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

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Form 10-Q

(Mark One)

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

For the quarterly period ended April 28, 2001

OR

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

For the transition period from  to

Commission File Number: 000-28797

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NIKU CORPORATION(Exact name of registrant as specified in its charter)

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

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

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

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

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

76,166,875
shares of common stock as of June 2, 2001

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NIKU CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED APRIL 28, 2001

INDEX

|        |  |                                                                                       |  | Page
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  |  | Financial Information                                                                 |  |     
|Item 1. |  | Financial Statements:                                                                 |  |     
|        |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|        |  | Condensed Consolidated Statements of Operations and Comprehensive Loss                |  | 4   
|        |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|        |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|Item 2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 24  
|PART II |  | Other Information                                                                     |  |     
|Item 1. |  | Legal Proceedings                                                                     |  | 26  
|Item 2. |  | Changes in Securities and Use of Proceeds                                             |  | 26  
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 26  
|        |  | Signature                                                                             |  | 27  

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

|                                          |                                           | April 30,
2001                             |         | January 31,
2001
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------- | ----------------
|ASSETS                                    |                                           |                                            |         |                 
|Current Assets:                           |                                           |                                            |         |                 
|                                          | Cash and cash equivalents                 |                                            | $       | 99,394          
|                                          | Short-term investments                    |                                            |         | 22,184          
|                                          | Accounts receivable, net                  |                                            |         | 16,673          
|                                          | Prepaid expenses and other current assets |                                            |         | 12,756          
|                                          |                                           |                                            |         |                 
|                                          |                                           | Total current assets                       |         |                 
|Property and equipment, net               |                                           |                                            | 23,126  |                 
|Deposits and other assets                 |                                           |                                            | 4,973   |                 
|Goodwill and other intangible assets, net |                                           |                                            | 123,996 |                 
|                                          |                                           |                                            |         |                 
|                                          |                                           | Total assets                               |         | $               
|                                          |                                           |                                            |         |                 
|LIABILITIES AND STOCKHOLDERS' EQUITY      |                                           |                                            |         |                 
|Current Liabilities:                      |                                           |                                            |         |                 
|                                          | Accounts payable                          |                                            | $       | 7,478           
|                                          | Accrued liabilities                       |                                            |         | 22,135          
|                                          | Current portion of long-term obligations  |                                            |         | 25,597          
|                                          | Deferred revenue                          |                                            |         | 16,756          
|                                          |                                           |                                            |         |                 
|                                          |                                           | Total current liabilities                  |         |                 
|Stockholders' equity                      |                                           |                                            | 231,136 |                 
|                                          |                                           |                                            |         |                 
|                                          |                                           | Total liabilities and stockholders' equity |         | $               
|                                          |                                           |                                            |         |                 

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

3

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

|                                                              |                                                                                                                                                        | Three Months
Ended April 30, |       
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------- | ------
|
|Revenue:                                                      |                                                                                                                                                        |                              |       
|                                                              | License                                                                                                                                                |                              | $     
|                                                              | Services                                                                                                                                               |                              |       
|                                                              |                                                                                                                                                        |                              |       
|                                                              |                                                                                                                                                        | Total revenue                |       
|                                                              |                                                                                                                                                        |                              |       
|Cost of revenue:                                              |                                                                                                                                                        |                              |       
|                                                              | License                                                                                                                                                |                              |       
|                                                              | Services (exclusive of stock-based compensation of $330 and $81 for the three months ended April 30, 2001 and 2000, respectively)                      |                              |       
|                                                              | Impairment of licensed technology                                                                                                                      |                              |       
|                                                              |                                                                                                                                                        |                              |       
|                                                              |                                                                                                                                                        | Total cost of revenue        |       
|                                                              |                                                                                                                                                        |                              |       
|                                                              |                                                                                                                                                        | Gross profit                 |       
|                                                              |                                                                                                                                                        |                              |       
|Operating expenses:                                           |                                                                                                                                                        |                              |       
|                                                              | Sales and marketing (exclusive of stock-based compensation of $2,306 and $6,067 for the three months ended April 30, 2001 and 2000, respectively)      |                              |       
|                                                              | Research and development (exclusive of stock-based compensation of $1,050 and $1,355 for the three months ended April 30, 2001 and 2000,
respectively) |                              |       
|                                                              | General and administrative (exclusive of stock-based compensation of $999 and $1,258 for the three months ended April 30, 2001 and 2000, respectively) |                              |       
|                                                              | Asset impairment and other                                                                                                                             |                              |       
|                                                              | Amortization of goodwill and other intangible assets                                                                                                   |                              |       
|                                                              | Stock-based compensation                                                                                                                               |                              |       
|                                                              | Restructuring and exit costs                                                                                                                           |                              |       
|                                                              |                                                                                                                                                        |                              |       
|                                                              |                                                                                                                                                        | Total operating expenses     |       
|                                                              |                                                                                                                                                        |                              |       
|                                                              |                                                                                                                                                        | Operating loss               |       
|Interest and other income, net                                |                                                                                                                                                        |                              | 999   
|                                                              |                                                                                                                                                        |                              |       
|                                                              |                                                                                                                                                        | Net loss                     |       
|                                                              |                                                                                                                                                        |                              |       
|Basic and diluted net loss per share                          |                                                                                                                                                        | $                            | (1.23 
|                                                              |                                                                                                                                                        |                              |       
|Shares used in computing basic and diluted net loss per share |                                                                                                                                                        |                              | 75,504
|                                                              |                                                                                                                                                        |                              |       
|Comprehensive loss:                                           |                                                                                                                                                        |                              |       
|                                                              | Net loss                                                                                                                                               |                              | $     
|                                                              | Foreign currency translation adjustments                                                                                                               |                              |       
|                                                              | Unrealized gain on short-term investments                                                                                                              |                              |       
|                                                              |                                                                                                                                                        |                              |       
|                                                              |                                                                                                                                                        | Comprehensive loss           |       
|                                                              |                                                                                                                                                        |                              |       

