Impairment of licensed technology                        |                          |     |                  |       |      |     | 18.0 |        |    |     |      |        |    |     | 19.1  |       
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               |                                                          | Total cost of revenue    |     |                   | 25.9  |      |     |      | 51.4   |    |     |       | 30.1   |    |     |       | 63.9   |   
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               |                                                          | Gross profit             |     |                   | 74.1  |      |     |      | 48.6   |    |     |       | 69.9   |    |     |       | 36.1   |   
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|Operating expenses:            |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               | Sales and marketing                                      |                          |     | 29.2              |       |      |     | 85.0 |        |    |     | 52.2  |        |    |     | 125.8 |       
|                               | Research and development                                 |                          |     | 16.7              |       |      |     | 61.9 |        |    |     | 27.4  |        |    |     | 62.1  |       
|                               | General and administrative                               |                          |     | 19.0              |       |      |     | 21.6 |        |    |     | 18.6  |        |    |     | 27.0  |       
|                               | Restructuring and other                                  |                          |     | 63.4              |       |      |     | 28.6 |        |    |     | 101.8 |        |    |     | 30.5  |       
|                               | Stock-based compensation                                 |                          |     | 1.4               |       |      |     | 7.8  |        |    |     | (10.4 | )      |    |     | 16.3  |       
|                               | Asset impairment and other                               |                          |     | 0.6               |       |      |     |     |        |    |     | 1.4   |        |    |     | 282.4 |       
|                               | Amortization of goodwill and other intangible
    assets |                          |     |                  |       |      |     |     |        |    |     |      |        |    |     | 55.6  |       
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               |                                                          | Total operating expenses |     |                   | 130.3 |      |     |      | 204.9  |    |     |       | 191.0  |    |     |       | 599.7  |   
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               |                                                          | Operating loss           |     |                   | (56.2 | )    |     |      | (156.3 | )  |     |       | (121.1 | )  |     |       | (563.6 | ) 
|Interest and other income, net |                                                          |                          | 1.5 |                   |       |      | 2.7 |      |        |    | 1.7 |       |        |    | 5.1 |      
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      
|                               |                                                          | Net loss                 |     |                   | (54.7 | )%   |     |      | (153.6 | )% |     |       | (119.4 | )% |     |       | (558.5 | )%
|                               |                                                          |                          |     |                   |       |      |     |      |        |    |     |       |        |    |     |      

Comparison of Three and Nine Months Ended
October 31, 2002 and 2001



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

License.License
revenue consists of revenue from licenses of our software
products. License revenue was $4.9 million and
$6.2 million in the third quarter of fiscal 2003 and 2002,
respectively, decreasing 22.2%. License revenue was
$14.5 million and $21.3 million in the nine months
ended October 31, 2002 and 2001, respectively, decreasing
32.0%. The decrease in license revenue in absolute dollars in
each period was primarily attributable to a slowdown in
corporate information technology spending.

Services.Services
revenue consists of revenue from implementation services and
maintenance and support contracts. Services revenue from
implementation services was $2.6 million and
$3.0 million in the third quarter of fiscal 2003 and 2002,
respectively, decreasing 12.0%. Services revenue from
implementation

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services was $8.3 million and
$12.3 million in the nine months ended October 31,
2002 and 2001, respectively, decreasing 33.0%. The decrease in
services revenue in each period from implementation services in
absolute dollars was primarily attributable to a decrease in
license revenue and a decrease in the size of the implementation
services organization pursuant to the restructuring programs we
effected. Services revenue from maintenance and support
contracts was $4.3 million and $5.3 million in the
third quarter of fiscal 2003 and 2002, respectively, decreasing
18.3%. Services revenue from maintenance and support contracts
was $13.6 million and $15.5 million in the nine months
ended October 31, 2002 and 2001, respectively, decreasing
12.3%. The decrease in services revenue in each period from
maintenance and support contracts in absolute dollars was
primarily attributed to a decrease in the number of supported
users for maintenance renewals and a decrease in amortization of
deferred maintenance revenue we assumed from the ABT acquisition
in August 2000.




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

Cost of license revenue.Cost of license revenue includes
royalties due to third parties, product packaging, documentation
and shipping costs. Cost of license revenue was $179,000 and
$252,000 in the third quarter of fiscal 2003 and 2002,
respectively, representing 3.7% and 4.0% of license revenue in
the respective periods. Cost of license revenue was $798,000 and
$1.3 million in the nine months ended October 31, 2002
and 2001, respectively, representing 5.5% and 6.2% of license
revenue in the respective periods. The decrease in cost of
license revenue in each period in absolute dollars was primarily
attributable to a decline in license revenue and the
introduction of Niku 6, which requires lower royalty
payments to third parties than certain prior products.

Cost of services revenue.Cost of services revenue includes
salaries and related expenses for our implementation services
and maintenance and support personnel and the costs of third
parties contracted to provide implementation services to our
customers. Cost of services revenue was $2.9 million and
$4.6 million in the third quarter of fiscal 2003 and 2002,
respectively, representing 41.5% and 55.7% of services revenue
in the respective periods. Cost of services revenue was
$10.2 million and $20.7 million in the nine months
ended October 31, 2002 and 2001, respectively, representing
46.4% and 74.3% of services revenue in the respective periods.
The decrease in cost of services revenue in absolute dollars in
the third quarter of fiscal 2003 from the third quarter of 2002
was primarily attributable to a $902,000 reduction in salaries,
benefits and other employee related costs resulting from
reductions in headcount and salary reductions, and a $467,000
decrease in facilities allocation as a result of facility leases
we vacated pursuant to our restructuring programs. The decrease
in cost of services revenue in the nine months ended
October 31, 2002 from the nine months ended
October 31, 2001 was primarily attributable to a
$5.5 million reduction in salaries, benefits and other
employee costs resulting from reductions in headcount and salary
reductions, and a $1.6 million reduction in costs for third
parties contracted to implement our products.

