##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, 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 July 31, 2003

OR

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

For the transition period from                to

Commission File Number: 000-28797



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NIKU CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

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

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

The number of shares outstanding of the registrants common stock as of
August 31, 2003 was 11,931,402.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                                        |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                       
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                  
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II: OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|Exhibit Index                
|EXHIBIT 10.1                 
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JULY 31, 2003

INDEX

|                                                                                              |                                                                        |  |      |   | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  | ---- | - | 
|                                                                                              |                                                                        |  | Page
|                                                                                              |                                                                        |  |     
|PART I Financial Information                                                                  |                                                                        |  |      |  
|Item 1. Financial Statements (unaudited):                                                     |                                                                        |  |      |  
|                                                                                              | Condensed Consolidated Balance Sheets                                  |  |      | 3 | 
|                                                                                              | Condensed Consolidated Statements of Operations and Comprehensive Loss |  |      | 4 | 
|                                                                                              | Condensed Consolidated Statements of Cash Flows                        |  |      | 5 | 
|                                                                                              | Notes to Condensed Consolidated Financial Statements                   |  |      | 6 | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                        |  | 11   |  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                        |  | 25   |  
|Item 4. Controls and Procedures                                                               |                                                                        |  | 26   |  
|PART II Other Information                                                                     |                                                                        |  |      |  
|Item 1. Legal Proceedings                                                                     |                                                                        |  | 26   |  
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                                        |  | 27   |  
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                        |  | 27   |  
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                        |  | 27   |  
|Signatures                                                                                    |                                                                        |  | 29   |  

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




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

|                                               |                                                  |                                                                     |       |          |        |             |        |        |        | 
|---------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------------- | ----- | -------- | ------ | ----------- | ------ | ------ | ------ | 
|                                               |                                                  |                                                                     |       | July 31, |        | January 31,
|                                               |                                                  |                                                                     |       |          |        |            
|                                               |                                                  |                                                                     |       | 2003     |        | 2003       
|                                               |                                                  |                                                                     |       |          |        |            
|ASSETS                                         |                                                  |                                                                     |       |          |        |             |        |       
|Current Assets:                                |                                                  |                                                                     |       |          |        |             |        |       
|                                               | Cash and cash equivalents                        |                                                                     | $     | 21,675   |        |             | $      | 16,670 |       
|                                               | Current portion of restricted cash               |                                                                     |       |         |        |             |        | 229    |       
|                                               |                                                  |                                                                     |       |          |        |             |        |        |       
|                                               |                                                  | Total cash, cash equivalents and current portion of restricted cash |       |          | 21,675 |             |        |        | 16,899 | 
|                                               | Accounts receivable, net                         |                                                                     |       | 4,572    |        |             |        | 7,211  |       
|                                               | Prepaid expenses and other current assets        |                                                                     |       | 2,154    |        |             |        | 1,687  |       
|                                               |                                                  |                                                                     |       |          |        |             |        |        |       
|                                               |                                                  | Total current assets                                                |       |          | 28,401 |             |        |        | 25,797 | 
|Restricted cash                                |                                                  |                                                                     | 1,108 |          |        |             | 1,108  |       
|Property and equipment, net                    |                                                  |                                                                     | 1,758 |          |        |             | 2,515  |       
|Deposits and other assets                      |                                                  |                                                                     | 908   |          |        |             | 1,143  |       
|                                               |                                                  |                                                                     |       |          |        |             |        |        |       
|                                               |                                                  | Total assets                                                        |       | $        | 32,175 |             |        | $      | 30,563 | 
|                                               |                                                  |                                                                     |       |          |        |             |        |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |                                                  |                                                                     |       |          |        |             |        |       
|Current Liabilities:                           |                                                  |                                                                     |       |          |        |             |        |       
|                                               | Accounts payable                                 |                                                                     | $     | 1,668    |        |             | $      | 2,422  |       
|                                               | Accrued liabilities                              |                                                                     |       | 4,635    |        |             |        | 6,180  |       
|                                               | Accrued restructuring                            |                                                                     |       | 2,327    |        |             |        | 5,550  |       
|                                               | Bank borrowings and other short-term obligations |                                                                     |       | 4,264    |        |             |        | 1,051  |       
|                                               | Deferred revenue                                 |                                                                     |       | 7,373    |        |             |        | 9,375  |       
|                                               |                                                  |                                                                     |       |          |        |             |        |       
|                                               |                                                  | Total current liabilities                                           |       |          | 20,267 |             |        |        | 24,578 | 
|Long-term accrued restructuring                |                                                  |                                                                     | 6,896 |          |        |             | 6,209  |       
|Long-term portion of bank borrowings           |                                                  |                                                                     |      |          |        |             | 3,750  |       
|                                               |                                                  |                                                                     |       |          |        |             |        |        |       
|                                               |                                                  | Total liabilities                                                   |       |          | 27,163 |             |        |        | 34,537 | 
|Stockholders equity (deficit)                 |                                                  |                                                                     | 5,012 |          |        |             | (3,974 | )     
|                                               |                                                  |                                                                     |       |          |        |             |        |        |       
|                                               |                                                  | Total liabilities and stockholders equity (deficit)                |       | $        | 32,175 |             |        | $      | 30,563 | 
|                                               |                                                  |                                                                     |       |          |        |             |        |        |       

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

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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 |        | Six Months Ended
|                                                    |                                                                                                                                                                                                                        |                          |        | July 31,           |        | July 31,        
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                 
|                                                    |                                                                                                                                                                                                                        |                          |        | 2003               |        | 2002             |       | 2003    |         | 2002
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |     
|Revenue:                                            |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|                                                    | License                                                                                                                                                                                                                |                          | $      | 3,131              |        |                  | $     | 3,961   |         |      | $      | 6,344  |        |   | $     | 9,652   |        
|                                                    | Services                                                                                                                                                                                                               |                          |        | 6,877              |        |                  |       | 6,533   |         |      |        | 13,503 |        |   |       | 14,969  |        
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|                                                    |                                                                                                                                                                                                                        | Total revenue            |        |                    | 10,008 |                  |       |         | 10,494  |      |        |        | 19,847 |   |       |         | 24,621  |  
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|Cost of revenue:                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|                                                    | License                                                                                                                                                                                                                |                          |        | 134                |        |                  |       | 303     |         |      |        | 110    |        |   |       | 619     |        
|                                                    | Services (exclusive of stock-based compensation of $1 and ($31)
for the three months ended July 31, 2003 and 2002 and $2 and ($291)
for the six months ended July 31, 2003 and 2002, respectively)                     |                          |        | 2,807              |        |                  |       | 3,517   |         |      |        | 5,457  |        |   |       | 7,283   |        
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |         |        
|                                                    |                                                                                                                                                                                                                        | Total cost of revenue    |        |                    | 2,941  |                  |       |         | 3,820   |      |        |        | 5,567  |   |       |         | 7,902   |  
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|                                                    |                                                                                                                                                                                                                        | Gross profit             |        |                    | 7,067  |                  |       |         | 6,674   |      |        |        | 14,280 |   |       |         | 16,719  |  
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|Operating expenses:                                 |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|                                                    | Sales and marketing (exclusive of stock-based compensation of $12 and
$109 for the three months ended July 31, 2003 and 2002 and $29 and
($1,841) for the six months ended July 31, 2003 and 2002, respectively)       |                          |        | 3,364              |        |                  |       | 7,414   |         |      |        | 6,946  |        |   |       | 15,561  |        
|                                                    | Research and development (exclusive of stock-based compensation of $5 and
($392) for the three months ended July 31, 2003 and 2002 and $13 and
($1,598) for the six months ended July 31, 2003 and 2002, respectively) |                          |        | 1,817              |        |                  |       | 3,993   |         |      |        | 3,714  |        |   |       | 8,022   |        
|                                                    | General and administrative (exclusive of stock-based compensation of $56 and
$13 for the three months ended July 31, 2003 and 2002 and $91 and
($217) for the six months ended July 31, 2003 and 2002, respectively)   |                          |        | 1,531              |        |                  |       | 2,331   |         |      |        | 3,068  |        |   |       | 4,538   |        
|                                                    | Restructuring and other                                                                                                                                                                                                |                          |        | 1,648              |        |                  |       | 30,405  |         |      |        | 1,648  |        |   |       | 29,567  |        
|                                                    | Stock-based compensation                                                                                                                                                                                               |                          |        | 74                 |        |                  |       | (301    | )       |      |        | 135    |        |   |       | (3,947  | )      
|                                                    | Asset impairment and other                                                                                                                                                                                             |                          |        |                   |        |                  |       | 425     |         |      |        |       |        |   |       | 425     |        
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |         |        
|                                                    |                                                                                                                                                                                                                        | Total operating expenses |        |                    | 8,434  |                  |       |         | 44,267  |      |        |        | 15,511 |   |       |         | 54,166  |  
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|                                                    |                                                                                                                                                                                                                        | Operating loss           |        |                    | (1,367 | )                |       |         | (37,593 | )    |        |        | (1,231 | ) |       |         | (37,447 | )
|Interest and other income (expense), net            |                                                                                                                                                                                                                        |                          | (273   | )                  |        |                  | 312   |         |         |      | (307   | )      |        |   | 432   |        
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |         |        
|                                                    |                                                                                                                                                                                                                        | Net loss                 |        | $                  | (1,640 | )                |       | $       | (37,281 | )    |        | $      | (1,538 | ) |       | $       | (37,015 | )
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |         |        
|Basic net loss per share                            |                                                                                                                                                                                                                        | $                        | (0.14  | )                  |        | $                | (5.03 | )       |         | $    | (0.14  | )      |        | $ | (4.99 | )      
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |         |        
|Shares used in computing basic net loss per share   |                                                                                                                                                                                                                        |                          | 11,907 |                    |        |                  | 7,414 |         |         |      | 11,182 |        |        |   | 7,414 |        
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|Diluted net loss per share                          |                                                                                                                                                                                                                        | $                        | (0.14  | )                  |        | $                | (5.03 | )       |         | $    | (0.14  | )      |        | $ | (4.99 | )      
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |         |        
|Shares used in computing diluted net loss per share |                                                                                                                                                                                                                        |                          | 11,907 |                    |        |                  | 7,414 |         |         |      | 11,182 |        |        |   | 7,414 |        
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|Comprehensive loss:                                 |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |        
|                                                    | Net loss                                                                                                                                                                                                               |                          | $      | (1,640             | )      |                  | $     | (37,281 | )       |      | $      | (1,538 | )      |   | $     | (37,015 | )      
|                                                    | Foreign currency translation adjustments                                                                                                                                                                               |                          |        | 86                 |        |                  |       | 57      |         |      |        | 92     |        |   |       | 118     |        
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |         |        
|                                                    |                                                                                                                                                                                                                        | Comprehensive loss       |        | $                  | (1,554 | )                |       | $       | (37,224 | )    |        | $      | (1,446 | ) |       | $       | (36,897 | )
|                                                    |                                                                                                                                                                                                                        |                          |        |                    |        |                  |       |         |         |      |        |        |        |   |       |         |        