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

4

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

|                                                     |                                                                                                          | Three Months Ended April 30,                                                               |                                          
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -----------------------------------------
|
|Cash flows from operating activities:                |                                                                                                          |                                                                                            |                                          
|                                                     | Net loss                                                                                                 |                                                                                            | $                                        
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities:                              |                                                                                            |                                          
|                                                     |                                                                                                          | Depreciation                                                                               |                                          
|                                                     |                                                                                                          | Impairment of licensed technology                                                          |                                          
|                                                     |                                                                                                          | Asset impairment and other                                                                 |                                          
|                                                     |                                                                                                          | Amortization of debt discount                                                              |                                          
|                                                     |                                                                                                          | Amortization of goodwill and other intangible assets                                       |                                          
|                                                     |                                                                                                          | Stock-based compensation                                                                   |                                          
|                                                     |                                                                                                          | Provision for doubtful accounts receivable                                                 |                                          
|                                                     |                                                                                                          | Revenue resulting from nonmonetary exchanges for computer equipment, software and services |                                          
|                                                     |                                                                                                          | Expense resulting from nonmonetary exchanges for services                                  |                                          
|                                                     |                                                                                                          | Interest on notes receivable from stockholders                                             |                                          
|                                                     |                                                                                                          | Changes in operating assets and liabilities:                                               |                                          
|                                                     |                                                                                                          |                                                                                            | Accounts receivable                      
|                                                     |                                                                                                          |                                                                                            | Prepaid expenses and other current assets
|                                                     |                                                                                                          |                                                                                            | Deposits and other assets                
|                                                     |                                                                                                          |                                                                                            | Accounts payable                         
|                                                     |                                                                                                          |                                                                                            | Accrued liabilities                      
|                                                     |                                                                                                          |                                                                                            | Deferred revenue                         
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|Cash flows from investing activities:                |                                                                                                          |                                                                                            |                                          
|                                                     | Purchases of property and equipment                                                                      |                                                                                            |                                          
|                                                     | Sales and maturities (purchases) of short-term investments, net                                          |                                                                                            |                                          
|                                                     | Acquisitions, net of cash received                                                                       |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|Cash flows from financing activities:                |                                                                                                          |                                                                                            |                                          
|                                                     | Proceeds from initial public offering of common stock, net                                               |                                                                                            |                                          
|                                                     | Issuance of common stock                                                                                 |                                                                                            |                                          
|                                                     | Repurchase of common stock                                                                               |                                                                                            |                                          
|                                                     | Proceeds from bank borrowings, net                                                                       |                                                                                            |                                          
|                                                     | Repayment of debt and capital lease obligations                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     |                                                                                                          |                                                                                            |                                          
|Net increase in cash and cash equivalents            |                                                                                                          |                                                                                            | (8,592                                   
|Effect of exchange rate on cash and cash equivalents |                                                                                                          |                                                                                            | (174                                     
|                                                     |                                                                                                          |                                                                                            |                                          
|Cash and cash equivalents, beginning of period       |                                                                                                          |                                                                                            | 108,160                                  
|                                                     |                                                                                                          |                                                                                            |                                          
|Cash and cash equivalents, end of period             |                                                                                                          | $                                                                                          | 99,394                                   
|                                                     |                                                                                                          |                                                                                            |                                          
|Supplemental disclosures of cash flow information:   |                                                                                                          |                                                                                            |                                          
|                                                     | Cash paid for interest during the period                                                                 |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|Noncash investing and financing activities:          |                                                                                                          |                                                                                            |                                          
|                                                     | Repurchases of common stock in settlement of notes receivable from stockholders                          |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Common stock issued for notes receivable                                                                 |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Deferred revenue resulting from nonmonetary exchanges for computer equipment, software and
services      |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Deferred stock-based compensation                                                                        |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Common stock and redeemable convertible preferred stock issued and stock options assumed for acquisition |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Conversion of redeemable convertible preferred stock to common stock                                     |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Unrealized gain on short-term investments                                                                |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          
|                                                     | Write-off of property and equipment to goodwill                                                          |                                                                                            | $                                        
|                                                     |                                                                                                          |                                                                                            |                                          

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

5

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NIKU CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Niku Corporation (the Company) and reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the interim periods presented. Such adjustments are of a normal recurring nature. The condensed consolidated results of
operations for the interim periods presented are not necessarily indicative of the results for any future interim period or for the entire fiscal year. Certain information and footnote disclosures
normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted, although the Company believes that the disclosures
included are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the consolidated financial statements and notes for the fiscal year ended January 31, 2001, included in the Company's fiscal 2001 Annual
Report on Form 10-K.

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

The
Company has a fiscal year that ends on the Saturday nearest January 31. For presentation purposes, the condensed consolidated financial statements and notes refer to the
interim periods' calendar month end.

Use of Estimates

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

2. ASSET IMPAIRMENT AND OTHER AND IMPAIRMENT OF LICENSED TECHNOLOGY

During the first quarter of fiscal 2002, the Company performed an impairment assessment of its goodwill and other intangible assets recorded in connection with
its various acquisitions. 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 includes $21.7 million to write off the net book value of certain goodwill and
other intangible assets from its acquisitions of Legal Anywhere, Inc. (Legal Anywhere), bSource.com, Inc. (bSource), 600 Monkeys, Inc. (600 Monkeys) and Alyanza Software
Corporation (Alyanza). The carrying value of Legal Anywhere's goodwill and customer lists was reduced to their estimated fair value of $1.8 million. Other asset impairment charges include
$1.9 million in accelerated depreciation for internally used software and $874,000 to write off fixed assets that the Company no longer utilizes. The net book

6

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value of the goodwill and other intangible assets written off by the Company as asset impairment charges by acquisition during the first quarter of fiscal 2002 are as follows (in thousands):