Impairment of licensed technology.There was no impairment of licensed
technology in the third quarter of fiscal 2003 and the nine
months ended October 31, 2002. In the first quarter of
fiscal 2002, we determined that the carrying value of certain
prepaid royalties for the right to third party licensed
technology would not be realized. We recorded $9.4 million
in impairment of licensed technology, including
$8.5 million from prepaid royalties and $850,000 from
royalties paid in fiscal 2002. In each case we determined that
the third-party technologies would not be included in our
products at all or to the extent required under the applicable
contracts due to a change in our product plan.



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

Sales and marketing.Sales and marketing expenses consist
primarily of salaries, commissions, bonuses, travel, advertising
and bad debt expense. Sales and marketing expenses were
$3.4 million and $12.3 million in the third quarter of
fiscal 2003 and 2002, respectively, representing 29.2% and 85.0%
of total revenue in the respective periods. Sales and marketing
expenses were $19.0 million and $61.9 million in the
nine months ended October 31, 2002 and 2001, respectively,
representing 52.2% and 125.8% of total revenue in the respective
periods. The decrease in sales and marketing expenses in
absolute dollars in the third quarter of fiscal 2003 from the
third quarter of fiscal 2002 was primarily attributable to a
$3.9 million reduction in

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salaries, benefits and other employee related
costs resulting from reductions in headcount and salary
reductions effected pursuant to the restructuring programs we
implemented, a decrease of $1.6 million in facilities
allocation as a result of facility leases we vacated pursuant to
our restructuring program, a decrease of $1.1 million in
bad debt expense and a decrease of $699,000 in commissions and
bonuses. The decrease in sales and marketing expenses in
absolute dollars in the nine months ended October 31, 2002
from the nine months ended October 31, 2001 was primarily
attributable to a $15.7 million reduction in salaries,
benefits and other employee related costs resulting from
reductions in headcount and salary reductions, a decrease of
$9.3 million in bad debt expense, a decrease of
$5.5 million in commissions and bonuses, a decrease of
$3.5 million in advertising, a decrease of
$2.5 million in travel and a decrease of $2.5 million
in facilities allocation as a result of facility leases we
vacated pursuant to our restructuring program.


Research and development.Research and development expenses
consist primarily of personnel and related expenses associated
with the development of new products, the enhancement of
existing products and quality assurance and testing costs.
Research and development expenses were $2.0 million and
$9.0 million in the third quarter of fiscal 2003 and 2002,
respectively, representing 16.7% and 61.9% of total revenue in
the respective periods. Research and development expenses were
$10.0 million and $30.5 million in the nine months
ended October 31, 2002 and 2001, respectively, representing
27.4% and 62.1% of total revenue in the respective periods. The
decrease in research and development expenses in absolute
dollars in the third quarter of fiscal 2003 from the third
quarter of fiscal 2002 was primarily attributable to a
$3.7 million reduction in salaries, benefits and other
employee related costs resulting from reductions in headcount
and salary reductions effected pursuant to the restructuring
programs we implemented, a $2.5 million decrease in
facilities allocation as a result of facility leases we vacated
pursuant to our restructuring program and a decrease of $607,000
in outside services primarily related to third-party development
services. The decrease in research and development expenses in
absolute dollars in the nine months ended October 31, 2002
from the nine months ended October 31, 2001 was primarily
attributable to a $12.7 million reduction in salaries,
benefits and other employee related costs resulting from
reductions in headcount and salary reductions, a
$4.8 million decrease in facilities allocation as a result
of facility leases we vacated pursuant to our restructuring
program and a decrease of $2.5 million in outside services
primarily related to third-party development services.

General and administrative.General and administrative expenses
consist primarily of salaries and other related costs for
finance, human resource, information technology and legal
employees, as well as professional services fees. General and
administrative expenses were $2.2 million and
$3.1 million in the third quarter of fiscal 2003 and 2002,
respectively, representing 19.0% and 21.6% of total revenue in
the respective periods. General and administrative expenses were
$6.8 million and $13.3 million in the nine months
ended October 31, 2002 and 2001, respectively, representing
18.6% and 27.0% of total revenue in the respective periods. The
decrease in general and administrative expenses in absolute
dollars in the third quarter of fiscal 2003 from the third
quarter of fiscal 2002 was primarily attributable to a reduction
of $867,000 in salaries, benefits and other employee costs
resulting from reductions in headcount and salary reductions
effected pursuant to the restructuring programs we implemented.
The decrease in general and administrative expenses in absolute
dollars in the nine months ended October 31, 2002 from the
nine months ended October 31, 2001 was primarily
attributable to a $5.0 million reduction in salaries,
benefits and other employee costs resulting from reductions of
headcount and salary reductions, a decrease of $1.5 million
in professional services and a decrease of $1.1 million in
bonuses. Our legal costs were higher in the third quarter of
fiscal 2003, compared to the third quarter of fiscal 2002, as a
result of our litigation with Business Engine Corporation (See
Note 10).

Restructuring and other.We recorded $7.5 million and
$37.0 million in restructuring and other charges in the
third quarter of fiscal 2003 and in the nine months ended
October 31, 2002, respectively.



| |                             
| | ----------------------------
| | Third quarter of fiscal 2003

In the third quarter of fiscal 2003, we continued
our restructuring program and reduced our workforce by
approximately 40 employees. This action affected all of our
functional groups. We recorded $2.2 million in severance
costs, of which $1.0 million related to the severance and
related charges for our former chief

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executive officer and former executive vice
president of planning and strategy. We also retired
$1.5 million in property and equipment for assets no longer
in use.