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

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##### Table of Contents






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

|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |        |         |  
|---------------------------------------------------- |  | --------------------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------- | ------ | ---------------- | ------- | ---- | ------- | ------ | ------- | -
|                                                     |  |                                                                                   |                                                                |                                                     |        | Six Months Ended
|                                                     |  |                                                                                   |                                                                |                                                     |        | July 31,        
|                                                     |  |                                                                                   |                                                                |                                                     |        |                 
|                                                     |  |                                                                                   |                                                                |                                                     |        | 2003             |         | 2002
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|Cash flows from operating activities:                |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|                                                     |  | Net loss                                                                          |                                                                | $                                                   | (1,538 | )                |         | $    | (37,015 | )     
|                                                     |  | Adjustments to reconcile net loss to net cash used in operating activities:       |                                                                |                                                     |        |                  |         |      |         |       
|                                                     |  |                                                                                   | Depreciation                                                   |                                                     |        | 812              |         |      |         | 2,361  |        
|                                                     |  |                                                                                   | Restructuring and other                                        |                                                     |        | 30               |         |      |         | 7,962  |        
|                                                     |  |                                                                                   | Stock-based compensation                                       |                                                     |        | 135              |         |      |         | (3,947 | )      
|                                                     |  |                                                                                   | Provision for doubtful accounts receivable                     |                                                     |        | 204              |         |      |         | 128    |        
|                                                     |  |                                                                                   | Cancellation of interest on notes receivable from stockholders |                                                     |        |                 |         |      |         | 116    |        
|                                                     |  |                                                                                   | Interest on notes receivable from stockholders                 |                                                     |        |                 |         |      |         | (46    | )      
|                                                     |  |                                                                                   | Issuance of common stock for services received                 |                                                     |        | 6                |         |      |         |       |        
|                                                     |  |                                                                                   | Changes in operating assets and liabilities:                   |                                                     |        |                  |         |      |         |        |        
|                                                     |  |                                                                                   |                                                                | Accounts receivable                                 |        |                  | 2,435   |      |         |        | 5,844   |  
|                                                     |  |                                                                                   |                                                                | Prepaid expenses and other current assets           |        |                  | (497    | )    |         |        | 2,720   |  
|                                                     |  |                                                                                   |                                                                | Accounts payable                                    |        |                  | (754    | )    |         |        | 137     |  
|                                                     |  |                                                                                   |                                                                | Accrued liabilities                                 |        |                  | (1,545  | )    |         |        | (7,826  | )
|                                                     |  |                                                                                   |                                                                | Accrued restructuring                               |        |                  | (2,536  | )    |         |        | 18,242  |  
|                                                     |  |                                                                                   |                                                                | Deferred revenue                                    |        |                  | (2,002  | )    |         |        | (2,248  | )
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       
|                                                     |  |                                                                                   |                                                                | Net cash used in operating activities               |        |                  | (5,250  | )    |         |        | (13,572 | )
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       
|Cash flows from investing activities:                |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|                                                     |  | Purchases of property and equipment                                               |                                                                |                                                     | (36    | )                |         |      | (2,436  | )     
|                                                     |  | Releases of investments of restricted cash, net                                   |                                                                |                                                     | 229    |                  |         |      | 3,978   |       
|                                                     |  | Deposits and other assets                                                         |                                                                |                                                     | 235    |                  |         |      | 756     |       
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|                                                     |  |                                                                                   |                                                                | Net cash provided by investing activities           |        |                  | 428     |      |         |        | 2,298   |  
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|Cash flows from financing activities:                |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|                                                     |  | Issuance of common stock                                                          |                                                                |                                                     | 119    |                  |         |      | 388     |       
|                                                     |  | Issuance of common stock and warrants in connection with a private placement, net |                                                                |                                                     | 10,171 |                  |         |      |        |       
|                                                     |  | Proceeds (repayment) from bank line of credit, net                                |                                                                |                                                     | 4,250  |                  |         |      | (22,000 | )     
|                                                     |  | Repayment of bank term loan                                                       |                                                                |                                                     | (4,750 | )                |         |      |        |       
|                                                     |  | Repayment of debt and capital lease obligations                                   |                                                                |                                                     | (37    | )                |         |      | (170    | )     
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       
|                                                     |  |                                                                                   |                                                                | Net cash provided by (used in) financing activities |        |                  | 9,753   |      |         |        | (21,782 | )
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       
|Net increase (decrease) in cash and cash equivalents |  |                                                                                   | 4,931                                                          |                                                     |        |                  | (33,056 | )   
|Effect of exchange rate changes                      |  |                                                                                   | 74                                                             |                                                     |        |                  | 34      |     
|Cash and cash equivalents, beginning of period       |  |                                                                                   | 16,670                                                         |                                                     |        |                  | 51,585  |     
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|Cash and cash equivalents, end of period             |  | $                                                                                 | 21,675                                                         |                                                     |        | $                | 18,563  |     
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       
|Supplemental disclosures of cash flow information:   |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|                                                     |  | Cash paid for interest during the period                                          |                                                                | $                                                   | 137    |                  |         | $    | 34      |       
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       
|Noncash investing and financing activities:          |  |                                                                                   |                                                                |                                                     |        |                  |         |     
|                                                     |  | Deferred stock-based compensation                                                 |                                                                | $                                                   | 40     |                  |         | $    |        |       
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       
|                                                     |  | Reversal of deferred stock-based compensation                                     |                                                                | $                                                   |       |                  |         | $    | 19,224  |       
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       
|                                                     |  | Repurchases of common stock in settlement of notes receivable from stockholders   |                                                                | $                                                   |       |                  |         | $    | 675     |       
|                                                     |  |                                                                                   |                                                                |                                                     |        |                  |         |      |         |       

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

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##### Table of Contents






NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

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

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

Use of Estimates

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

Reclassification

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

Stock Split

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

Stock-Based Compensation

The Company uses the intrinsic-value method to account for all of its
employee stock-based compensation plans prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employeesand FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation. Stock-based compensation is being amortized over the vesting
period of the individual award in a manner consistent with the method described
in Financial Accounting Standards Board (FASB) Interpretation No. 28. The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation
and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation,to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This statement also amends the
disclosure requirements of SFAS No. 123 to require more prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported
6Table of Contentsresults. The Company adopted the annual disclosure requirements of SFAS
No. 148 in fiscal 2003. The Company adopted the interim disclosure requirements
of SFAS 148 during the first quarter of fiscal 2004.Under the intrinsic-value method used by the Company to account for its
employee stock-based compensation, no compensation cost has been recognized for
any stock options granted or restricted stock sold because the exercise price
of each option or purchase price of each share of restricted stock equaled or
exceeded the fair value of the underlying common stock as of the grant date for
each stock option or purchase date of each restricted stock share, except for
stock options granted and restricted stock sold from January 31, 1998 through
February 28, 2000 (from inception until the Companys initial public offering)
and certain stock options granted in November 2001. With respect to the stock
options granted and restricted stock sold from January 31, 1998 to February 28,
2000 and certain stock options granted in November 2001, the Company recorded
deferred stock compensation for the difference at the grant or issuance date
between the exercise price of each stock option granted or purchase price of
each restricted share sold and the fair value of the underlying common stock
and such difference is being amortized over the vesting period, consistent with
the method described in FASB Interpretation No. 28.Had compensation costs been recorded by the Company in its consolidated
statements of operations in accordance with SFAS No. 123 for all of the
Companys stock-based compensation plans, net income (loss) and basic and diluted net
income (loss) per share would have been as follows (in thousands, except per share
data):

|                                                                                                                                                |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------- | ------- | - | ------------------ | ----- | ------------------ | - | ---------------- | ----- | ---- | - | ------ | ----- | ---- | - | ------- | ----- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                                                                                                                                                |         |   | Three Months Ended |       | Three Months Ended |   | Six Months Ended
|                                                                                                                                                |         |   | April 30,          |       | July 31,           |   | July 31,        
|                                                                                                                                                |         |   |                    |       |                    |   |                 
|                                                                                                                                                |         |   | 2003               |       | 2002               |   | 2003             |       | 2002 |   | 2003   |       | 2002
|                                                                                                                                                |         |   |                    |       |                    |   |                  |       |      |   |        |       |     
|Net income (loss), as reported                                                                                                                  |         | $ | 102                |       |                    | $ | 266              |       |      | $ | (1,640 | )     |      | $ | (37,281 | )     |   | $ | (1,538 | )     |   | $ | (37,015 | )    
|Add: Stock-based employee compensation
expenses included in reported net income (loss),
net of related tax effects                              |         |   | 61                 |       |                    |   | (3,646           | )     |      |   | 74     |       |      |   | (301    | )     |   |   | 135    |       |   |   | (3,947  | )    
|Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of related tax effects |         |   | (468               | )     |                    |   | (2,381           | )     |      |   | (1,221 | )     |      |   | 561     |       |   |   | (1,689 | )     |   |   | (1,821  | )    
|                                                                                                                                                |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |      
|Pro
forma net income (loss)                                                                                                                     |         | $ | (305               | )     |                    | $ | (5,761           | )     |      | $ | (2,787 | )     |      | $ | (37,021 | )     |   | $ | (3,092 | )     |   | $ | (42,783 | )    
|                                                                                                                                                |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |      
|Net income (loss) per share:                                                                                                                    |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |      
|                                                                                                                                                | Basic   |   | $                  | 0.01  |                    |   | $                | 0.04  |      |   | $      | (0.14 | )    |   | $       | (5.03 | ) |   | $      | (0.14 | ) |   | $       | (4.99 | )
|                                                                                                                                                |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |      
|                                                                                                                                                | Diluted |   | $                  | 0.01  |                    |   | $                | 0.03  |      |   | $      | (0.14 | )    |   | $       | (5.03 | ) |   | $      | (0.14 | ) |   | $       | (4.99 | )
|                                                                                                                                                |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |      
|Pro forma net income (loss) per share:                                                                                                          |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |      
|                                                                                                                                                | Basic   |   | $                  | (0.03 | )                  |   | $                | (0.78 | )    |   | $      | (0.23 | )    |   | $       | (4.99 | ) |   | $      | (0.28 | ) |   | $       | (5.77 | )
|                                                                                                                                                |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |      
|                                                                                                                                                | Diluted |   | $                  | (0.03 | )                  |   | $                | (0.74 | )    |   | $      | (0.23 | )    |   | $       | (4.99 | ) |   | $      | (0.28 | ) |   | $       | (5.77 | )
|                                                                                                                                                |         |   |                    |       |                    |   |                  |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |         |      

|                                                                                                                                                |         |   |                         |       |      |   |          |        |   |   |          |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------- | ------- | - | ----------------------- | ----- | ---- | - | -------- | ------ | - | - | -------- | ------ | -
|                                                                                                                                                |         |   | Years Ended January 31,
|                                                                                                                                                |         |   |                        
|                                                                                                                                                |         |   | 2003                    |       | 2002 |   | 2001    
|                                                                                                                                                |         |   |                         |       |      |   |         
|Net income (loss), as reported                                                                                                                  |         | $ | (37,794                 | )     |      | $ | (291,546 | )      |   | $ | (130,876 | )     
|Add: Stock-based employee compensation
expenses included in reported net income (loss),
net of related tax effects                              |         |   | (3,647                  | )     |      |   | 14,402   |        |   |   | 29,045   |       
|Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of related tax effects |         |   | (1,654                  | )     |      |   | (23,964  | )      |   |   | (52,048  | )     
|                                                                                                                                                |         |   |                         |       |      |   |          |        |   |   |          |       
|Pro forma net income (loss)                                                                                                                     |         | $ | (43,095                 | )     |      | $ | (301,108 | )      |   | $ | (153,879 | )     
|                                                                                                                                                |         |   |                         |       |      |   |          |        |   |   |          |       
|Net income (loss) per share:                                                                                                                    |         |   |                         |       |      |   |          |        |   |   |          |       
|                                                                                                                                                | Basic   |   | $                       | (4.96 | )    |   | $        | (39.20 | ) |   | $        | (19.57 | )
|                                                                                                                                                |         |   |                         |       |      |   |          |        |   |   |          |       
|                                                                                                                                                | Diluted |   | $                       | (4.96 | )    |   | $        | (39.20 | ) |   | $        | (19.57 | )
|                                                                                                                                                |         |   |                         |       |      |   |          |        |   |   |          |       
|Pro forma net income (loss) per share:                                                                                                          |         |   |                         |       |      |   |          |        |   |   |          |       
|                                                                                                                                                | Basic   |   | $                       | (5.66 | )    |   | $        | (40.49 | ) |   | $        | (23.01 | )
|                                                                                                                                                |         |   |                         |       |      |   |          |        |   |   |          |       
|                                                                                                                                                | Diluted |   | $                       | (5.66 | )    |   | $        | (40.49 | ) |   | $        | (23.01 | )
|                                                                                                                                                |         |   |                         |       |      |   |          |        |   |   |          |       