Legal Anywhere

$
9,269bSource


8,150600 Monkeys


4,134Alyanza


164$
21,717


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

3. BUSINESS COMBINATIONS

The Company acquired four companies in fiscal 2001. Each acquisition was accounted for as a purchase, with the results of each acquired company's operations
included in the Company's results of operations from the date of its acquisition. On August 5, 2000, the Company acquired ABT Corporation (ABT), a privately-held company located in
New York City, New York. ABT was a provider of enterprise project management solutions for information technology organizations. In the first quarter of fiscal 2002, an adjustment was made to the net
tangible liabilities acquired resulting in an increase in ABT's goodwill by $661,000. On July 6, 2000, the Company acquired bSource, a privately-held company in San Francisco,
California. bSource was a provider of a virtual marketplace for services such as web development, law and public relations services. On May 17, 2000, the Company acquired 600 Monkeys, a
privately-held company in Cleveland, Ohio. 600 Monkeys was a provider of Internet solutions for advertising and public relations agencies. On January 31, 2000, the Company acquired
Legal Anywhere, a privately-held company in Portland, Oregon. Legal Anywhere provided Internet-based collaborative tools to law firms and corporate legal departments.

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

Three Months Ended April 30, 2000Revenues

$
24,671Net loss

$
(37,300
)Basic and diluted net loss per share

$
(0.69
)Shares used in pro forma per share calculation


54,301


7

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The
pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the period presented. In addition, they are not intended to
be a projection of future results and do not reflect any synergies that might be achieved from combined operations.

In
connection with the acquisition of ABT, the Company recorded deferred stock-based compensation in the amount of $5.1 million, of which $2.0 million is being amortized
over the vesting period of 24 months, $2.8 million is being amortized over the vesting period of 12 months and $300,000 was amortized over the vesting period of three months, in a
manner consistent with FIN 28. The Company will also issue options to purchase up to 163,000 shares of common stock on August 9, 2001 to former ABT employees, at which time the then fair market
value of the options will be recorded as additional goodwill and amortized over the remaining life of the goodwill.

4. RESTRUCTURING AND EXIT COSTS

In the first quarter of fiscal 2002, the Company approved a restructuring plan. The Company restructured its operations and reduced its workforce by
approximately 260 employees, a 25% reduction from January 31, 2001. The Company also terminated two leased facilities and exited the vertical legal market. The Company recorded
$3.1 million in restructuring and exit costs that are not associated with, and do not benefit activities of, the Company's ongoing operations. The restructuring and exit costs consisted of the
following (in thousands):

Total Restructuring and Exit Costs

Paid Through April 30, 2001

Accrued as of April 30, 2001Severance

$
2,008

$
422

$
1,586Lease termination fees


493


42


451Exit costs for business line


591





591$
3,092

$
464

$
2,628


The
Company expects that the restructuring and exit costs accrued as of April 30, 2001 for severance will be fully paid in the second quarter of fiscal 2002, and the lease
termination fees and exit costs for business line will be fully paid by May 2004. Exit costs for business line consisted primarily of termination fees for a hosting arrangement and a leased
facility.

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

8

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

Three Months
Ended April 30,2001

2000Shares issuable under stock options

13,411

7,129Shares of restricted stock subject to repurchase

900

2,418Shares issuable under warrants

46




The
weighted-average exercise price of stock options was $8.59 and $5.64 per share as of April 30, 2001 and 2000, respectively. The weighted-average purchase price of
restricted stock subject to repurchase was $1.79 and $2.11 per share as of April 30, 2001 and 2000, respectively. The exercise price of warrants outstanding as of April 30, 2001 was
$11.58 per share.

6. SEGMENT REPORTING

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

Three Months
Ended April 30,2001

2000Services:Consulting

$
4,104

$
2,014Maintenance


4,807


527$
8,911

$
2,541


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

Three Months Ended April 30,2001

2000United States

$
9,447

$
8,615Europe and other


7,519


$
16,966

$
8,615


There
were no customers individually representing more than 10% of accounts receivables as of April 30, 2001 and January 31, 2001. One customer represented 11.5% of
total revenue in the first quarter of fiscal 2002. No customer represented more than 10% of total revenue in the first quarter of fiscal 2001.

9

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated
financial statements and related notes contained herein and the information contained in our annual report on Form 10-K for the fiscal year ended January 31, 2001. This
discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We may identify these statements by the use of
words such as "believe", "expect", "anticipate", "intend", "plan" and similar expressions. These forward-looking statements involve several risks and uncertainties. Our actual results may differ
materially from those set forth in these forward-looking statements as a result of a number of factors, including those described under the caption "Factors That May Affect Future Results" herein and
in our annual report on Form 10-K for the year ended January 31, 2001. These forward-looking statements speak only as of the date of this quarterly report. We do not plan or
undertake a duty to update them and we caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business as addressed
elsewhere in this quarterly report and in our annual report on Form 10-K for the fiscal year ended January 31, 2001.

Overview

We design, develop and market software for service organizations in large enterprises. Service organizations include internal information technology, or IT,
departments, consulting organizations, product development groups, and other organizations rendering services inside and outside the enterprise. Our software allows teams within these organizations to
manage people and projects, to capture and reuse knowledge and to account for project-related activities. Our software also provides executives and managers with visibility into projects, project
portfolios and businesses, enabling informed decision-making. We believe that our software enables service organizations to deliver results more efficiently and effectively, thereby securing a
competitive advantage.