We also vacated and terminated leases for certain
facilities, including the termination of a major lease in
Redwood City, California. We recorded $3.3 million in net
lease commitment costs on vacated leases in the third quarter of
fiscal 2003, of which $995,000 related to additional cash
consideration for the termination of the Redwood City lease
beyond that previously recorded, $2.0 million related to an
increase in valuation beyond that previously recorded for a
warrant for 1,445,000 shares of common stock issued in
connection with the termination of the Redwood City lease, and
$247,000 related to net lease commitment costs for certain other
vacated facilities. The total termination costs for the Redwood
City lease amounted to $21.8 million, offset by
$2.2 million for the reversal of previously recorded
deferred rent. The $21.8 million in termination costs
include lease termination payments of $7.4 million, the
release to the landlord of cash securing a $5.9 million
letter of credit classified as restricted cash, the release of a
$2.9 million security deposit and $5.6 million in
estimated fair value for a warrant issued for 1,445,000 shares
of common stock with an exercise price of $0.001, offset by
$2.2 million in previously recorded deferred rent relating
to the lease. The estimated fair value of the warrant was
determined using the Black-Scholes options pricing model with a
contractual life of five years, risk-free interest rate of
3.67%, volatility of 150% and expected dividend of 0%. Of the
total $21.8 million in termination costs,
$18.8 million was accrued in the second quarter of fiscal
2003. Our future commitments under the Redwood City lease prior
to the termination were approximately $121.7 million.

We also terminated a lease for a facility in
Atlanta, Georgia for $481,000, consisting of lease termination
payment of $181,000 and the release to the landlord of cash
securing a $300,000 letter of credit classified as restricted
cash, offset by $569,000 for the reversal of future lease
payments that had been previously accrued, net of estimated
sublease income, relating to the lease. We also terminated a
lease for a facility in Bellevue, Washington for $10,000, offset
by $80,000 for the reversal of future lease payments that had
been previously accrued relating to the lease.

In addition to these restructuring costs, we
recorded $500,000 in net lease commitment costs on vacated
facilities in the third quarter of fiscal 2003 related to
restructuring activities in fiscal 2002 primarily due to
adjustments to estimated future sublease income for certain
facilities vacated in fiscal 2002. We also terminated a lease
for a facility in Lincolnshire, Illinois for $388,000,
consisting of lease termination payment of $63,000 and the
release to the landlord of cash securing a $325,000 letter of
credit classified as restricted cash that had been previously
accrued in the second quarter of fiscal 2003. Our future
commitments under this lease prior to termination were
approximately $692,000, net of estimated sublease income.

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



| |                              
| | -----------------------------
| | Second quarter of fiscal 2003

In the second quarter of fiscal 2003, we reduced
our workforce by approximately 72 employees. These headcount
reductions affected all of our functional groups. We also
vacated certain facilities, moved back to our former
headquarters, which we had previously vacated in August 2001,
and engaged in negotiations to terminate the lease for a major
facility in Redwood City, California. The $18.9 million in
net lease commitments on vacated facilities recorded in the
second quarter of fiscal 2003 includes $18.8 million in
cash and non-cash costs related to the proposed termination
costs for the lease in Redwood City, California and
$2.3 million in net lease commitments for certain other
facilities that we vacated and leases we terminated, offset by
$2.2 million of previously accrued deferred rent under such
leases. Our future commitments under the Redwood City,
California lease prior to the proposed termination were
approximately $121.7 million. The $18.8 million in
proposed termination costs for the Redwood City lease included a
variety of cash and non-cash items.

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During the second quarter of fiscal 2003, we also
terminated a lease for a facility in Danville, California. Our
future liabilities under this lease prior to termination
approximated $2.7 million. The consideration for this
termination included the release to the landlord of a $534,000
security deposit, a lease termination payment of $216,000 and
$42,000 in fair value for warrants to purchase 15,000 shares of
common stock at an exercise price of $0.10 per share.

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

The $2.4 million in net lease commitments on
vacated facilities recorded in the second quarter of fiscal 2003
relating to restructuring activities in fiscal 2002 included a
$4.3 million decrease in estimated future sublease income
for certain facilities, $1.8 million in settlement of
claims asserted in the lawsuit with the landlord of our former
headquarters, $388,000 in proposed termination costs for a lease
in Lincolnshire, Illinois and $296,000 in legal fees, offset by
$4.4 million for the reversal of future lease payments that
had been previously accrued, net of estimated sublease income,
relating to our former headquarters and the Lincolnshire,
Illinois lease.



| |                             
| | ----------------------------
| | First quarter of fiscal 2003

In the first quarter of fiscal 2003, we recorded
a credit of $838,000 in restructuring and other charges
primarily related to the value of 39,052 shares of our common
stock recovered from escrow accounts in which such shares had
been placed in conjunction with acquisitions of ABT Corporation,
Proamics Corporation and 600 Monkeys Inc. in fiscal 2001. We
valued these escrow shares based on our stock price on the date
these shares were recovered. The weighted average price per
share for these escrow shares was $20.60.



| |                                               
| | ----------------------------------------------
| | Third, second and first quarter of fiscal 2002

We recorded $4.1 million and
$15.0 million in restructuring and other charges in the
third quarter of fiscal 2002 and in the nine months ended
October 31, 2001, respectively.

In the third quarter of fiscal 2002, we reduced
our workforce by approximately 45 employees and incurred
$512,000 in severance and also retired $3.3 million in
property and equipment and other assets that do not benefit
activities of our on-going operations.

In the second quarter of fiscal 2002, we reduced
our workforce by approximately 150 employees and incurred
$2.1 million in severance costs and $5.4 million in
vacating seven leased facilities. We also retired
$6.1 million in property and equipment and other assets.