The pro forma net income (loss) and basic and diluted pro forma net income
(loss) per share for the three months ended April 30, 2003 and 2002 and for the
years ended January 31, 2003, 2002 and 2001 have been presented
here to
revise the amounts previously disclosed in the Companys quarterly report on Form 10-Q for the quarter
ended April 30, 2003 and annual report on Form 10-K/A for the year ended
January 31, 2003.

2. Repricing of Stock Options

On November 12, 2001, the Companys board of directors, acting pursuant to
existing terms of the Companys stock option plans, approved the repricing of
approximately 890,000 outstanding stock options with exercise prices above
$7.50. The exercise prices of all such stock options were repriced to $7.50,
which was the fair market value of the Companys stock on November 12, 2001.
There were no changes to the vesting schedules or other terms of the repriced
stock options. Stock options held by the Companys former chief executive
officer, former executive vice president of strategy and planning, board of
directors and non-employees were not repriced. The Company has accounted for
the repriced stock options using variable accounting whereby the aggregate
intrinsic value of the repriced stock options is continuously remeasured and
amortized to stock-based compensation expense over the vesting periods. On
April 15, 2003, the Company announced a voluntary stock option exchange program
for its employees. Under the program, the Companys employees were given the
opportunity to exchange outstanding stock options previously granted to them
with an exercise price greater than or equal to $7.50 per share for a new stock
option exercisable for 1.15 shares for each share subject to the tendered stock
options, to be granted at a future date, at least six months and a day from the
cancellation date. The exercise price of these new stock options will be equal
to the fair market value of the Companys common stock on the date of grant. On
the grant date, the new stock options will be vested as to the number of stock
options that would have been vested on such date had the old stock options not been
tendered plus the number of shares that
would have been vested had the old stock option been

7



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##### Table of Contents



exercisable for 15% more
shares. The Companys chief executive officer, chief financial officer, members
of the board of directors and non-employees were not eligible to participate in
the program. The stock option exchange program did not result in any additional
compensation charges or variable plan accounting. On April 15, 2003, stock
options for 622,511 shares of common stock were eligible to be exchanged. On
May 13, 2003, the Companys employees tendered stock options for 525,031 shares
of common stock. The Company expects to grant its employees stock options to
purchase 603,785 shares of common stock at least six months and a day from May
13, 2003. As a result of this stock option exchange program, the Company will
no longer incur stock-based compensation for outstanding stock options for
approximately 298,000 shares of common stock that were previously repriced in
November 2001. The Company will continue to incur stock-based compensation for
outstanding stock options for approximately 73,000 shares of common stock that
were previously repriced in November 2001 that were not tendered pursuant to
the stock option exchange program to the extent that the Companys stock price
increases above $7.50. As of July 31, 2003, the Company had outstanding
repriced stock options for approximately 73,000 shares of common stock that
were subject to variable accounting. Based on the stock price as of July 31,
2003, the Company recorded no stock-based compensation in the second quarter of
fiscal 2004 and in the six months ended July 31, 2003 relating to these
repriced stock options. As of July 31, 2003, deferred stock-based compensation
relating to these repriced stock options was zero, reflecting the intrinsic
value of unvested repriced stock options as of July 31, 2003.

In October 2002, the Company cancelled stock options to purchase 55,000
shares of common stock held by its chief executive officer and immediately
thereafter granted him stock options to purchase 150,000 shares of common stock
at a price of $1.50, which was the closing price of its common stock on the
grant date. As a result, based on the closing price of its common stock of

$4.67 on April 30, 2003, the Company recorded $35,000 in stock-based
compensation in the first quarter of fiscal 2004. In May 2003, the Companys
chief executive officer exercised all of his repriced stock options to purchase
55,000 shares of common stock and the Company recorded an additional $56,000 in
stock-based compensation in May 2003. As all such repriced options were
exercised, the Company will no longer be required to record additional
stock-based compensation relating to these stock options in the future.

3. Restructuring and Other

In the second quarter of fiscal 2004, the Company recorded $1.6 million in
restructuring charges as a result of the Companys current assessment of
sublease opportunities for facilities the Company had previously vacated. In
the second quarter of fiscal 2004, the Company also terminated a facility lease
in Waltham, Massachusetts. The consideration for this termination included the
release to the landlord of a $30,000 security deposit and a lease termination
payment of $135,000. The table below represents restructuring activities in
the second quarter of fiscal 2004 (in thousands):

|                                       |                                                  |   |                |       |                    |   |                    |       |                    |   |               |     |   |   |      |      |   |   |       |       | 
|-------------------------------------- | ------------------------------------------------ | - | -------------- | ----- | ------------------ | - | ------------------ | ----- | ------------------ | - | ------------- | --- | - | - | ---- | ---- | - | - | ----- | ----- | 
|                                       |                                                  |   |                |       |                    |   | Restructuring      |       |                    |   |               |     |   |   |      |      |   |   |      
|                                       |                                                  |   | Accrued        |       | Charges in the     |   | Write Offs in the  |       | Paid in the        |   | Accrued      
|                                       |                                                  |   | as of          |       | Three Months Ended |   | Three Months Ended |       | Three Months Ended |   | as of        
|                                       |                                                  |   | April 30, 2003 |       | July 31, 2003      |   | July 31, 2003      |       | July 31, 2003      |   | July 31, 2003
|                                       |                                                  |   |                |       |                    |   |                    |       |                    |   |              
|Restructuring initiated in fiscal 2003 |                                                  |   |                |       |                    |   |                    |       |                    |   |               |     |   |   |      |      |   |   |       |      
|                                       | Severance                                        |   | $              | 548   |                    |   |                    | (5    | )                  |   |               |    |   |   |      | (531 | ) |   | $     | 12    | 
|                                       | Net lease commitment costs on vacated facilities |   |                | 1,271 |                    |   |                    | 314   |                    |   |               |    |   |   |      | (289 | ) |   |       | 1,296 | 
|                                       | Computer and car leases                          |   |                | 206   |                    |   |                    | 5     |                    |   |               |    |   |   |      | (41  | ) |   |       | 170   | 
|                                       | Other exit costs                                 |   |                | 541   |                    |   |                    | (34   | )                  |   |               |    |   |   |      | 83   |   |   |       | 590   | 
|Restructuring initiated in fiscal 2002 |                                                  |   |                |       |                    |   |                    |       |                    |   |               |     |   |   |      |      |   |   |       |      
|                                       | Net lease commitment costs on vacated facilities |   |                | 5,842 |                    |   |                    | 1,368 |                    |   |               | (30 | ) |   |      | (192 | ) |   |       | 6,988 | 
|                                       | Exit costs for business line                     |   |                | 173   |                    |   |                    |      |                    |   |               |    |   |   |      | (6   | ) |   |       | 167   | 
|                                       |                                                  |   |                |       |                    |   |                    |       |                    |   |               |     |   |   |      |      |   |   |       |       | 
|                                       |                                                  | $ | 8,581          |       |                    | $ | 1,648              |       |                    | $ | (30           | )   |   | $ | (976 | )    |   | $ | 9,223 |      
|                                       |                                                  |   |                |       |                    |   |                    |       |                    |   |               |     |   |   |      |      |   |   |       |       | 

The Company expects that of the restructuring and other charges accrued as
of July 31, 2003, severance costs will be paid by the third quarter of fiscal
2004, exit costs for business line (related to legal vertical market) will be
paid no later than May 2004, and the net lease commitments on vacated leased
facilities will be paid no later than February 2011.

The Companys restructuring activities for the six months ended July 31,
2003 were as follows (in thousands):

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##### Table of Contents



|                                       |                                                  |   |                  |       |                  |   |                   |       |                  |   |               |     |   |   |        |        |   |   |       |       | 
|-------------------------------------- | ------------------------------------------------ | - | ---------------- | ----- | ---------------- | - | ----------------- | ----- | ---------------- | - | ------------- | --- | - | - | ------ | ------ | - | - | ----- | ----- | 
|                                       |                                                  |   |                  |       |                  |   | Restructuring     |       |                  |   |               |     |   |   |        |        |   |   |      
|                                       |                                                  |   | Accrued          |       | Charges in the   |   | Write Offs in the |       | Paid in the      |   | Accrued      
|                                       |                                                  |   | as of            |       | Six Months Ended |   | Six Months Ended  |       | Six Months Ended |   | as of        
|                                       |                                                  |   | January 31, 2003 |       | July 31, 2003    |   | July 31, 2003     |       | July 31, 2003    |   | July 31, 2003
|                                       |                                                  |   |                  |       |                  |   |                   |       |                  |   |              
|Restructuring initiated in fiscal 2003 |                                                  |   |                  |       |                  |   |                   |       |                  |   |               |     |   |   |        |        |   |   |       |      
|                                       | Severance                                        |   | $                | 1,031 |                  |   |                   | (5    | )                |   |               |    |   |   |        | (1,014 | ) |   | $     | 12    | 
|                                       | Net lease commitment costs on vacated facilities |   |                  | 3,635 |                  |   |                   | 314   |                  |   |               |    |   |   |        | (2,653 | ) |   |       | 1,296 | 
|                                       | Computer and car leases                          |   |                  | 303   |                  |   |                   | 5     |                  |   |               |    |   |   |        | (138   | ) |   |       | 170   | 
|                                       | Other exit costs                                 |   |                  | 588   |                  |   |                   | (34   | )                |   |               |    |   |   |        | 36     |   |   |       | 590   | 
|Restructuring initiated in fiscal 2002 |                                                  |   |                  |       |                  |   |                   |       |                  |   |               |     |   |   |        |        |   |   |       |      
|                                       | Net lease commitment costs on vacated facilities |   |                  | 6,029 |                  |   |                   | 1,368 |                  |   |               | (30 | ) |   |        | (379   | ) |   |       | 6,988 | 
|                                       | Exit costs for business line                     |   |                  | 173   |                  |   |                   |      |                  |   |               |    |   |   |        | (6     | ) |   |       | 167   | 
|                                       |                                                  |   |                  |       |                  |   |                   |       |                  |   |               |     |   |   |        |        |   |   |       |       | 
|                                       |                                                  | $ | 11,759           |       |                  | $ | 1,648             |       |                  | $ | (30           | )   |   | $ | (4,154 | )      |   | $ | 9,223 |      
|                                       |                                                  |   |                  |       |                  |   |                   |       |                  |   |               |     |   |   |        |        |   |   |       |       | 

4. Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock. 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 using the treasury stock method. The following potential common
shares have been excluded from the computation of diluted net loss per share
because the effect would have been antidilutive (in thousands):

|                                    |  |          |       |      |  |  |       | 
|----------------------------------- |  | -------- | ----- | ---- |  |  | ----- | 
|                                    |  | July 31,
|                                    |  |         
|                                    |  | 2003     |       | 2002
|                                    |  |          |       |     
|Shares issuable under stock options |  |          | 1,215 |      |  |  | 1,217 | 
|Shares issuable under warrants      |  |          | 406   |      |  |  | 196   | 

The weighted-average exercise price of anti-dilutive options outstanding
as of July 31, 2003 and 2002 was $3.86 and $15.40 per share, respectively. The
weighted-average exercise price of anti-dilutive warrants as of July 31, 2003
and 2002 was $4.55 and $27.20 per share, respectively.