10

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Results of Operations

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

|                               |                                                      | Three Months
Ended April 30, |      
|------------------------------ | ---------------------------------------------------- | ---------------------------- | -----
|
|Revenue:                       |                                                      |                              |      
|                               | License                                              |                              | 47.5 
|                               | Services                                             |                              | 52.5 
|                               |                                                      |                              |      
|                               |                                                      | Total revenue                |      
|                               |                                                      |                              |      
|Cost of revenue:               |                                                      |                              |      
|                               | License                                              |                              | 3.9  
|                               | Services                                             |                              | 51.3 
|                               | Impairment of licensed technology                    |                              | 40.0 
|                               |                                                      |                              |      
|                               |                                                      | Total cost of revenue        |      
|                               |                                                      |                              |      
|                               |                                                      | Gross profit                 |      
|                               |                                                      |                              |      
|Operating expenses:            |                                                      |                              |      
|                               | Sales and marketing                                  |                              | 191.0
|                               | Research and development                             |                              | 65.1 
|                               | General and administrative                           |                              | 35.9 
|                               | Asset impairment and other                           |                              | 144.7
|                               | Amortization of goodwill and other intangible assets |                              | 75.6 
|                               | Stock-based compensation                             |                              | 27.6 
|                               | Restructuring and exit costs                         |                              | 18.2 
|                               |                                                      |                              |      
|                               |                                                      | Total operating expenses     |      
|                               |                                                      |                              |      
|                               |                                                      | Operating loss               |      
|Interest and other income, net |                                                      | 5.8                          |      
|                               |                                                      |                              |      
|                               |                                                      | Net loss                     |      
|                               |                                                      |                              |      

Comparison of Three Months Ended April 30, 2001 and 2000

Revenue

License.License revenue consists of revenue from licenses of our software products. License revenue was
$8.1 million and $6.1 million in the first quarter of fiscal 2002 and 2001, respectively, increasing 32.6% period over period. License revenue as a percentage of total revenue was 47.5%
and 70.5% in the first quarter of fiscal 2002 and 2001, respectively. The increase in license revenue in absolute dollars in the first quarter of fiscal 2002 was primarily due to additional licenses
resulting from increased headcount in our sales force, expanded marketing efforts and penetration of the ABT installed base.

License
revenue was $8.1 million and $18.6 million in the first quarter of fiscal 2002 and in the fourth quarter of fiscal 2001, respectively, decreasing 56.7% period
over period. License revenue as a percentage of total revenue was 47.5% and 69.5% in the first quarter of fiscal 2002 and in the fourth quarter of fiscal 2001, respectively. The decrease in license
revenue in absolute dollars in the first quarter of fiscal 2002 primarily resulted from a slowdown in corporate information technology spending, the timing of new sales force hires and product
development cycles.

Services.Services revenue consists of revenue from the delivery of implementation services and maintenance and support
contracts. Services revenue from implementation services in the first quarter of

11

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fiscal 2002 increased 103.8% to $4.1 million from $2.0 million in the first quarter of fiscal 2001. Services revenue from maintenance and support contracts in the first quarter of fiscal
2002 increased 812.1% to $4.8 million from $527,000 in the first quarter of fiscal 2001. Total services revenue was $8.9 million and $2.5 million in the first quarter of fiscal
2002 and 2001, respectively, representing 52.5% and 29.5% of total revenue in the respective period. The increase in services revenue in absolute dollars in the first quarter of fiscal 2002 resulted
primarily from increases in customer implementations and maintenance and support arrangements.

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 $654,000 and $602,000 in the first quarter of fiscal 2002 and 2001, respectively, representing 8.1% and 9.9% of total license revenue in
the respective period.

Cost of services revenue.Cost of services revenue includes salaries and related expenses for our maintenance and
support contracts and implementation services and the costs of third parties contracted to provide implementation services to our customers. Cost of services revenue was $8.7 million and
$2.0 million in the first quarter of fiscal 2002 and 2001, respectively, representing 97.7% and 78.0% of total services revenue in the respective period. The increase in cost of services
revenue in absolute dollars in the first quarter of fiscal 2002 was primarily attributable to an increase in the number of professional service personnel to 105 employees at the end of the first
quarter of fiscal 2002 from 63 employees at the end of the first quarter in fiscal 2001 and an increase in costs for third parties contracted to implement our products.

Impairment of licensed technology.We recorded $6.8 million in impairment of licensed technology in the first
quarter of fiscal 2002, including $5.9 million from prepaid royalties on third-party technologies and $850,000 from future royalties on third-party technologies which we will not be including
with our products at all or at the rate required under the applicable contracts due to a change in product plan.

Operating Expenses

Sales and marketing.Sales and marketing expenses consist primarily of salaries, commissions, bonuses, travel and bad
debt expense. Sales and marketing expenses were $32.4 million and $11.8 million in the first quarter of fiscal 2002 and 2001, respectively, representing 191.0% and 137.3% of total
revenue in
the respective period. The increase in sales and marketing expenses in absolute dollars in the first quarter of fiscal 2002 was primarily due to an increase in bad debt expense of $7.4 million,
an increase in the number of personnel to 257 employees at the end of the first quarter in fiscal 2002 from 172 employees at the end of the first quarter of fiscal 2001 and increases in commissions,
bonuses and recruiting expenses. In the second quarter of fiscal 2002, we expect sales and marketing expenses in absolute dollars to decrease from the first quarter of fiscal 2002.

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 incurred prior to commercial production. Research and development expenses
were $11.0 million and $6.7 million in the first quarter of fiscal 2002 and 2001, respectively, representing 65.1% and 77.5% of total revenue in the respective period. The increase in
research and development expenses in absolute dollars in the first quarter of fiscal 2002 was primarily attributable to an increase in the number of personnel to 264 employees at the end of the first
quarter of fiscal 2002 from 150 employees at the end of the first quarter of fiscal 2001. In the second quarter of fiscal 2002, we expect research and development expenses in absolute dollars to be
consistent with the first quarter of fiscal 2002.