In the first quarter of fiscal 2002, we incurred
restructuring and other charges of $3.1 million related to
a reduction of our workforce of approximately 260 employees,
elimination of certain excess leased facilities and the exit of
a business line. The total restructuring and other charges
included $2.0 million related to employee termination costs
primarily consisting of the cost of severance packages, $493,000
to vacate two leased facilities, which included future lease
payments on these leases, net of estimated sublease income, and
$591,000 to exit the legal vertical market, which consisted
primarily of termination fees and future lease payments for a
hosting arrangement and a leased facility.

Asset impairment and other.We regularly perform an impairment
assessment of a $500,000 strategic equity investment we made in
a private company in April 2000. In performing an impairment
assessment, we consider the private companys current
solvency, future access to capital and recent equity
transactions. Based on an analysis of these factors at the end
of the second quarter of fiscal 2003, we determined that there
was an impairment of $425,000 associated with the investment. At
the end of the third quarter of fiscal 2003, we determined that
the remaining balance of $75,000 was impaired. The carrying
value of our strategic equity investment was zero as of
October 31, 2002.

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

Stock-based compensation.Amortization of stock-based
compensation was $165,000 and $1.1 million in the third
quarter of fiscal 2003 and 2002 and ($3.8) million and
$8.0 million in the nine months ended October 31, 2002
and 2001, respectively. Stock-based compensation
(recovery) in the third quarter of fiscal 2003 and in the
nine months ended October 31, 2002 was primarily attributed
to variable accounting applied to our stock options that were
repriced in the fourth quarter of fiscal 2002, which resulted in
zero and $4.8 million in recovery of stock-based compensation in
the third quarter of fiscal 2003 and the nine months ended
October 31, 2002, respectively, offset by $165,000 and
$1.0 million in other stock-based compensation in the third
quarter of fiscal 2003 and in the nine months ended
October 31, 2002, respectively.

Amortization of goodwill and other intangible
assets.There was no amortization of
goodwill and other intangible assets in the third quarter of
fiscal 2003 and 2002 or the nine months ended October 31,
2002 because all goodwill and identifiable intangible assets
were written off in fiscal 2002. Amortization of goodwill and
identifiable intangible assets was $27.3 million in the
nine months ended October 31, 2001 and included
$6.5 million in amortization of developed and core
technologies.



| |                                   
| | ----------------------------------
| | Interest and Other Income,
    Net

Interest income and other income (expense),
net.Interest income and other income
(expense), net, consists of interest income, interest expense
and other non-operating expenses. Interest income and other
income (expense), net were $184,000 and $395,000 in the third
quarter of fiscal 2003 and fiscal 2002, respectively, and
$616,000 and $2.5 million in the nine months ended October
31, 2002 and 2001, respectively. The net decrease in absolute
dollars in the third quarter of fiscal 2003 from the third
quarter of fiscal 2002 and in the nine months ended
October 31, 2002 from the nine months ended
October 31, 2001 was primarily attributable to lower
average invested cash and short-term investment balances, which
yielded lower interest income.

Liquidity and Capital Resources

Since inception, we have financed our operations
through private and public sales of our capital stock, bank
loans, equipment leases, and cash from sales of our products and
delivery of related services. The cash

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from these sources is used for working capital
for our business. As of October 31, 2002, we had cash and
cash equivalents of $17.1 million. We also had current
portion of restricted cash and restricted cash in the amount of
$6.2 million and $1.3 million, respectively, in the form of
certain certificates of deposit securing letters of credit for
various leased facilities. We had bank borrowings under a term
loan of $5.0 million as of October 31, 2002, of which
$250,000 plus interest was repaid in December 2002. As of
October 31, 2002, we had a working capital deficit of
$3.6 million, compared to a working capital of
$11.0 million as of January 31, 2002. The working
capital deficit as of October 31, 2002 was primarily
attributed to decreases in cash and cash equivalents, net
accounts receivable and an increase in accrued restructuring,
offset in part by decreases in bank borrowings and accrued
liabilities. Our liquidity could be negatively impacted by
factors discussed under Factors That May Affect Future
Results.


Net cash used in operating activities was
$17.2 million and $64.2 million in the nine months
ended October 31, 2002 and 2001, respectively. Net cash
used in operating activities in the nine months ended
October 31, 2002 was primarily attributed to a net loss of
$43.5 million and a decrease in accrued liabilities, offset
in part by non-cash restructuring charges, an increase in
accrued restructuring and a decrease in net accounts receivable.
Net cash used in operating activities in the nine months ended
October 31, 2001 was primarily attributed to a net loss of
$274.7 million, offset in part by impairment charges,
amortization of goodwill and intangible assets, a decrease in
accounts receivable, provision for doubtful accounts receivable,
restructuring charges and stock-based compensation.

Net cash provided by investing activities was
$4.4 million and $17.5 million in the nine months ended
October 31, 2002 and 2001, respectively. Net cash provided
by investing activities in the nine months ended
October 31, 2002 was primarily attributed to a net release
of $6.9 million in restricted cash, offset by purchases of
property and equipment. Net cash provided by investing
activities in the nine months ended October 31, 2001 was
primarily attributed to net sales and maturities of short-term
investments, offset by net purchases of investments for
restricted cash for certain facility leases and purchases of
property and equipment.

Net cash used in financing activities was
$21.8 million and $1.3 in the nine months ended
October 31, 2002 and 2001, respectively. Net cash used in
financing activities in the nine months ended October 31,
2002 was primarily attributed to the net repayment of our
$27.0 million bank lines of credit, which expired according
to its term in July 2002, offset by proceeds of $5.0 million
from a term loan we entered in September 2002. Net cash used in
financing activities in the nine months ended October 31,
2001 was primarily attributed to the repurchase of common stock,
offset in part by the proceeds from the issuance of our common
stock upon the exercise of stock options.