5. Debt

The Company had a term loan for $5.0 million from a financial institution,
which it entered into in September 2002. The term loan was secured by the
Companys tangible and intangible assets, accrued interest at 7.50% per annum
and was to mature on February 15, 2004. The Company was required to make
quarterly payments of principal and interest on a five-year amortization
schedule. The Company had repaid $750,000 plus interest through June 2003. On
the maturity date, the remaining principal balance of $3.8 million was to have
been due. There were no financial covenants for the quarter ended July 31,
2003. On July 23, 2003, the Company terminated the term loan and repaid $4.3
million outstanding balance of the loan as of such date plus accrued interest.

On July 18, 2003, the Company entered into a $5.0 million line of credit
with the same financial institution. The Company had borrowings of $4.3
million as of July 31, 2003, which it repaid in August 2003. The line of
credit is secured by the Companys tangible and intangible assets, accrues
interest rate at prime rate plus 0.50% per annum (currently at 4.50%) and
expires in July 2004. The line of credit has certain financial covenants,
including covenants requiring 1) minimum cash and cash equivalent balance equal
to or at least 1.25 times the outstanding principal line balance at each month
end, 2) minimum liquidity of $10 million at the end of each fiscal quarter and
3) annual GAAP profitability of at least $1 (excluding restructuring charges
for vacated facilities and stock-based compensation) for the period from May 1,
2003 to April 30, 2004. As of July 31, 2003, the Company was in compliance
with all financial covenants.

6. Notes Receivable from Stockholder

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

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On March 16, 2003, Mr. Pickus made a $150,000
payment against this loan, which reduced the interest outstanding as of the
date of payment to zero and reduced the principal outstanding to $537,000. On
June 2, 2003, Mr. Pickus made a $120,000 payment against this loan which
reduced the interest outstanding as of the date of payment to zero and reduced
the principal outstanding to $421,000.

7. Segment Reporting

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

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

Disaggregated product information is as follows (in thousands):

|          |             |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |       | 
|--------- | ----------- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|          |             |   | Three Months Ended |       | Six Months Ended
|          |             |   | July 31,           |       | July 31,        
|          |             |   |                    |       |                 
|          |             |   | 2003               |       | 2002             |   | 2003   |       | 2002
|          |             |   |                    |       |                  |   |        |       |     
|License   |             | $ | 3,131              |       |                  | $ | 3,961  |       |      | $ | 6,344  |       |  | $ | 9,652  |      
|Services: |             |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      
|          | Consulting  |   |                    | 2,925 |                  |   |        | 2,226 |      |   |        | 5,400 |  |   |        | 5,680 | 
|          | Maintenance |   |                    | 3,952 |                  |   |        | 4,307 |      |   |        | 8,103 |  |   |        | 9,289 | 
|          |             |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      
|          |             | $ | 10,008             |       |                  | $ | 10,494 |       |      | $ | 19,847 |       |  | $ | 24,621 |      
|          |             |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      

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

|                |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|--------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                |  | Three Months Ended |        | Six Months Ended
|                |  | July 31,           |        | July 31,        
|                |  |                    |        |                 
|                |  | 2003               |        | 2002             |  | 2003 |        | 2002
|                |  |                    |        |                  |  |      |        |     
|United States   |  | $                  | 6,611  |                  |  | $    | 7,150  |      |  | $ | 12,136 |  |  | $ | 15,024 | 
|United Kingdom  |  |                    | 1,353  |                  |  |      | 1,563  |      |  |   | 2,565  |  |  |   | 4,261  | 
|The Netherlands |  |                    | 847    |                  |  |      | 534    |      |  |   | 2,396  |  |  |   | 1,280  | 
|Europe Others   |  |                    | 1,197  |                  |  |      | 1,247  |      |  |   | 2,750  |  |  |   | 4,056  | 
|                |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|                |  | $                  | 10,008 |                  |  | $    | 10,494 |      |  | $ | 19,847 |  |  | $ | 24,621 | 
|                |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 

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

There were no customers individually representing more than 10% of gross
accounts receivables (including unbilled accounts receivable) as of July 31,
2003 and January 31, 2003, respectively. There were no customers individually
representing more than 10% of total revenue in the second quarter of fiscal
2004 and 2003 and in the six months ended July 31, 2003 and 2002, respectively.

8. Litigation

In August 2001, Goldman, Sachs and Co., Dain Rauscher Wessels, U.S.
Bancorp Piper Jaffray and Thomas Weisel Partners, the managing underwriters of
the Companys initial public offering (IPO), the Company, and certain of the
Companys officers and directors, were named as defendants in a number of
purported securities class actions in United States District Court for the
Southern District of New York arising out of the Companys initial public
offering in February 2000. The complaints in these actions allege, among other
things, that the registration statement and prospectus filed with the
Securities and Exchange Commission for purposes of the IPO were false and
misleading because they failed to disclose that the managing underwriters
allegedly (i) solicited and received commissions from certain investors in
exchange for allocating to them shares of Company stock in connection with the
IPO and (ii) entered into agreements with their customers to allocate such
stock to those customers in exchange for the customers agreeing to purchase
additional shares of the Company in the aftermarket at pre-determined prices.
On August 8, 2001 the Court ordered that

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these actions, along with hundreds of
IPO allocation cases against other issuers, underwriters and directors and
officers, be transferred to one judge for coordinated pre-trial proceedings. In
July 2002, omnibus motions to dismiss the complaints based on common legal
issues were filed on behalf of all issuers, underwriters and directors and
officers. By order dated October 8, 2002, the Court dismissed the Companys
officers and directors from the case without prejudice. In an opinion issued on
February 19, 2003, the Court granted in part and denied in part the motions to
dismiss. The complaints against the Company and the other issuers and
underwriters were not dismissed as a matter of law. These cases remain at a
preliminary stage and no discovery proceedings have taken place in relation to
the issuers. The Company believes that the claims asserted against it in these
cases are without merit and the Company intends to defend vigorously against
them. These cases seek compensatory damages in unspecified amounts as well as
other relief. A proposed settlement between the plaintiffs and issuer
defendants is in the process of being negotiated and approved.

9. Subsequent Event

In the
Companys annual meeting held on September 10,
2003, the Companys stockholders approved an
amendment to the Companys amended and restated certificate of incorporation to
reduce the number of authorized shares of common stock from 250,000,000 to
60,000,000.




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, as amended, for the
fiscal year ended January 31, 2003 and in our other filings with the Securities
and Exchange Commission. This discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. Any statements herein that are not statements of
historical fact may be deemed to be forward-looking statements. We may identify
these statements by the use of words such as believe, expect, anticipate,
intend, potential, strategy, plan and similar expressions. These
forward-looking statements involve known and unknown risks and uncertainties.
Our actual results may differ materially from those set forth in these
forward-looking statements as a result of a number of factors, including those
described under the caption Factors That May Affect Future Results herein and
in our annual report on Form 10-K, as amended, for the year ended January 31,
2003 and in our other filings with the Securities and Exchange Commission.
These forward-looking statements speak only as of the date of this quarterly
report. We do not assume any duty to update them.

Overview

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

Critical Accounting Policies, Methods and Estimates

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

Revenue Recognition

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

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

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

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

The fee is fixed or determinable. We negotiate the fees for our products
at the outset of an arrangement. In these arrangements, the majority of the
licenses are perpetual and related fees are nonrefundable. The fees are
generally due within six months or less. We consider fees relating to
arrangements with payment terms extending beyond six months not to be fixed or
determinable. If the fee is not fixed or determinable, revenue is recognized as
payments become due from the customer.

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

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

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

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

Accounts Receivable

Accounts receivable are recorded net of allowances for doubtful accounts
and totaled $4.6 million and $7.2 million as of July 31, 2003 and January 31,
2003, respectively. The allowances for doubtful accounts were $915,000 and $1.0
million as of July 31, 2003 and January 31, 2003, respectively. We regularly
review the adequacy of our allowance for doubtful accounts after considering
the amount of the aged accounts receivable, the age of each invoice, each
customers expected ability to pay and our collection history with each
customer. We review any invoice greater than 30 days past due to determine if
an allowance is appropriate based on the risk category using the factors
discussed above. In addition, we maintain a reserve for all invoices by
applying a percentage to aging

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

Impairment Assessment

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

There were no asset impairment and other charges in the second quarter of
fiscal 2004 or the six months ended July 31, 2003. In the second and third
quarter of fiscal 2003, we recorded $425,000 and $75,000, respectively, in
asset impairment charges related to a $500,000 strategic equity investment we
made in a private company in April 2000. In April 2000, we purchased 75,000
shares of the private companys common stock at $6.67 per share. In performing
an impairment assessment, we consider the private companys current solvency,
future access to capital and recent equity transactions. Based on an analysis
of these factors, including the terms in a proposed financing in the second
quarter of fiscal 2003, which indicated that its price per share has dropped to
$0.32 per share, we determined that the investment impairment was other than
temporary and recorded an asset impairment charge in the second and third
quarter of fiscal 2003.

Restructuring Reserves for Vacated Leased Facilities

We have recorded restructuring charges in connection with vacating certain
leased facilities pursuant to our restructuring program. Costs associated with
vacated leased facilities include remaining lease liabilities and brokerage
fees, offset by estimated sublease income. Estimated sublease income is
determined by taking into consideration the type and condition of the subject
property, information regarding the local commercial real estate market and
expectations about time to obtain a sublessee provided by local commercial real
estate brokerages. We regularly review these estimates in the second quarter
and fourth quarter of each year or anytime we have persuasive evidence that a
change in estimate has occurred. In the second quarter of fiscal 2004, we
recorded an additional $1.6 million in restructuring reserves as a result of
our current assessment of sublease opportunities for facilities previously
vacated. To the extent that these estimates continue to change due to changes
in market conditions, the actual restructuring expenses for vacated leases
could vary by material amounts.