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General and administrative.General and administrative expenses consist primarily of salaries and other related costs
for finance, human resource and information technology employees, as well as legal and other professional fees. General and administrative expenses were $6.1 million and $2.2 million in
the first quarter of fiscal 2002 and 2001, respectively, representing 35.9% and 25.5% of total revenue in the respective period. The increase in general and administrative expenses in absolute dollars
in the first quarter of fiscal 2002 was primarily attributable to an increase in the number of personnel to 97 employees at the end of the first quarter of fiscal 2002 from 66 employees at the end of
the first quarter of fiscal 2001 and certain executive payments. In the second quarter of fiscal 2002, we expect general and administrative expenses in absolute dollars to decrease from the first
quarter of fiscal 2002.

Asset impairment and other.During the first quarter of fiscal 2002, we performed an impairment assessment of our
goodwill and other intangible assets recorded in connection with our various acquisitions. 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 includes $21.7 million to write off the net book value of
certain goodwill and other intangible assets from our acquisitions of Legal Anywhere, bSource, 600 Monkeys and Alyanza. The carrying value of Legal Anywhere's goodwill and customer lists was reduced
to their estimated fair value of $1.8 million. Other asset impairment charges include $1.9 million in accelerated depreciation for internally used software and $874,000 to write off
fixed assets that we no longer utilize.

Amortization of goodwill and other intangible assets.Amortization of goodwill and other intangible assets was
$12.8 million and $5.0 million in the first quarter of fiscal 2002 and 2001, respectively. The increase in amortization of goodwill and other intangible assets was primarily due to the
acquisition of 600 Monkeys in May 2000, bSource in July 2000 and ABT in August 2000. Amortization of goodwill and
other intangible assets included approximately $3.3 million and $1.7 million relating to the amortization of developed and core technologies in the first quarter of fiscal 2002 and 2001,
respectively. We expect amortization expense of approximately $30.7 million for the remaining nine months of fiscal 2002, assuming no additional impairment charges.

Stock-based compensation.Amortization of stock-based compensation was $4.7 million and $8.8 million in
the first quarter of fiscal 2002 and 2001, respectively. The decrease in amortization of stock-based compensation was primarily attributed to our adoption of Financial Accounting Standard Board (FASB)
Interpretation No. 28 that allows for an accelerated amortization of stock-based compensation. Amortization of stock-based compensation is estimated to be approximately $8.6 million for
the remaining nine months of fiscal 2002, assuming no additional grants of stock options below fair market value.

Restructuring and exit costs.In the first quarter of fiscal 2002, we incurred restructuring and exit costs of
$3.1 million relating to a reduction of our workforce, elimination of certain excess leased facilities and the exit of a business line. We restructured our operations and reduced our workforce
by approximately 260 employees, a 25% reduction from January 31, 2001. We also terminated two leased facilities and exited the legal vertical market. The total restructuring and exit costs
included $2.0 million related to employee termination costs primarily consisting of the cost of severance packages, $493,000 to terminate two leased facilities, which included future lease
payments on these leases, and incurred $591,000 to exit the legal vertical market, which consisted primarily of termination fees and future lease payments for a hosting arrangement and a leased
facility. We expect that the restructuring and exit costs accrued as of April 30, 2001 for severance will be fully paid in the second quarter of fiscal 2002, and the lease termination fees and
exit costs for business line will be fully paid by May 2004.

Interest and Other Income, Net

Interest and other income, net.Interest and other income, net, consists of interest income, interest expense and other
non-operating expenses. The net decrease was primarily attributable to lower average

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invested cash and short-term investment balances, which yielded lower interest income in the first quarter of fiscal 2002, compared to the first quarter of fiscal 2001.

Liquidity and Capital Resources

Since inception, we have financed our operations through private sales of capital stock, with net proceeds of $68.0 million through April 30,
2001, through our initial public offering of common stock in February 2000, with net proceeds of $202.5 million, and from bank loans and equipment leases. These proceeds are used for
working capital for our business. As of April 30, 2001, we had cash, cash equivalents and short-term investments of $121.6 million and $79.0 million in working
capital. The decrease in working capital as of April 30, 2001 from $135.6 million as of January 31, 2001 primarily resulted from the use of cash, cash equivalents and
short-term investments in our operations and a decrease in net accounts receivable.

Net
cash used in operating activities was $22.6 million and $15.2 million in the first quarter of fiscal 2002 and 2001, respectively. Net cash used in operating
activities in the first quarter of fiscal 2002 primarily resulted from a net loss of $92.9 million, offset in part by impairment charges, a decrease in accounts receivable, amortization of
goodwill and intangible assets and provision for doubtful accounts receivable. Net cash used in the first quarter of fiscal 2001 primarily resulted from a net loss of $26.9 million and
increases in accounts receivable and deposits and other assets, offset in part by stock-based compensation, amortization of goodwill and other intangible assets and an increase in accrued liabilities.

Net
cash provided by (used in) investing activities was $13.1 million and $(25.6) million in the first quarter of fiscal 2002 and 2001, respectively. Net cash provided by
investing activities in the first quarter of fiscal 2002 primarily resulted from net sales and maturities of short-term investments, offset in part by purchases of property and equipment.
Net cash used in the first quarter of fiscal 2001 primarily resulted from net purchases of short-term investments.

Net
cash provided by financing activities was $869,000 and $197.9 million in the first quarter of fiscal 2002 and 2001, respectively. Net cash provided by financing activities
in the first quarter of fiscal 2002 primarily resulted from the proceeds from issuance of our common stock, offset in part by the repurchase of our common stock. Net cash provided in the first quarter
of fiscal 2001 primarily resulted from net proceeds from our initial public offering, offset in part by payment on debt and capital lease obligations.

In
September 1999, we entered into a loan and security agreement with a financial institution providing a line of credit of up to $4.0 million. This line of credit was
subsequently increased to $10.0 million in July 2000 and to $25.0 million in January 2001. As of April 30, 2001, we had borrowings of $25.0 million
outstanding under this line of credit. Interest on this line of credit accrues at a current rate of 9.25% per annum. In fiscal 2001, we also entered into a lease financing arrangement providing a
lease line of credit of up to $4.6 million which we have utilized in full.