In March 2000, we entered into a lease agreement
for a major facility in Redwood City, California. 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. We also have
other noncancellable operating facility leases with various
expiration dates through 2009 that required letters of credit
drawable by the lessor for $1.3 million.

On September 9, 2002, we entered into a term
loan for $5.0 million with a financial institution. This
term loan is secured by our tangible and intangible assets,
accrues interest at 7.50% per annum and matures on
February 15, 2004. We are required to make quarterly
payments of principal and interest on a five-year amortization
schedule. We repaid $250,000 plus interest in December 2002.
This term loan has certain financial covenants, including
covenants relating to cash on hand, revenue and operating
expenses. As of October 31, 2002, we were in compliance
with all financial covenants.

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Future minimum lease and termination payments
under operating leases and payments under bank borrowings are as
follows as of October 31, 2002 (in thousands):

|                                |  |           |        |            |  |       |       |  |  |   |        | 
|------------------------------- |  | --------- | ------ | ---------- |  | ----- | ----- |  |  | - | ------ | 
|                                |  | Operating |        | Bank       |  |      
|Twelve Months Ended October 31, |  | Leases    |        | Borrowings |  | Total
|                                |  |           |        |            |  |      
|2003                            |  | $         | 17,711 |            |  | $     | 1,000 |  |  | $ | 18,711 | 
|2004                            |  |           | 2,861  |            |  |       | 4,000 |  |  |   | 6,861  | 
|2005                            |  |           | 2,394  |            |  |       |      |  |  |   | 2,394  | 
|2006                            |  |           | 1,341  |            |  |       |      |  |  |   | 1,341  | 
|2007                            |  |           | 1,274  |            |  |       |      |  |  |   | 1,274  | 
|Thereafter                      |  |           | 3,707  |            |  |       |      |  |  |   | 3,707  | 
|                                |  |           |        |            |  |       |       |  |  |   |        | 
|Total payments                  |  | $         | 29,288 |            |  | $     | 5,000 |  |  | $ | 34,288 | 
|                                |  |           |        |            |  |       |       |  |  |   |        | 

Lease payments above, net of estimated sublease
income, relating to facilities that we vacated or terminated
pursuant to our restructuring program, amounted to
$14.3 million, $259,000, $1.1 million,
$1.0 million and $1.0 million for the twelve months ended
October 31, 2003, 2004, 2005, 2006 and 2007, respectively,
and $3.5 million thereafter. We regularly review the
estimates for sublease income and to the extent that these
estimates change due to changes in market condition, the
ultimate restructuring payments could vary by material amounts.
The $14.3 million restructuring payments for the twelve
months ended October 31, 2003 for leases we vacated or
terminated (but had not yet paid as of October 31, 2002)
included $7.4 million in cash payments and cash securing a
$5.9 million letter of credit relating to the termination
of a major lease in Redwood City, California. Of the
$7.4 million in cash payments, we paid $5.6 million to
the landlord of the Redwood City lease in November 2002 and
expect to pay the balance in February 2003. The full amount of
the cash securing the letter of credit, reflected in current
portion of restricted cash as of October 31, 2002, was also
released to the landlord in November 2002. These amounts
relating to restructuring were recorded in accrued restructuring
and long-term restructuring accrual as of October 31, 2002.

We have a working capital deficit of
$3.6 million as of October 31, 2002. We believe that
cash from operations and existing cash will be sufficient to
meet our current expectations for working capital and expense
requirements for at least the next twelve months based on, among
other things, our current revenue and 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.

Recent Accounting Pronouncements

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

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections.The provisions of SFAS No. 145 relating to
the rescission of SFAS No. 4 are effective for financial
statements issued for fiscal years beginning after May 15,
2002, and the provisions relating to SFAS No. 13 are
effective for transactions occurring after May 15, 2002.
SFAS No. 145 rescinds SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt,and an amendment of
that Statement, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements.SFAS No. 145
also rescinds SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers,and amends SFAS No. 13,
Accounting for Leases,to eliminate an inconsistency
between the

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required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions.


In June 2002, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting
Standards No. 146, or SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities.SFAS
No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This Statement requires
that a liability for costs associated with an exit or disposal
activity be recognized and measured at fair value only when the
liability is initially incurred. SFAS No. 146 will be
effective for exit or disposal activities that are initiated
after December 31, 2002.

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 the case of such an adverse
effect, the trading price of our common stock, which has been
extremely volatile, could decline and you might lose all or part
of your investment.

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

We were incorporated in January 1998 and began
licensing our software in December 1998. Due to our limited
operating history, it is difficult for us to predict our future
operating results. We cannot forecast operating results based on
our historical results because our operating history is limited
and our business is changing rapidly. For example, in fiscal
2002, we introduced a major new release of our software and
implemented a restructuring program, which continued in fiscal
2003. In particular, we have limited visibility into our future
revenue. Since we forecast our expenses based in part on future
revenue projections, our operating results would be adversely
affected if we cannot meet those revenue projections.

On a GAAP basis, we have incurred losses
throughout our operating history, and we may incur losses in the
future.

On a GAAP basis, we have experienced operating
losses in each quarterly and annual period since we were formed,
and we may incur losses in the future. We had an accumulated
deficit of $505.4 million as of October 31, 2002. On a
GAAP basis, we had net loss of $6.5 million and
$43.5 million in the third quarter of fiscal 2003 and in
the nine months ended October 31, 2002, respectively. We
had $3.6 million in working capital deficit as of
October 31, 2002.

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

Our operating results have in the past and could
in the future vary significantly from quarter to quarter. Our
quarterly operating results are likely to be particularly
affected by the number of customers licensing our products
during any quarter and the size of such licensing transactions.
Other factors that could affect our quarterly operating results
include:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | our ability to attract new customers and retain
    and sell additional products and services to current customers;
|
| |  | changes in the pricing of our products and
    services or those of 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;  
|
| |  | the announcement or introduction of new products
    or services by us or our competitors;                         

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

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

We have a working capital deficit and may
require additional financing.