Future lease payments, net of estimated sublease income, relating to
facilities that we vacated pursuant to our restructuring program amounted to
$1.6 million, $1.4 million, $1.2 million, $1.1 million and $922,000 for the
twelve months ending July 31, 2004, 2005, 2006, 2007 and 2008, respectively,
and $2.3 million thereafter. These amounts are recorded in accrued
restructuring and long-term accrued restructuring on the condensed consolidated
balance sheets

Private Placement of Common Stock and Warrants to Purchase Common Stock

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

Reverse Stock Split

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

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Repricing of Stock Options

On November 12, 2001, our board of directors, acting pursuant to existing
terms of our stock option plans, approved the repricing of approximately
890,000 outstanding stock options with exercise prices above $7.50. The
exercise prices of all such stock options were repriced to $7.50, which was the
fair market value of our stock on November 12, 2001. There were no changes to
the vesting schedules or other terms of the repriced options. Stock options
held by our former chief executive officer, former executive vice president of
strategy and planning, board of directors and non-employees were not repriced.
We have accounted for the repriced stock options using variable accounting
whereby the aggregate intrinsic value of the repriced stock options is
continuously remeasured and amortized to stock-based compensation expense over
the vesting periods. On April 15, 2003, we announced a voluntary stock option
exchange program for our employees. Under the program, our employees were given
the opportunity to exchange outstanding stock options previously granted to
them with an exercise price greater than or equal to $7.50 per share for a new
stock option exercisable for 1.15 shares for each share subject to the tendered
stock options, to be granted at a future date, at least six months and a day
from the cancellation date. The exercise price of these new stock options will
be equal to the fair market value of our common stock on the date of grant. On
the grant date, the new stock options will be vested as to the number of stock
options that would have been vested on such date had the old stock options not
been tendered plus the number of shares that would have been vested had the old
stock option been exercisable for 15% more shares. Our chief executive officer,
chief financial officer, members of the board of directors and non-employees
were not eligible to participate in the program. The stock option exchange
program did not result in any additional compensation charges or variable plan
accounting. On April 15, 2003, stock options for 622,511 shares of common stock
were eligible to be exchanged. On May 13, 2003, our employees tendered stock
options for 525,031 shares of common stock. We expect to grant our employees
stock options to purchase 603,785 shares of common stock at least six months
and a day from May 13, 2003. As a result of this stock option exchange program,
we will no longer incur stock-based compensation for outstanding stock options
for approximately 298,000 shares of common stock that were previously repriced
in November 2001. We will continue to incur stock-based compensation for
outstanding stock options for approximately 73,000 shares of common stock that
were previously repriced in November 2001 that were not tendered pursuant to
the stock option exchange program to the extent that our stock price increases
above $7.50. Based on the stock price as of July 31, 2003, we recorded no
stock-based compensation in the second quarter of fiscal 2004 and in the six
months ended July 31, 2003 relating to these repriced stock options. As of July
31, 2003, deferred stock-based compensation relating to these repriced stock
options was zero, reflecting the intrinsic value of unvested repriced stock
options as of July 31, 2003.

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

Pro Forma Financial Results

We prepare and release quarterly unaudited financial statements prepared
in accordance with generally accepted accounting principles in the United
States of America (GAAP). We also disclose and discuss certain non-GAAP pro
forma financial information in the quarterly and annual financial results press

release and investor conference call. This non-GAAP pro forma financial
information excludes certain non-cash and special charges, consisting primarily
of stock-based compensation, restructuring and other charges and impairment
charges. We believe that the presentation of non-GAAP pro forma information may
be of use to investors because we have historically provided such information
and understand that some investors consider it useful in evaluating our
on-going operations. However, we urge investors to carefully review the GAAP
financial information included as part of our quarterly reports on Form 10-Q
and our annual reports on Form 10-K. The investors should also read the
portions of our quarterly and annual
financial results press releases which compare GAAP financial information
with the non-GAAP pro forma financial results, and include a reconciliation of
the GAAP and non-GAAP pro forma financial information.

Results of Operations

The following table sets forth certain items in our condensed consolidated
statements of operations for the three and six months ended July 31, 2003 and
2002 and expressed as a percentage of total revenue:

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Comparison of Three and Six Months Ended July 31, 2003 and 2002

|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |       |        |   
|------------------------------ | -------------------------- | ------------------------ | ---- | ------------------ | ----- | ---------------- | --- | ----- | ------ | ---- | ---- | ---- | ----- | -- | --- | ----- | ------ | --
|                               |                            |                          |      | Three Months Ended |       | Six Months Ended
|                               |                            |                          |      | July 31,           |       | July 31,        
|                               |                            |                          |      |                    |       |                 
|                               |                            |                          |      | 2003               |       | 2002             |     | 2003  |        | 2002
|                               |                            |                          |      |                    |       |                  |     |       |        |     
|Revenue:                       |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |      
|                               | License                    |                          |      | 31.3               | %     |                  |     | 37.7  | %      |      |      | 32.0 | %     |    |     | 39.2  | %     
|                               | Services                   |                          |      | 68.7               |       |                  |     | 62.3  |        |      |      | 68.0 |       |    |     | 60.8  |       
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |      
|                               |                            | Total revenue            |      |                    | 100.0 |                  |     |       | 100.0  |      |      |      | 100.0 |    |     |       | 100.0  |   
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |      
|Cost of revenue:               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |      
|                               | License                    |                          |      | 1.3                |       |                  |     | 2.9   |        |      |      | 0.5  |       |    |     | 2.5   |       
|                               | Services                   |                          |      | 28.1               |       |                  |     | 33.5  |        |      |      | 27.5 |       |    |     | 29.6  |       
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |       |       
|                               |                            | Total cost of revenue    |      |                    | 29.4  |                  |     |       | 36.4   |      |      |      | 28.0  |    |     |       | 32.1   |   
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |      
|                               |                            | Gross profit             |      |                    | 70.6  |                  |     |       | 63.6   |      |      |      | 72.0  |    |     |       | 67.9   |   
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |      
|Operating expenses:            |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |      
|                               | Sales and marketing        |                          |      | 33.6               |       |                  |     | 70.6  |        |      |      | 35.0 |       |    |     | 63.2  |       
|                               | Research and development   |                          |      | 18.2               |       |                  |     | 38.1  |        |      |      | 18.7 |       |    |     | 32.6  |       
|                               | General and administrative |                          |      | 15.3               |       |                  |     | 22.2  |        |      |      | 15.5 |       |    |     | 18.4  |       
|                               | Restructuring and other    |                          |      | 16.5               |       |                  |     | 289.7 |        |      |      | 8.3  |       |    |     | 120.1 |       
|                               | Stock-based compensation   |                          |      | 0.6                |       |                  |     | (2.8  | )      |      |      | 0.6  |       |    |     | (16.0 | )     
|                               | Asset impairment and other |                          |      |                   |       |                  |     | 4.0   |        |      |      |     |       |    |     | 1.7   |       
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |       |       
|                               |                            | Total operating expenses |      |                    | 84.2  |                  |     |       | 421.8  |      |      |      | 78.1  |    |     |       | 220.0  |   
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |       |       
|                               |                            | Operating loss           |      |                    | (13.6 | )                |     |       | (358.2 | )    |      |      | (6.1  | )  |     |       | (152.1 | ) 
|Interest and other income, net |                            |                          | (2.8 | )                  |       |                  | 2.9 |       |        |      | (1.6 | )    |       |    | 1.8 |      
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |       |       
|                               |                            | Net loss                 |      |                    | (16.4 | )%               |     |       | (355.3 | )%   |      |      | (7.7  | )% |     |       | (150.3 | )%
|                               |                            |                          |      |                    |       |                  |     |       |        |      |      |      |       |    |     |       |       

Revenue

License.License revenue consists of revenue from licenses of our software
products. License revenue was $3.1 million and $4.0 million in the second
quarter of fiscal 2004 and 2003, respectively, decreasing 21.0% period over
period. License revenue was $6.3 million and $9.7 million in the six months
ended July 31, 2003 and 2002, respectively, decreasing 34.3% period over
period. We believe that the decrease in license revenue in absolute dollars in
the second quarter of fiscal 2004 from the second quarter of fiscal 2003 and in
the six months ended July 31, 2003 from the six months ended July 31, 2002 was
primarily attributable to a slowdown in corporate information technology
spending, a restructuring program we implemented in fiscal 2003 in response to
such slowdown in spending that reduced the number of revenue producing account
executives, and a decline in the average size of our license sales in part as a
result of fewer seats being purchased or a decrease in per seat price. The
slowdown in corporate information technology spending was primarily due to
deteriorating business conditions for our customers.

Services.Services revenue consists of revenue from the delivery of
implementation services and maintenance and support contracts. Services revenue
from implementation services was $2.9 million and $2.2 million in the second
quarter of fiscal 2004 and 2003, respectively, increasing 31.4% period over
period. Services revenue from implementation services was $5.4 million and $5.7
million in the six months ended July 31, 2003 and 2002, respectively,
decreasing 4.9% period over period. The increase in services revenue from
implementation services in absolute dollars in the second quarter of fiscal
2004 from the second quarter of fiscal 2003 was primarily due to higher
utilization of our professional services organization and services revenue from
implementation services deferred from the first quarter of fiscal 2004. The
decrease in services revenue from implementation services in absolute dollars
in the six months ended July 31, 2003 from the six months ended July 31, 2002
was primarily attributable to a decrease in the size of the implementation
services organization pursuant to the restructuring program we implemented in
fiscal 2003 which reduced revenue
generating implementation services consultants and a decrease in license
revenue that led to a decrease in demand for implementation services, offset by
an increase in utilization in the second quarter of fiscal 2004. Services
revenue from maintenance and support contracts was $4.0 million and $4.3
million in the second quarter of fiscal 2004 and 2003, respectively, decreasing
8.2% period over period. Services revenue from maintenance and support
contracts was $8.1 million and $9.3 million in the six months ended July 31,
2003 and 2002, respectively, decreasing 12.7% period over period. The decrease
in services revenue from maintenance and support in absolute dollars in the
second quarter of fiscal 2004 from the second quarter of fiscal 2003 and in the
six months ended July 31, 2003 from the six months ended July 31, 2002 was
primarily attributable to a decrease in the number of supported users for
maintenance renewals and the absence of amortization of deferred maintenance
revenue from the ABT acquisition in the second quarter of fiscal 2004 and in
the six months ended July 31, 2003, compared to $386,000 and $764,000 of such
amortization in the second quarter of fiscal 2003 and in the six months ended
July 31, 2002.

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Cost of Revenue

Cost of license revenue.Cost of license revenue includes royalties due to
third parties for embedding their technologies in our products, product
packaging, documentation and shipping costs. Cost of license revenue was
$134,000 and $303,000 in the second quarter of fiscal 2004 and 2003,
respectively, representing 4.3% and 7.6% of total license revenue in the
respective period. Cost of license revenue was $110,000 and $619,000 in the six
months ended July 31, 2003 and 2002, respectively, representing 1.7% and 6.4%
of total license revenue in the respective period. The decrease in cost of
license revenue in absolute dollars in the second quarter of fiscal 2004 from
the second quarter of fiscal 2003 and in the six months ended July 31, 2003
from the six months ended July 31, 2002 was primarily attributable to a decline
in license revenue and the reversal of $110,000 in royalties previous accrued
as a result of a settlement during the first quarter of fiscal 2004 with a
third party vendor. Royalties are calculated and paid quarterly based on among
other things, percentage of total license revenue, number of seats sold or
number of servers on which our customers have our product installed. There were
no significant changes in the number of third party technologies we embedded in
our products in the second quarter of fiscal 2004 and the six months ended July
31, 2003, compared to the second quarter of fiscal 2003 and the six months
ended July 31, 2002.