We
anticipate that operating expenses, as well as planned capital expenditures, will constitute a material use of our cash resources. In addition, we may utilize cash resources to
fund acquisitions or investments in complementary businesses, technologies or product lines. We believe that cash from operations and
existing cash will be sufficient to meet our working capital and expense requirements for at least the next twelve months.

Recent Accounting Pronouncements

In October 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.This statement supercedes and replaces the guidance in
Statement 125,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 provides accounting
and reporting guidance for transfers and servicing for financial assets and liabilities.

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The provisions of SFAS No. 140 became effective for transactions entered into after March 31, 2001. The adoption of SFAS No. 140 did not have a material effect on our financial
statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

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

Due to our limited operating history, it is difficult or impossible for us to predict our future operating results. For example, we cannot forecast operating
expenses based on our historical results because we have recently introduced and plan to continue to introduce new versions of our software, have acquired a number of companies, and are selling our
products in more geographic areas. Also, we forecast our
expenses based in part on future revenue projections. Therefore, if we cannot meet these revenue projections, our operating results would be adversely affected.

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

We have experienced operating losses in each quarterly and annual period since we were formed, and we expect to incur losses in the future. As of
April 30, 2001, we had an accumulated deficit of $263.3 million. We had net losses of $92.9 million in the first quarter of fiscal 2002. As a result of our acquisitions, we will
record substantial non-cash charges as goodwill and other intangible assets are amortized over the next three to five years. In addition, we will incur substantial stock-based compensation
expense in future periods, which represents non-cash charges incurred as a result of the issuance of stock and stock options below fair market value prior to our initial public offering on
February 28, 2000, and subsequently in the month of January 2001. We will need to increase our revenue significantly to achieve and maintain profitability. We may not be able to sustain
our recent revenue growth rates. In fact, we may not have any revenue growth, and our revenue could decline. Our failure to continue to increase our revenue significantly would seriously harm our
business and operating results.

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 could 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 as well as sales and marketing and other expenses for a particular quarter. 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------
| |  |  | the announcement or introduction of new products or services by us or our competitors;                         
| |  |  | changes in the pricing of our products and services or those of our competitors;                               
| |  |  | variability in the mix of our product and services revenue in any quarter; and                                 

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| |  |  | the amount and timing of operating expenses and capital expenditures relating to the expansion of our business.
| | - |  | ---------------------------------------------------------------------------------------------------------------

Due
to these and other factors, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as
indicators of our future performance. It is possible that, in some future periods, our revenue growth or other operating results will be below the expectations of investors. If this occurs, the price
of our common stock would likely decline.

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

The majority of our revenue has been and is expected to continue to be derived from customers in the United States. Recent economic indicators, including
growth in gross domestic product, reflect a decline in economic activity in the United States from prior periods. Some reports have indicated an even more significant decline in spending by
corporations in the area of information technology, which includes the services relationship management market. While we cannot specifically correlate the impact of macro-economic conditions on our
sales activities, we believe that the economic conditions have resulted in decreased demand in our target markets, and in particular, have increased the average length of our sales cycles. To the
extent that the current downturn continues or increases in severity, or results in a similar downturn worldwide, we believe demand for our products and services, and therefore future revenue, will be
reduced. Even if the current downturn improves, we can not assure you that corporations will increase their information technology spending.

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

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

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

Our financial results are dependent upon the collection of our accounts receivable. As of April 30, 2001, our accounts receivable, net of allowance for
doubtful accounts, was $16.7 million. During the first quarter of fiscal 2002, we increased our allowance for doubtful accounts to $7.7 million, after recording
write-offs of $5.2 million. The failure by our customers to pay or the delay by our customers in making payments would adversely affect our cash flows and operating results.

Our recent personnel reduction may harm our business

In connection with our efforts to streamline our operations and reduce costs, we recently restructured our organization with headcount reductions of
approximately 25%, based on our staffing level as of January 31, 2001. There were significant costs associated with this personnel reduction related to severance and other employee-related
costs. As a result of these reductions, our ability to respond to unexpected challenges may be impaired, and we may be unable to take advantage of new opportunities. The personnel reduction may reduce
employee morale and create concern among existing employees about job security, which would lead to increased turnover. Further, this reduction in workforce may subject us to the risk of litigation.

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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 six months, making it difficult to predict the quarter in which we may recognize revenue from
a sale, if at all. 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 educating and 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. Our lengthy sales cycle may cause license revenue and other operating results to vary significantly from period
to period. If anticipated sales from a specific customer for a particular quarter are not realized in that quarter, our operating results may vary significantly.

If we fail to strengthen our sales organization, our ability to generate revenue will be limited

We need to increase the efficiency of our sales organization. Our failure to do so could harm our ability to generate revenue. Our sales force is, in large
part, new and unproven. If new sales personnel do not become effective in a timely manner, our revenue would be harmed. We also need to expand our direct sales force by hiring additional salespersons
and sales management personnel. There is strong competition for qualified sales personnel in our industry, and we may not be able to attract, assimilate or retain sufficient new sales personnel.

We have sold and may continue to sell our products to companies as part of broader business relationships, and revenue from these relationships may not be indicative of future
revenue

We have licensed our products to a number of companies from which we have purchased products and services under separate arrangements. These are generally
companies (1) from whom we license software for internal use; (2) from whom we license software for resale or incorporation into our products; or (3) from whom we purchase
development or implementation services. In the first quarter of fiscal 2002 and 2001, we derived $0 and $1.1 million, respectively, of our total revenue from customers from whom we have
purchased products or services.

Our
software licenses to these companies are typically non-exclusive, have a perpetual term and may be terminated only if the terms of the license are violated. Our
agreements with companies providing services to or for us have varying terms and may generally be terminated before the end of the term if there is a breach of the agreement. It may be more difficult
to license our products and services to potential customers if we do not also agree to use the software products or services that they provide. We cannot assure you that we will be successful in
licensing our products to customers without having to enter broader relationships with them.