As of October 31, 2002, we had cash and cash
equivalents of $17.1 million, including bank borrowings
under a term loan of $5.0 million as of October 31,
2002, of which $250,000 plus interest was repaid in December
2002. We believe that cash from operations and existing cash
will be sufficient to meet our current expectations for working
capital and expense requirements for at least the next twelve
months based on, among other things, our current revenue and
expense projections. However, 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.

Although we currently meet all listing
requirements for the Nasdaq SmallCap Market, we must continue to
meet those requirements to remain listed.

On December 3, 2002, our common stock was
transferred to the Nasdaq SmallCap Market from the Nasdaq
National Market. The Nasdaq Hearing Panel that transferred the
listing determined that our common stock would continue to be
listed on the Nasdaq SmallCap Market provided that we
demonstrated a closing bid price of at least $1.00 for ten
consecutive trading days by December 5, 2002 and a market
value of listed securities of at least $35 million for ten
consecutive trading days by December 20, 2002. We met both
of these special Panel requirements and therefore qualify for
listing on the Nasdaq SmallCap Market. In the future, we must
meet the standard listing criteria for the Nasdaq SmallCap
Market to maintain our listing. Those criteria include
(1) a $35 million market value of listed securities or
stockholders equity of $2.5 million or $500,000 in net
income from continuing operations, (2) a $1.00 bid price,
(3) 500,000 public held shares, (4) a $1 million
market value of public held shares, (5) two market makers,
and (6) 300 round lot shareholders. Failure to maintain
compliance with any of these standards could, after applicable
grace periods, result in the delisting of our common stock.

We have recently experienced several
changes in our senior management team.

In November 2002, Joshua Pickus, our chief
financial officer, succeeded Farzad Dibachi as our president and
chief executive officer. We are conducting a search for a new
chief financial officer. Mr. Pickus will remain our chief
financial officer until a candidate has been selected to succeed
him. In November 2002, our executive vice president of strategy
and planning, who was the wife of our former chief executive
officer, also left the Company.

Our success will depend to a significant extent
on our ability to assimilate these changes in our leadership
team and to retain the services of Mr. Pickus 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.

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

While the most recent economic indicators,
including gross domestic product figures, reflect a possible
turn around in economic activity from prior periods, many
reports have indicated that spending by corporations in the area
of information technology, the overall market in which we
participate, will recover slowly if at all. While we cannot
specifically correlate the impact of macro-economic conditions
on our sales activities, we believe that the economic conditions
have resulted in decreased demand in our market, and in
particular, have increased the average length of our sales
cycles and decreased the size of our license transactions. To
the extent that the current economic climate worsens or that the
global economy fails to improve or information technology
spending in our market does not increase, the demand for our
products and services, and therefore future revenue, may be
further reduced. We may not be able to respond to future revenue
reductions in a sufficiently timely manner to avoid increases in
future losses. Even if the current decline abates, we cannot
assure you that corporations will increase their information
technology spending or that we will be able to maintain or
improve revenue levels.

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

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

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

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

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

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

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

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To date, few customers have deployed our
new product on a large scale (i.e. installations over 10,000
seats), and we may experience customer dissatisfaction and lost
revenue if our new product does not accommodate large-scale
deployments.

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

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

Implementation of our products may be difficult,
costly and time-consuming. Because we are one of the first
companies to offer an applications suite for services
organizations, many customers will be facing these
implementation issues for the first time in the context of such
software. Customers could become dissatisfied with our products
if implementation requires more time, expense or personnel than
they expected. Additionally, our losses could increase if, for
customer satisfaction and reputation reasons, we do not bill our
customers for time and expenses we incur in connection with
these implementation issues, which would adversely affect our
operating results.

As part of the implementation, our products must
integrate with many of our customers existing computer
systems and software programs. Integrating with a number of
computer systems and software programs can be time-consuming and
expensive and could lead to customer dissatisfaction and
increased expenses.

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

Rapidly changing technology and standards may
impede market acceptance of our products and services. Our new
products have been designed based upon currently prevailing
technologies such as extensible markup language, or XML, or
extensible stylesheet language, or XSL. If new technologies
emerge that are incompatible with our products, our products
could become obsolete and our existing and potential customers
might seek alternatives. We may not be able to adapt quickly to
a new technology.

Additionally, we design our products to work with
databases such as Oracle Enterprise Server and SQL Server and
operating systems such as Sun Solaris, Windows 2000 and NT.
Any changes to those databases or operating systems, or
increasing popularity of other databases or systems, might
require us to modify our products or services and could cause us
to delay releasing future products and enhancements. As a
result, uncertainties related to the timing and nature of new
product announcements or introductions or modifications by
vendors of databases, operating systems, web servers and other
enterprise and Internet-based applications could delay our
product development, increase our research and development
expenses and cause customers to delay evaluation, purchase and
deployment of our products.

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

In the third quarter of fiscal 2003,
international revenue represented 36.2% of total revenue,
compared to 46.2% of total revenue in the third quarter of
fiscal 2002. International license revenue represented 32.4% of
total license revenue in the third quarter of fiscal 2003,
compared to 47.0% in the third quarter of fiscal 2002. Even with
these reductions in the percentage of international revenue and
international license revenue, international activities remain a
significant part of our business.

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



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | currency exchange rate fluctuations, particularly
    if we sell our products in denominations other than
    U.S. dollars;

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

There is competition in our market, which
could make it difficult to attract customers, cause us to reduce
prices and result in reduced gross margins or loss of market
share.