Cost of services revenue.Cost of services revenue includes salaries and
related expenses for our implementation services and maintenance and support
personnel and the costs of third parties contracted to provide implementation
services to our customers. Cost of services revenue was $2.8 million and $3.5
million in the second quarter of fiscal 2004 and 2003, respectively,
representing 40.8% and 53.8% of total services revenue in the respective
period. Cost of services revenue was $5.5 million and $7.3 million in the six
months ended July 31, 2003 and 2002, respectively, representing 40.4% and 48.7%
of total services revenue in the respective period. The decrease in cost of
services revenue in absolute dollars in the second quarter of fiscal 2004 from
the second quarter of fiscal 2003 was primarily attributable to a $542,000
decrease in facility and information technology (IT) department costs and a
$177,000 reduction in salaries and benefits resulting from reductions in
headcount effected pursuant to the restructuring program we implemented in
fiscal 2003. The decrease in cost of services revenue in absolute dollars in
the six months ended July 31, 2003 from the six months ended July 31, 2002 was
primarily attributable to a $1.1 million decrease in facility and IT department
costs and a $504,000 decrease in salaries and benefits resulting from
reductions in headcount effected pursuant to the restructuring program we
implemented in fiscal 2003.

Operating Expenses

Sales and marketing.Sales and marketing expenses consist primarily of
salaries and benefits, marketing costs, commissions, bonuses, travel and bad
debt expense. Sales and marketing expenses were $3.4 million and $7.4 million
in the second quarter of fiscal 2004 and 2003, respectively, representing 33.6%
and 70.6% of total revenue in each respective period. Sales and marketing
expenses were $6.9 million and $15.6 million in the six months ended July 31,
2003 and 2002, respectively, representing 35.0% and 63.2% of total revenue in
each respective period. The decrease in sales and marketing expenses in
absolute dollars in the second quarter of fiscal 2004 from the second quarter
of fiscal 2003 was primarily attributable to a $1.5 million reduction in
salaries and benefits resulting from reductions in headcount effected pursuant
to the restructuring program we implemented in fiscal 2003, a $1.6 million
decrease in facility and IT department costs and a $201,000 decrease in
commissions. The decrease in sales and marketing expenses in absolute dollars
in the six months ended July 31, 2003 from the six months ended July 31, 2002
was primarily attributable to a $3.5 million decrease in salaries and benefits
resulting from reductions in headcount effected pursuant to the restructuring
program we implemented in fiscal 2003, a $3.2 million decrease in facility and
IT department costs and a $664,000 decrease in commissions.

Research and development.Research and development expenses consist
primarily of salaries and benefits associated with the development of new
products, the enhancement of existing products and quality assurance and
testing costs. Research and development expenses were $1.8 million and $4.0
million in the second quarter of fiscal 2004 and 2003, respectively,
representing 18.2% and 38.1% of total revenue in each respective period.
Research and development expenses were $3.7 million and $8.0 million
in the six months ended July 31, 2003 and 2002, respectively, representing
18.7% and 32.6% of total revenue in each respective period. The decrease in
research and development expenses in absolute dollars in the second quarter of
fiscal 2004 from the second quarter of fiscal 2003 was primarily attributable
to a $1.2 million decrease in facility and IT department costs and a $699,000
decrease in salaries and benefits resulting from reductions in headcount
effected pursuant to the restructuring program we implemented in fiscal 2003.
The decrease in research and development expenses in absolute dollars in the
six months ended July 31, 2003 from the six months ended July 31, 2002 was
primarily attributable to a $2.4 million decrease in facility and IT department
costs and a $1.5 million decrease in salaries and benefits resulting from
reductions in headcount effected pursuant to the restructuring program we
implemented in fiscal 2003.

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General and administrative.General and administrative expenses consist
primarily of salaries and benefits and other related costs for finance, human
resource, information technology and legal department employees, professional
services fees and other general corporate expenses. General and administrative
expenses were $1.5 million and $2.3 million in the second quarter of fiscal
2004 and 2003, respectively, representing 15.3% and 22.2% of total revenue in
each respective period. General and administrative expenses were $3.1 million
and $4.5 million in the six months ended July 31, 2003 from 2002, respectively,
representing 15.5% and 18.4% of total revenue in each respective period. The
decrease in general and administrative expenses in absolute dollars in the
second quarter of fiscal 2004 from the second quarter of fiscal 2003 was
primarily attributable to a $406,000 decrease in facility and IT department
costs, a $224,000 decrease in salaries and benefits resulting from reductions
in headcount effected pursuant to the restructuring program we implemented in
fiscal 2003 and a $142,000 decrease in legal fees. The decrease in general and
administrative expenses in absolute dollars in the six months ended July 31,
2003 from the six months ended July 31, 2002 was primarily attributable to a
$727,000 decrease in facility and IT department costs, a $250,000 decrease in
salaries and benefits resulting from reductions in headcount effected pursuant
to the restructuring program we implemented in fiscal 2003 and a $269,000
decrease in legal fees.

Stock-based compensation.Amortization of stock-based compensation was
$74,000 and ($301,000) in the second quarter of fiscal 2004 and 2003 and
$135,000 and ($3.9 million) in the six months ended
July 31, 2003 and 2002,
respectively. The stock-based compensation in the second quarter of fiscal 2004
and in the six months ended July 31, 2003 related to the amortization of stock
options granted to our chief executive officer that were repriced in October
2002 and the amortization of stock options granted below fair market value
prior to our initial public offering in February 2000. The recovery of
stock-based compensation in the second quarter of fiscal 2003 and in the six
months ended July 31, 2002 was attributable to variable accounting applied to
our stock options that were repriced in the fourth quarter of fiscal 2002. As
a result of a stock option exchange program we initiated in May 2003 and the
exercise of stock options for 55,000 shares of common stock by our chief
executive officer in May 2003, we will no longer incur stock-based compensation
for outstanding stock options for approximately 298,000 shares of common stock
that were previously repriced in November 2001 and outstanding stock options
for 55,000 shares of common stock that were previously repriced in October
2002. We will continue to incur stock-based compensation for outstanding stock
options for approximately 73,000 shares of common stock that were previously
repriced in November 2001 that were not tendered pursuant to the stock option
exchange program to the extent that our stock price increases above $7.50.

Stock-based compensation by functional group for the second quarter of
fiscal 2004 and 2003 and in the six months ended July 31, 2003 and 2002 are as
follows (in thousands):

|                           |  |                    |    |                  |  |   |      |   |  |   |     |  |  |   |        |  
|-------------------------- |  | ------------------ | -- | ---------------- |  | - | ---- | - |  | - | --- |  |  | - | ------ | -
|                           |  | Three Months Ended |    | Six Months Ended
|                           |  | July 31,           |    | July 31,        
|                           |  |                    |    |                 
|Services                   |  | $                  | 1  |                  |  | $ | (31  | ) |  | $ | 2   |  |  | $ | (291   | )
|Sales and marketing        |  |                    | 12 |                  |  |   | 109  |   |  |   | 29  |  |  |   | (1,841 | )
|Research and development   |  |                    | 5  |                  |  |   | (392 | ) |  |   | 13  |  |  |   | (1,598 | )
|General and administrative |  |                    | 56 |                  |  |   | 13   |   |  |   | 91  |  |  |   | (217   | )
|                           |  |                    |    |                  |  |   |      |   |  |   |     |  |  |   |        |  
|                           |  | $                  | 74 |                  |  | $ | (301 | ) |  | $ | 135 |  |  | $ | (3,947 | )
|                           |  |                    |    |                  |  |   |      |   |  |   |     |  |  |   |        |  

Restructuring and other.In the second quarter of fiscal 2004, we recorded
$1.6 million in restructuring charges as a result of our current assessment of
sublease opportunities for facilities that we had previously vacated. In the
second quarter of fiscal 2004, we also terminated a facility lease in Waltham,
Massachusetts. The consideration for this termination included the release to
the landlord of a $30,000 security deposit and a lease termination payment of
$135,000. There were no restructuring charges in the first quarter of fiscal
2004.

We recorded $30.4 million and $29.6 million in restructuring and other
charges in the second quarter of fiscal 2003 and in the six months ended July
31, 2002, respectively. In the second quarter of fiscal 2003, we implemented
a restructuring program. At the end of such quarter, we restructured our
operations and reduced our workforce by approximately 72 employees. These
headcount reductions affected all of our functional groups.

We also vacated certain facilities, moved back to our former headquarters,
which we had previously vacated in August 2001, and engaged in negotiations to
terminate the lease for a significant facility in Redwood City, California,
which we terminated in the third quarter of fiscal 2003. The $18.9 million in
net lease commitments on vacated facilities recorded in the second quarter of
fiscal 2003 includes $18.8 million in cash and non-cash costs related to the
proposed termination costs for the facility lease in Redwood City, California
and $2.3 million in net lease commitments for certain other facilities that we
vacated and leases we terminated, offset by $2.2 million of previously accrued
deferred rent under such leases. Our future liabilities under the Redwood City,
California lease prior to the proposed termination were approximately $121.7
million.

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

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

The $2.4 million in net lease commitments on vacated facilities recorded
in the second quarter of fiscal 2003 relating to restructuring activities in
fiscal 2002 included a $4.3 million decrease in estimated future sublease
income for certain facilities, $1.8 million in settlement of claims asserted in
the lawsuit brought by the landlord of our former headquarters, $388,000 in
proposed termination costs for a lease in Lincolnshire, Illinois and $296,000
in legal fees, offset by $4.4 million for the reversal of future lease payments
that had been previously accrued, net of estimated sublease income, relating to
our former headquarters and the Lincolnshire, Illinois lease. Subsequent to the
end of the second quarter of fiscal 2003, we terminated the lease in Lincolnshire, Illinois. Our future
liabilities under this lease prior to the proposed termination were
approximately $692,000, net of estimated sublease income.

In the first quarter of fiscal 2003, we recorded a credit of $838,000 in
restructuring and other charges related primarily to the value of 39,052 shares
of our common stock recovered from escrow accounts in which they had been
placed in conjunction with acquisitions of ABT Corporation, Proamics
Corporation and 600 Monkeys Inc. in fiscal 2001. We valued these escrow shares
based on our stock price on the date these shares were recovered. The weighted
average price per share for these escrow shares was $20.06.

Interest and Other Income (Expense), Net

Interest income and other income (expense), net.Interest income and other
income (expense), net, consists of interest income, interest expense and other
non-operating expenses. Interest income and other income (expense), net was
($273,000) and $312,000 in the second quarter of fiscal 2004 and 2003 and
($307,000) and $432,000 in the six months ended July 31, 2003 and 2002,
respectively. The change to a net interest expense and other expense in the
second quarter of fiscal 2004 from a net interest income and other income in
the second quarter of fiscal 2003 and in the six months ended July 31, 2003
from the six month ended July 31, 2002 was primarily attributable to foreign
exchange losses we incurred from the revaluation of our intercompany balances
and interest expense from the $5.0 million bank borrowings under a term loan.