To date, customers have not deployed our products on a large scale, and we may experience customer dissatisfaction and lost revenue if our products do not accommodate
large-scale deployments

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

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

Implementation of our products may be difficult, costly and time-consuming. Because we are one of the first companies to offer products designed
for services relationship management, many customers will be facing these implementation issues for the first time in the context of services relationship management

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software. Customers could become dissatisfied with our products if implementation requires more time, expense or personnel than they expected. Additionally, our expenses could increase as we seek to
satisfy our customers, 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.

The market for services relationship management software is newly emerging, and customers may not accept our products and services

The market for services relationship management software products and services is newly emerging. Services organizations have not traditionally automated the
management of their business processes. We cannot be certain that this market will continue to develop and grow, or that companies will elect to utilize our products and services rather than attempt
to develop applications internally or through other sources. In addition, the use of the Internet, as well as corporate intranets and extranets, has not been widely adopted for services relationship
management. Companies that have already invested substantial resources in other methods may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems or
methods. We expect that we will need to continue marketing and sales efforts to educate prospective customers about the uses and benefits of our products and services. Therefore, demand for and market
acceptance of our products and services will be subject to a high level of uncertainty.

If we are unable to introduce new services relationship management products or product enhancements on a timely basis, or if the market does not accept these products or
product enhancements, our business will suffer

The services relationship management market is new and likely to change rapidly. Our future success will depend on our ability to anticipate changing customer
requirements effectively and in a timely manner and to offer products that meet these demands. We intend to release a new version of our software product in the third quarter of fiscal 2002. The
development of new or enhanced services relationship management products is a complex and uncertain process. We may experience design, development, testing and other difficulties that could delay or
prevent the introduction of new products or product enhancements and could increase research and development costs. Further, we may experience delays in market acceptance of new products or product
enhancements as we engage in marketing and education of our user base regarding the advantages and system requirements for the new products and as customers evaluate the advantages and disadvantages
of upgrading to our new products.

Defects in our products could result in loss of or delay in revenue, loss of market share, 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, loss of market share, 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

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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.

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 upcoming releases are being designed based upon
currently prevailing technologies such as XML/XSL. If new technologies emerge that are incompatible with our products, our key products and services could become obsolete and our existing and
potential customers might seek alternatives. We may not be able to adapt quickly to any new technology.

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

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:

| |  |  | the Niku Partners Network of consulting firms; and                                                                                                                                                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | third-party vendors of software, such as Actuate, Allaire, Extensity, Fulcrum, Microsoft, Oracle, Sun and Verity, whose products or technologies, such as development tools, databases and search engines, we incorporate into or integrate with our
products.

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

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

In the first quarter of fiscal 2002, international revenue represented 44.3% of total revenue, compared to 34.9% of total revenue in the fourth quarter of
fiscal 2001.

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

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

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

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

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

Because we have expanded our operations, our success will depend on our ability to manage our growth, improve our existing systems and implement new systems, procedures and
controls

We have rapidly and significantly expanded our operations. Much of this growth has come from the acquisition of other companies. This growth has placed, and
continues to place, a significant strain on our managerial, operational, financial and other resources. To execute successfully, we must manage our acquired operations effectively and improve our
financial and management controls, reporting systems and procedures on a timely basis. We may not be able to manage our growth effectively.

Acquisitions may present risks to our business

Past and potential future acquisitions create and could create risks and expenses for us, including:

| |  |  | amortization of goodwill and other intangible assets;
| | - |  | -----------------------------------------------------

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

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

The goodwill and other intangible assets we recorded as a result of our acquisitions of ABT Corporation and Proamics Corporation may become impaired

We have acquired six companies since we were incorporated: ABT Corporation in August 2000, bSource.com, Inc. in July 2000, 600
Monkeys, Inc. in May 2000, Legal Anywhere, Inc. in January 2000, Proamics Corporation in December 1999 and Alyanza Corporation in December 1998, all of which
were accounted for as purchase business combinations. In the first quarter of fiscal 2002, we have recorded impairment charges with respect to our acquisitions of Legal Anywhere, bSource.com, 600
Monkeys and Alyanza. From our current assessment we do not believe that the goodwill and other intangible assets from our acquisitions of ABT Corporation and Proamics Corporation are currently
impaired. However, we will perform further impairment assessments if there is a change in circumstances. Any further impairment would harm our financial position and operating results if and when it
is recorded.

We may not be able to realize the carrying value of our prepaid royalties if we do not generate revenue from third party technologies that we license

We have entered into arrangements to pay royalties to third parties in exchange for the right to resell their products or integrate their software into our
products. These royalties are payable either on a per
unit basis or based on a specified percentage of revenue generated from sales included in the integrated product for the contractual term of the respective royalty arrangement. As of
January 31, 2001, we had prepaid royalties of approximately $8.2 million. In the first quarter of fiscal 2002, we determined that the carrying value of certain prepaid royalties were
impaired. As a result, in the first quarter of fiscal 2002, we recorded $6.8 million in cost of revenue for impairment of licensed technology, including $5.9 million from prepaid
royalties of third-party technologies and $850,000 from future royalties on third-party technologies which the Company will not be including with its product at all or at the rate required under the
applicable contracts due to a change in product plan. Should we determine that our remaining prepaid royalties are impaired, it would have an adverse effect on our financial position and operating
results.

We depend on the continued services of our executive officers

Our future success depends upon the continued service of our executive officers, particularly Farzad Dibachi, our founder and chief executive officer. None of
our executive officers is bound by an employment agreement for any specific term or that prevents him or her from terminating his or her employment at any time. Our business would be seriously harmed
if we lost the services of one or more of our executive

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officers or if one or more of them decided to join a competitor or otherwise compete directly or indirectly with us.