The market for our products and services is
competitive, dynamic and subject to frequent technological
changes. We expect the intensity of competition and the pace of
change to increase in the future. Our products compete with
products that have been developed by potential customers
in-house developers and IT departments and by a number of
competitors offering products and services that vary in
functionality. These include:



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

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

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

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



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

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

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services. We may not be able to maintain these
relationships or enter into additional relationships in the
future.


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

We will continue to incur stock-based
compensation expense in future periods, which represents
non-cash charges incurred as a result of the issuance of stock
and stock options below fair market value and the repricing of
our stock options. On November 12, 2001, our board of
directors, acting pursuant to existing terms of our stock 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. 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 accounted for the repriced options using
variable accounting whereby the aggregate intrinsic value of the
repriced options is continuously remeasured and amortized to
stock-based compensation expense over the vesting periods. Based
on the stock price as of October 31, 2002, we recorded zero
and $4.8 million in recovery of stock-based compensation
relating to these repriced stock options in the third quarter of
fiscal 2003 and the nine months ended October 31, 2002,
respectively, offset by $165,000 and $1.0 million in other
stock-based compensation in the third quarter of fiscal 2003 and
the nine months ended October 31, 2002, respectively. As of
October 31, 2002, deferred stock-based compensation
relating to these repriced options was zero, reflecting the
intrinsic value of unexercised repriced options as of October
31, 2002. To the extent that our stock price increases in future
periods, we will need to record additional stock-based
compensation expense.

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

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



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

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

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

We regard substantial elements of our products as
proprietary and attempt to protect them by relying on patent,
trademark, service mark, copyright and trade secret laws and
restrictions, as well as confidentiality procedures and
contractual provisions. Any steps we take to protect our
intellectual property may be

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inadequate, time-consuming and expensive. We may
be unable to prevent third parties from infringing upon or
misappropriating our intellectual property, which could harm our
business.


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

Legal standards relating to the validity,
enforceability and scope of protection of intellectual property
rights in software are uncertain and still evolving, and the
future viability or value of any of our intellectual property
rights is uncertain. Effective trademark, copyright and trade
secret protection may not be available in every country in which
our products are distributed or made available. Furthermore, our
competitors may independently develop similar technologies that
substantially limit the value of our intellectual property or
design around patents issued to us.

On August 12, 2002, we filed a suit against
Business Engine Corporation (Business Engine), a San
Francisco-based software developer, in the United States
District Court in San Francisco for alleged theft of trade
secrets, computer fraud and other activities directed at the
Company. On August 15, 2002, the Court entered a temporary
restraining order against Business Engine, which among other
things, prevented Business Engine from continuing to access or
attempting to access our internal computer system, using or
disclosing any information or documents gained from such access,
or destroying, altering, deleting or tampering with any such
documents or information derived from such access. On
November 27, 2002, we entered into a settlement agreement
with Business Engine. The agreement provides for a payment to us
of $5.0 million, an injunction against Business Engine
prohibiting it from continuing to access or attempting to access
our internal computer system and from using or disclosing any
information or documents gained from any unauthorized access, a
one year inspection procedure whereby a jointly appointed
neutral expert will ensure protection of our intellectual
property, and mutual releases.

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

In recent years, there has been significant
litigation in the United States involving patents and other
intellectual property rights, particularly in the software
industry. We could become subject to intellectual property
infringement claims as the number of our competitors grows and
our products and services increasingly overlap with competitive
offerings. In addition, as part of our product licenses, we
agree to indemnify our customers against claims that our
products infringe upon the intellectual property rights of
others. These claims, even if not meritorious, could be
expensive and divert managements attention from operating
our business. We could incur substantial costs in defending
ourselves and our customers against infringement claims. If we
become liable to third parties for infringement of their
intellectual property rights, we could be required to pay a
substantial damage award and to develop non-infringing
technology, obtain one or more licenses for us and our customers
from third parties or cease selling the products that contain
the infringing intellectual property. We may be unable to
develop non-infringing technology or obtain a license at a
reasonable cost, or at all.

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

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



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

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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.                                                                                        

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

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




Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

We develop products in the United States and
market our products in North America and Europe. 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 63.8% and 63.7% of our total
revenue was made in U.S. dollars in the third quarter of fiscal
2003 and in the nine months ended October 31, 2002,
respectively. Therefore, a strengthening of the dollar may make
our products less competitive in foreign markets. We do not
expect any material adverse effect on our consolidated financial
position, results of operations or cash flows due to movements
in any specific foreign currency. We currently do not use
financial instruments to hedge operating expenses of our
European subsidiaries. We will continue to assess the need to
utilize financial instruments to hedge currency exposures on an
ongoing basis.

Our exposure to market risk for changes in
interest rates relates primarily to our cash and cash
equivalents and outstanding debt obligations. We do not use
derivative financial instruments for speculative or trading
purposes. Our cash and cash equivalents consist primarily of
demand deposits, certificates of deposits and money market
accounts that mature in three months or less. Due to the
short-term nature of our cash and cash equivalents, we believe
that there is no material market or interest rate risk exposure
on our cash and cash equivalents. Due to the fixed interest rate
of our indebtedness, a 5% decrease in interest rate would not
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 has 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 (the Exchange Act)) as of a
date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date). Based on
such evaluation, he has concluded that, as of the Evaluation
Date, our disclosure controls and procedures are effective in
alerting him 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.



| |                             
| | ----------------------------
| | 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.