Liquidity and Capital Resources

Since inception, we have financed our operations through private and
public sales of our capital stock, bank loans, equipment leases, and cash from
sales of our products and delivery of related services. The cash from these
sources is used for working capital for our business. As of July 31, 2003, we
had cash and cash equivalents of $21.7 million. We also had restricted cash in
the amount of $1.1 million in the form of a certificate of deposit securing a
letter of credit for a leased facility. We had bank borrowings under a bank
line of credit of $4.3 million as of July 31, 2003, of which the entire amount
was repaid in August 2003. As of July 31, 2003, we had working capital of $8.1
million, compared to working capital of $1.2 million as of January 31, 2003.
The increase in working capital as of July 31, 2003 was primarily attributable
to increases in cash and cash equivalents in connection with our recent private
placement described below, an increase in prepaid expenses and a decrease in
accrued restructuring, offset in part by a reclassification
of long-term portion of bank borrowings to short-term bank borrowings and
a decrease in net accounts receivable. We believe that cash from operations and
existing cash, including approximately $10.2 million net proceeds from the
private placement, will be sufficient to meet our current expectations for
working capital and expense requirements for at least the next twelve months.
As of July 31, 2003, we had no material commitments for capital expenditures.
Our liquidity could be negatively impacted by factors discussed under Factors
That May Affect Future Results.

In February 2003, we entered into a common stock and warrant purchase
agreement with various investors led by Walden VC, providing for the issuance
of 3,088,230 shares of our common stock at a price of $3.35 per share and
warrants to purchase 386,034 shares of common stock at a price of $0.40 per
warrant in connection with a private placement. The warrants have an exercise
price of $3.40. In February 2003, we issued 1,549,735 shares of our common
stock and warrants to purchase 193,720 shares of common stock in connection
with initial closing of this private placement. In April 2003, our stockholders
approved and we

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subsequently issued the remaining 1,538,495 shares of our
common stock and warrants to purchase 192,314 shares of common stock. Total net
proceeds from the private placement approximated $10.2 million.

Net cash used in operating activities was $5.3 million and $13.6 million
in the six months ended July 31, 2003 and 2002, respectively. Net cash used in
operating activities in the six months ended July 31, 2003 was primarily
attributable to decreases in accrued restructuring, deferred revenue, accrued
liabilities and a net loss of $1.5 million, offset in part by a decrease in
accounts receivable. Net cash used in operating activities in the six months
ended July 31, 2002 was primarily attributable to a net loss of $37.0 million
and a decrease in accrued liabilities, offset in part by an increase in accrued
restructuring, non-cash restructuring charges and a decrease in net accounts
receivable.

Net cash provided by investing activities was $428,000 and $2.3 million in
the six months ended July 31, 2003 and 2002, respectively. Net cash provided
by investing activities in the six months ended July 31, 2003 was primarily
attributable to a release of investments of restricted cash and a decrease in
deposits and other assets. Net cash provided by investing activities in the six
months ended July 31, 2002 was primarily attributable to a release of
investments of restricted cash, offset in part by purchases of property and
equipment.

Net cash provided by (used in) financing activities was $9.8 million and
($21.8 million) in the six months ended July 31, 2003 and 2002, respectively.
Net cash provided by financing activities in the six months ended July 31, 2003
was primarily attributable to net proceeds from the issuance of common stock
and warrants in connection with the private placement and proceeds from a bank
line of credit, offset in part by repayment of a bank term loan. Net cash used
in financing activities in the six months ended July 31, 2002 was primarily
attributable net repayment of bank line of credit.

We had a term loan for $5.0 million from a financial institution, which we
entered into in September 2002. The term loan was secured by our tangible and
intangible assets, accrued interest at 7.50% per annum and was to mature on
February 15, 2004. We were required to make quarterly payments of principal and
interest on a five-year amortization schedule. We had repaid $750,000 plus
interest through June 2003. On the maturity date, the remaining principal
balance of $3.8 million was to have been due. There were no financial covenants
for the quarter ended July 31, 2003. On July 23, 2003, we terminated the term
loan and repaid $4.3 million outstanding balance of the loan as of such date
plus accrued interest.

On July 18, 2003, we entered into a $5.0 million line of credit with the
same financial institution. We had borrowings of $4.3 million as of July 31,
2003, which we repaid in August 2003. The line of credit is secured by our
tangible and intangible assets, accrues interest rate at prime rate plus 0.50%
per annum (currently at 4.50%) and expires in July 2004. The line of credit
has certain financial covenants, including covenants requiring 1) minimum cash
and cash equivalent balance equal to or at least 1.25 times the outstanding
principal line balance at each month end, 2) minimum liquidity of $10 million
at the end of each fiscal quarter and 3) annual GAAP profitability of at least
$1 (excluding restructuring charges for vacated facilities and stock-based
compensation) for the period from May 1, 2003 to April 30, 2004. As of July
31, 2003, we were in compliance with all financial covenants.

Future minimum lease and termination payments under operating leases and
payments under bank borrowings are as follows as of July 31, 2003 (in
thousands):

|                             |  |           |        |            |  |       |       |  |  |   |        | 
|---------------------------- |  | --------- | ------ | ---------- |  | ----- | ----- |  |  | - | ------ | 
|                             |  | Operating |        | Bank       |  |       |       | 
|Twelve Months Ended July 31, |  | Leases    |        | Borrowings |  | Total
|                             |  |           |        |            |  |      
|2003                         |  | $         | 4,316  |            |  | $     | 4,250 |  |  | $ | 8,566  | 
|2004                         |  |           | 3,261  |            |  |       |      |  |  |   | 3,261  | 
|2005                         |  |           | 1,704  |            |  |       |      |  |  |   | 1,704  | 
|2006                         |  |           | 1,375  |            |  |       |      |  |  |   | 1,375  | 
|2007                         |  |           | 1,061  |            |  |       |      |  |  |   | 1,061  | 
|Thereafter                   |  |           | 2,377  |            |  |       |      |  |  |   | 2,377  | 
|                             |  |           |        |            |  |       |       |  |  |   |        | 
|Total payments               |  | $         | 14,094 |            |  | $     | 4,250 |  |  | $ | 18,344 | 
|                             |  |           |        |            |  |       |       |  |  |   |        | 

Included in the lease payments above are the following amounts, net of estimated sublease
income, relating to facilities that we have vacated pursuant to our
restructuring program: $1.6 million, $1.4 million, $1.2 million, $1.1 million
and $922,000 for the twelve months ended July 31, 2004, 2005, 2006, 2007 and
2008, respectively, and $2.3 million thereafter. These amounts are recorded in
accrued restructuring and long-term accrued restructuring on the condensed
consolidated balance sheets. We regularly review the estimates for sublease
income in the second and fourth quarter of each year or anytime we have
persuasive evidence that a change of

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estimate has occurred. In the second
quarter of fiscal 2004, we recorded an additional $1.6 million in restructuring
reserves due to our current assessment of sublease opportunities for our
vacated facility leases. To the extent that these estimates change due to
changes in market condition, the actual restructuring payments could vary by
material amounts.

We have working capital of $8.1 million as of July 31, 2003. We believe
that cash from operations and existing cash will be sufficient to meet our
current expectations for working capital and expense requirements for at least
the next twelve months based on, among other things, our current revenue and
expense projections. However, we may require additional financing in the
future. If we are unable to raise capital in the event of ongoing losses and
depletion of our available cash resources, the absence of funding would have a
material adverse effect on our business. If we issue additional equity
securities, stockholders will experience additional dilution and the new equity
securities may have rights, preferences or privileges senior to those of the
then existing holders of our common stock.

Recent Accounting Pronouncements

In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.This statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement is effective for
contracts entered into or modified after June 30, 2003, and the guidance should
be applied prospectively. We have not determined the impact that the adoption
of SFAS No. 149 will have on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The provisions of SFAS
No. 150 apply immediately to all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. We do not expect the impact the
adoption of SFAS No. 150 will have a material effect on our financial position
or results of operations.

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

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

We were incorporated in January 1998 and began licensing our software in
December 1998. Until recently, we experienced GAAP losses for almost every
quarter of our history, and have not yet been profitable on an annual basis. We
had net loss of $37.8 million in the year ended January 31, 2003. We had an
accumulated deficit of $501.3 million as of July 31, 2003. Although our
financial results have improved recently, these improvements may not continue,
and we may incur losses in the future. Additional losses will reduce the cash
available to us to run our business, and unless financing is available to us
from other sources, we may become unable to implement our business plan.

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

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

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

Other factors that could affect our quarterly operating results include:



| |  |  | changes in the pricing of our products and services or those of
our competitors or the announcement or introduction of new products or
services by us or our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the renewal or non-renewal of annual maintenance contracts to our customers;                                                                                             
|
| |  |  | the demand for professional services to implement our products and our efficiency in rendering such services;                                                            
|
| |  |  | variability in the mix of our product and services revenue in any quarter;                                                                                               
|
| |  |  | the amount and timing of operating expenses and capital expenditures relating to the business;                                                                           
|
| |  |  | the application of variable accounting to stock options that were
previously repriced but not exchanged by our employees pursuant to our
stock option exchange program;  
|
| |  |  | changes in foreign exchange rates; and                                                                                                                                   
|
| |  |  | changes in restructuring accruals based on changes in sublease estimates
for lease facilities we vacated.                                                                

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

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

Our total revenue was $10.0 million in the second quarter of fiscal 2004,
compared to $10.5 million in the second quarter of fiscal 2003 and $19.8
million in the six months ended July 31, 2003, compared to $24.6 million in the
six months ended July 31, 2002.
Our license revenue was $3.1 million in the second quarter of fiscal 2004,
compared to $4.0 million in the second quarter of fiscal 2003 and $6.3 million
in the six months ended July 31, 2003, compared to $9.7 million in the six
months ended July 31, 2002. While we cannot specifically correlate the impact
of macro-economic conditions on our sales activities, we believe that the
economic conditions have contributed to a decrease in demand in our market, and
in particular, have increased the average length of our sales
21Table of Contents

cycles and
decreased the size of our license transactions. To the extent that the current
economic climate remains depressed or worsens, or international conflicts
develop or worsen, the demand for our products and services, and therefore
future revenue, may be further reduced. We may not be able to respond to future
revenue reductions in a sufficiently timely manner to avoid future losses. Even
if economic conditions improve and international conflicts diminish,
corporations may not increase their information technology spending in our
market and we may be unable to maintain or improve revenue levels.

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

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

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

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

Because the application of our product is complex, our products, including our
recently released Niku 6, may contain undetected defects and errors which could
result in loss of or delay in revenue, failure to achieve market acceptance or
increased costs and liabilities.

Products as complex as those we offer or are developing, including our
flagship product Niku 6, may contain undetected defects or errors. Despite
internal testing and testing by our customers or potential customers, defects
or errors may occur in our existing or future products and services. From time
to time in the past, versions of our software that have been delivered to
customers have contained errors. Such errors could result in additional
development costs, diversion of technical and other resources from our other
development efforts, or the loss of credibility with our current and
prospective customers. In the future, if we are not able to detect and correct
errors prior to release, we may experience a loss of or delay in revenue,
failure to achieve market acceptance and increased costs to correct errors, any
of which could significantly harm our business.