In order to grow our business, we must attract and retain qualified sales personnel at a time when competition for these personnel in our industry is intense

We believe that we will need to hire additional sales personnel. We have from time to time in the past experienced, and we expect in the future to continue to
experience, difficulty in hiring highly skilled sales employees with appropriate qualifications for our business. There is a shortage of qualified personnel, and competition for these personnel is
intense in our industry. We may be unable to attract, assimilate or retain new sales personnel.

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

We may need to raise additional funds in order to fund our business, expand our sales activities, develop new or enhance existing products, respond to
competitive pressures or acquire complementary businesses, products or technologies. We may also need to raise funds in the future to meet our working capital needs. Our working capital decreased to
$79.0 million as of April 30, 2001 from $135.6 million as of January 31, 2001. Additional financing may not be available on terms favorable to
us, or at all. If we issue additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of the
then existing holders of our common stock.

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

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

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

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

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

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights, particularly in the
software industry. We could become subject to intellectual property infringement claims as the number of our competitors grows and our products and services increasingly overlap with competitive
offerings. In addition, as part of our product licenses, we agree to indemnify our customers against claims that our products infringe upon the intellectual property rights of others. These claims,
even if not meritorious, could be expensive and divert management's attention from operating our business. We could incur substantial costs in defending ourselves and our customers against

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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.

The success of our business depends on the adoption of the Internet for electronic commerce and communications

Our business is based on providing software for services organizations using the Internet. Therefore, in order for our business to be successful, the Internet
must be widely adopted, in a timely manner, as a means of electronic commerce and communication by these organizations. Because electronic commerce and communication over the Internet are new and
evolving, it is difficult to predict the adoption rate. To date, many businesses and consumers have been deterred from utilizing the Internet for a number of reasons, including, but not limited to:

| |  |  | potentially inadequate development of network infrastructure;                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
| |  |  | security concerns, including the potential for fraud or theft of stored data and information communicated over the Internet;
| |  |  | inconsistent quality of service, including well-publicized down times for popular websites;                                 
| |  |  | lack of availability of cost-effective, high-speed service;                                                                 
| |  |  | limited numbers of local access points for corporate users;                                                                 
| |  |  | delay in the development of enabling technologies or adoption of new standards;                                             
| |  |  | inability to integrate business applications with the Internet;                                                             
| |  |  | the need to operate with multiple and frequently incompatible products;                                                     
| |  |  | a lack of tools to simplify access to and use of the Internet; and                                                          
| |  |  | uncertainty relating to increasing governmental regulation of the Internet.                                                 

Security risks of electronic commerce may deter future use of our products

A fundamental requirement of conducting Internet-based electronic commerce is the secure transmission of confidential information over public networks. Failure
to prevent security breaches of our
customers' networks, or well-publicized security breaches affecting the Internet in general, could significantly harm our business. We cannot be certain that advances in computer
capabilities, new discoveries in the field of cryptography, or other developments will not result in a compromise or breach of the security measures of our products and services. Anyone who is able to
circumvent our security measures could misappropriate proprietary, confidential customer information or cause interruptions in our operations. We may be required to incur significant costs to protect
against security breaches or to alleviate problems caused by breaches.

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;
| | - |  | -------------------------------------------------------------------------

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| |  |  | providing for a classified board of directors with staggered, three-year terms;                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
| |  |  | prohibiting cumulative voting in the election of directors;                                                                            
| |  |  | requiring two-thirds of the outstanding shares to approve amendments to some provisions of our certificate of incorporation and bylaws;
| |  |  | requiring a majority of the stockholders to call stockholders meetings; and                                                            
| |  |  | prohibiting stockholder actions by written consent.                                                                                    

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

California is currently experiencing an energy crisis and has recently experienced significant power shortages. As a result, energy costs in California,
including those for natural gas and electricity, may rise significantly over the next several months relative to the rest of the United States. Because our principal operating facilities are located
in California, our operating expenses may increase significantly if this trend continues. In addition, a sustained or frequent power failure could disrupt our operations, which would limit our ability
to provide our products and services to our customers, harm our customer relationships and have an adverse effect on our operating results.

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

The market price of our common stock, like that of many other early-stage software companies is extremely volatile. The value of your investment in our common
stock could decline due to the impact of any of the following factors upon the market price of our common stock:

| |  |  | variation in our quarterly operating results;                              
| | - |  | ---------------------------------------------------------------------------
| |  |  | announcements of new product or service offerings by us or our competitors;
| |  |  | announcement of new customer relationships by us or our competitors;       
| |  |  | changes in market valuations of comparable companies;                      
| |  |  | additions to, or departures of, our executive officers; and                
| |  |  | conditions and trends in the Internet and electronic commerce industries.  

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We develop products in the United States and market our products in North America and, to a lesser extent, Europe and the Asia-Pacific region. As a
result, our financial results may be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As a majority of our sales are currently
made in U.S. dollars, a strengthening of the dollar may make our products less competitive in foreign markets. We do not expect any material adverse effect on our consolidated financial position,
results of operations or cash flows due to movements in any specific foreign currency as our operating expenses in each of our foreign subsidiaries is the local currency. We currently do not use
financial instruments to hedge operating expenses by our European and Asia-Pacific subsidiaries. We intend to assess the need to utilize financial instruments to hedge currency exposures
on an ongoing basis.

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Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and outstanding debt obligations. We do not use derivative financial
instruments for speculative or trading purposes. Our investments consist primarily of highly liquid debt instruments that are of high-quality investment grade and mature in one year or
less, as specified in our investment policy. The policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. Due to the short-term nature of our
investments and the short-term and variable interest rate features of our indebtedness, we believe that there is no material market or interest rate risk exposure.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not currently a party to any material legal proceeding.

Item 2. Change in Securities and Use of Proceeds.

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



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

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



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



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SIGNATURE

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

|                   |  | NIKU CORPORATION
|------------------ |  | ----------------
|Date: June 8, 2001 |  | By:             

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