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PART II:     OTHER
INFORMATION




Item 1.     Legal
Proceedings

On August 12, 2002, we filed a suit against
Business Engine Corporation (Business Engine), a San
Francisco-based software developer, in the United States
District Court in San Francisco for alleged theft of trade
secrets, computer fraud and other activities directed at the
Company. On August 15, 2002, the Court entered a temporary
restraining order against Business Engine, which among other
things, prevented Business Engine from continuing to access or
attempting to access our internal computer system, using or
disclosing any information or documents gained from such access,
or destroying, altering, deleting or tampering with any such
documents or information derived from such access. On
November 27, 2002, we entered into a settlement agreement
with Business Engine. The agreement provides for a payment to us
of $5.0 million, an injunction against Business Engine
prohibiting it from continuing to access or attempting to access
our internal computer system and from using or disclosing any
information or documents gained from any unauthorized access, a
one year inspection procedure whereby a jointly appointed
neutral expert will ensure protection of our intellectual
property, and mutual releases.




Item 2.     Change
in Securities and Use of Proceeds



| |                                   
| | ----------------------------------
| | (c)Sale of Unregistered Securities

In October 2002, we issued a warrant to purchase
1,445,000 shares of our common stock with an exercise price of
$0.001 in connection with the termination of a facility lease in
Redwood City, California. The warrant was issued in a private
placement exempt from registration under the Securities Act of
1933 pursuant to Section 4(2) of the Act.




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

A Special Meeting of Stockholders of ours was
held on October 10, 2002 to approve a series of amendments
to our amended and restated certificate of incorporation to
effect a reverse stock split of our common stock. The results of
the vote were as follows (adjusted for the reverse stock split):

|          |  |         |  |         |       | 
|--------- |  | ------- |  | ------- | ----- | 
|For       |  | Against |  | Abstain
|          |  |         |  |        
|5,860,114 |  | 239,449 |  |         | 6,436 | 




Item 5.     Other
Information

On October 29, 2002, we appointed Joshua
Pickus, our chief financial officer, and Ravi Chiruvolu, a
general partner at Charter Venture Capital, to our Board of
Directors.

On November 14, 2002, Joshua Pickus, our
chief financial officer, succeeded Farzad Dibachi as our
president and chief executive officer. We are conducting a
search for a new chief financial officer. Mr. Pickus will
remain our chief financial officer until a candidate has been
selected to succeed him.

On November 21, 2002, we completed a
one-for-ten reverse stock split of our outstanding common stock.
Our shareholders authorized the reverse stock split at a Special
Shareholders Meeting held on October 10, 2002 and our Board
of Directors approved the one-for-ten reverse stock split ratio
on November 13, 2002.

On November 27, 2002, a warrant was
exercised to purchase 1,445,000 shares of common stock issued in
connection with the termination of a facility lease in Redwood
City, California.

33



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##### Table of Contents






Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

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

|       |          |               |  |                                                                                                                                                                                                                   
|------ | -------- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |          | Exhibit Title
|       |          |              
|       | 3.01(1)  |               |  | Registrants Amended and Restated
    Certificate of Incorporation.                                                                                                                                               
|       | 3.02(2)  |               |  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation dated November 20,
    2002.                                                                                                
|       | 3.02(1)  |               |  | Registrants Amended and Restated Bylaws.                                                                                                                                                                         
|       | 4.01(3)  |               |  | Warrant to Purchase Common Stock of Niku
    Corporation dated October 31, 2002, in favor of Limar
    Realty Corp. #30.                                                                                          
|       | 10.01(3) |               |  | Termination of Lease Agreement dated
    October 31, 2002, between Limar Realty Corp. #30 and
    Registrant.                                                                                                     
|       | 10.02(3) |               |  | Voting Agreement dated October 31, 2002,
    between Limar Realty Corp. #30 and Registrant.                                                                                                                       
|       | 10.03(3) |               |  | Bill of Sale dated October 31, 2002, between
    Limar Realty Corp. #30 and Registrant.                                                                                                                           
|       | 10.04    |               |  | Employment Agreement, dated October 18,
    2002, by and between Farzad Dibachi and Registrant.                                                                                                                   
|       | 10.05    |               |  | Employment Agreement, dated October 18,
    2002, by and between Rhonda Dibachi and Registrant.                                                                                                                   
|       | 99.01    |               |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                   
|       | 99.02    |               |  | Certification Pursuant to Section 240.13a-14
    and Section 240.15d-14 of Title 17, Chapter II,
    of the Code of Federal Regulations, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.



---



|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the
    Registrants Fiscal 2000 Annual Report on Form 10-K
    filed on April 28, 2000.
|   
|(2) | Incorporated by reference to the current report
    on Form 8-K filed on November 21, 2002.                          
|   
|(3) | Incorporated by reference to the current report
    on Form 8-K filed on November 7, 2002.                           

(b) Reports on Form 8-K

On November 7, 2002, we filed a current
report on Form 8-K regarding the termination of our
headquarters lease at 350 Convention Way, Redwood City and
various other related documents.

On November 21, 2002, we filed a current
report on Form 8-K for the one-for-ten reverse stock split
effective November 21, 2002.

On December 3, 2002, we filed a current
report on Form 8-K for the transfer of the listing of our
common stock from the Nasdaq National Market to the Nasdaq
SmallCap Market.

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##### Table of Contents






SIGNATURE

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



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



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

| |                            
| | ---------------------------
| |                            
| | Joshua Pickus              
| | Chief Executive Officer and
| | Chief Financial Officer    

Date: December 13, 2002

35



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##### Table of Contents






EXHIBIT INDEX

|       |       |               |  |                                                                                                                                                                                                                   
|------ | ----- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       | Exhibit Title
|       |       |              
|       | 10.04 |               |  | Employment Agreement, dated October 18,
    2002, by and between Farzad Dibachi and Registrant.                                                                                                                   
|       | 10.05 |               |  | Employment Agreement, dated October 18,
    2002, by and between Rhonda Dibachi and Registrant.                                                                                                                   
|       | 99.01 |               |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                   
|       | 99.02 |               |  | Certification Pursuant to Section 240.13a-14
    and Section 240.15d-14 of Title 17, Chapter II,
    of the Code of Federal Regulations, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.

36