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

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

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

22



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##### Table of Contents



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

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

Additionally, we design our products to work with databases such as Oracle
Database Server and SQL Server and operating systems such as Sun Solaris,
Microsoft Windows and HP UX. Any changes to those databases or operating
systems, or increasing popularity of other databases or operating systems,
might require us to modify one or both of our products or services and could
cause us to delay releasing future products and enhancements. As a result, the
timing and nature of new product introductions or product modifications, and
increases and decreases in the market acceptance of databases and operating
systems, as well as web servers and other enterprise and Internet-based
applications could delay our product development, increase our research and
development expenses and cause customers to delay evaluation, purchase and
deployment of our products.

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

In the second quarter of fiscal 2004, international revenue represented
33.9% of our total revenue, compared to 43.8% in the first quarter of fiscal
2004 and 31.9% in the second quarter of fiscal 2003. In the second quarter of
fiscal 2004, international license revenue represented 25.2% of our license
revenue, compared to 45.4% in the first quarter of fiscal 2004 and 20.9% in the
second quarter of fiscal 2003. International activities are a significant part
of our business.

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



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

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

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



| |  |  | providers of project management, portfolio management and portfolio
analysis software; and
| | - |  | ------------------------------------------------------------------------------------------

23



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##### Table of Contents





| |  |  | enterprise software providers such as Lawson, Mercury
Interactive, Microsoft, Oracle, Peoplesoft, SAP and Siebel Systems;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | providers of professional services automation software.                                                                      

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

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

As of July 31, 2003, we had cash and cash equivalents of $21.7 million.
This amount includes net proceeds of approximately $10.2 million from a private
placement we completed in April 2003 and $4.3 million in bank borrowings under
a line of credit. The line of credit was repaid in full in August 2003. We
believe that cash from operations and existing cash will be sufficient to meet
our current expectations for working capital and expense requirements for at
least the next twelve months based on, among other things, our current revenue
and expense projections. However, we may require additional financing. If we
were unable to raise capital in the event of ongoing losses and depletion of
our available cash resources, the absence of funding would have a material
adverse effect on our business. If we issue additional equity securities,
stockholders will experience additional dilution and the new equity securities
may have rights, preferences or privileges senior to those of the then existing
holders of our common stock.

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

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

We rely to a large degree on copyright laws with respect to our software,
but we have not made any copyright registration with any government entity with
respect to our products. Although registration is not required to obtain
protection under copyright laws, our failure to register may limit our ability
to seek certain remedies available under such laws. We are currently pursuing
one patent application but no patent has issued. We received U.S. registration
of the trademarks Niku, the Niku logo, and Do What Matters. These registrations
may not provide us with significant protection for our trademarks. It is
possible that no patents will issue from our current or future patent
applications. Any patents that do issue may not provide us with any competitive
advantages over, or may be challenged by, third parties.

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

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

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

Our standard product licenses provide that we agree to indemnify our
customers against claims that our products infringe upon the intellectual
property rights of others. These claims, even if not meritorious, could be
expensive and divert managements

24



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##### Table of Contents



attention from operating our business. We
could incur substantial costs in defending ourselves and our customers against
infringement claims. If we become liable to third parties for infringement of
their intellectual property rights, we could be required to pay a substantial
damage award and to develop non-infringing technology, obtain one or more
licenses for us and our customers from third parties or cease selling the
products that contain the infringing intellectual property. We may be unable to
develop non-infringing technology or obtain a license at a reasonable cost, or
at all. If we are unable to license our technology, we would be unable to
support our operations.

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

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

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

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



| |  |  | authorizing the issuance of preferred stock without stockholder approval;                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | prohibiting cumulative voting in the election of directors;                                                                            
|
| |  |  | requiring two-thirds of the outstanding shares to approve
amendments to some provisions of our certificate of incorporation and
bylaws;
|
| |  |  | requiring a majority of the stockholders to call stockholders meetings; and                                                            
|
| |  |  | prohibiting stockholder actions by written consent.                                                                                    

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

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

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

A significant amount of our outstanding stock is now owned by one
institution and a few individual investors. Any sales of substantial amounts
of our common stock in the public market, or the perception that such sales
might occur, could harm the market price of our common stock.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

25



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##### Table of Contents



We develop products in the United States and market our products in North
America and Europe and to a lesser degree in Asia. As a result, our financial
results may be affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Approximately 33.9% and
38.9% of our total revenue was made in currencies other than U.S. dollars in
the second quarter of fiscal 2004 and in the six months ended July 31, 2003.
Our exposures to foreign exchange rate fluctuations also arise in part from
intercompany accounts with our foreign subsidiaries. These intercompany
accounts are typically denominated in the local currency of the foreign
subsidiary. We expect that exchange rate fluctuations will affect our financial
results in the future. We currently do not use financial instruments to hedge
operating expenses of our European subsidiaries. As of July 31, 2003, we had a
deposit of approximately 1.8 million Euros to minimize our exposures from
intercompany accounts with foreign subsidiaries. We will continue to assess if
there is a need to utilize financial instruments to hedge currency exposures in
the future.

Our exposure to market risk for changes in interest rates relates
primarily to our cash and cash equivalents and outstanding debt obligations. We
do not use derivative financial instruments for speculative or trading
purposes. Our cash and cash equivalents consist primarily of demand deposits,
certificates of deposits and money market accounts that mature in three months

or less. Due to the short-term nature of our cash and cash equivalents, we
believe that there is no material market or interest rate risk exposure on our
cash and cash equivalents. We do not believe that we have interest rate
exposure on our bank term loan because the interest rate is fixed. We do not
believe an immediate 10% increase or decrease in interest rate would have a
material effect on our consolidated financial position and results of
operations.




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our chief executive
officer and chief financial officer carried out an evaluation of the
effectiveness of our disclosure controls and procedures (pursuant to Rules
13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as
amended). Based upon that evaluation, our chief executive officer and chief
financial officer concluded that as of the end of such period our disclosure
controls and procedures are effective and timely.

Changes in Internal Controls Over Financial Reporting

There was no significant change in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred over the period covered by this quarterly report on
Form 10-Q that materially affected or is reasonably likely to materially affect
our internal control over financial reporting.




PART II: OTHER INFORMATION




Item 1. Legal Proceedings

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

26



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##### Table of Contents






Item 2. Changes in Securities and Use of Proceeds

In February 2003, we entered into a common stock and warrant purchase
agreement with various investors led by Walden VC, providing for the issuance
of 3,088,230 shares of our common stock at a price of $3.35 per share and
warrants to purchase 386,034 shares of common stock at a price of $0.40 per
warrant in connection with a private placement. The warrants have an exercise
price of $3.40. In February 2003, we issued 1,549,735 shares of our common
stock and warrants to purchase 193,720 shares of common stock in connection
with initial closing of this private placement. In April 2003, our stockholders
approved and we subsequently issued the remaining 1,538,495 shares of our
common stock and warrants to purchase 192,314 shares of common stock. These
shares and warrants were issued in a private placement exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) and Regulation D of
the Act. The aggregate offering price for the securities was approximately
$10.5 million and total net proceeds from the private placement were
approximately $10.2 million. On April 30, 2003, we filed a Registration
Statement on Form S-3, as amended (No. 333-104860) to register these shares.
The Securities and Exchange Commission declared the Registration Statement
effective on August 8, 2003.




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

The annual meeting of Niku Corporation was held on September 10, 2003,
during which the following three proposals were voted on as follows:

Proposal 1:Election of Directors

|                   |  |            |  |  |          |  | 
|------------------ |  | ---------- |  |  | -------- |  | 
|                   |  | For        |  |  | Withheld |  | 
|Ravi Chiruvolu     |  | 10,636,558 |  |  | 134,309  |  | 
|Matt Miller        |  | 10,756,966 |  |  | 13,901   |  | 
|Joshua Pickus      |  | 10,298,390 |  |  | 472,477  |  | 
|Peter Thompson     |  | 10,756,389 |  |  | 14,028   |  | 
|Edward F. Thompson |  | 10,636,457 |  |  | 134,410  |  | 
|Val E. Vaden       |  | 10,639,356 |  |  | 131,511  |  | 



| |  | Proposal 2:To approve an amendment to the amended and restated
certificate of incorporation to reduce the number of authorized shares of
common stock
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|10,743,277 |  | 22,817  |  | 4,773  



| |  | Proposal 3:Ratification of Independent Auditors
| |  | -----------------------------------------------

|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|10,748,982 |  | 8,544   |  | 13,341 




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

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

|        |  |                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------
|Number  |  | Exhibit Title                                                                                             
|3.1 (1) |  | Registrants Amended and Restated Certificate of Incorporation.                                           
|        |  |                                                                                                           
|3.2 (2) |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation dated
November 20, 2002.
|        |  |                                                                                                           
|3.3 (3) |  | Registrants Amended and Restated Bylaws.                                                                 
|        |  |                                                                                                           
|10.1    |  | Business Loan Agreement, Commercial Security Agreement and Promissory by and between Mid
Peninsula        

27



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##### Table of Contents



|       |  |                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------
|Number |  | Exhibit
Title                                                                                
|       |  | Bank and the Registrant, dated July 18, 2003.                                                
|       |  |                                                                                              
|31.1   |  | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|       |  |                                                                                              
|31.2   |  | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|       |  |                                                                                              
|32.1   |  | Certificate of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.  
|       |  |                                                                                              
|32.2   |  | Certificate of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.  



---



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

(b) Reports on Form 8-K



| |  | On May 5, 2003, we filed a current report on Form 8-K to announce our
preliminary financial results for the quarter ended April 30, 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On May 15, 2003, we filed a current report on Form 8-K to announce our
financial results for the quarter ended April 30, 2003.           
|
| |  | On August 21, 2003, we filed a current report on Form 8-K to announce our
financial results for the quarter ended July 31, 2003.         

28



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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: September 12, 2003 |  | By: |  | /s/ |  | Joshua Pickus             
|                         |  |     |  |    
|                         |  |     |  |     |  | Joshua Pickus             
|                         |  |     |  |     |  | Chief Executive Officer   
|                         |  |     |  |     |  |                           
|Date: September 12, 2003 |  | By: |  | /s/ |  | Michael Shahbazian        
|                         |  |     |  |    
|                         |  |     |  |     |  | Michael Shahbazian        
|                         |  |     |  |     |  | Chief Financial Officer   
|                         |  |     |  |     |  | (Chief Accounting Officer)

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Exhibit Index

|       |  |                                                                                                                                                 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit Title                                                                                                                                   
|10.1   |  | Business Loan Agreement, Commercial Security Agreement and Promissory by and between
Mid Peninsula Bank and the Registrant, dated July 18, 2003.
|       |  |                                                                                                                                                 
|31.1   |  | Certificate of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                                     
|       |  |                                                                                                                                                 
|31.2   |  | Certificate of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                                     
|       |  |                                                                                                                                                 
|32.1   |  | Certificate of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.                                                     
|       |  |                                                                                                                                                 
|32.2   |  | Certificate of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.                                                     

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